CLS Blue Sky Blog

What Public Blockchain Protocol Governance Can Learn from Corporate Governance

Despite the hype, blockchain technology remains in an early phase of development. Indeed, for many public blockchain protocols, the process of building consensus around the desired trajectory of the code base remains under-conceptualized and informal. Such uncertainty has led to some sharp disagreements that have arguably damaged the legitimacy of certain protocols and increased marketplace skepticism. Indeed, there is growing recognition that, although the individuals leading development of public blockchain protocols initially eschewed the notion of formal governance and claimed that decentralization eliminated any need for it, in reality those individuals created governance structures without viewing them as such. As a result, the broader blockchain technical community is only beginning to investigate theories of blockchain governance in earnest.

In the midst of the vacuum of governance leadership left by the blockchain community up to this point, some scholars suggest that developers who contribute open-source code to a blockchain protocol and people who validate certain blockchain transactions be deemed responsible parties that owe fiduciary duties to users of public blockchain protocols. The idea of the coders-as-fiduciary model is to give users of blockchain systems recourse against open-source coders for code contributions under certain circumstances.  Even the mere prospect of imposing such duties by regulatory fiat has, however, caused further uncertainty. Current lawsuits claim that open-source software developers owe users monetary damages because the developers did not make certain changes to the software that a particular group of users wanted. Further, at least one key contributor to the Ethereum blockchain ceased making contributions for fear of reprisal under the laws of his home jurisdiction. Such scenarios make it difficult for effective collaboration in an open source context.

Such scenarios also prompt the question: Why should contributors to blockchain open-source software be treated differently from contributors to open-source software in other contexts? Traditionally, open source projects and the communities involved in developing and using them determine their own governance structures through codes of conduct and contractual mechanisms. And yet, many public blockchain protocols could clearly benefit from more formal and robust governance to avoid the reputational damage and marketplace uncertainty that results from gridlock, slow processing times, and rising transaction costs. Perhaps to resolve these governance roadblocks without a coders-as-fiduciaries rule, blockchain protocol communities can emulate their open-source project kin and adopt formal governance contracts.

They might consider using those contracts to, for example, define governance roles based on corporate governance models, given the functional similarities between blockchain protocols and corporations. For example, some blockchain protocol architects explain their code by analogizing them to corporations. Indeed, some protocols, smart contracts, and Decentralized Autonomous Organizations (“DAOs”) could be structured as business trusts in order to receive corporate treatment without actually incorporating. Other protocol architects are exploring ways to formally incorporate their projects. Regardless of whether protocol architects intend to organize a specific protocol as a legally recognized corporation, or the comparison is more theoretical, the range of scenarios points to the broader potential of the corporate governance experience to shape and guide blockchain protocol governance.

Although it may initially rub public blockchain communities the wrong way, the functional similarities between corporations and public blockchain protocols suggest that corporate governance models may enable a more endogenous governance model for blockchains than other legal regimes that governments may seek to impose in the absence of any clearly identifiable system. For example, when it comes to developing and maintaining the code base of a public blockchain protocol, although anyone can suggest an improvement to the core blockchain-protocol code base, the improvement must be approved by a majority of node operators. Such power to determine the trajectory of the code (and thus, the enterprise) resembles the management power of a corporate board of directors. Open-source code contributors, including core developers, do not enjoy this same level of influence. Instead, core developers, along with blockchain protocol founders, and protocol foundations resemble corporate gatekeepers—private actors with the unique knowledge and insight to prevent misconduct in a specific blockchain protocol context and the incentive to do so as a way to protect their reputations.

Exploring these functional similarities provides a starting point for crafting robust blockchain governance systems, and requires blockchain communities to engage in open, active, and thoughtful conversation about their collective culture and vision. For example, a design trade-off exists between protection for users via the imposition of fiduciary duties on node operators and the level of unfettered discretion left to node operators. In the corporate context, when owners of a company want an expert group of managers strongly enough, they may be willing to forego a stronger level of protection and opt instead for weaker fiduciary duties. Crafting a governance contract between participants in a blockchain ecosystem will force a transparent discussion about such tradeoffs. Such transparency, standing alone, offers one benefit of looking to the corporate governance model for inspiration and further discussion.

Moreover, basing blockchain governance structures in contracts that resemble corporate governance structures allows such communities to tap into centuries of scholarship and experimentation in a functionally equivalent governance arena.  Any given community should, however, retain the flexibility to tailor the corporate governance model to its own needs.

This post comes to us from Carla L. Reyes, assistant professor of law and director of the Center for Law, Technology & Innovation, Michigan State University, and faculty associate, Berkman Klein Center for Internet & Society at Harvard University. It is based on her recent paper, “(Un)Corporate Crypto-Governance,” forthcoming in the Fordham Law Review, and available here.

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