March 4, 2021

Ten facts about decentralized network governance

Over the past few years, I have analyzed a lot of data and come up with ten statements about governance decentralized networks, including networks withthe underlying public blockchain; and applications built on top of such networks, such as smart contracts. First there are general and theoretical, descriptive statements, and then specific and practical, that is, prescriptive. The first five statements are conclusions from previous articles. The last five are conclusions from recent observations.


Management is the use of design features and mechanisms for monitoring and maintaining a system.

one.Blockchain-related technological and institutional innovation is part of the current maturation stage of the Information Technology (IT) revolution, which implies the emergence of IT-native forms of socio-economic organization: digital, global, decentralized and automated.

In the last stages of the technological revolutionkey technologies are beginning to change the institutional structure of society. Blockchain and related innovations are part of the trend towards digitalization, computing and automation. In this world, the number of systemically important processes is constantly growing, based on formal rules of protocols, which are aimed at effective interaction in the context of the growing complexity of the system. Despite the revolutionary nature of such technologies, this trend is an evolutionary stage of an early form of organization that sociologists call bureaucratic. Routine adherence to the rules for managing information and conducting transactions related to it is increasingly being done not by people, but by distributed computer networks. Some of which have already reached the global level.

2.Decentralized networks are fields, social arenas of symbolic and material production, in which interested participants compete for network-specific resources or cooperate to obtain them, since it is the network participants who produce and consume the products and services available in the system.

To form a field and benefit from ityou need distributed information about resources and at least some general understanding of why these resources are of value. The structure of the field depends on the allocation of resources and the relationships among the participants in the field. In decentralized networks, participants are those who are involved in investing, creating, maintaining, using the network or in other processes. The management process is built into the structure of the network and is initially determined by the persons who are most associated with its launch. The actions of network participants strengthen or challenge the structure by increasing or decreasing the amount and value of available resources. The evolution of structure is influenced by social norms and rules, including conditions specified in software protocols. The ability to legitimately define and change the norms and rules of the network is a fundamental element.

3. The evolution of decentralized networks is influenced not only by traditional market dynamics, but also by a combination of ideology, reality and financial motivation.

People participating in blockchain networks can haveopposing opinions on many aspects, but tend to adhere to the same ideological and pragmatic views. They advocate decentralization - resistance to collision and minimization of single points of control and refusal, - self-ownership, that is, for individual freedom, ownership and privacy, for unrestricted access, censorship resistance, open source software. Participants in such networks oppose excessive mediation and bribery. However, ideological preferences cannot always be realized from a technical and sociological point of view. Blockchain innovators are constantly looking for a middle ground, trying to find a way to prevent the problems that innovative technologies must solve. The challenge is complicated by the desire for short-term financial gain. Economic success and massive acceptance of individual networks do not always depend on strict adherence to a limited set of principles. However, the combination of ideology, reality and financial motivation will play a key role in the design and evolution of network management systems.

4.Decentralized network governance has four main components: leadership, vision, and values ​​that attract and follow network participants; rules written in software protocols; rules and regulations outside of software protocols; community management.

The original concept and values ​​of the network are formedin its early documents and launch information and depends on the personal views and preferences of the early participants. Software protocols define how the network processes the most important information and transactions. This includes the rules for implementing changes to software - a process called on-chain management. Additional rules may appear independently of the software. Most of this happens through organizations that help manage community activities, a process called off-chain governance, which often resembles the governance of traditional free and open source software (FOSS). The most innovative aspects of decentralized network governance are used in on-chain governance, as it relates to on-chain data analysis, tokenization, automation and new forms of online voting. The latter is typically used to update software or allocate shared pools of financial resources.

5.Decentralized network management systems differ in two parameters: whether the software includes rules for introducing changes to the corresponding software protocols and the level of formalization and institutionalization of off-chain management.

B software protocolsDecentralized networks are making planned and urgent changes. Usually, network participants can choose to interact with the software or not, that is, to continue using the network or not. Software can, to varying degrees, be used to formalize and automate coordination and decision-making to manage the system (relative importance of on-chain management). This includes a voting mechanism tied to an identity process or a network-specific token. On-chain governance is formalized by definition, while off-chain governance includes less formal and irregular processes and institutionalized actions. Off-chain governance includes uncoordinated individual actions, personal conversations, public events, online interactions, especially on social networks, where users exchange materials and memes, the activities of various legal entities affecting the network, as well as voting and decision-making mechanisms independent of on-chain management.

6.If you do not change the software and other system parameters, the existing trends in the system are retained. If you make changes to software and other system parameters, then new risk factors appear, but this approach also creates new trends in the system.

Minimizing governance means reducing the need and the number of legal ways to change the rules of the network. In practice, it boils down to the following:

  • To consolidate the first development decisions. More freedom is given to those who have more influenced the governance of the decentralized network, that is, established the initial rules of the system.
  • To increase the system's ability to automaticallyadaptation to changing conditions, for example, with minimal human effort. In such networks, a lot of effort is often spent protecting the immutability of the functions and controls that govern the system.

A clear inclination to maintain the current positionaffairs or strict adherence to specific rules hinders the development of the system, but at the same time helps to maintain current functions and trends. Open and dynamic control systems are less stable, but more adaptable. When network participants have legitimate ways to influence the rules, structure and development of the network, depending on changing conditions and circumstances, networks are better able to cope with systemic problems and at the same time, new risks and problems arise in them more often.

7.Proper management of decentralized networks allows the system to survive development stages and acquire innovative and useful functions for society. Such management helps to adequately resolve conflicts between those who participate in the network and whom it affects.

People avoid need all the timeredefine solutions to recurring problems by creating habits and roles that are ultimately institutionalized. This is the manual equivalent of rule-based automation. But even the simplest and most stable institutions find themselves in a complex and constantly changing environment. They have to adapt and evolve, and the challenge is made more difficult by conformism, structural inertia and well-organized advocacy mechanisms. The same applies to decentralized networks. Networks are created according to different principles and for different purposes, so different control systems must be used for different networks. If the network is properly managed, the interests of all participants fit into a fairly flexible system of checks and balances. Unbalanced governance or the inability to resolve conflicts between participants reduces the stability of the system. This is especially true for networks in which there must be an important administrative infrastructure with a large number of users.

8.In networks with a formal system of governance, the ability to distribute decision making among participants, including end users, allows effective use of decentralization and protects against abuse of concentration of power.

The following are involved in decentralized networksImportant groups: 1) Technicians responsible for developing software and managing the associated infrastructure or otherwise helping with highly specialized aspects of the network; 2) individuals and organizations with a strong financial interest in the network; 3) users. In practice, these three groups may overlap, but each of them is usually associated with a specific form of decision-making: for professionals - technocratic, for the most financially interested participants - plutocratic, and for users - democratic. Decentralized networks seek technocracy. To balance the balance of decision-making, a token-based voting system is usually implemented, which leads to a plutocracy. More democratic forms of network management have not yet been studied and raise many serious questions. Who or what chooses the people, that is, voters online? For which decisions should a popular vote be held? Are there sufficient secure and privacy-protecting voting methods available? Given that the people have the ability to test the power of the dominant participants, what kind of democracy should be: direct, representative or delegative? All these questions arise when thinking about the practical use of the network.

9. In the management of decentralized networks, the quality of decision-making by non-specialists is significantly influenced by political communication - such a task requires a professional approach.

Often in organizations with a complex structure, overMany people work in the distribution of labor, which gives rise to branches in knowledge and competencies. Specializations exist in the design, construction, maintenance and management of decentralized networks, and their number will only grow over time. Individuals in networks with distributed power are not necessarily specialists in the areas that fall under their influence. Therefore, other actors should be aware of the possible consequences of such individuals' decisions and the relative benefits of going forward. In the world of network politics, people want people to support their ideas and plans. Charismatic individuals with strong communication skills often succeed in this. Most users are passive consumers. They usually don't want to get involved in the technical and day-to-day controls of the network, especially if they like the current state of affairs. But this agreement does not mean that end users do not need power. Encouraging public comment, accountability and legitimacy are essential in the event of disputes or crises.

ten.Decentralized networks with governance models that are poorly defined or too complex and resource-intensive lose to networks that are optimized in the long run - all elements are clear, simple and automated, and protective mechanisms are designed in case of unforeseen circumstances.

In networks with fuzzy and inconsistentmanagement models, it is difficult for participants to come to a general agreement on a course of action in different situations. Because of this, conflicts often arise that lead to network fragmentation or forks. Management models that are overly complex or resource-intensive reduce the scalability and adaptability of networks. Simple networks are easier to modify when needed. One popular way to improve the efficiency of decentralized network governance is through automation, which is any technology that reduces the need for people to participate in a task or to complete a process. However, automated controls need to be constantly tested as they create systemic trends. These mechanisms need to be equipped with protective tools in case of unforeseen situations that arise due to critical errors in software and other serious factors.