Advocates of blockchain technology promised that it would revolutionize governance through strong commitments, transparency, and “trustlessness” – the absence of any need to trust a bank or other intermediary.  In a recent paper, I argue that these promises have largely fallen short. Instead of eliminating traditional governance problems, blockchains have merely relocated them – shifting power from familiar institutions to new gatekeepers like developers, foundations, and companies. Drawing on evidence from Bitcoin and Ethereum and other major blockchains, I argue that blockchain governance has evolved into technocracy rather than democracy, and that the blockchain-based organizations’ supposed advantages over traditional organizations remain largely mythical.

Blockchain advocates built their narrative on three claims: that blockchain rules and data are immutable – once written, they cannot be changed; that blockchains enable trustless cooperation through cryptography and game theory; and that public ledgers and open-source code create unprecedented transparency. Each of these claims crumbles under scrutiny.

The 2016 hack of The DAO provides the clearest refutation of blockchain immutability. When an attacker exploited a bug to drain $50 million worth of Ethereum from the decentralized autonomous organization, the Ethereum community faced a choice: accept the theft as the price of “code is law,” or intervene. Core developers, led by Vitalik Buterin, orchestrated a “hard fork” (i.e., a bifurcation) of the chain that effectively rewrote history: To return of the stolen funds, the fraudulent transactions were left on the abandoned branch of the chain. This wasn’t the only time that developers implemented significant changes to the ledger or code. Ethereum’s 2022 transition from proof-of-work to proof-of-stake fundamentally altered the network’s consensus mechanism.

Even Bitcoin’s supposedly inviolable cap of 21 million coins exists only as long as miners and nodes agree to maintain it. While Bitcoin evangelists warn that changing the cap would trigger a catastrophic price collapse, such an event would require perfect coordination among millions of actors – a dubious proposition for an asset whose price swings by double-digit percentages on celebrity tweets. The truth is simple: Blockchain code and records can change when powerful stakeholders agree to change them. The question isn’t whether blockchains are immutable, but who has the power to mutate them.

This leads directly to the second myth – trustlessness. Founder Satoshi Nakamoto promised Bitcoin would be “a system for electronic transactions without relying on trust.” This vision died with the rise of specialized mining hardware. Today, Bitmain Technologies, a private Chinese company, controls approximately 75 percent of the global market for Bitcoin mining equipment. The company also dominates mining pools, mining farms, and cloud mining services – creating a blockchain conglomerate with both incentives and means to influence governance.

The Bitcoin “block size wars” of 2016-2017 revealed how supposedly trustless systems still depend on key stakeholders. The conflict over whether to increase Bitcoin’s block-size limit wasn’t resolved through cryptographic consensus but through the political influence of the Bitcoin Core development team, which opposed the change despite support from major mining companies and businesses. Ethereum’s ProgPoW debate tells a similar story. Despite 93 percent support in a community vote, the proposal to change Ethereum’s mining algorithm was ultimately shelved after opposition from DeFi projects and subtle disapproval from Vitalik Buterin. His public statements, though not formally binding, carried enough weight to sink a proposal with apparent community support.

Rather than eliminating trust, blockchains have merely shifted it – from banks and governments to developers, forum moderators, and charismatic leaders. Users must trust that core developers are competent and aligned with their interests. They must trust mining pools not to collude. They must trust foundations to coordinate development fairly. The system requires trust at every level; it just obscures who or what needs to be trusted.

The third claim – transparency – proves equally illusory. While transaction data are public, understanding them requires specialized knowledge that few possess. Smart contracts on Ethereum deploy as bytecode – machine language incomprehensible to all but a tiny technical elite. Even when projects publish source code, users must trust that it matches the deployed bytecode and understand complex programming concepts to evaluate its behavior.

The collapse of blockchain Terra and the cryptocurrency Luna in May 2022 illustrates this opacity problem. The Anchor protocol (a decentralized finance (DeFi) platform built on the Terra blockchain) promised 19.5 percent annual yields on TerraUSD (an algorithmic stablecoin) deposits through mechanisms few users understood. Despite warning signs visible on the blockchain – including $6 million daily subsidies by April 2022 – the subsequent $50 billion collapse caught most participants by surprise.

Organizational opacity compounds technical opacity. The Ethereum Foundation plays a crucial role in development yet discloses little about its operations or decision-making. Bitcoin Core developers are selected through opaque processes with undisclosed compensation arrangements. Mining operations’ ownership structures remain murky, with vertical integration between hardware manufacturers and mining pools concentrating power in ways difficult to observe. Blockchains have achieved the opposite of their transparency promise: public data few can interpret, governed by structures more opaque than traditional institutions.

The case of EOS, a blockchain platform designed to support the development of decentralized applications, demonstrates how these myths play out in practice. Once dubbed the “Ethereum killer,” EOS raised $4 billion in the largest initial coin offering ever. Its governance crisis began immediately after its 2018 launch when block producers froze accounts without official authorization – what critics called “consensus by conference call.” The crisis peaked in 2019 when block producers adopted a new constitution despite attracting only 1.74 percent voter turnout, far below the 15 percent required by the existing constitution. The new rules omitted prohibitions on vote-buying, leading to immediate vote-trading markets. Crypto exchanges, controlling vast amounts of user tokens, became dominant block producers through apparent collusive voting. By 2020, the top two block producers were voting 90-95 percent of their stakes for each other.

These failures reveal that blockchains haven’t solved governance problems; they’ve made them observable. By stripping away institutional infrastructure we take for granted, they reveal fundamental challenges all governance systems must address: collective action problems, principal-agent conflicts, and centralizing tendencies. Token-based voting has devolved into plutocracy where large holders dictate outcomes. Exit options through forking are constrained by network effects. Voice mechanisms suffer from the participation problems plaguing direct democracy, compounded by technical complexity excluding most users from meaningful participation.

Rather than new and revolutionary forms of organizations, blockchains have evolved to resemble traditional corporate structures with their own barriers to entry, concentration of power, and reliance on off-chain coordination. Blockchain conglomerates combine hardware manufacturing, mining operations, and other services. Foundations and corporations fund development. Technical elites make critical decisions through informal processes.

Blockchains remain valuable as governance experiments, attempting to solve real problems like reducing transaction costs and eliminating rent-seeking intermediaries. Their failures are as instructive as their successes would have been. They demonstrate that cryptography cannot solve governance problems any more than constitutions or corporate charters can. These challenges require ongoing negotiation among stakeholders with divergent interests – the very human element blockchain technology was supposed to eliminate.

This post comes to us from Professor Daniel Ferreira at the London School of Economics. It is based on his recent article, “The Myths of Bockchain Governance,” available here.