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November 28, 2018 . 5 min read

Blockchain Governance, Trade Offs, and the Importance of a Checks-and-Balances based Decentralized Governance

Session 2 of Storecoin’s public peer review of its p2p governance.

Overview

Storecoin is building a zero-fee payment protocol for the public internet. Our proposed governance model is the result of extensive research of governance models from crypto networks and beyond. We believe that the only viable model that allows for decentralized, democratic decision making at global enterprise scale is a decentralized republic model based on checks and balances. As part of our ongoing Governance Peer Review & Working Group, we share this piece about the trade-offs inherent in blockchain governance; how inspiration from outside crypto led us to think in terms of checks and balances; and the core tenets of our proposed governance model.

Intro

On one hand, crypto protocols share some aspects with technology startups - a need to iterate, evolve, change features and generally improve the technology that underpins the protocol. On the other, they are more like emerging economies - complex networks of commercial relationships among different stakeholders who all advocate for their interests.

In short they are a new phenomenon - something Naval Ravikant has called “market networks.”

The economic scope of crypto market networks is limited by the confidence each group of actors has in the others to play by the theoretical rules of engagement. In all of today’s major crypto market networks, that confidence is limited primarily to two groups: 1) extremely risk-tolerant early adopters and speculators; 2) opportunists who believe they can take advantage of ill-defined rules of engagement for their own economic gain.

Already an important conversation, blockchain governance is finding itself with additional focus as an array of economic giants determines whether and how to enter the crypto market network. For these institutions, governance not only determines how protocols will evolve and adapt their technology and monetary policy to changing circumstances, but also what type of community and social risk they expose themselves to by participating in one network versus another.

Do they risk cartel-ism and oligarchic control by a group of unchecked core developers? Do they risk enshrining plutocracy in a holdings-equals-political-power environment? Do they risk the radical volatility and potential for constant distracting political battles that come with populism?

Until now, these questions have been theoretical. No longer. If only the riskiest and most opportunistic are allowed to participate, crypto can’t hope to be the transformative global force we all believe it has the potential to be. If governance can inject sufficient confidence to allow today’s largest enterprises to participate, however, the opportunities to expand trade and commerce are unbound.

Section One: The Landscape Of Blockchain Governance

Decisions about governance models in crypto market networks aren’t about right or wrong, but about trade-offs and priorities.

On one end of the spectrum, there are a variety of effectively autocratic governance models. These include networks with Benevolent Dictators, such as Ethereum; networks where a strong corporate entity drives key decision making, such as Ripple; and networks where an active foundation is the primary determinant of direction, such as Stellar.

The advantage of these autocratic models is that they can be efficient as compared to more democratic approaches. The downside is that they come with many of the same problems that plague centralized organizations, such as the potential for censorship and/or unilateral changes in policy.

Another set of crypto market networks apportion political power on the basis of token ownership. These systems are inherently plutocratic, giving those with the highest financial stake in the network the greatest ability to influence its direction. Plutocratic systems can be delegative - in other words, allowing stakeholders to delegate their voting power to others - or non-delegative. By giving the most powerful actors more control over the governance process than minority stakeholders, plutocratic models tend to have an inevitable trajectory towards centralization, and reward early adopters in a way that limits the ability of later market entrants to participate.

Still another approach is the formal-governance-minimized voluntarism, where core developers take the functional lead in governance, often accumulating extreme influence and power in the process. Proponents of these systems tend to argue both that they are meritocratic (despite enormous power concentration among early adopters) and that, ideologically, governance is a threat vector that should be minimized. This is well and good for crypto market networks that aspire to be entirely independent of today’s pre-crypto financial system and provide a truly permissionless and censorship-resistant store of value. At the same time, these governance systems are enormously hard for mainstream enterprises to understand and make assessment of risk about future changes, creating a confidence hurdle that is too much for many to overcome.

Lastly, there are systems that try to provide a mechanism for decentralized, democratic decision-making without using a stake-based system that enshrinines plutocracy. The challenge with unlimited democratic systems is that they tend to devolve into populist anarchy, with endless warring factions wanting a say in every operational decision. This can clog up the process of governance so much that it becomes a fundamental threat to the ability of the protocol to evolve and compete.

At Storecoin, we believe there is an alternative approach to populist democracies which we think of as a decentralized republic. Unlike many of the contemporary models, which seem determined to reinvent the wheel of governing systems, our approach draws consciously from some of the best thinking on governance in human history.

Section Two: A Governance Model From Outside Crypto

The United States is one of the longest running democracies in the world. Much of that success has to do with decisions the original framers of the Constitution made when they designed the government in the first case. Three underlying elements of their approach stand out:

Make change hard, but not impossible

The Founding Fathers understood that the system of governance needed to be adaptable to changing times and circumstances, but also that one of the great threats to democracy was the inevitable volatility if populism were allowed to run rampant. If change were too difficult, the government wouldn’t be able to adapt to new needs. If it were too easy, however, the body politic would veer wildly between extremes in a never-ending and likely-fatal cycle of reaction and counter-reaction.

Make the change process understandable

Another thing that the founders knew was that complexity and obfuscation were the enemy of participation. Indeed, complexity could be weaponized to make citizens feel and be disenfranchised. Their solution was in part a system of delegation, where professional politicians were voted in with the presumption of mastery of the relevant materials to make educated decisions. Even with this, the process by change was made was clear and enumerated, allowing all to understand the levers of power they could pull to see their desired outcomes.

Make change enforceable

Finally, that change that was enacted was enforceable, and different members of the governing system were accountable to one another.

Enforceability of rights - such as property rights - was at the very heart of the governing system. Throughout history, contracts and laws have been the keys to expanding trade and commerce. This is particularly true in the case of land and property, as land without governance and contractual enforcement quickly devolves into anarchy.

In crypto market networks, the nature of property may be changing, but the enforceability of governance remains paramount. When stakeholders engage with a governance process, they need to be assured that the decisions made will actually be enacted; that there is recourse in the event this doesn’t happen; and most of all, that the rights of their digital property are paramount.

Section Three: The Principles Of A Checks-And-Balances Governance

Storecoin believes that the only long-term viable approach for truly decentralized crypto market networks that function at global enterprise scale is a checks-and-balances based democratic republic. The key features of our system include:

Separation of powers/checks and balances

The founders of the US government separated the powers to create a government that was adaptable, but in which change was sufficiently difficult to prevent populist volatility. Storecoin is applying the same principle to create a system in which the features, leadership, and even aspects of the monetary policy of the protocol can change through democratic consensus, but in which that consensus is difficult to achieve. We achieve this by giving different stakeholders - who have different incentives - different roles to play that create a balance of power and series of political counterweights. In this way, we avoid the problem of populist volatility.

No Fed

Monetary policy is at the heart of crypto networks and has an outsized impact on which protocols people and investors chose to engage with. We believe that it is essential for any cryptocurrency trying to be a long-term store of value to have credibly-low inflation while also addressing the costs of securing the network without resorting to expensive fees. In any decentralized protocol, however, there will be actors who have economic incentive to push for more inflation. In Storecoin, there is no “Fed” - in other words, no body with a unilateral ability to make changes to monetary policy. Any proposed changes around monetary policy have to go through an extensive, multi-chamber voting process of checks and balances, making change possible, but exceedingly difficult without true, cross-network support. In other words, checks-and-balances governance make it nearly impossible for any one set of Storecoin participants to hijack monetary policy in a way that benefits them to the detriment of others.

Explicit enumeration of the change process

Unlike some of the governance-minimized, voluntarist, core developer cartel systems, Storecoin has an extensively enumerated change process. This allows all current and potential stakeholders to understand exactly how change is determined and enacted. Among other benefits, this gives existing categories of major economic enterprises more confidence in their participation in our crypto market network.

One-Entity-One-Vote

Storecoin believes that plutocracy is a problem that creates an inevitable and powerful financial motivation for manipulation and centralization. We reject the paradigm of one-token-one-vote that enshrines plutocracy, instead opting for a system based on one-entity-one-vote, verified by a KYC/AML process.

Enforceability

One of the most essential aspects of Storecoin’s proposed governance is the enforceability of contracts that it represents. When stakeholders join the network in any capacity, whether as validators or govnodes or security guards or as a developer working for the nonprofit, they are entering a contractual relationship that obligates them to perform certain functionalities. When they don’t meet those obligations, they are punished.

Validators, for example, are punished automatically for missing too many governance votes in a row. An Executive Director who doesn’t act promptly to enact change proposals passed through governance can be fired for cause. One of the most important aspects of Storecoin’s enforcement is that nodes are required to upgrade the software when consensus is reached. If they don’t, their stake can be slashed. While in other protocols there is a “governance-by-default” catchall that allows nodes to protest a decision by simply not running the latest software, nodes that join the Storecoin market network explicitly agree to abide by decentralized consensus.

Conclusion:

The growing interest of the mainstream pre-crypto financial world to participate in crypto market networks is focusing more attention on the differences between different governance models. To these new actors, the trade-offs inherent in any model represent risk that must be accounted for. As articulated above, we believe that the only governance model that can function at global enterprise scale without returning to centralization or descending into the volatility of mob rule is a checks-and-balances based system.

If you agree, and want to help us build it, or disagree and want to convince us to design something different, we invite you to join our Governance Peer Review & Working Group. Join here.

Peer Review Sessions

KYC/AML checks are required for securities law compliance. This will be a Reg D and Reg S global offering.

DISCLAIMER

Nothing herein is intended to be an offer to sell or solicitation of offer to buy, Storecoin tokens or rights to receive Storecoin tokens in the future. In the event that Storecoin conducts an offering of Storecoin tokens (or rights to receive Storecoin tokens in the future), Storecoin will do so in compliance with all applicable laws which may include the Securities Act of 1933 and the rules and regulations promulgated thereunder, as well as applicable state and foreign law. Any offering for sale to US Persons in a regulated transaction will be pursuant to a registration statement qualified by the Securities and Exchange Commission, or an applicable exemption from the registration requirements.