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Blog 7 - Defining clear boundaries of decentralised organisation on a blockchain.

September 6, 2018

In Ostrom's seminal work that demonstrated  the tragedy of the commons does not occur in the decentralized management of Common Pool Resources (CPR) if eight certain principles are part of their design, she identified that the successful governance of CPR requires clearly defined user and resource boundaries. In today’s blog we are investigating what that means to decentralized applications on blockchains.

 

Swan (2015) categorizes blockchain use cases into three categories, Blockchain 1.0, 2.0 and 3.0, by their function. He argues that 1.0 is concerned with money such as cryptocurrencies, 2.0 are contract applications such as smart contracts, smart property and further financial and economic classes, and 3.0 are applications that go beyond economics and markets and into the areas of justice and governance. It is arguable that blockchain 3.0 use cases are predominately provided for by the sum of the capabilities provided by blockchain 1.0 and 2.0 applications and in attempting to build a framework for the governance of blockchain hosted decentralized organizations, we are in fact seeking to identify blockchain 1.0 and 2.0 applications that are applicable for the purpose of defining boundaries.

 

A usual characteristic of public blockchains, such as Bitcoin and Ethereum, are cryptocurrencies that are of finite supply and which are obtained via a financial investment either through purchasing the cryptocurrency from a third party or the mining capabilities that generate the cryptocurrency. As these blockchains can in themselves be considered a kind of decentralized autonomous organizations that governs a CPR, arguably the ownership of a cryptocurrency represents a kind of membership in the respective organizations and this in combination with the limited supply define the boundary of the organization. Additionally, many blockchains allow the issuance of additional tokens that operate on top of an underlying blockchain and these can represent a fraction of anything. Regulators classify these as either security tokens that represent a share of a common asset(s) or utility tokens that provide a proportional right to use the thing that they represent. Under either definition the thing represented can be considered a common resource and the tokens that are obtained by swapping something else of value, usually a cryptocurrency, represent a boundary of the group that is governing the asset.

 

Ownership of cryptocurrencies and tokens are represented by a Public Address that is similar to an account number that most of us are familiar with through our dealings with banks and other institutions. Similar to bank accounts, specific Blockchains differ in the cost to create or operate multiple Public Address’s. For some such as bitcoin there is no cost and for others such as Tezos there is both a small fee for creating an account that is used for governance purposes and an opportunity cost if cryptocurrencies owned are not held within a single account. However, unlike a bank account number, Public Addresses are always pseudonymous and there is no limit to the number that a user can create. That is, any person (or machine) can create as many accounts as they wish and there is no linkage between a Public Address and an individual human being.

 

The question is does a cryptocurrency public address define a clear enough boundary to successfully govern blockchain CPRs or do we need to do something more and is that something more better provided as a core part of a blockchain protocol or an application that runs on top of it?

 

It is arguable that the need to define clear boundaries is not an end in itself but an enabler for other principles defined by Ostrom. For example, the Ostrom principle that a decentralized organization must develop a system, carried out by community members, for monitoring members’ behavior, obviously requires members to know who other member are. In cases where a decentralized organization is primarily a closed ecosystem, such as bitcoin, the identification of members may be largely satisfied by a pseudonymous Public Addresses in conjunction with correlated reputations built on social networks that cannot be verified. It is also apparent that Public Addresses will suffice as a representation of manufactured goods - such as IOT sensors - that have the capacity to include a secure embedded digital identity as an integral part of the products makeup. 

 

However, on reflection it seems that this is not enough to define the boundaries of the more complex systems that will interact with the real world. These will require granular details of members identity, such as evidence members are a unique human person or the provenance of a product. Furthermore this identity would need to be practically impossible to replicate and transfer. A property that does have these characteristics is DNA. Conceptually it should be possible to use  biological signatures as a private key and use this to derive Public Addresses for everything from bottles of wine to human beings. The challenge is how do we create this signature cheaply and easily, how do we verify it in a decentralised way, and do we require location information ?

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