This document discusses governance models for public blockchains and DAOs. It begins by outlining some key differences between standalone blockchain projects and dependent projects. It then analyzes various fork models and failure modes when upgrading protocols. The document also discusses concepts like Schelling points, firm theory, and futarchy as potential governance mechanisms for blockchains and DAOs. It notes challenges around manipulating votes and markets, as well as splitting assets during forks. In general, it explores finding the right balance of coordination and decentralization when governing distributed projects.

1. Governance for Public
Blockchains and DAOs
It looks like an open source
project, it quacks like a
corporation, it walks like a genetic
algorithm, it smells like a
political party... what is it?

2. What we're covering
● What is the right model to use to look
at public blockchain projects?
● Voice and exit
● Differences between standalone projects
and dependent projects (and hybrids)
● From cryptoeconomics to crypto-
political science
● Schelling: brinksmanship as
probabilistic punishment (and other
insights from mutually assured
destruction theory)

3. The Old Model
● Public blockchains have a static
protocol
● It is guaranteed that “honest”
users will follow this protocol
forever, the only risk is attacks
● No governance challenges whatsoever
(It's all algorithmic! Non-
political money!!!1!)

4. Is this person describing...
A) The traditional banking system
B) Regulators
C) The shiny newfangled thing
that's supposed to be nimbler and
faster than the above?
“It's a system that has been
designed to resist change”
https://www.reddit.com/r/Bitcoin/comments/4946ku/its_a_system_that_has_bee
n_designed_to_resist/

5. A Taxonomy of Forks
● Soft fork: valid messages under new
rules a strict subset of valid
messages under old rules
● Kinda hard fork: valid messages
under new rules a strict superset
of valid messages under old rules
● Maximally hard fork: arbitrary new
rules

6. Forks depend on...
● Soft fork: miners
● Kinda hard fork: miners and
developers/users
● Maximally hard fork:
developers/users

7. Failure modes
● Soft fork:
– Developers/users sign up but not most
miners: chain split (hence 75%+ threshold)
– Miners sign up but not developers/users:
success
● Kinda hard fork:
– Developers/users sign up but not miners:
no change
– Miners sign up but not developers/users:
chain split (hence adequate warning time
required)

8. Failure modes
● Hard fork:
– Miners don't matter at all (except in
so far as they are users)
– Some users sign up but not others:
chain split (hence social consensus
required)

9. Reminder: Schelling Points
● Two prisoners in separate rooms are
shown the following numbers:
162 281 296 1000 1209 1612 1728 1837
● If both give the same answer, they
are freed, otherwise both are
tortured to death
● Which do you choose?

10. Hard fork decision-making
● In this model, the choice is
whether or not to install a
software package choosing to fork
● If you are on the same chain as
everyone else, all is good
● Otherwise, you suffer inconvenience
● What's the schelling point?

11. The pre-game
● Each side's incentive is to “puff
itself up”, make its victory seem
inevitable
● If a Schelling point exists, try to
manipulate it
● Examples from Core/Classic dispute

12. The pre-game
● What if no Schelling point is
agreed?
● Controversial hard forks are
dangerous (maybe, will return to
this later)
● But they are a highly useful
negotiating tactic (for both sides)
– Brinksmanship as probabilistic “tit
for tat” in prisoner's dilemma

13. Non-convergent post-game
(maximally hard forks only!)
● 1-4 hours: community realizes that a split is
occurring, neither side willing to back down (main
battlefield: Reddit)
● 1-2 days: quickest exchanges start trading “BTC-A”
and “BTC-B”
● 1-7 days: businesses make a decision to support
one or neither or both
● 1-2 weeks
– (option I): one of the two is clearly ahead, the other
dies
– (option II): both chains soft-fork (or one chain hard-
forks) to ensure transactions are bound to one chain
● Is total market cap higher or lower than original?

14. Network effects and anti-
network-effects
● Positive: currency acceptance and
liquidity
● Positive: developer mindshare (may be
cross-protocol!)
● Positive: economic security (hashpower,
size of deposits, etc)
● Negative: blockchain congestion
(transaction fees, full node costs)
● Negative: political infighting
● Negative: bigger applications invite
bigger attackers

15. Firm theory
● Left-side failures (everyone is a
contractor): underproduced public
goods, lack of coordination,
transaction costs (eg. bureaucratic
costs, high cognitive overhead,
costs of gaining trust)
● Right-side failures (everyone works
for one giant corporation): see,
North Korea
● There is a balance

16. Firm theory in Blockchains
● Left-side failures (everyone has
their own currency): low liquidity,
high cognitive overhead, developer
confusion
● Right-side failures (one currency
to rule them all): failure to
satisfy differing views, loss of
cohesion, fighting rather than
coexistence

17. Blockchains vs other
governance
● Open-source projects: forking often
used (only some developer network
effect lost)
● Countries/corporations: forking not
possible at all, only exit
– Secession exists, but in case of countries
requires camps to be geographically
localized
– Puzzle: why don't we see corporate
secession? Is it because exit is too easy?
● Blockchains are somewhere in the middle

18. DAOs
● DAOs on Ethereum are, at least to
some degree, dependent projects
● They sit on an underlying layer
that provides “ground truth”, so
truth no longer subjective
● This makes DAO governance much more
like governance of corporations

19. So, how do DAOs decide?
● Naive answer: we vote!
● Problem: voting is not incentive-
compatible
● Rational ignorance/irrationality
(see Caplan etc)
– Less of a problem for
DAOs/corporations than countries
● 51% attacks
● Voter bribery

20. 51% Attacks
● 51% of shareholders move all assets
into new DAO, expropriate the other
49%
● If DAO assets are primarily social
capital / goodwill, then grim
trigger argument discourages this
● Otherwise... this is why we need
shareholder regulations!

21. Subjectivocracy
● DAO should only hold assets that
are defined by itself
● In the event of a disagreement, the
DAO can “fork” on the chain
– Users free to follow whichever fork
they wish
– Indifferent users check market price
to determine to gauge which fork is
more popular

22. DAO splitting
● If the DAO holds externally defined
assets (eg. ETH, digix gold, assets
defined by other DAOs), then there
is a “splitting” protocol where
these assets are proportionately
split
● No need to specify minimum
percentage, but force costs of a
split on the minority to prevent
spam

23. DAO splitting
● Challenge: what about non-fungible
assets?
● Option 1: probabilistic distribution
(problems: imposes risk, requires secure
RNG)
● Option 2: cut-and-choose protocols
(problem: distribution may not be
perfectly fair)
● Option 3: cut-and-choose plus
compensation payments (problem:
bilateral monopoly negotiation is not
Pareto-efficient)

24. DAO splitting
● Ethereum-specific challenge: how do
we maximally generally split all
positions that the DAO might have
in all other contracts
● Split by address, “mother” contract
does two-way forwarding for
children?
– But then, how do we address cases
where positions can be proportionately
split?

25. Futarchy
● General principle: pick easily
measurable objective function, have
“conditional prediction markets” on
objective function if:
– action is made
– action is not made
● Common objective: share price vs. base
asset (eg. ETH)
● Perform the action only if the
conditional share price if the action is
made exceeds the conditional share price
if the action is note made

26. Futarchy: Implementation
● Let people convert 1 DAO share into
1 yes-share and 1 no-share
● Let people convert 1 ETH into 1
yes-ETH and 1 no-ETH
● Let yes-ETH trade against yes-
shares and no-ETH against no-
Shares, watch prices

27. Futarchy: Manipulation
● What if the action only slightly
affects the share price?
● Then, yes proponents may try to buy
up yes-shares
● If you have accurate information
about the effect of the decision,
you cannot easily trade on that
knowledge without assuming
secondary risk of DAO price; hence,
pool of counter-trades limited

28. Futarchy: Manipulation
● “Limits to arbitrage” argument /
capital limitations can make
shorting harder
● Solution 1: use futarchy for “big
decisions” only
● Solution 2: bet on log(price)
instead of price; log(price)
practically capped at ~30 so
capital is limited

29. Futarchy as Backstop
● If minority unhappy with voting
decision, they may “file a
complaint”
● Futarchy resolves whether or not
the motion goes through
● Expropriators pushing up price of
yes-shares not a problem (!!) as it
lets no proponents “cash out”
gracefully

30. Governing blockchains like
DAOs?
● Problem: no “base asset” to make
markets against
– Difficulty futures could substitute,
but only in PoW blockchains
– Schelling-USD could substitute, but
introduces stronger economic
assumptions into base protocol
● Voting can be done... miners do it
already
● Blockchain splitting can be done...
it's called a hard fork