Governance of a Blockchain Project

Why is governance an ongoing issue for blockchains?

Governance has been a core topic around blockchain, particularly for decentralised autonomous organisations (DAOs, or communities run on the blockchain). The need for good governance can be explained by exploring The DAO case. 

The DAO framework  was built on the ERC-20 protocol and members bought into DAO with Ether, and this Ether was used to create a pot of crypto assets. Ideas were brought forward to the DAO, and, if sufficient members approved of an idea, it would receive a pay-out in Ether. This worked well initially and in terms of governance they adopted the “code is the law” mantra. The idea was that instead of having the expensive lawyers involved, you can do anything which the code allows you to. This was an issue as the DAO relied on a smart contract, and, at a broad generalisation, the principle was “if” an idea is approved “then” there is a pay-out in Ether and the DAO is updated to reflect this. However, someone came along and put in a fact pattern which was not foreseen. After taking out the Ether, before the DAO updated, they effectively turned everything off and before records were updated. With the smart contracts not being “smart” the attackers exploited to withdraw 50 to 60 million dollars from the DAO. As they considered “code is law”, technically it was not hacked and you had to accept it and cannot get the Ether back - this was a major problem!

Problems around immutability of blockchain 

The main issue is that one of the core principles of a blockchain is the “immutable” nature (transactions cannot be changed, even though it was evidently a breach) and changing the information on the protocol would devalue it as a record keeping mechanism.  

Possible solution to the immutability issue 

A prominent solution was creating a “hard fork” (cloning the protocol), to have two identical versions, with the new version being altered so it does not have the undesirable features of the original version which were exploited by users. While it was expected that people would stop using the old protocol, it gave birth to 2 unique crypto assets which people started trading separately, with the old protocol called Ethereum Classic (ETC) and new one called Ethereum (ETH). As there was no governance structure, there was no inbuilt process for resolving unexpected scenarios. 

What is the need for governance in our situation?

An important consideration to be taken in building our proposed project on the blockchain, is whether a particular participant should be restricted to an overall maximum number of votes (regardless of the amount of tea held). Lot of focus in this area has been on how to tie votes to tokens and have a fair voting system, without a small percent of individuals having dominance. Thus, we need to have a governance framework put in place, especially as it will articulate what is and what is not permitted by the participants. In this way, the fact that Eth was taken without following the process can easily be characterised as a rule breach. 

How would we incorporate governance in our proposed blockchain project?

Governance also sets out procedures for dealing with the unexpected, and acts as a form of a dispute resolution framework. Governance frameworks generally require a rulebook for participants. As we’d want to open up the blockchain to as many participants as possible, rather than have specific people enter into direct contract, we prescribe “roles”, and whoever can satisfy the requirements of a particular role be added (eg: if the role is tea provider, in terms of being able to grow the tea to the prescribed requirements.) Additionally, we need an enforcement mechanism such as an administrator, this need can be termed as “legal entity dependence”. Regulators can still exercise power of the blockchain project by imposing rules on the administrator. 

How can we maintain decentralisation whilst implementing governance?

Although many believe the existence of an administrator undermines the principle of true decentralisation, participants should recognise the advantages they have in terms of setting out the rules the administrator must abide by and also so the platform can be built within jurisdictions which the administrator is familiar with, reducing potential breach issues Administrator acts to protect the interests of participants as a whole.