A blockchain network may be a complex system that involves a spread of actors that can't be trusted. Its protocol is meant to make sure that each actor has an incentive to cooperate which the prices of defection are above the potential gains.
Yet, like other complex systems, blockchains are made from many various parts, interacting with each other in ways in which are difficult to predict – and thus difficult to control or regulate.
It might be possible to manage the actions of every individual part. But because the whole becomes greater than the sum of its parts, governance can't be achieved without a correct understanding of the varied components that constitute that whole, and therefore the power dynamics that subsist among them.
This post provides an summary of the multiple layers of governance affecting blockchain-based systems. It distinguishes between two distinct governance structures: on-chain governance by the infrastructure and off-chain governance of the infrastructure – each model incorporating both endogenous and exogenous components, which contribute to varying degrees to the general governance structure of a blockchain-based network.
Layers of governance
If we glance at the primary post of this blockchain governance series, we see that the majority decentralized blockchain-based applications have their governance split into different layers, all interacting with the other:
The Internet protocols layer: e.g., the TCP/IP protocol
The blockchain layer: e.g., the ethereum protocol
The decentralized app (DApp) framework: e.g., DAOstack
The DApp layer: e.g., Sapien
Each layer implements its own governance structure, which can affect or be suffering from that of the opposite layers. the planning and implementation of those multiple layers involve several individuals, but likelihood is that they are available from different communities which will or might not communicate with each other .
Specifically, bottom-layer communities often implement their own governance structure with little to no regard for the governance system implemented on the upper layers. And yet in doing in order that they ultimately dictate how applications from the upper layers will operate.
For instance, DAOstack, a project i'm involved in, may be a DApp framework (Layer 3) built on top of the ethereum blockchain. it's therefore subject to the governance rules of that specific blockchain-based network.
Yet DAOstack also implements its own protocols that determine how people interact with the platform, and the way they will create new decentralized organizations on top of it. An application (like Sapien) deployed on top of DAOstack will, in turn, have its own governance protocols specific thereto DApp (Layer 4).
Accordingly, any blockchain-based application is subject first to its own governance rules, but is additionally indirectly suffering from the principles of the platform on which it operates: the ethereum blockchain that ensures the right execution of relevant smart contracts (Layer 2), and therefore the internet network that creates everything run (Layer 1).
The governance of every layer are often distinguished into two separate components:
governance by the infrastructure
governance of the infrastructure.
These two mechanisms co-exist more or less peacefully and both contribute to regulating a specific platform or infrastructure consistent with their own – sometimes divergent or contradictory – set of rules
Depending on the main target of study , these two mechanisms are often considered either endogenous to a specific community or exogenous thereto community.
Endogenous rules are elaborated by the community and for the community: they're a community’s attempt at self-governance through a group of self-imposed rules (e.g., the hipster’s dress code).
Exogenous rules are established and/or imposed by a 3rd party that's external to the community, but nonetheless have the power to influence it through a group of rules that community members are required to abide by (e.g., school uniforms).
Modes of governance
Governance by the infrastructure refers to hard-coded rules embedded into a technological platform. It generally focuses on the method of rule enforcement instead of rule-making (at least with reference to the elaboration of the initial set of rules).
In the case of ethereum, for instance , endogenous rules ask the blockchain protocol and consensus algorithm (Layer 2). From a DApp’s perspective, endogenous rules include decision-making procedures and technical rules embedded within the relevant smart contracts (Layers 3 and 4) – whereas the underlying ethereum protocol qualifies as exogenous. a spread of other exogenous rules also exist, just like the TCP/IP and other Internet protocols that make it possible for people to seek out and hook up with the blockchain-based network (Layer 1).
When these rules are endogenous to a blockchain-based network, we ask governance by the infrastructure as “on-chain” governance. These rules are encoded directly into the blockchain-based network, which guarantees their execution during a secure and decentralized manner.
Sometimes, on-chain governance rules also specify procedures to amend themselves: a bit like we will make laws that stipulate the way to make, amend or repeal laws, we will design protocol rules that outline the procedures to form , amend or repeal other protocol rules.
Take Tezos, for instance: a self-amending blockchain, where people have the power to vary the protocol rules – including the principles to vary the rules!
Governance of the infrastructure refers to all or any forces that subsist outside of a technological platform, but nonetheless influence its development and operations. These rules operate at the social or institutional level instead of at the technical level.
Endogenous rules comprise rules, social norms, customs, and other governance structures developed or endorsed by a specific community with a view to facilitating coordination within that community.
For instance, developers in open source communities codify rules and procedures to make a decision on developing and evolving an open source software project. Peer-review usually enforces these rules, although the community may additionally implement formalized mechanisms of enforcement and oversight. Failure to follow these rules might cause exclusion from the community or other sorts of social punishment.
In a blockchain-based network, we frequently ask governance of the infrastructure as “off-chain” governance because the governance rules subsist and operate outside of the blockchain infrastructure. As against on-chain governance rules, these rules aren't automatically executed: they require a third-party authority for enforcement or oversight.
For most blockchain communities, endogenous rules include all rules and procedures wont to decide which changes to implement within the protocol, including the choice to fork. In bitcoin, these are done via the Bitcoin Improvement Proposals (BIP) – an off-the-cuff mechanism by which individuals can propose new features and enhancements to the bitcoin protocol.
Ethereum implemented an identical system for people to submit Ethereum Improvement Proposals (EIP), an off-the-cuff procedure by which individuals can suggest or request changes to the ethereum protocol or code. However, none of those procedures are binding. The developer community evaluates these proposals and decides whether (and how) they ought to be implemented into the code base – along side the varied problems that this might entail.
To the extent that these proposals get accepted and implemented into the code, governance of the infrastructure has the power to affect governance by the infrastructure. In other words, because off-chain governance is usually geared toward changing the principles of the underlying blockchain protocol, it's the facility to switch the structure of on-chain governance.
Exogenous rules neither stem from the community nor are chosen by it, yet they need the power to influence the activities thereof.
For instance, although they are doing not apply on to blockchain-based networks, national laws can impact the operations of such networks. Of course, because laws are inherently territorial, if violated, they will only be enforced by the national court system within the scope of a specific jurisdiction. Yet as soon as we start handling real-world assets (as against pure digital assets), the rule of law will necessarily inherit play, potentially countering the rule of code.
Perhaps the clearest illustration of the strain between endogenous and exogenous rules comes from the recent discovery of kid pornography imagery and links encoded into the bitcoin blockchain. Hosting this sort of content is illicit and national laws stipulate that such harmful content should be taken down.
Yet consistent with bitcoin’s endogenous rules, the blockchain is immutable: nodes cannot arbitrarily delete or modify the content that has been recorded onto the blockchain.
The same tension exists between blockchain’s immutability and Europe’s right to be forgotten, which entitles people to request the removal and deletion of specific information concerning them, if such information is deemed irrelevant, outdated, or otherwise inappropriate.
Governments or other regulatory authorities impose these exogenous rules to make sure public order and morality. Their goal is to market the interests of specific communities or the general public at large – sometimes at the expense of the interests and norms of other communities.
Putting it all at once
Today, most of the discussion about on-chain and off-chain governance is especially watching endogenous rules. Yet, it's the mixture of endogenous and exogenous rules that ultimately dictates the way during which blockchain-based platforms will operate.
Before we will begin to know blockchain governance, we'd like to adopt an ecosystemic approach, watching the varied forces which may affect the operations of those platforms, and the way they interrelate with each other .
As a result, we cannot focus only on endogenous rules and ditch exogenous rules. that might be like trying to know people independent from their social context, analyzing a cell without watching the body during which it lives, or disregarding the entire for its parts.