Nick Chong · 1 week ago · 2 min read · Insights via Grayscale Investments
Answering Vitalik Buterin’s 7 Hard Questions For the Blockchain World Part 7: Fundamentally Flawed Governance
Ethereum co-founder Vitalik Buterin put forward a series of open questions to the cryptocurrency community in a recent discussion with Mars Finance International WeChat group, postulating seven issues present within the blockchain ecosystem.
Buterin’s “hard questions for any blockchain people” deal with some of the biggest obstacles that stand between the current state of blockchain technology and widespread adoption, highlighting hashpower centralization, the lack of “useful” large-scale apps, the high frequency of hacks, scalability and latency, issues with consensus methods, and the inefficiency of on-chain governance.
Previously in this series, we answered Buterin’s questions on hashpower centralization, securities issues, dApps latency, scalability and Proof of Work (PoW) energy consumption, and the centralization risks of Proof of Stake.
In this multi-part series, we will attempt to answer each of Buterin’s 7 questions.
How Will Blockchain Governance Work?
“Given how EOS governance has turned into an epic fail, doesn’t this mean that all on-chain governance including DAOs is fundamentally flawed? How can any DAO deal with bribe attacks, plutocrats, and other risks?”
Buterin’s final “hard question for the blockchain world” deals with one of the most difficult issues present in any decentralized ecosystem—governance. A public blockchain, by design, has no centralized authority or organization making decisions. While decentralized architecture delivers a wholly trustless, permissionless, and transparent system, it also makes the creation, maintenance of standards, security, and development problematic.
Regardless of how “decentralized” any blockchain network organization is, it’s still necessary for developers and network participants to agree upon, fund, and implement new standards, features, and upgrades.
The Governance Paradox
The techno-libertarian dream of a blockchain is a system that enforces immutable contracts, prevents double spending, and caps total capital supply pool without ceding power to any individual or third party. The reality of any complex system, however, is that governance — at least in some capacity — is inevitable.
Oxford Internet Institute Professor Vili Lehdonvirta outlined the blockchain governance paradox in a 2017 talk at the Alan Turing Institute:
“No rent-seeking, no abuses of power, no politics … This is why so many people are so excited about blockchain: its supposed ability change economic organization in a way that transforms dominant relationships of power. Unfortunately, this turns out to be a naive understanding of blockchain, and the reality is inevitably less exciting”
Lehdonvirta highlights the difference between making rules and enforcing rules. Laws, for example, are rules made by legislature, and enforced by state bureaucracy? The Bitcoin protocol is a set of rules enforced by network participants — a decentralized network of computers — but who makes the rules?
“Blockchain technology may provide for completely impartial rule-enforcement, but that is of little comfort if the rules themselves are changed. This rule-making is what we refer to as governance.”
The core issue with blockchain governance, argues Lehdonvirta, is that the concept of “trust-by-computation,” or the emphasis placed by blockchain maximalists on the shift from trusting people to trusting math, ignores the underlying politics — highlighting the late-2017 SegWit2x debate:
“… many people don’t recognize (blockchain politics), preferring instead the idea that Bitcoin is purely “math-based money” and that all the developers are doing is purely apolitical plumbing work. But what has started to make this position untenable and Bitcoin’s politics visible is the so-called “block size debate” — a big disagreement between factions of the Bitcoin community over the future direction of the rules.”
The Impact of Poorly-Implemented Blockchain Governance
The inherent issues present within the current blockchain governance paradigm are clearly presented by the outcome of the original DAO or decentralized autonomous organizations. The original DAO was designed as an equivalent to a venture capital fund, supporting new blockchain innovation without the need for a centralized governance structure. Investment decisions were made in an atomic fashion, with token holders collectively deciding on what to invest in, and how.
Security flaws present within the DAO code, however, allowed hackers to abscond with $55 million in cryptocurrency — a devastating blow to the cryptocurrency ecosystem that forced Ethereum developers to implement a still-controversial hard fork.
The original DAO illustrates the fact that even with a nuanced, atomic approach to governance that provides all network participants to contribute to the making and enforcement of rules, individual weak links in the “chain” can still cause catastrophic damage.
Ultimately, a blockchain governance structure can be distilled into two elements:
- Incentivization: Groups and individuals present within a blockchain governance structure must be incentivized to contribute to the development, maintenance, and use of the network, proposing and acting collectively upon changes that are advantageous for both themselves and the gestalt.
- Coordination mechanisms: It’s highly unlikely that all participants in a network will align. Therefore, it’s essential that a governance model includes a mechanism that allows participants to coordinate around common goals.
Bitcoin, for example, incentivizes developers with the potential for an increase in value of their current BTC holdings, social recognition, and control over future project direction. Participants that assist with network maintenance — miners — are incentivized with block rewards and transaction fees, while users are incentivized with an anticipated increase in existing token holdings and increased functional utility.
The Future of Blockchain Governance
Buterin posits in his final question that the future of blockchain governance is fundamentally flawed — it’s not possible to fully decentralize governance, as there will always be hackers or attack vectors present within a governance structure that could potentially cause catastrophic failure.
There are several projects, however, that take an opposite view, promoting the further quantification and atomization of governance elements. DAOStack is a more sophisticated, nuanced interpretation of the original DAO, favoring a modular approach to governance structure that allows participants to collectively vet governance elements for functionality and security before implementation.
Ralph Merkle, one of the inventors of public key cryptography, proposes a blockchain governance structure that implements Robert Hanson’s “futarchy” structure where network participants define values, with prediction markets used to decide what actions will maximize those values and incentivize network participants.
The blockchain paradigm shift represents a wholly unique stage of human development — there has never before been a time at which thousands of different governance structures can be tested simultaneously, at such high speeds. Blockchain governance development may currently be at a nascent stage, but a Cambrian explosion of governance experimentation is currently underway.
You can find all the answers for our “Answering Vitalik Buterin’s 7 Hard Questions For the Blockchain World” series here:
- Part 1: Hashpower Centralization
- Part 2: The Scalability Barrier
- Part 3: Hacks, Security, and Theft
- Part 4: DApp Latency
- Part 5: Proof of Waste
- Part 6: Proof of Centralization
- Part 7: Fundamentally Flawed Governance