The invention of Bitcoin in 2008 as a new type of electronic cash has arguably been one of the most radical financial innovations in the last decade. Recently, developer communities of blockchain technologies have started to turn their attention towards the issue of governance. The features of blockchain governance raise questions as to tensions that might arise between a strictly “on-chain” governance system and possible applications of “off-chain” governance. In this paper, we approach these questions by reflecting on a long-running debate in legal philosophy regarding the construction of a positivist legal order. First, we argue that on-chain governance shows striking similarities with Kelsen’s notion of a positivist legal order, characterised by Schmitt as the machine that runs itself. Second, we illustrate some of the problems that emerged from the application of on-chain governance, with particular reference to a calamity in a blockchain-based system called the DAO. Third, we reflect on Schmitt’s argument that the coalescence of private interests is a vulnerability of positivist legal systems, and accordingly posit this as an inherent vulnerability of on-chain governance of existing blockchain-based systems.
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Since there is a wide literature about the basics of blockchain technology (cf. Grinberg 2012; Tschorsch and Scheuermann 2016), we will not engage in a technical exposition of how it works. Instead, we will focus on the governance structures adopted by blockchain systems and communities and how these are susceptible to transform social and legal relations between people.
Because of these specificities, most blockchain-based systems rely on off-chain governance only in exceptional situations when on-chain governance fails or is unable to process a certain decision—for example, when a protocol change is required to improve a network’s functionalities or fix technical issues that would otherwise place the whole network in jeopardy.
As Ippoliti and Chen argue, a central aspect of debates in philosophy of finance, notably with regard to the “view from the inside” (i.e. the study of internal mechanisms of the financial system), is the qualitative study—involving the use of philosophical methods—of “trades executions, laws, institutions, regulators, the behavior and the psychology of traders and investors” (Ippoliti and Chen 2017, p. viii). This paper contributes to studies of this kind because it uses a philosophical method to analyze the governance system of blockchain technologies, which at least in the first instance have been developed as explicitly financial technologies (i.e. digital currencies).
This also accords with the way Lessig imagined the code as law, meaning that the limitations placed by code (as opposed to simply the limitation of code) intrinsically bind the behavior of participants (Lessig 2006). As he argued in an early paper on constitution-making in cyberspace, "while regulation in real space is primarily regulation that relies upon the cooperation of the individuals who live under the regulation, regulation in cyberspace can be something different. The code in cyberspace—the software—can enforce its control directly" (Lessig 1996, p. 899).
In line with Dyzenhaus (1994, p. 19), we explicitly distance ourselves from accepting Schmitt’s critique—taking heed of Schmitt’s highly problematic embrace of Nazism—but instead use it as a productive critique with which positivist attempts to construct a legal order should be concerned.
Public Act No. 436 (2013) in Michigan is a recent example of a legislative response to a state of emergency being declared due to financial crises in Detroit and thereby granting an emergency manager extensive powers in achieving a financial rehabilitation plan, including the right to make binding orders on elected officials.
The Puerto Rico Emergency Moratorium and Financial Rehabilitation Act (2016) is another example of such a response to impending debt default. For a historical account, Agamben (2005, pp. 10–22) traces the parallels between military and economic emergencies throughout the twentieth century.
President Macron’s decision to replace the state of emergency with a new counterterrorist law has led some commentators to argue that in fact a permanent state of emergency has been put into effect (McQueen 2017).
See the relevant Reddit discussions here: https://www.reddit.com/r/TheDao/comments/4oisep/ether_safe_but_dao_cancelled_were_getting_a_refund/; https://www.reddit.com/r/ethereum/comments/4oiqj7/critical_update_re_dao_vulnerability/ also visualized here: https://dao.consider.it/hard-fork-to-revert-stolen-dao-funds?results=true. Accessed 30 July 2018.
Forking is a commonly accepted, though exceptional, practice in open source software development (Robles and González-Barahona 2012). Nyman and Lindman argue that it is a “central freedom” in open source licensing (Nyman and Lindman 2013, pp. 7–8). In blockchain-based systems, soft forks involve a temporary split of a blockchain as part of a software protocol upgrade, in which the original blockchain accrues blocks validated by non-upgraded and upgraded nodes (i.e. is backwards compatible) and the forked blockchain accrues blocks only from upgraded nodes which, following the implementation of the soft fork, tries to achieve a majority of hashing power so that the forked chain reflects the truest sequence of events (Acheson 2018).
The problem of a growth of private powers is not unique to the blockchain ecosystem. The concept of a ‘benevolent dictator’ and an oligarchy among co-developers in open-source software development projects has been discussed since the 1990s (Raymond 1998).
As Reijers et al. (2016) argue, the sum of individual “wills” in blockchain-based systems, represented by the nodes, do not allow for the conception of a common will, or common good, as it was put forward by the social contract theory of Rousseau.
Looking at the most prominent blockchain networks—Bitcoin and Ethereum—this pattern indeed seems to be present. Both these networks suffer from a concentration of voting, or ‘mining’, power, with a few participants who own large portions of the available assets. In the Ethereum community, ether holders, Ethereum developers, miners and exchanges all participate in the governance of the network in order to promote their own interests, without much clarity as to which party has decisive influence (ConsenSys 2016).
Although community votes were tallied within 12 h of voting being opened, they accounted for only 5% of ether holders (Santos 2018, pp. 38–44).
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This research is funded by the European Research Council (ERC) under the European Union’s Horizon 2020 Research and Innovation Programme (Grant Agreement No 716350).
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The authors declare that they have no conflict of interest.
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Reijers, W., Wuisman, I., Mannan, M. et al. Now the Code Runs Itself: On-Chain and Off-Chain Governance of Blockchain Technologies. Topoi (2018). https://doi.org/10.1007/s11245-018-9626-5
- Blockchain governance
- State of exception