The Downside of Democracy (and What it Means for Blockchain Governance)
Following acrimonious debates within the bitcoin and ethereum communities over the past few years regarding governance decisions that led to forks, there has been a wave of projects offering on-chain governance.
This is a system for choosing changes to public blockchain protocols using formalized governance mechanisms encoded within the blockchain, instead of informal discussions offline. Prominent samples of protocols with on-chain governance include Tezos, EOS and Decred.
While these projects may have some value, i think the push for on-chain governance is, in large part, the results of an intuition carried over from environments like nation-states and personal companies, both of which are very different from crypto networks
Implicitly, their belief is that we are seeing an excessive amount of exit and not enough voice and that we got to build better mechanisms for voice via formal on-chain governance.
Let’s step back a touch . What do I mean by voice and exit?
Members of a corporation , be it a nation, a business or a crypto network, have two possible responses when they’re unhappy with its governance.
They can exit – leave the connection – or they will use their “voice” to undertake to enhance the connection through communication.
Citizens of a rustic can answer political repression by emigrating (exit) or protesting (voice). Employees can prefer to quit their unpleasant job (exit), or ask management to undertake and improve things (voice). Unsatisfied customers can prefer to shop elsewhere (exit), or they will invite the manager (voice).
In crypto networks, users can attempt to change the way that the protocol operates through governance (voice) or they will prefer to exit by either leaving the network or forking.
Spectrum of governance
The relative merits and disadvantages of voice and exit depend upon the value of exit.
For example, it’s important that countries are democratic and have (on-chain) voting that permits citizens to formally express their opinions because the prices of switching your citizenship (exit cost) are very high.
The tradeoff of prioritizing voice exit is that democracies tend to be very inefficient compared to more technocratic sorts of governance. this is often epitomized in moments like Alaska senator Ted Stevens describing the web as “not an enormous truck, but a series of tubes.” Despite being the top of the committee ruling on net neutrality, Stevens displayed a really low level of understanding about how the web actually worked.
Democracy fundamentally operates at the median of society, not the sting . It does that so as to take care of peace and permit for economic prosperity. On the entire , this has worked better than any previous governance system.
Private companies are more technocratic than nation-states. a comparatively small group composed of top management and enormous activist shareholders effectively control the institution. this enables them to be more efficient but also makes them more susceptible to disgruntled stakeholders – be it shareholders, employees or customers.
This is less of a problem because, compared to changing your citizenship, it’s much easier to vary your job or sell your stock. That is, the value to exit is lower so you’re less likely to “revolt.” If you don’t like how Apple’s key decision makers are behaving, you've got the choice to quit your job or sell your stock.
At the far end of this spectrum is open-source software. The governance of open-source software is captured within the phrase “rough consensus and running code.”
Open-source software governance tends to be technocratic with a comparatively small group of stakeholders controlling the project. The broader stakeholder community has little or no voice. Even fairly large bitcoin holders and miners have almost no say over bitcoin core’s development roadmap.
However, if the technocratic rulers enter a direction you don’t like, you'll far more easily “revolt” by forking the network. Facebook’s employees and shareholders can leave but they can’t take the database with them. In open source software and blockchains, you can.
It is the other of democratic nation-states during this sense. you've got very low exit costs then you'll get the efficiencies of a technocratic system without the threat of revolution. The revolutionaries can just start their own competitor.
From a top-down perspective, this technocratic, fork-prone governance is uncertain and hard to predict, which is usually perceived as an inefficiency. To the contrary, this uncertainty may be a necessary pre-condition, a fertilizer, for opportunity.
Open-source source software (and software more broadly) is that the source of such a lot innovation because it so uncertain and loosely governed.
It is susceptible to frequent “revolutions” but those revolutions don't end an equivalent way as real-world revolutions because information may be a non-rivalrous good. The revolutionaries can walk out the door and build the longer term they believe should exist.
Physicist Planck is usually paraphrased as saying that “Science advances one funeral at a time.” Democracies tend to be no different and organizations often advance one retirement at a time.
By contrast, open-source software advances one fork at a time. it's not bounded by biology or geography but only by non-rival, infinitely replicable information.
These forks may ultimately be proven as worthless by the market, but the dissatisfied faction needn't wait to undertake out the approach they perceive as better.
Returning, then, to blockchains, introducing on-chain governance to crypto networks is probably going to form them more like nation-states with the inefficiencies that entails. Is that the proper tradeoff?
Network effects associated with brand and real-world integration points are other important sources of friction that discourage forking. i think for specific circumstances, that some sort of on-chain governance proves more efficient.
But for a technology with comparatively low exit costs, forking is more feature than bug. Many projects with strong technocratic leaders practicing loose consensus and running code form a strong and competitive ecosystem. While many individual projects will fail, it’s more likely that more optimal approaches are found by one among many forks.
Off-chain governance could seem more unpredictable, but may prove more fertile ground for innovation for just that reason.