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Blog 8 - Matching blockchain governance rules to local needs and conditions.

September 13, 2018

This a continuation of our blog series looking at blockchain and DAOs through the prism of Ostroms 8 principles. This time we are checking out her second rule which says to match the design of decentralized organizations to local needs and conditions.

 

Some authors consider that this principle deals with who can access resources and the barriers to entry and exit {Bradley, 2017 #86}, whilst other authors who specifically consider the application of this principle in the design of digital platforms argue that is it is concerned with ensuring that newcomers can participate and access the platform, and have an incentive to participate in the provision and the maintenance. {Dulong de Rosnay, 2012 #87}

 

Blockchains allows decentralized organizations to scale beyond geographical boundaries, and the limits of language inter-comprehension, via atomization and the worldwide internet. However, this need to design blockchains and the DAOs - that operate on top of blockchains -to match local needs and conditions seems somewhat contradictory to this scaling opportunity. That is, although it is conceivable that future DAOs will include a large number of disparate members with common interests that have ceded to a crypto economy operating on blockchain(s) that matches their needs, it is arguable that member’s local conditions such as regulatory constraints that restrict the purchase and sale of cryptocurrency currently prevent many individuals from making such a move.  

 

To achieve a balance and facilitate individuals moves to the crypto economy, it is arguable that an approach is for blockchain(s) to have generic features that allow the largest amount of individuals to cede and features that enable blockchain application layers – where DAOs will operate – that include features that are more specific to the needs of the smaller groups that will utilize bespoke DAO applications.

 

What are these features, what is the current state of their development, and does it make sense for them all to be available on a single blockchain or will those who cede to the crypto economy do so via a blockchain that best meets their present needs and utilize an alternate blockchain when their needs change?  

 

Arguably the greatest challenge for those seeking to cede to the crypto economy is the obtainment of cryptocurrencies via either the exchange of ones existing wealth or via the sale of goods and/or services for cryptocurrencies. This challenge is manifested in many ways. Firstly, some countries such as China and India have made the use of cryptocurrencies illegal and in China’s case control the social networks that can be used to organize trades and distribute information. Secondly, in more liberal countries that allow the purchase of cryptocurrencies, the eternal visibility of transactions on blockchains such as bitcoin present a risk that those who cede to the crypto economy may in the future be subject to changes to or the application of existing laws. Finally, the price volatility that most cryptocurrencies experience represents an unacceptable risk to the wealth of those who are considering a move.

 

There are two potential methods to avoid sovereign regulatory constraints in the obtainment of crypto currencies. One is to bootstrap the cryptocurrency and use community adoption to drive value. Another is to provide new participants with an opportunity to obtain cryptocurrency via contributions of value to the ecosystem – such as mining - or via the sale of goods and services.

Although Bitcoin succeeded in proceeding from something that was worthless to something that has value, this approach is challenging. There have many subsequent attempts to provide a crypto currency (or token) for free, a term called airdropping, and then to drive value into it. None have been successful thus far. It is arguable that the time to pursue this approach has passed. Bitcoin, which used a decentralized organic approach to develop value, had no competitors and its’ creator disappeared after its launch. Today it is arguable that a bootstrapped cryptocurrency would struggle to obtain mindshare of potential participants without an ongoing marketing campaign that would require centralized coordination, and this centralized decision making would prevent the cryptocurrency from obtaining value due to likely third party interventions and principle agent problems. That is, cryptocurrency value is driven by trust and this trust requires decentralization.  Although it is arguable that there may be an opportunity to pursue this strategy in those regulatory domains where cryptocurrencies are banned, and there is space within the marketplace to organically bootstrap a bitcoin like ecosystem, censorship of social networking platforms makes this challenging. Furthermore, if potential participants are able to circumvent this censorship, then they are likely to purchase a cryptocurrency that already has value and is trustworthy, such as bitcoin.

 

Incentivizing of ecosystem participants is a viable but currently limited means by which individuals can earn cryptocurrencies and allow them to cede to the crypto economy. The current approach- often called mining - has been to reward those who participate in the operation of the blockchain protocol by producing blocks or validating those that have already been created.  However, for the majority of blockchains, this approach has developed characteristics that self-limit the expansion of the blockchain ecosystems.

 

Bitcoin relies on a consensus algorithm called Proof of Work and this has evolved to require extensive investments in skills, hardware and facilities that are outside of the reach of the majority of people. Some blockchains such as Monero have countered this issue by choosing POW consensus algorithms that only allow standard computer hardware to mine, and hence enable a large number of people to equally compete for the mining of blocks. However, as POW also limits the capacity of a blockchain transaction processing scalability, this has caused fees to sometimes spike to prohibitive levels and these costs limit Monaro’s’ potential ecosystem size.  Whilst alternate consensus mechanisms such as Delegated Proof of Stake (DPOS) do allow blockchains to scale without the need for investments in expensive hardware and facilities, participation in these is only available to those who have purchased the cryptocurrency in the first place – and therefore DPOS ecosystems are also not open to those who have regulatory or financial constraints. It is therefore arguable that blockchain ecosystems require new and additional ways to allow potential participants to earn cryptocurrency if they are to incent them to cede to the crypto economy.

 

The final identified means of obtaining cryptocurrencies is via the sale of goods and services. Presently, cryptocurrencies are not a great means of making a payment. Firstly, they are slow, with the best wait time being around 1.5 minutes, secondly transactions are not private and therefore are subject to regulatory intervention, and finally the price volatility of cryptocurrencies in comparison to fiat currencies makes it prohibitive for both the seller and buyer to transact in cryptocurrencies. Although significant progress is being made by the bitcoin lightening network, a fully encrypted network that overlays the bitcoin protocol and allows instant payments, price stability for buyers and sellers that have fiat input costs remains problematic. Currently the most successful means of ensuring price stability has been by using existing futures markets or via the issuance of cryptocurrencies that are backed by fiat currencies and both of these methods require centralized interfaces which are in themselves subject to third party interventions. More recent approaches such as the MakerDAO have attempted to provide a decentralized means of providing price stability, however their approaches ultimately rely on the value of an underlying cryptocurrency and they therefore risk losing all value when a blackswan event occurs.

 

Perhaps these two fundamental obstacles to the uptake of cryptocurrencies, earned incentives and price stability, can be solved by the one solution. Is it possible to design a market place where traders are incentivized by a decentralized blockchain protocol to move the price of a cryptocurrency towards parity with a fiat currency ?

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