Basic Principles For Governance In Decentralized Systems

Decentralized systems, such as blockchain networks, come with some major challenges regarding their governance frameworks. Whereas centralized systems, such as typical enterprises, are typically organised as hierarchical structures with top-down processes, blockchains lack a central authority that sets the rules and acts as the ultimate policymaker. In a blockchain network, all participants (full nodes) decide upon the architecture and the processes in a decentralized way, defined by a governance model, set-up by the participants themselves.

Whereas public blockchains are open to the public, i.e. everybody can download a client and participate in the network, the members of private networks decide who can join as a new member. The consensus mechanisms are the rules that define how information is added and how the network’s participants can work together in the network. Many public networks rely on Proof-of-Work (PoW) that requires some work from the nodes, usually meaning processing time, in order to prove that effort has been invested to qualify for the right to decide what is the truth. In most private networks, other consensus mechanisms, such as Proof-of-Authority (PoA), or Proof-of-Stake (PoS) are used. In these cases, the network’s participants agree upon a governance model defining the processes within the networks. PoA and PoS don’t depend on nodes solving arbitrarily difficult mathematical problems, but instead use a set of authorities – nodes that are explicitly allowed to create new blocks and secure the blockchain (in the case of PoA), or the creator of the next block is chosen via various combinations of random selection and wealth or age – the stake (in case of PoS).

Governance of decentralized systems is a matter of hot debate on conferences and in technological, as well as political and sociological circles. Without claiming to discuss this topic in its entirety in this post, based on our practical experiences creating and working with blockchain networks, we want to point out three basic principles for governance models for decentralized systems:

1. Ability of self-regulation

Every decentralized system starts in a centralized way: an individual or a group of people have the idea to create the network and start by designing its architecture and processes. Given the human nature, even in the best case, this network will be designed based on the beliefs and convictions of its founding members – but not necessarily matching the requirements of its future members, let alone future challenges caused by social-technological change.

In order to design the network in a resilient, future-proof way, its most important design principle is an inherent self-regulation ability: based on the to-be-defined rules the network‘s members can re-define their rule set, beginning with the elementary governance principles. As important as the general ability to self-regulate, is the process that defines the conditions under which this self-regulation takes place. As in any democratic process, a major challenge lies in motivating the system‘s members to actively participate in the formation of opinion.

2. Based on accepted regulatory frameworks

Blockchain technology itself is quite new: with the advent of Ethereum‘s smart contracts, these distributed ledgers could be applied to industrial use cases. However, the basic functionalities of a database and a ledger are well known and are also provided by traditional software offerings.

When blockchains are introduced in enterprises, they come across their legacy forefathers – and – the legal and regulatory frameworks the legacy systems are embedded in. Some of these frameworks, such as the open source modelling framework Eclipse (EMF), are well known and accepted in their respective industries. Often, enterprises have invested significant resources to check which framework works best – in a functional, and in a legal sense.

For a wider acceptance of new breed of decentralized ledger technologies, it makes sense to adopt basic elements of existing and already accepted legacy frameworks. If a blockchain solution comes with a governance model based on an accepted model, they are easier to handle by the company‘s legal department. As so often, it‘s easier to sell innovation if it comes with a pinch of familiarity.

3. Integrated incentive scheme

Whereas the above-mentioned self-regulation and familiarity aspects are necessary conditions of decentralized governance models, a frictionless integrated incentive scheme is the sufficient condition: any decentralized system will exclusively work if a sufficient number of network participants feel permanently motivated to add their inputs to the system. In other words: each individual member must be incentivized to constantly add value to the network.

The essence of any efficient incentive scheme is a monetary incentive that is positively correlated with the respective participant‘s efforts: the more value I add, the more value I get. Ideally, the incentive evolves in parallel to the system; i.e. depending on the network’s development the incentive adapts, accordingly.

Of course, there are many other elements of efficient decentralized governance models. However, we regard the above mentioned as key aspects. In cooperation with a team of the European Blockchain Association, we have developed a blockchain-based governance model that inherits these elements. In our first 2019 Blockchain Meetup, on 22 January, we will present and discuss this model in public. Afterwards, the first clients can plug themselves in and make use of this model in a Governance-as-a-Service scheme.