Blockchain Governance: Is Everyone on the Same Page?

In this blog I want to provide a working definition of blockchain governance, highlight previous research that I have done on blockchain governance and utility token protocols, and discuss additional research questions that I intend to explore. Strong emphasis is placed on the role of the token holder rather than other stakeholders following the formal definition of blockchain governance. This is a long post! I hope you find it useful.

Blockchain governance has been a hot topic for some time. Early discussion focused on Bitcoin governance, then governance surrounding the DAO and now on DeFi. Special attention has been given to governance tokens and their role in democratizing DeFi projects. Governance tokens give token holders voting rights, but they have several pitfalls which include concentration of power and quick founder exits. Sometimes the pitfalls and ideological concerns of governance tokens (and presumably blockchain governance as a whole) intertwine, and questions such as, “do governance tokens actually help with decentralization?” and “Is blockchain DeFi governance really different from corporate governance?” are born.

The literature that addresses blockchain governance beyond DeFi typically looks for theoretical foundations in corporate, IT and Open-source Software (OSS) governance literature to define and provide a framework for blockchain governance. The definition of blockchain governance is still yet to be agreed on and many mainstream outlets often conflate several concepts to define blockchain governance. The first is that consensus and governance are sometimes used interchangeably. The second is properly distinguishing between “governance through blockchain” and “governance of the blockchain” in writing. Governance through blockchain means that a governmental process is implemented through information exchange and transactions on the blockchain. *Governance of blockchain* means the development, execution, maintenance and adaptation of the blockchain. Governance of blockchain is more akin to corporate, IT and OSS governance. Governance of blockchain should be considered the framing in which we define blockchain governance. A more appropriate definition of blockchain governance should be:

The means of achieving the direction, control and coordination of stakeholders within the context of a given blockchain project to which they jointly contribute.

So why is any of this relevant? An answer can be formulated from findings in OSS literature which states that the competitiveness of open-source projects is correlated with its ability to successfully manage and govern resources. Since most public blockchains are at the very least descendants of the OSS software movement, surely they inherit some of the properties of the parent and many of the conditions for the success of these projects are similar. Without being overly academic, we do need to define who the stakeholders are, define “contribute”, and define “success”. Motivation of stakeholders is also necessary to define. I will define each of these concepts in the OSS context and then the blockchain context for comparison. For traditional OSS communities, there are a number of motivations for individuals to get involved, but I will not dive deeply into those motivations here. “Success” in open-source projects has been elucidated by some authors as including a combination of : 1. Recognition, 2.User engagement, and 3. Porting. Contribution can take many forms in many ways in OSS projects. A few include: 1. Writing to improve documentation, 2. Improving UX, 3. Planning events, 4. Coding, 5. Organization. The stakeholders in traditional OSS projects are usually a collection of developers, corporate sponsors and other enthusiasts working to further the project through varied means of contribution.

There are several ways in which blockchain open source projects’ qualities do not perfectly intersect with non-blockchain OSS qualities. The first is that the stakeholders in most blockchain projects include: 1. Developers, 2. Miners/Validators, 3. Users, 4. Token holders. The success criteria of the blockchain project is highly equated with the token value, but also to its adoption rate. The motivations for contribution are also different where blockchains have added a monetary component to the development and governance process.

While corporate sponsors were highlighted as stakeholders in an OSS project, they are not often considered a part of the internal governance process of these projects. (This point is important to highlight the uniqueness of token holders in blockchain projects, in particular utility token blockchain projects) This is made clear through the illustration of the evolution of governance in OSS. There are several stages: 1. Spontaneous, 2. Internal, 3. External. Spontaneous is the stage where a group of developers come together to create an innovative project. This form is usually the de facto form of many blockchain start-ups in their early days of inception. Internal governance evolved to institutionalize governance to allow for more efficient coordination. External governance is the evolution that has risen from the success of OSS projects. Industry interest in incorporating OSS into their organizations has led to the need to coordinate OSS communities with external sources. Corporate influence on OSS communities generally take three forms which are: hybrid companies, pure-play OS companies, and OSS process-oriented companies. The hybrid model is based on the integration of open source and internal development. Pure-players make the bulk of their money from selling support and training on OS software. Process-oriented OSS companies make their money from enhancing coordination and control in OSS development. Other authors describe the relationship between corporates and OSS communities in terms of corporate behaviors which can take on roughly three forms: symbiotic, commensalistic, or parasitic. Corporate influence therefore is an exogenous pressure that can augment the governance of an OSS project.

Token holders who are not also developers, miners/validators/auditors nor users also create exogenous pressures to augment internal governance. These token holders, which I often define as pure token holders, are different than the corporates who influence OSS projects in that they don’t derive profit by incorporating the OSS into their products for competitive advantage, but rather through either speculative token value increase or through the token increase of the adoption of the technology. This type of token holder is disconnected from the project in a way that a corporate sponsor is not because speculative gains are not necessarily correlated with quality product.

This relationship can prove problematic in blockchain projects that are organized as utility token platforms. In a paper using Factom as a case-study, I explored several areas of concern pertaining to governance of utility token platforms and misaligned incentives of stakeholders. In many blockchain projects, I believe that there are also misaligned criteria's of success and misaligned expectations and needs for roadmaps to adoption. In the paper I used Principal-Agent theory to establish several propositions for agency problems and their solutions. Through these propositions I derived the short-comings and a potential impasse in restructuring governance. Most analysis focused on the use of contracts by principals which are assumed to be other ANO’s and token holders (although token holders have no formal recourse on enforcing contracts) to elicit certain behaviors. This paper did not fully analyze the role of token holders in utility token projects. While it is self-explanatory that the early demand for the token created a monetary value for the tokens, it is less clear what other benefits pure token holders bring to blockchain projects, specifically utility token projects.

While blockchain governance is important in potentially improving the coordination problems of creation, maintenance and improvements of projects, it is not a panacea for all problems related to blockchain project success. This is in part due to a lack of formal metrics for determining the success of some blockchain projects. I believe that existing research on defining blockchain governance and formalizing a blockchain governance framework is beneficial, but further research questions exist. In narrowing the focus of blockchain governance on utility token projects we have several questions we can ask:

1. What role does a protocols governance play in its adoption?

2. What benefits do pure token holders bring to utility token platforms?

3. What is the relationship between adoption and token price?

4. How does token holder fundraising of OSS projects compare to traditional corporate funding of OSS projects affect the project?

Question 1 is an important one. While it has been identified in the literature that governance is important for the competitiveness of OSS projects, there are no empirical findings on how this translates in the blockchain space. If in fact adoption is the success metric of interest, how much energy should be put into crafting “cutting-edge” governance. Question 2 can be broken into several sub questions which include: 1. What impact does token price have on adoption of a utility token? 2. What impact does word-of-mouth marketing have on the adoption of a utility token? It is difficult to observe the behaviors of pure token holders. These two questions however could be useful to determine additional utility to projects of utility tokens other than creating initial demand and therefore a monetary value to the token. Question 4 is also an interesting one, it gets at a fundamental question we want to know, “Did blockchain create a successful new way of funding OSS projects compared to more traditional alternatives?”

As always, I am interested in understanding whether we are placing emphasis on the right things. After the speculative bubbles are gone, what remains? What are the real causal impacts that exist by leveraging certain component parts of the social and technical pieces of the blockchain puzzle?

All BTC donations for blockchain posts will be given to the W&M Blockchain Lab.

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