Blockchain’s governance paradox

Izabella Kaminska at the Financial Times: “Distributed ledger technologies “are starting to look an awful lot like some of the more conventional technical solutions that we have,” says Prof. Vili Lehdonvirta, an associate professor and senior research fellow at the Oxford Internet Institute, at a recent talk he gave at the Alan Turing Institute.

At the heart of the issue (as always) is who dictates and enforces the rules of the system if and when things go wrong, according to Lehdonvirta. He echoes a point we’ve long made, namely, that what really matters in these systems is how they deal with exceptions rather than norms.

The industry’s continuous shifting of nomenclature hints at the inherent challenges and revisionism at hand. As blockchains become DLTs, shared databases and permissioned consensus networks, what the techies working on these systems fail to publicly highlight is that much of the time, “advance” means returning to tried and tested paradigms, or reintroducing trusted or governance-focused nodes.

Albeit, the “back to square one” solution isn’t unique to blockchain. We see the same pattern playing out across the network/platform industry. For example, Airbnb was built on the notion that peers could organise accommodation for each other bilaterally without any dependence on a centralised manager. As time went on, however, trust issues across the platform — everything from fraud, misrepresentation, bad consumer experience, abuse, vandalism or damage — forced the once proudly employee-light company to load up on staff who could troubleshoot many of these problems. In so doing, Airbnb — much like Ebay before it — transformed itself from a tech company into an adjudicator, value custodian and rules-and-standards authority.

And by and large, that’s not been an unwelcome transformation, from the consumer’s perspective. Indeed, what libertarian tech anarchists often fail to understand is that the public is not opposed to the idea of putting their trust in institutions, especially when they’re operated by real people who can be held accountable for things going wrong.

What they seemingly understand and technologists don’t is this: Trusting other parties to protect, enforce and adjudicate the rules of operation enhances division of labour and thus efficiency. I no longer have to waste hours of time trying to figure out if the counterparty I’ve dealt with on Ebay is trustworthy or not. Ebay governs the platform in such a way that I can be confident failed trades will always be compensated, and that Ebay’s own judgement about compensation entitlement will always be fair. After all, its continuing reputation as an efficient exchange platform depends on it.

But back to blockchian.

As Lehdonvirta observes, the vision of blockchain is of a system which can enforce contracts, prevent double spending, and cap the money supply pool without ceding power to anyone:

No rent-seeking, no abuses of power, no politics — blockchain technologies can be used to create “math-based money” and “unstoppable” contracts that are enforced with the impartiality of a machine instead of the imperfect and capricious human bureaucracy of a state or a bank. This is why so many people are so excited about blockchain: its supposed ability change economic organization in a way that transforms dominant relationships of power.

The problem which blockchain claims to have solved, in other words, is a rule-enforcement one, not a technological one….(More)”.