Blockchain networks tend to support principles, like open access and permission-less use, that should be familiar to proponents of the early internet. To protect this vision from political pressure and regulatory interference, blockchain networks rely on a decentralized infrastructure that can’t be controlled by any one person or group. Unlike political regulation, blockchain governance is not emergent from the community. Rather, it is ex ante, encoded in the protocols and processes as an integral part of the original network architecture. To be a part of a community supporting a blockchain is to accept the rules of the network as they were originally established.
In a blockchain transaction, you don’t have to trust your counterpart to perform their obligations or properly record transaction data, since these processes are standardized and automated, but you do have to trust that the code and the network will function as you expect. And just how immutable are blockchain ledger entries if the network becomes politicized? As it turns out, not very.
Consider the case of The DAO. Short for decentralized autonomous organization, a DAO is software designed to manage the fiduciary obligations of holding and disbursing blockchain assets without any human involvement. The code that was developed for the (confusingly named) The DAO application was called a “smart contract,” and ran as a DAO application on top of the Ethereum blockchain. The DAO issued tokens through its smart contract and traded them for Ethereum’s blockchain tokens, which are called ether. This token sale was done through a widely marketed crowdfunding campaign, raising more than $150 million in ether value.
The original vision of the Ethereum creators was that computer code should, quite literally, be treated as law in their community and serve as replacement for legal agreements and regulation. The DAO creators embraced this vision and noted that participants should look exclusively to the application’s code as dispositive on all matters. The code was the contract and the law for The DAO. Unfortunately, The DAO’s smart contract was flawed: It allowed a DAO token holder who exploited a bug in the code to siphon off one-third of the value held in the application (roughly $50 million) to their own account. This withdrawal of funds, while unexpected, did not violate either Ethereum’s or The DAO’s rules, naïve as they may have been. Nor does it appear to have violated any laws.
But, at the end of the day, too many Ethereum community members, including some of its most prominent leaders, suffered losses, having traded their ether for DAO tokens. They felt that action had to be taken to reverse their losses. The Ethereum leadership was able to coordinate with the network stakeholders to create a so-called “hard fork,” a permanent split of the Ethereum blockchain, so that control of the siphoned-off funds would be shifted to a group of trusted leaders.
This hard fork created a new Ethereum blockchain and was labeled a bailout by critics. The new Ethereum blockchain selectively rolled back losses only for those Ethereum blockchain token holders who had unwisely exchanged those tokens for The DAO application tokens. If you happened to lose your ether tokens in any other way, whether through market manipulation or through another hack, the rigid “code as law” doctrine still applied — and you were out of luck.
For some members of the community, the decision to hard fork was a wanton violation of the community’s core principles, akin to burning down the house to roast the pig. In protest, they decided to keep running the original Ethereum blockchain unadulterated, and thus there are now two Ethereum networks. Somewhat confusingly, the old Ethereum network has been rebranded as “Ethereum Classic”; the new network retained the original name, Ethereum.
Blockchain fabulists may claim that smart contract applications like The DAO’s will displace lawyers and disrupt the legal industry. But as this incident amply demonstrated, the reality is that smart contracts have proven to be neither smart nor, for that matter, enforceable agreements. The blockchain is truly an innovative approach to governance for networks and machines. But we must resist the temptation to anthropomorphize code and misapply machine governance to social systems. Code is law for machines, law is code for people. When we mix up these concepts, we wind up with situations like The DAO.
Consider some of the controversy surrounding bitcoin. First, understand that on the bitcoin blockchain, power is meant to be distributed among all the stakeholders in the community. None of these stakeholders should have any greater influence or power than any other to change the terms of the bitcoin protocol. They are interdependent and incentive to cooperate in conserving the extant network rules. Any change to the network rules requires coordination and consensus among all of the stakeholders. So when bitcoin software developers began debating about how to increase network capacity, the discussion devolved into a multi-stakeholder melee that was dubbed a “governance crisis” by the popular media. Some of the developers wanted to incorporate changes to the bitcoin code base that would not be backward compatible, and thus would split the network into multiple blockchains — a hard fork.
The majority of bitcoin developers have opposed hard fork scaling proposals in favor of a more conservative approach that assures the continuity of a single bitcoin blockchain. Other stakeholders have begun to view this process as obstructionist, and populist campaigns have sprung up to route around it. But despite much storm and drag, these efforts to alter bitcoin’s power structure and circumvent bitcoin developer consensus have thus far failed. For many in the community, bitcoin’s ability to resist such populist campaigns demonstrates the success of the blockchain’s governance structure and shows that the “governance crisis” is a false narrative.
As a blockchain community grows, it becomes increasingly more difficult for stakeholders to reach a consensus on changing network rules. This is by design, and reinforces the original principles of the blockchain’s creators. To change the rules is to split the network, creating a new blockchain and a new community. Blockchain networks resist political governance because they are governed by everyone who participants in them, and by no one in particular.
The power of blockchain technology is that it can algorithmically enforce private agreement and community principles at a global scale by shifting the cost of trust and coordination to the network. This is what allows blockchains to create new markets where they couldn’t exist before, whether for political or for economic reasons. To do this, we have to be able to trust the blockchain, and to trust that no one controls it.