Blockchain International Scientific Conference https://www.britishblockchainassociation.org/isc2020

1. 1
Blockchain Governance:
What we can Learn from the
Economics of Corporate Governance
Darcy Allen
RMIT Blockchain Innovation Hub
Chris Berg
RMIT Blockchain Innovation Hub
August 2018

2. 2
Motivation
• Bitcoin has a governance crisis (De Filippi and Loveluck 2016)
o NY Consensus Agreement
o User Activated Soft Fork
• Should governance be ‘on chain’ (Ehrsam 2017) or ‘off chain’ (Buterin 2016, Zamfir 2017)?
Should it be ‘formal’ or ‘informal’?
• How does governance evolve? (Alston 2019, Berg, Berg and Novak 2019)
• Clarification: we’re looking at the governance of blockchains, not governance by blockchains

3. 3
Findings
We use the economics of corporate governance and the theory of the firm to explore
blockchain governance and find:
1. All blockchains have ‘governance’ – governance debate should seek to be descriptive
before it is prescriptive
2. Who is a stakeholder in blockchain governance is poorly defined or understood
3. Three elements that contribute to blockchain governance
o Endogenous governance
o Exogenous governance
o The needs of bootstrapping
4. Distributed governance is effected by agents all up and down the blockchain stack

4. 4
What is governance?
• Governance describes the processes by which groups coordinate activity within an
institutional environment
• They seek to make decisions, implement those decisions, and monitor their
implementation and outcomes

5. 5
Who are stakeholders in governance?
• Shareholder model describes the firm as a nexus of contracts between shareholders,
management and employees (Alchian & Demsetz 1972; Coase 1960)
o Blockchains are a multisided market between buyers, sellers, and validators (and
stakers) (Berg Davidson and Potts 2020)
• Stakeholder model says a wider variety of groups and interests should be taken into
consideration (Bowen 1953)
o But who is a stakeholder?
• Discussions of blockchain governance have typically identified relevant stakeholders (ie
tokenholders, miners) and built governance systems around those

6. 6
Endogenous and exogenous governance
• Blockchains have endogenous governance mechanisms determined by the consensus
mechanism
o These shape relative bargaining power between stakeholder groups instrumentally
o Process of discovery: from Bitcoin’s miner-centric governance to the primary of economic
nodes
o Nexus of contracts model
o These can be intentionally or unintentionally designed
• Blockchains can have exogenous governance mechanisms
o Formal and informal institutions that can be designed or evolve in response to the demands
for legitimacy from different stakeholder groups
o This includes off-chain governance (forums, mailing lists, conferences) and on-chain
governance (voting mechanisms for protocol amendment)

7. 7
The needs of bootstrapping
• Blockchains are not born decentralised
o They have to be built, coded, white paper written, and hyped
o Blockchains have a proto-entrepreneurial stage and organizational stage
• The role of founder(s) forms an exogenous governance mechanism that shapes future governance
of the network
• For example Bitcoin:
o Satoshi’s “vision” is a powerful norm or point of ideological contest (depending on where you
sit)
o Satoshi’s hands on governance until 2010, disappearance post 2010 shaped Bitcoin
governance
• Exogenous governance determined by implicit contracts (sometimes described as culture) between
stakeholders

8. 8
The ends of blockchain governance
• In the shareholder model, a firm is a form of team production (Alchian and Demsetz 1972)
o It is an intentional system with a group purpose (to produce, to remit profits to
shareholders)
o Governance is the task of ensuring team production functions (minimising shirking,
expropriation etc)
• Blockchains function as shared economic infrastructure:
o End 1: to survive
o End 2: to increase adoption
• Similarities to internet governance, but competitive chains and tokens create significantly
different dynamics