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?

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)

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!)

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/

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

Forks depend on...

● Soft fork: miners● Kinda hard fork: miners and developers/users

● Maximally hard fork: developers/users

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)

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)

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?

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?

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

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

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?

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

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

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

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

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

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

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!

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

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

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)

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?

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

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

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

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

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

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