This article is a summary of Ian Grigg's Governed Blockchain presentation. The underlying concepts of Governance and the Governed Blockchains are discussed in detail.
Governance refers to the system of rules used to establish the basic functions of social systems such as governments, markets and organizations. Governance systems allow the processes of interaction and decision making amongst involved parties.
Trust is defined as the belief in the identity and integrity of an entity inside a socioeconomic system. Trust is one of the main concepts of Governance, because without it, there’s no peer to peer interaction within the system.
Relationships between system entities frequently have feedback loops, and trust’s complex nature makes it computationally expensive to manipulate. Trust is inherently too complex and expensive for one single trade, so trust usually implies high volume of trades. The complexity of trust also introduces risk, therefore governance platforms need to provide mechanisms of protection for the users.
A ledger is the central entity of a socioeconomic system that works as the main database responsible for keeping track of the total sum of transactions in terms of monetary units.
Ledgers are the core of commerce since ancient times. They are used to record assets such as money and property. Ledgers have been recorded as stone, clay, papyrus, vellum, paper, and recently, as digital databases. Assets have evolved from food, animals and salt, to precious metals and fossil fuels, and recently to digital records that serve as proof of staken computational resources.
Distributed Ledger Technology (DLT) allows the full automation of ledgers inside socioeconomic systems. Moving from paper to bytes with proper mechanisms of democracy, auditability and collaborative development render most of the traditional bureaucracy obsolete. Distribution mitigates Single Point of Failure vulnerabilities of Centralized Ledger schemes.
Pioneer DLT technologies such as Bitcoin and Ethereum attempt to operate as DLTs by providing unpermissioned blockchain platforms. However, their governance mechanisms have severe limitations. Users are not given much power over system complexity and organization, and developers collaborate as factions and tribes amongst anarchy.
Operations that involve trust (e.g.: loans, swaps) are inherently complex, and the dynamic nature of interactions between entities in the system must be modelled into the DLT design. Permissioned ledgers attempt to solve this problem by building walled gardens, however limited to cost restrictions and free entry issues.
The walled garden solution for permissioned blockchains is a naive attempt to protect users against risk by constraining trust inside a sealed environment. The main problem of this approach is gatekeeper costs, which tend to rise exponentially as the number of users grows. Exponential growth of entry costs eventually exclude small players from entering the system, which leads to centralization and a decline in potential for innovation.
With the exception of big players and early adopters (hodl), entities must be constantly trading to survive inside any socioeconomic system. Trades generate revenues, that generate profits, that generate living, that generates demands, which closes the loop generating new trades.
The cyclical nature of trades ensures that players are always able to act based upon system history.
The inherently complex nature of trading introduces risks, errors, and unpredictability. Thus, the need for care and conscious human interaction is always constant in any governance system. This creates a yan-yang kind of situation where the complexity of system dynamics drives the need for human care and profits.
The dynamics between Complexity and Care is reflected on the governance problem of Anarchy vs Leviathan. Automation is desirable for simple tasks, while complex tasks should be left for humans to manage. The main question to be asked is where to draw the line between simple and complex, which in practice is the line between horizontal/automated (Anarchy) and vertical/human (Leviathan) power structures. This line must be iteratively evaluated by democratic voting in order to achieve long term system stability and avoid Black Swans.
Black swans are rare events beyond the realm of expectations in history, science, finance and technology. Due to their singular and unpredictable nature, the probability of these events are not computable through scientific methods.
Black Swans manifest when the design of human interaction inside the system allows for psychological biases, both individually and collectively, inserting unpredictable factors into the system dynamics.
After Black Swans occur, there’s a deep need for conscious interference to the systems organization through direct human intervention. Governance mechanisms must allow human interaction that ensures that new rules and consensus are established by democratic means.
The socioeconomic environments enabled by blockchain are largely populated by entrepreneurs and speculators. Speculators play a relatively passive role in terms of governance actions, while entrepreneurs need dynamically evolving environments where the game rules constantly minimize the risk of black swans.
Trust is inherently too complex and expensive for one single trade, so trust implies volume and frequency of trades. Game rules must go on for multiple rounds, with no end in sight. Profits from each round are distributed amongst players, and losers get penalized. The cyclical nature of trading ensures that players are always able to act based upon system history. Bad actors are punished for actions that go against the rules of the game.
In terms of Game Theory, the ideal scenario for long term system stability is a net-positive game, where most players consistently collect profits across system iterations. However most frequently entities find themselves in Prisoner’s Dilemma scenarios where parties choose not cooperate, even when it appears that it is in their best interests to do so.
The Prisoner’s Dilemma is a fundamental problem of governance and trades. By their own free will, even when it might not be a good strategy, game players might choose to compete instead of cooperate, which leads to win-lose scenarios and small players being outcompeted by complexity they can’t manage.
In terms of Negotiation Theory, the ongoing trading cycle must be supported by abundance of win-win scenarios, where most players collect profits and are happy to continue playing the game.
The conditions for win-win scenarios are:
Control Theory deals with the behavior of dynamic systems conditioned by input signals and how this behavior is modified by feedback loops of information. Control Theory aims to achieve system control and stability mechanisms.
In terms of governance, the main goal is to achieve stability of the trading cycle with net positive profits for most players and more cooperation than competition between them. This stability might be inferred from multiple indicators such as trading volume, market capitalization and fees.
Decentralized Autonomous Corporations (DACs) leverage smart contract and constitutions of Blockchain technologies to act as a self governed organizations that withhold human interest without the need for direct human interaction.
Identities are atomic identificators that serve as reference pointers to entities inside the system. An identity might represent a single human being or a collective organization.
DACs establish peer-to-peer binding contracts among those who used their identities to sign it. These umbrella contracts are referred to as a constitutions. The content of a constitution defines the user obligations that cannot be entirely enforced by code. Constitutions facilitate dispute resolution by establishing jurisdiction and choice of law along with other mutually accepted rules. Every transaction broadcast on the network incorporates the hash of the constitution as part of the signature and thereby explicitly binds the signer to the contract.
Users agree to the constitution by the time of entry, so freedom of entry is preserved and there is no need for walls. Every action and transaction sign the constitution. While simple tasks are automated as smart contracts, constitutions enforce that complex decision making tasks are managed by human interaction. Constitutions are key to enable and encourage win-win net-profit games because game players are incentivized to make value instead of take value.
Constitutions are the building blocks for the architecture of governance systems. They establish baseline rules including consensus, referenda, and arbitration. Constitutions are designed and enforced by communities.
In terms of governance, a community is defined as the set of member entities that abide to the same constitution. By definition, members are locked into the set of rules that they agree by the time of entry.
Because the constitution is designed and implemented by the community, the community effectively owns the constitution and rules are established by consensus.
Blockchains achieve consensus by the Delegated Proof of Stake model. Entities stake computational resources like bandwidth, CPU, and memory to validate blocks of transactions. DPoS uses voting to attribute keys roles to system entities in a democratic way.
Players are able to get other entities to represent them as proxies. This allows for complex representation systems where entities are able to withdraw from direct interaction while being represented by someone else.
Entities might engage in disputes, where interests need to be mediated by an arbitration mechanism. Constitutions make sure there are arbitration mechanisms inside the system.
Ricardian contracts were invented by Ian Grigg in 1996 as a tool for recording a document as a law contract and securely linking it to digital systems. It combines human readable text, legal prose, cryptographic hash functions, and markup language.
Real world contracts are, given a set of input parameters, agreements upon outcomes for actions. Contracts can rule over many kinds of scenarios, from financial transactions, to legal contracts, to game rules. Common actions are asset transfers or game moves.
Smart contracts leverage the trusted timestamping and distributed databases provided by the blockchain technology to completely automate contacts. Given Turing completeness, the blockchain virtual machine is able to execute the contracts with little to no human interaction. The smart contract defines the interface components such as actions, parameters, data structures. The blockchain stores the transactions (e.g., legal transfers, game moves) of the contract. Each Smart Contract is accompanied by a Ricardian Contract that defines the legally binding terms and conditions of the contract.
Smart contract and constitution rules must be publicly auditable so the community is able to trust the platform.
An industrial scale auditable network infrastructure is essential for truly decentralized systems. The public auditability of network infrastructure software and hardware (full stack) ensures nodes are trusted.
