Governance
Aron Fischer, Colony
María-Cruz Valiente, Universidad Complutense de Madrid
1. Existing definitions of the term ‘governance’
The importance of governance is well recognised in the information technology (IT) industry (ITSM Library, 2008), and this term is widely used in academic, economic and policy debates. In the blockchain space, this term has been tightly linked to Decentralised Autonomous Organisations (DAOs) (Ethereum Whitepaper, 2013). Unfortunately, there is no common understanding, or generally accepted formal definition of governance, when associated with blockchain-based technologies. In pursuit of a formalisation of this term, before going more deeply into its evolution in the context of blockchain technology, we will briefly chart out a few common definitions.
The origins and most common approaches to governance are thoroughly dealt with by Hufty (2011), and as stated by Bevir (2011), at the most general level, governance can be associated with “theories and issues of social coordination and the nature of all patterns of rule”. The Oxford English Dictionary defines governance as “the action or fact of governing a nation, a person, an activity, one's desires, etc.; direction, rule; regulation.” In an economics context, governance is defined as “the use of institutions, structures of authority and collaboration to allocate resources and coordinate the effort and activity in society or in the economy” (Bell, 2002).
On the other hand, from an IT perspective, governance is composed of the leadership and the set of structures and processes that guarantee that the IT of an organisation provides support and extends the organisation’s strategy and objectives in a manner that is focused on achieving a better alignment between the business and IT (Bon, 2008). In contrast, corporate governance is “the whole set of legal, cultural, and institutional arrangements that determine what publicly traded corporations can do, who controls them, how that control is exercised, and how the risks and returns from the activities they undertake are allocated” (Clarke, 2012). However, the meaning of corporate governance could vary considerably according to the values, institutions, culture and objectives pursued by each organisation as well as the corporate governance system in the jurisdiction where the corporation is registered (Pollman, 2019; Norbäck and Persson, 2009). Corporate governance is not just about accountability, and it has an important role enabling strategising, value creation and innovation, as highlighted by Kraakman et al. (2017).
2. Issues currently associated with the term in the Blockchain domain
Despite the gap in literature due to the lack of a formal, comprehensive and holistic definition of what governance means in different domains, we can find several papers focused on governance whose approaches are applied or could be applied to the blockchain technology.
For example, Fuster (2014) proposes a comprehensive framework encompassing all the diverse aspects determining governance of Online Creation Communities (OCCs), based on notions of governance of the commons derived from the study of natural resources, particularly the work of the Nobel-laureate Elinor Ostrom (1990). Here governance is considered as the direction, control and coordination of a dynamic process, which evolves over time and manages several aspects of power classified by eight interrelated categories, from cultural principles/social norms and formal rules or policies, to infrastructure provision. More concretely, Rozas et al. (2018) specifically explore the transformative potential of blockchains while drawing on Ostrom’s (1990) principles for self-governance. They identify and conceptualise six affordances that blockchains may provide including tokenisation, formalisation and decentralisation of rules, autonomous automatisation, decentralisation of power over the infrastructure, increase in transparency and codification of trust.
De Filippi and Wright (2018) review blockchain technology and explore the idea that governance attached to organisations could be implemented in blockchain-based decentralised software systems through smart contracts (i.e., small pieces of code deployed on the blockchain). Similarly, Davidson et al. (2016) share the idea that by eliminating the need for trust of agreed contracts through consensus and transparency, blockchains enable a new type of economy for self-governing organisations with the coordination properties of a market. Nevertheless, as stated in Yermack (2017), the fact that the blockchain is operated autonomously, could itself raise problems for corporate governance, such as corporate record-keeping and the maintenance and upgrading of blockchains themselves.
Meanwhile Reijers et al. (2016) explore how blockchain technology enables the configuration of specific forms of political organisation using the Ethereum network as a case study.
In another line of research, Karjalainen (2020) presents an interesting survey of governance models in blockchain-based decentralised networks. It is worth highlighting that consensus mechanisms inherent in blockchain transactions have been excluded from this study.
3. Usage of the term ‘blockchain governance’
We find interesting visions of governance in the context of blockchain, for instance, in the works presented by Finck (2018) and Reijers et al. (2018). However, the academic research for blockchain governance is still somewhat sparse (see also: Pelt et al., 2020), and while governance is a much discussed topic at blockchain conferences, such as Ethereum Devcon (DevCon Archive), EDCon (EDCON), ETHCC (ETHCC) and DAO Fest (DAOFEST), the written record still comprises mostly of blog posts and social media entries of dubious quality.
As stated earlier, all governance is ultimately a social construct, comprising not simply laws (or by-laws), but also norms, culture, institutions, and individuals. Despite impassioned claims to the contrary, this is no different in regard to blockchains.
To understand the (mis-)usage of the notion of blockchain governance, we must first consider what specifically blockchains bring to the table: they enable systems in which adherence to procedure is automatically enforced, relying neither on norms nor a legal system, and leaving no room for individual discretion. This strict separation of enforceable procedure on the one hand and norms and discretion on the other is genuinely novel, but its import is exaggerated. Among the more enthusiastic supporters of blockchain technology, we observe a tendency to wilfully ignore all questions of norms and culture and equate governance entirely with coded procedures ("code is law"). Once all governance is reduced to procedure, it is hard to resist the claim that blockchains change everything.
This mixture of confusion and hubris is exemplified nicely in Singh (2020), who introduces "standard" governance as being either direct governance or representative governance, thus conflating governance with voting procedures, and asserting that everything is different with the blockchain: "We can broadly categorize the governance types into two major categories: Standard Governance and Blockchain Governance".
A further ambiguity stems from the fact that blockchain governance is used in two related but distinct contexts, on top of which usage in the first context is further complicated by the highly polarised and politicised nature of the blockchain space where we observe different factions reinterpreting and redefining the phrase to fit their outlook.
In this first usage, blockchain governance refers to governance of the blockchain (i.e. the specific question of making consensus-relevant changes to the software running a blockchain). Consensus relevance here means a change to the internal rules of the blockchain that must be applied (i.e., software must be updated) by all relevant participants in the blockchain network such as cryptocurrency exchanges, wallet software providers, miners, and users. If a large enough portion of the network does not apply the changes, then the network splits into two: those following the new rules and those following the old rules - this is called a hard fork[1].
Examples of this approach include: (i) Curran (2020), who uses blockchain governance to vaguely mean whatever process leads to consensus-relevant changes in the software, and hard forks are hailed as a safety valve for users to choose their own fork if things go awry; and (ii) Rajarshi (2020), where governance is conflated with voting procedures, and hard forks are hailed as enabling "much more flexibility in operation than traditional structures" because "a user is free to choose which blockchain to follow."
In this context, we typically observe the introduction of a strict separation of governance into off-chain governance and on-chain governance.
The main idea of on-chain governance is to use coded procedures within a blockchain that represent voting procedures by which decisions about consensus-relevant software upgrades are mediated through the consensus system itself. Usage of the term in industry is neatly summarised by Frankenfield (2018): "On-chain governance is a system for managing and implementing changes to cryptocurrency blockchains. In this type of governance, rules for instituting changes are encoded into the blockchain protocol. Developers propose changes through code updates and each node votes on whether to accept or reject the proposed change".
Proponents of this way of doing things disparage the off-chain (human) world as begin outdated in its reliance on people, norms, and culture to achieve governance, specifically alleging that procedures might be ill-defined or opaque: "off-chain collectives that organize over phone calls or at conferences, which either leads to shadow hierarchies where only a few, unwritten people make decisions" (Petrowski, 2020). Central to this line of thought is that anything on-chain is transparent and thus fair, and anything off-chain is hidden and potentially nefarious. This stands in contrast to the Bitcoin notion that all consensus relevant changes are bad because they represent human involvement and in as much as code is law, they are breaking the law (de Filippi and Wright, 2018). On-chain governance, they argue, only aids and abets such law breaking; arguing that the goal is not coordinated updates to the network, but immutability.
The other context in which blockchain governance is used ignores the previous question entirely and focuses on "using the blockchain to achieve governance". It presupposes the existence of a functioning blockchain network such as Ethereum, which can be leveraged to deploy smart contracts that encode the procedures of a decision-making paradigm. The blockchain is used to force/guarantee adherence to procedure, but the decisions being made have nothing to do with the blockchain itself (i.e., upgrading, avoiding hard forks). Rather, the goal of this form of on-chain governance is to enable the creation and operation of DAOs (i.e., organisations whose by-laws are written in code and enforced by the blockchain).
Once a DAO has been deployed to a blockchain, its rules can no longer be changed - short of a hard fork of the underlying network. Envisioning the need for future changes, DAO authors must incorporate the rules-for-changing-the-rules in the original deployment. We may think of this as analogous to an ordinary legislative process, coupled with a process for amending the constitution that the legislation is based on.
Current prominent examples of DAO platforms such as Aragon (Aragon, 2020) and Daostack (DAOstack, 2020) place heavy emphasis on a process in which proposals - usually to reallocate cryptocurrency funds - are put forward, a voting procedure then determines passage of the proposal, and eventually the funds are moved. This all happens on the blockchain, though off-chain communication and discussion are alluded to. Other examples such as Colony (Colony, 2020) take a more holistic view of governance, involving primarily off-chain interactions between human beings to come up with ideas and make decisions, and usage of the blockchain is reserved for enforcement, as opposed to decision making, whenever this is feasible.
It is worth noting that all DAO projects are ultimately a mixture of off-chain and on-chain elements, echoing the idea that even with blockchains and cryptocurrencies, governance consists of more than coded procedures.
4. Conclusion
As we have seen, the concept of blockchain governance is still under development and it can be understood differently depending on the domain of the application area under discussion.
In a broad sense, blockchain governance can be regarded as the integration of norms and culture, the laws and the code, the people and the institutions that facilitate coordination and together determine a given organisation. Importantly it refers to the entirety of motivations, rules, and activities that feed into the establishment of choices and subsequently deciding on them, and includes, but is not limited to, any coded on-chain rules that guide these processes.
However, blockchain governance also refers to two distinct dimensions: off-chain governance vs on-chain governance.
When referring strictly to smart contracts, one should specify that one is referring specifically to the on-chain elements of the governance system in question. Further care should also be taken to clarify whether one is talking about governance of a blockchain's own consensus relevant rules, or whether the governance system in question is merely using a blockchain to enforce on-chain rules in an otherwise unrelated off-chain domain.
References
Aragon. https://aragon.org/ (accessed September, 2020)
Bevir, M. (Ed.), 2011. The SAGE handbook of governance. SAGE, Los Angeles, Calif.
Clarke, T. (Ed.), 2012. The SAGE handbook of corporate governance. Sage Publ, London.
Colony. https://colony.io/whitepaper.pdf (accessed September, 2020)
Curran, B., 2020. What is Blockchain Governance? Complete Beginner’s Guide. https://blockonomi.com/blockchain-governance/ (accessed September, 2020).
DAOFest. https://daofest.io (accessed September, 2020).
DAOstack. https://daostack.org/ (accessed September, 2020).
DevCon Archive. The annual conference for all Ethereum developers, researchers, thinkers, and makers. https://archive.devcon.org/ (accessed September, 2020).
EDCON. Community Ethereum Development Conference. https://edcon.io/ (accessed September, 2020).
ETHCC. Ethereum Community Conference. https://ethcc.io/ (accessed September, 2020).
Finck, M., 2018. Blockchain Regulation and Governance in Europe. Cambridge University Press. https://doi.org/10.1017/9781108609708
Frankenfield, J., 2018. On-Chain Governance. https://www.investopedia.com/terms/o/onchain-governance.asp (accessed September, 2020).
ITSM Library, 2008. IT Service Management Global Best Practices - Volume 1. Van Haren Publishing.
Kraakman, R., et al., 2017. The anatomy of corporate law : A Comparative and Functional Approach. Oxford University Press.
Norbäck, P.-J., Persson, L., 2009. The Organization of the Innovation Industry: Entrepreneurs, Venture Capitalists, and Oligopolists. Journal of the European Economic Association, 7(6), 1261-1290.
Ostrom, E., 1990. Governing the Commons: The Evolution of Institutions for Collective Action. Cambridge University Press. https://books.google.co.uk/books?id=4xg6oUobMz4C
Pelt, R., Jansen, S., Baars, D., Overbeek, S., 2020. Defining Blockchain Governance: A Framework for Analysis and Comparison. https://doi.org/10.1080/10580530.2020.1720046
Petrowski, J., 2020. Polkadot Governance. https://polkadot.network/polkadot-governance/
Pollman, E., 2019. Startup Governance. 168 U. Pa. L. Rev. 155.
Rajarshi, M., 2020. What is Blockchain Governance: Ultimate Beginner's Guide. https://blockgeeks.com/guides/what-is-blockchain-governance-ultimate-beginners-guide/ (accessed September, 2020).
Reijers, W., Wuisman, I., Mannan, M., De Filippi, P., Wray, C., Rae-Looi, V., Cubillos, A., Orgad, L., 2018. Now the Code Runs Itself: On-Chain and Off-Chain Governance of Blockchain Technologies. https://doi.org/10.1007/s11245-018-9626-5
Rozas, D., Tenorio-Fornés, A., Díaz-Molina, S., Hassan, S., 2018. When Ostrom Meets Blockchain: Exploring the Potentials of Blockchain for Commons Governance. Available at SSRN 3272329.
Singh, N., 2020. Blockchain Governance Principles: Everything You Need To Know. https://101blockchains.com/blockchain-governance/ (accessed September, 2020).
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This term itself is not well defined. Thus hard fork may refer to a network split where different actors in the network follow different rules, whether due to an update that was not universally installed or due to a software flaw; but it is also used to describe a successful network upgrade that could have led to a split but did not. ↑
Florian Idelberger (not verified)
PUBLISHED ON: 27 Nov, 2020 - 15:15
First, I really think you did a good of capturing most of the essence of the governance debate with the distinction between on/off chain and, and code vs social, and chain vs. dao on chain.
Some comments/questions that I had – in the first sentence I perked up at ‘governance is an established term in IT’ but you later clarified that and then it is fine. Just as a start it kind of threw me off and I think that term is not necessarily always used.
What I would maybe like to see added is an aspect involving the economic incentives – if that would not go too far or would be part of another term - as many projects/companies I believe use a mix of on and off chain governance (f.e. on chain to vote, off chain to inform before) but in their model of governance it is assumed that stakeholders (in the form of tokens) have an incentive to inform themselves and vote. Preliminary results indicate however that this often does not hold up – presumably similar to people’s activity in other clubs and activities – it takes up a lot of time, and thus participants need enough capital invested to ‘really care’ but not overall have so much capital that their share is not important for their portfolio. These then form the core of the voting public. Unfortunately, it is probably true that there is not sufficient academic research so far, as my information is also from an online post of well, unknown quality. I link to it anyway, maybe it can prove useful either way or inspire more in-depth research. (MakerDAO. ‘Governance - Forget about Whales’, 4 November 2020. https://forum.makerdao.com/t/governance-forget-about-whales/4995.)
Similar to other entries, would be great to have a Tl;dr at the top.
Marina Micheli (not verified)
PUBLISHED ON: 02 Dec, 2020 - 12:23
Thank you, this is very informative, I will follow with interest. We tried to elaborate a social-science informed definition of data governance in the article linked below, if this could be somehow relevant to the debate. We emphasized how the term governance is often used to stress a discontinuity from so-called ‘command-and-control’ by the State and it is used to highlight how other actors are involved in the process of governing (also referring to the idea of good governance). Moving to the concept of data governance, we proposed a "social-science informed" definition that looks at how various social actors are involved, with different levels of power, in defining how data is controlled, shared and used.
Therefore, we defined data governance as the power relations between all the actors affected by, or having an effect on, the way data is accessed, controlled, shared and used, the various socio-technical arrangements set in place to generate value from data, and how such value is redistributed between actors.
https://journals.sagepub.com/doi/full/10.1177/2053951720948087
Samer Hassan, Complutense University of Madrid & Harvard University
PUBLISHED ON: 15 Dec, 2020 - 21:42
I would like to congratulate the authors for a good quality glossary entry. I do have some feedback and suggestions for improvements, and I hope they can be useful:
On Section 1, I miss the inclusion of definitions concerning community governance, alongside corporate governance. Governance is a well studied concept in peer production communities, which are directly relevant to the context, and the entry would have benefited from some input from there. This is touched later in Section 2 with Fuster (2014), and yet I think the Section 1 is incomplete.
On Section 2, when reading its title ("Issues currently associated with the term in the Blockchain domain") I expected something different from what I found. It seems a descriptive review of definitions in blockchain literature. Still, there is a lack of flow across the paragraphs of this section. Thus, I'd urge the authors to connect them better, e.g. one paragraph mentions "a new type of economy for self-governing organisations with the coordination properties of a market" but the previous paragraph tackled Ostrom-like self-governance which is not at all like a market. The article would benefit contrasting or relating better the paragraphs and the articles referenced, so that the flow and understanding for the reader is improved.
Section 3 is better structured with a clearer flow. I have the following comments on different parts of the text, listed in order of apperance:
- On what "blockchains bring to the table", I'd say the issues are partially oversimplified, and I'd encourage the authors to check out "Blockchain technology as a regulatory technology: From code is law to law is code" which covers the matter at hand (sorry for the self-citation!).
- On the "two related but distinct contexts" in which blockchain governance is used, I'd say it is difficult to read. And more so when the first is split into two (with on/off-chain discussion) without explaining that's the second. I'd suggest facilitate the flow through a brief mention of which those two are before starting discussing each. I.e. I'd clarify "governance of blockchains" vs "governance with blockchains" briefly first, and afterwards get in-depth into them.
- On the on/off chain discussion, I believe it's incomplete. The on-chain link to transparency and off-chain link to "phone calls" misses a more relevant comparison: the one with traditional free/open-source community governance. These communities have been managing and governing their internal processes often through a mailing list (see the governance of Apache Foundation projects or the Linux kernel) . To me, the most relevant comparison is discussing the contribution of on-chain governance when compared with the classical off-chain online governance from free/open-source projects.
- I find the sentence "On-chain governance (...) immutability" confusing and I honestly don't understand it.
- It is confusing you first define on-chain governance as changes to the blockchain itself, when later you mention that DAOs are a form of on-chain governance.
- Within the governance with blockchain part, I would not constrain on-chain governance to DAOs, since it may refer to smart contracts without actual DAOs. For instance, an IoT ecosystem with rules of interaction across devices implemented within on-chain smart contracts.
- On the DAO rules "can no longer be changed" once deployed, I'd say this is a bit more complex, since new versions can be deployed regularly, and this ultimately depends on the DAO implementation. For instance, in Aragon upgradeability is a core component of its DAOs, and thus saying they can no longer be changed is probably too extreme.
- When describing the different DAO frameworks, I'd be wary of highlighting one over the rest (e.g. "more holistic" ~ under a more positive light). I'd also include Daohaus approach btw.
On the Conclusions, I miss a clear full definition of blockchain governance to be used by third-parties. I hoped that was its second paragraph, but then since it expands into the on-chain and off-chain I'm not sure anymore.
Overall, good work!