Understanding and application analysis of blockchain governance

Governance has long been one of the most sought-after blockchain applications.

Yet there is often no clarity about what is meant by ‘governance’ – a term that covers applications ranging from secure online voting to new forms of political governance to flawed experiments with decentralized investment funds.

First, we need to be clear about what the word 'governance' means.

The term most often brings to mind political governance . The institutions that make up the various levels of government follow a system of rules and laws. The process of political governance includes democratic elections, voting by representative bodies such as parliaments, and giving different institutions specific responsibilities and powers.

We might also think of corporate governance : the decision-making process of a company. Corporate governance processes include shareholder voting, board meetings, and the various levels of authority and responsibility given to executives and members.

Both types of governance are the application of common tools designed to facilitate group decision making. Rules, laws, institutions, processes, rights, and customs combine to form a system that enables an organization to make decisions. Governance applications range from highly complex systems, such as nations, to simple systems, such as a private club with a simple voting mechanism for approving new members.

That’s what I mean by ‘governance’ in this article – the processes and systems used to facilitate all organizational decision making.

Note that this is not referring to a specific use of those tools. Governance systems can be well or poorly designed, they can be effective or ineffective, they can be fair or unfair. But the tools that allow us to create these systems share common characteristics, and they can be improved by a variety of projects, products, and technologies that make up the category of ‘blockchain governance’ applications.

Technical requirements for governance

Any governance system requires certain basic technologies.

First, there needs to be a way to record a set of rules , such as who votes, who serves as a councillor, or who has access to a codebase. These rules must be recorded somewhere securely so that they cannot be lost, destroyed or forgotten.

Importantly, we must also be able to verify that a given provision is genuine and not fraudulent.

Second, there has to be a way for people to interact with those regulations. For example, if a regulation gives you the right to vote, then you need to be able to connect to that power. You need an election: poll workers, polling stations, paper, vote counting machines, and other technology to facilitate voting. If there is no way to interact with the regulation, then the regulation will not serve its purpose in the overall system.

Third, the governance system needs a way to enforce those rules. What if someone cheats? What if someone votes twice, or refuses to give up power at the end of their term? There must be a way to force individuals to follow the rules, otherwise the rules will become empty words. Existing governance systems use different tools to enforce their rules, such as social norms or legal systems.

Let's look at a simple example: a small charitable non-governmental organization (NGO) with a three-person committee. The organization receives funding from donors and must decide how to spend the money to achieve its mission.

These simple rules are contained in a simple charter, setting out the purpose of the organisation and its bylaws, including rules defining how decisions are made. The NGO keeps a copy of these rules, as do the lawyers who act as a trusted third party - ensuring they can always be sure what the 'real' rules are.

In the future, the committee will meet and vote in accordance with these rules.

Fourth, regulatory enforcement – ​​if required – can be carried out by the legal system of the jurisdiction where the NGO is registered.

Applying blockchain technology

Blockchain technology offers an elegant new way to implement these three essential functions of governance.

First, blockchain is an ideal way to record information and verify it after it is recorded. Information stored on the blockchain is distributed, which means that it is difficult to destroy and easy to access. Everyone can verify that a given input on the blockchain has not been changed since it was created, and that the information was created through a specific process.

Second, blockchain provides a new way to interact directly with regulations.

To do this, in the example above, we would not simply store a copy of the physical regulations. Instead, we would codify the regulations into code. Using what we generally call 'smart contract code', some blockchains allow users to create logical scripts that can be executed by the blockchain itself.

Instead of writing down NGO rules in natural language, we use a simple computer program to express them. The program receives a payment proposal as an input, checks that the payment is for more than $1,000, and then triggers a vote. The program takes input in the form of signed votes, then counts the votes, and then determines if a supermajority is obtained. If 2 members of the 3-member committee vote in favor, the program automatically sends the funds to the proposed recipient.

Most importantly, we have achieved our third requirement - enforcement. When a rule is expressed as executable code, it can be enforced at the time of exercise. As long as the code can control the assets to obey the rule, then the rule itself can enforce the result.

Although they sound mundane, these basic features form the cornerstone of any governance system. The fact that they can be implemented through the scripting capabilities of blockchain networks opens up new possibilities to augment existing governance systems or to establish entirely new ones.

Larger context and limitations

The governance application of blockchain is an extension of the technology’s overall ability to enforce regulations defined in code.

This capability is often mentioned in discussions of ‘smart legal contracts’, where blockchain code is used to enhance traditional legal contracts. In this case, blockchain code is used to store and execute the terms of a commercial agreement between two institutions.

Here, we use the same technology — blockchain code as regulation — and apply it to a slightly different use case.

In a business contract, the participating institutions agree on certain rules that facilitate a certain type of transaction. In a governance system, these institutions agree on certain rules that help them collaborate and make decisions together. In both cases, the ability of blockchain smart contracts to ‘enforce’ their own rules is undoubtedly a huge advantage, although there are some limitations.

The first important limitation of blockchain smart contract code is what the blockchain governance system can actually control.

In our example above, our blockchain payment restriction rule is useful because the rule itself controls the funds. Once the vote is passed, the funds can be sent. This is possible because we assumed that the NGO funds are in the form of cryptocurrency, which can be controlled directly by the blockchain smart contract code.

But if the governing body controls something else — dollars, or a physical asset like a car — our solution can’t be so easily automated. We have a system that allows voting, but someone ultimately has to execute the results of the voting process, either by wire or transferring the title to the car.

Over time, we should expect other types of assets — like fiat currencies, or vehicle registries — to be integrated with blockchain systems as well, which would expand the utility of blockchain governance systems.

Likewise, if our governance systems are primarily focused on controlling access and permissions within some other system (e.g., a code repository or a private internet forum), then the utility of a blockchain governance system depends on whether the rules enforced by the blockchain can control permissions or access to those systems.

This is also a hurdle that will soon be overcome as platforms are created to easily integrate with blockchain.

Existing use cases

Keeping in mind our analysis above, how do the various items in the ‘blockchain governance’ category relate to each other?

These projects aim to simply provide users with tools that they can use to create their own governance systems. For example, Boardroom is a set of 'governance components' that users can take and build whatever they want.

Using pre-built default code contracts — things like voting, proposals, boards, and committees — users can more quickly build something that fits their specific needs.

The focus of the product is not on a specific type of governance, but rather on providing users with the tools they need to build their own governance structures. For example, the NGO in the example above could use Boardroom to create the simple governance system we described.

Other projects attempt to create new types of governance systems that take advantage of the unique benefits of blockchain technology. The obvious advantage is that blockchains are decentralized - there is no need for a central authority to maintain the system or 'enforce' the rules. This enables governance systems built on blockchain networks to be decentralized, without the need for a central authority.

The most famous project of this type is The DAO. The DAO, short for Decentralized Autonomous Organization, aims to be a user-controlled venture capital fund that raises funds by selling tokens that give token holders certain rights in the governance system.

Token holders then vote on proposals submitted to The DAO, deciding how to invest their money. The DAO has no legal entity and no bank account — its governance is entirely conducted through blockchain code.

It was a bold plan, but unfortunately, The DAO quickly failed. Serious code security vulnerabilities allowed attackers to transfer The DAO’s funds, destroying people’s trust in the project.

As a test of smart contract security practices, The DAO failed. However, it was also a test of whether this type of governance system - a decentralized venture fund - could achieve market success. The failure of the first test unfortunately meant that the second test was not really tested.

The third type of blockchain governance applications aims to solve practical problems faced by traditional enterprises in the process of widespread adoption of blockchain systems. For example, the governance challenges faced by consortium blockchain projects.

Many of the 'consortium' blockchain systems being explored take the form of a permissioned blockchain network, which is shared between entities (the consortium). The nodes that make up a permissioned blockchain are not maintained by the public, but by each participating institution.

For example, a shared blockchain ledger maintained by several banks that enables them to more easily settle cash balances among each other, or one that can track ownership of financial assets such as stocks, derivatives and bonds.

One of the challenges that institutions face as they work on these projects is how to govern them. If there is no central entity controlling the ledger — a feature that makes such ledgers valuable — participants must be able to jointly govern the ledger. This is not only politically difficult (it’s never easy to coordinate between formerly competing parties), it’s also a practical problem.

There has to be a process, mediated by the code itself, through which the alliance makes major decisions, such as voting to add new members or remove existing ones, or making code updates over time.

In addition to our other examples above, this requires careful integration of blockchain code components, governance system provisions and traditional governance and legal requirements faced by financial institutions.

In 'blockchain governance' we can distinguish at least a few categories in the examples above.

There are some blockchain projects that aim to provide governance tools, such as Boardroom. Others are using these tools to establish specific forms of governance. The DAO seeks to create a new form of economic entity that is enabled by blockchain governance.

Other projects have more modest goals, designed to solve specific problems caused by adopting blockchain technology—such as those faced by consortium blockchain projects. They use decentralization in a more limited sense: allowing a smaller group of participants, such as banks, to jointly govern financial services infrastructure without the involvement of a centralized entity.

A broader development perspective

Blockchain governance systems are of great significance because they have the potential to permanently reduce the costs of creating and maintaining governance systems of all types.

Governance is valuable, and governance systems are expensive. Companies spend a lot of money to ensure their internal governance procedures are in place. If these procedures go wrong, they spend even more money in litigation with shareholders or regulators.

This challenge is exacerbated for organizations in jurisdictions without jurisdiction, such as those that need to ensure basic political or corporate governance and may not survive without relocating to another country. Access to functional governance systems is a barrier to entry for all types of organizations, from corporations to political institutions to charities.

In some cases, blockchain governance systems can serve as the basis for cheaper, more efficient, and more automated governance. This can reduce the burden on regulators with respect to existing political and corporate governance systems, and give others access to enforceable, verifiable governance systems.

It may seem odd to think of governance as dependent on or entangled with technology, but to some extent technology does shape the possible range of governance systems available to us.

The possibility of modern democratic governance depends on transportation and communications technologies that allow millions of people to participate in secure democratic elections and allow a centralized regime to govern a country of millions of citizens.

Blockchain governance systems are by no means a utopian fantasy that will end modern enterprise or replace all our existing governance methods. Many aspects of governance cannot be replaced by technology. Governance systems written in code may be as poorly designed as those written in ink. But at least we have expanded the basic governance tools.

Not only are these new tools low-cost, they are open source and available to anyone with an Internet connection and a computer.

You can't help but wonder what new things we'll create with these tools.