Governing the Crypto Revolution: What Business Can Teach Us

Blockchain technology promises a future where intermediaries, such as banks and governments, are no longer necessary to facilitate transactions or enforce rules. Instead, trust is embedded directly into the system through cryptography and consensus mechanisms. Blockchains underpin cryptocurrencies such as Bitcoin and Ethereum, as well as decentralized autonomous organizations (DAOs), online organizational forms that aim to run themselves democratically, without traditional managers or boards. Despite this techno-utopian vision, these systems still face many governance problems that require human input. This raises the question of how these systems should be governed. Should blockchain governance resemble political systems like democracy, or is there another model better suited to this novel technology?

As I argue in a recent working paper, the answer lies not in political governance but rather in corporate governance.

The Problem of Governing Blockchain Systems

Blockchain systems face two major challenges. First, they rely on the idea that everything can be pre-programmed into automated agreements called “smart contracts,” removing the need for human decision-making. Smart contracts, however, are not infallible; coding errors, unforeseen circumstances, and the inherent incompleteness of contracts often require human intervention. This is where governance comes into play. How should decisions be made in blockchain ecosystems when the technology falls short? Who should have the authority to intervene, and under what conditions?

Second, when human decisions are required, many blockchain projects adopt a model that resembles political governance: Participants vote on changes. While this sounds fair and inclusive, it is not always practical. Voting can be inefficient, costly, and prone to manipulation. Large token holders (often referred to as “whales”) can dominate decision-making, undermining decentralization and fairness.

Blockchain systems should rather learn from corporate governance, which focuses on balancing power and ensuring accountability in organizations through well-defined mechanisms.

How Businesses Manage Governance

Unlike political governance, which legitimizes the use of coercive power, corporate governance operates through contracts, incentives, and accountability structures.

Corporate governance deals with managing voluntary cooperation among stakeholders within organizations. It provides mechanisms to align the interests of insiders, such as managers, with those of outsiders, such as shareholders, thereby minimizing agency problems.

These principles are directly applicable to blockchain ecosystems, which rely on voluntary participation and self-enforcing rules rather than coercion. For example, traditional corporate governance employs boards of directors, performance-based rewards, and internal controls to ensure that managers act in the best interests of shareholders. Similarly, blockchain ecosystems can benefit from mechanisms that align incentives, monitor performance, and hold decision-makers accountable.

The need for governance in blockchain systems is evident from high-profile incidents. For example, after a significant hacking incident involving an early blockchain project called The DAO in 2016, the Ethereum community decided to make changes to its system’s rules to recover stolen funds. Similarly, MakerDAO’s “Black Thursday” event in 2020 highlighted the need for swift human intervention during market turmoil. These examples show that even in decentralized systems, human governance structures are indispensable.

Balancing Decentralization and Control

Blockchain systems are designed to avoid central control, which makes them unique but also creates challenges. Without a central authority, there is a risk of chaos when disagreements arise. Corporate governance offers a middle ground by balancing decentralization with oversight. For example, some blockchain projects have created foundations to manage resources and mediate disputes. Others allow a small group of trusted individuals to step in during emergencies. These approaches, however, often face resistance from communities committed to the ideals of full decentralization.

Blockchain governance, however, is not a perfect fit with corporate governance. Traditional businesses operate in a hierarchy, while blockchains aim to be more like open marketplaces. Even so, the principles of clarity, accountability, and oversight can improve how decisions are made in blockchain systems. Acknowledging the unique context of blockchains, these principles can be adapted to retain the ethos of decentralization while addressing practical governance needs.

Looking Ahead: A Hybrid Approach

The future of blockchain governance may lie in hybrid models that combine elements of both corporate and political systems. For example:

  • Foundations for Oversight: Independent foundations could handle complex tasks like funding and development while remaining accountable to the community. The role of such foundations could evolve to balance independence with community alignment.
  • Layered Decision-Making: Important decisions could involve specialized committees, while simpler issues are left to community votes. This layered approach could ensure efficiency while preserving inclusivity.
  • Emergency Powers: In rare situations, a small group of trusted participants could have the authority to act swiftly, ensuring the system’s stability. While controversial, such mechanisms could prevent catastrophic failures.

Conclusion

Blockchain governance is still a nascent field, and new challenges will undoubtedly emerge both as blockchain technology itself evolves and as the methods of governing these systems are refined. The principles of corporate governance provide a robust foundation for designing governance systems that are both effective and aligned with the decentralized ideals of blockchain.

By focusing on accountability, incentive alignment, and adaptability, blockchain platforms can address their governance challenges more effectively than by relying solely on political governance models. The key takeaway is that governance is not a one-size-fits-all solution; it must be tailored to the specific needs and characteristics of the system it serves. In the case of blockchain, corporate governance principles offer a promising path forward, but do not guarantee that this revolutionary technology will fulfill its potential to transform both the economy and society.

This post comes to us from Sinclair Davidson , a professor of institutional economics at RMIT University in Melbourne, Australia, and a fellow of the British Blockchain Association. It is based on his recent article, “Corporate Governance in a Crypto-World,” available here.

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