All Commentary
Monday, October 3, 2016

Blockchains: An Experiment in Governance without Power

Cryptocurrencies aren't just an experiment in monetary theory, but also a radical experiment in decentralized governance.

Bitcoin’s unique ecosystem of peers and stakeholders stands in stark contrast to most other human organizations.

The voting public is accustomed to issues being settled by aggregated winner-take-all votes, and executive edicts enforced by the state. Meanwhile in the corporate world, directives are issued down a hierarchy, and those who do not comply with them are ultimately fired.

Like other systems of government, though, democracy never actually questions the necessity of positions of power.

But the same rules and attitudes do not define the governance of blockchain ecosystems.

According to conventional political ideas a decentralized and wholly voluntary system of governance should not be possible, let alone optimal. The success of bitcoin as a monetary and social experiment therefore could depend on shattering this very narrative.

 Unlike other systems, its organization is not defined by power structures, but by voluntary consensus and open competition.

Contrast with Democracy

Take democracy, nearly unanimously considered in Western academia as the most optimal form of governance, it seeks to fill positions of power in the most egalitarian manner possible using popular vote.

Political scientist Francis Fukuyama even famously remarked “What we may be witnessing … is the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government”, leading us to believe that no further improvements are left to be made.

Like other systems of government, though, democracy never actually questions the necessity of positions of power. It is an underlying presumption that power, the ability to compel others, is a necessary prerequisite for organizing collective efforts in the most socially optimal manner.

So what happens when we can’t force our peers to conform and comply? What do we do when there is no one in charge?

These are the questions facing cryptocurrencies, making them not just an experiment in monetary theory, but also a radical experiment in decentralized governance.

How does such a system work, and can it prosper?

The Original DAO

At bitcoin’s core is a peer-to-peer network of nodes and miners, and on top of this network is a much larger ecosystem comprised of a diverse population of stakeholders. Bitcoin is the original decentralized autonomous organization.

These stakeholders include everyone having something to gain should bitcoin use continue to grow, such as bitcoin businesses who would hope to see higher revenue as a result. But far more common are everyday users who are made significant stakeholders by the simple virtue of owning bitcoin.

The reason for this is inherent to the functionality of the blockchain, the breakthrough in computer science that is at the heart of bitcoin. Public blockchains by their very architecture require native tokens in order to operate. These tokens are created and rewarded to miners, or earned as transaction fees, in exchange for performing the work of securing the network.

This incentive created by native tokens is what keeps the network as a whole trustless.

In bitcoin’s case especially, an ultimately fixed number of tokens means that, should use and ownership increase, then so too will their value and the wealth of existing stakeholders. Just as the earning of newly created bitcoins and transaction fees incentivize miners to secure the network, the mere possession of them incentivizes the holder to contribute in some way to improving and growing the ecosystem.

Rather than a simple payment network, bitcoin thus resembles a corporation, complete with shareholders but without a head, officers, or any guidelines besides what is hardcoded into the protocol. In this way, bitcoin is the original decentralized autonomous organization (DAO), and has been running very successfully for over seven years in this capacity without any formal delegation of authority.

Replacing Authority

Initially the lack of any central leader or decision-making body in this system can seem like a significant drawback. As the blockchain adage goes: this is a feature, not a bug.

Governments and corporations both depend on such figures to make decisions on behalf of the collective group. But one person’s knowledge is limited, and they can always make mistakes. Misdirected decisions from on high can and do often bring ruin to both companies and nations.

Yet it is undeniable that like all else, bitcoin’s utility and growth face challenges which require solutions and directed effort. Fortunately, the lack of a structured hierarchy poses no actual barrier to problem solving. Instead of convincing one key decision maker, energy is better spent on competing in the market. Anyone is free to submit ideas, contribute code and build applications on top of the network.

The absence of a central authority figure is also not synonymous with a lack of leadership. To the contrary, it means anyone and everyone is able to lead. The difference is that without compulsion, different ideas and solutions must openly compete against each other. No one can be forced to accept any service or use any software. The resulting competition means that multiple solutions to different problems can be market tested and users will ultimately vote with their feet.

This simple dynamic is the key to not only how the bitcoin ecosystem works, but how it can ultimately thrive over centralized planning. Ineffective solutions to problems on the part of stakeholders are able to fail in isolation without threatening the whole ecosystem, and valuable solutions can succeed and grow on their own merit and earn the appropriate amount of market share.

Increasing Utility

So, what do the dynamics of this environment mean for stakeholders?

It means there are various classes of challenges limiting bitcoin’s utility and adoption, and ultimately they can only ever be addressed by stakeholders on their own volition. As utility increases so does the value of the token, and a rising tide lifts all boats.As far as we are motivated to improve the ecosystem as stakeholders, we should identify problems facing it that are in our power to address.

This can be as simple as educating others, as communicating the workings and ideas behind cryptocurrency are an ever-present challenge. Various other pain points can be addressed through a limitless possibility of services, businesses and applications built on top of the bitcoin peer-to-peer network. This includes services which make it as easy as possible to buy tokens and on-board new stakeholders, or wallets that improve the user experience and the security of their funds.

This level of ecosystem problem-solving has several advantages, chiefly that it’s the easiest to engage in. Such solutions require no consensus to implement and are able to move quickly using the centralized structure and decision-making of individuals and traditional businesses, while still operating competitively within the framework of the existing consensus protocol.

The benefit of building these services and apps on top of the most established and secure blockchain ecosystem is tremendous. The shared underlying token creates compatibility between services and applications, leading to a powerful network effect that greatly benefits utility. As utility increases so does the value of the token, and a rising tide lifts all boats. Yet blockchains themselves are far from perfect.

So, how do we manage deeper problems that cannot be addressed without altering the underlying protocol?

Law and Consensus

Bitcoin’s peer-to-peer network sets the framework within which everything else operates. It possesses the hard-coded rules by which everyone agrees to play in order to use the shared token it facilitates. In this way, the consensus around the Bitcoin Protocol is very much a social contract in the spirit of polycentric law – the idea that legal systems freely compete like any other good or service. The Bitcoin Protocol contains the rules that all participants agree to play by, but unlike monopolistic law, there’s also no compulsion to play by them. Participants freely choose to do so in their own self-interests, and can walk away at any time. Public blockchain development driven by special interests is a doomed enterprise.

If no parties can be forced into abiding by the protocol’s “legal” framework, then that framework must adequately and solely serve the universal needs of all stakeholders, lest it too lose market share and be replaced. This is why development of any cryptocurrency protocol requires true consensus.

A spectacular example of how this can go wrong is, of course, the ethereum classic split. Following “The DAO” hack, a group of ethereum and DAO stakeholders led an effort to reverse an exploited smart contract by altering blockchain history. It made no difference that these stakeholders included high-profile lead developers and architects of ethereum itself, or a great many of the burned investors in the DAO.

To continue to use polycentric parallels, this “ruling” was still deemed unacceptable to a significant part of the ecosystem. They were under no obligation to accept it and instead opted to continue operating by the original consensus rules of immutability, thereby peacefully splitting the network, ecosystem, and token as a result.

This development is arguably the most significant high-profile event to occur in the cryptocurrency space and it bodes very well for its future. Modern consumers have always taken for granted the ability to choose between goods and services and the beneficial competition which follows. But never before has the same competition been extended to the very rules which we agree to participate by.

This is the very idea behind polycentric law. Until now, that idea has largely been the purview of abstract legal and economic theory. Thanks to cryptocurrencies, we have for the first time living examples of frictionless and purely consensus-derived rules in place, and the spontaneous order which follows as individuals attempt to determine which are the best ones.

The developers of such projects as ethereum can be credited with recognizing the success of bitcoin as the original DAO and seeking to build on it. What they perhaps don’t realize is that that very success is due precisely to the conscious choice to limit the protocol itself to a simple and neutral framework for exchange.

We must work to shed the divisive winner-take-all mentality of politics we are all accustomed to. Commercial competition creates a positive sum world.

So long as such controversial steps as the ethereum rollback are taken, a blockchain’s consensus-based network cannot remain whole. The altering of the protocol in any unneutral manner can never be agreeable to all stakeholders, virtually ensuring a split occurs. Such actions could be pulled off easily from the top down in a hierarchical system, but even with good intentions they are incompatible with establishing a widely agreed upon voluntary protocol for transferring value. Public blockchain development driven by special interests is a doomed enterprise.

The most widely used blockchain will therefore be the one that best meets the base goal of facilitating universal exchange and cooperation and nothing more.

Any intervention beyond universally advantageous improvements to this function should not be undertaken, as consensus is not likely to be maintained and potential network utility will be needlessly lost. But where there is disagreement as to what actually constitutes improving “universal exchange and cooperation”, vote with your feet. Competition is the only way to identify which implementation works best.

A Shift in Thinking

In this environment, stakeholders are able to self-organize with others according to whichever shared goals or ideas they may possess. This means they can apply themselves to where they believe they can add the most value to the ecosystem, as well as choose which underlying protocol rules they use and support.

None of these actions requires permission and the accompanying zero-sum power struggles which follow.

This mode of thinking is predominantly different from looking to a distant capital or a powerful figurehead for either answers or to place blame. As my former colleague from FEE Max Borders writes, it demands a shift in attitude which requires we stop looking for leaders, and instead start looking for teammates.

By doing so, we must also work to shed the divisive winner-take-all mentality of politics we are all accustomed to. Commercial competition creates for us a positive sum world – that is, a world of ever-increasing wealth. But the advantages of a competitive system begins to be negated if energy is not actively directed towards creative and constructive efforts.

Should you find available features or services to be lacking, create a viable alternative. Should you believe adopted consensus rules fundamentally hamper the protocol’s neutral mandate to facilitate exchange and cooperation, switch to a competing cryptocurrency or fork and move on.

Forks especially may seem like a messy and undesirable event to skeptics who do not recognize the marvelous dynamics at play. But the unique competition that follows, and the new and more productive mentality that it enables, is the key to success in this experiment in decentralized governance.

Reprinted from

  • Ariel holds the Henry Hazlitt Fellowship for Digital Development at FEE. He is a student of Florida International University with a focus in finance and economics.