Decentralized Network Governance: Blockchain Technology and the Future of Regulation

TLDR

  • Effective governance is essential to protect the interests and needs of actors in the digital domains like blockchain and big data. This has become increasingly important due to the advancement of these technologies over the years.
  • The authors review literature and conclude that dominant modes of governance are inadequate for understanding emerging forms of governance such as DAOs.
  • They propose a new paradigm of governance based on the regulation of new power relationships between the state and actors in the digital domain, and they investigate the role blockchain technology can play in what they term decentralized network governance.

Core Research Question

Do current modes of governance in the digital domain adequately address the advancement of technology with respect to decentralized network governance?

Citation

Zwitter, A., & Hazenberg, J. (2020). Decentralized Network Governance: Blockchain Technology and the Future of Regulation. Frontiers in Blockchain. https://doi.org/10.3389/fbloc.28020.00012

Background

  • Network Theory: The study of complex interacting systems that can be represented as graphs equipped with extra structure. It provides techniques for analyzing interacting agents. In network theory, power is considered as the ability to leverage one’s position with other actors.
  • Decentralized Network Governance: A system of governance where governing tasks are distributed according to capability and exerted power on a fluid basis.
  • Social Network Analysis: The process of investigating social structures through the use of networks and graph theory. It is a process of quantitative and qualitative analysis of a social network. Here, the role and power of actors within a decentralized network are functions dependent on whether actors can influence other actors or whether they can leverage their positions through different forms of intermediaries. In social networks, members of distinct groups share a more tight-knit network among each other.

Summary

  • In today’s world, the operations and interactions of people, businesses, institutions of higher learning, and governmental bodies are progressively being shaped by innovations in the digital space.
  • Technology is leveraged to carry out activities such as creation, collection, dissemination and distribution of information which were once solely carried out through social processes.
  • The purpose of this research is to combine governance literature with social network theory in order to develop a new approach to governance: decentralized network governance.
  • Policy-making is increasingly conceptualized in terms of several forms of governance in the literature on governance. These include self-referential, decentralized, and horizontal systems of governance, as well as Westphalian command-and-control government.
  • Blockchain, DLTs, and artificial intelligence (AI) are all influencing how people interact with one another. The researchers discuss how these emerging technologies are silently imposing governance standards and describe the need to conceptualize a decentralized network governance that will incorporate the imposed sets of rules.
  • The concept of a decentralized autonomous organization (DAO), which includes internal and external governance components, is a significant advancement within blockchain ecosystems.
  • It is evident that networks made up of various public and private entities are increasingly governing interactions and communities.
  • As a result, power is concentrated in huge technology corporations, governmental agencies, and organizations engaging in blockchain technologies since ownership is in the hands of those who develop the means, collect the data, and repurpose the tools.
  • A network theory approach was imbibed in order to comprehend the governance effectuated by digital networks in general and by blockchain technology in particular. Given distributed ledgers and the decentralized nature of blockchain technology, this theory provides a useful concept of societal governance in a networked system.
  • The researchers reviewed the governance literature while the dominant modes of governance were conceptualized.
  • The authors presented the different modes of governance in the digital domain, including Mode 1 and Mode 2 governance. Mode 1 is referred to as the old governance literature, primarily via the hierarchical command-and-control structure of the state and other public hierarchies. Mode 2 refers to the new emergence of more horizontal policy-making modes that create a more level playing field for societal actors, both private and public.
  • To establish a more legitimate and imperative power balance, the digital space needs regulation and governance. Therefore a broad perspective of governance was taken, avoiding bias toward specific modes of governance.
  • The authors propose a novel network approach to governance (Mode 3) that is better suited to the decentralized nature of governance structures that may be found in blockchain solutions, particularly DAOs.

Method

  • The researchers conducted a qualitative study by collecting data from existing literature on governance theory.
  • The decentralized network governance approach intends to dynamically distribute governing tasks based on capacity and exerted authority.
  • The actors within the policy network in the decentralized network engage in a networked structure rather than a hierarchical or horizontal structure.
  • They analyze through the lens of social network theory, providing concrete insights into existing blockchain and DLT applications while focusing specifically on issues of power, identity, and the roles played in rigidly hierarchical and non-hierarchical governance structures.

Results

  • From the perspective of social network theory, decentralized network governance becomes more interesting when compared to the concepts underlying social networks.
  • A network of actors develops into a governance-relevant policy network as a result of their interactions rather than because of their individual prominent positions. It depends on the topic, how they are seen in certain policy circles, and what influence they have over other actors.
  • According to social network analysis, an actor’s position and power within a decentralized network depend on their ability to influence other actors in the network or to take advantage of their positions through various types of brokerage.
  • Traditional, hierarchical governance with fixed identities is described in Mode 1. Mode 2 governs in a more horizontal manner, with set roles based on authority and skill. Mode 3 enables the development of new forms of regulation for digitalized social affairs.

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Discussion and Key Takeaways

  • Decentralized network governance addresses governance challenges caused by blockchain technology in a more effective way.
  • Identities and roles are no longer central to the exertion of power in social coordination. Their place has been taken by new forms of power.
  • Decentralized network governance gives concrete indications of the utility of social network analysis with regard to policy-making and the design of governance tools in the digital domain.

Implications and Follow-ups

  • The need for governance to adapt to the technical innovations of the digital domain and to increase the use of blockchain technology.
  • Future direction should include designing smarter digital networks and assigning roles to actors depending on their centrality and intermediary positions.
  • Social network analysis can provide concrete insights into existing blockchain and DLT applications. This analysis also has the capability to help further develop a theoretical framework regarding decentralized network governance.

Applicability

  • This research applies to policy makers, state agencies, big corporations, organizations and individuals in the emerging technology space.
  • Decentralized governance can equally be applicable to all modern power interactions typified by a majority of private actors who offer communication networks for other private actors.
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Welcome back, @Deborah_Oni, and thanks for your substantial contribution to the forum.

I’m curious about the specific challenges that blockchain and DLTs raise that decentralized network governance addresses particularly well. Do you have any opinions or feelings about that?

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Thank you @rlombreglia for your question. I’m glad to be here.

The specific challenges that blockchain and DLTs raise that decentralized network governance addresses particularly well in my opinion are the fact that governance process in blockchain and DLTs are decentered, horizontal and networked. This poses a challenge to the existing governance process which is static, centralized, power is concentrated in one single authority and it is role and identity-based. Applying the existing mode of governance will not be able to cater for the interest of all stakeholders in the digital space and might as a result hinder innovations. Hence the need for a decentralized network governance where power is dynamic and fluid.

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Thanks for your reply, @Deborah_Oni.

In your answer you identified “stakeholders in the digital space,” which leads me to an interesting follow-up question: Does decentralized network governance apply to only the digital domain?

If the answer is “no,” how and where would its application to the non-digital world work?

Nice summary on decentralized network governance @Deborah_Oni
I think that over time, governance systems have changed as a result of globalization, greater technical specialization, and functional divergence. However, governance must also adjust and develop in order to keep up with technical developments in the digital sphere generally and the expanding use of blockchain technology in particular. As a result of the usage and dependence on digital networks, blockchain technology is gradually altering our society and power structures. Even if the entire extent of technology’s potential as a tool for governance is still up for debate and uncertainty, its consequences are starting to become increasingly obvious…

The way societies are and are capable of being properly controlled has evolved. The challenges of functional diversification, technical specialization, and globalization have caused governance processes and procedures to become more decentralized.
The use of power by a single actor, historically the government, is no longer the primary factor in determining how policies are made. Instead, social relationships and civilizations are increasingly being governed by networks made up of many public and private institutions. It has also been acknowledged that the governing actor field is becoming increasingly fragmented as a result of the digital era.
Due to these developments, I believe therefore it is necessary to reconsider what governance is, as well as the contribution that new technologies like blockchain may make to legal and efficient governing structures now and in future.

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Thanks for this exploration synopsis @Deborah_Oni. Is really interesting reading your research summary. I hold the view that Methods of governance depends on conceptions of the relevant aspects of power relationships to be governed. In relation to the digital domain and blockchain in particular, power must be conceptualized as fluid, as different actors perform different governance roles within different contexts. Also, there are times when the networks through which roles are distributed operate as governance actors themselves. As identities and roles are no longer central to the exertion of power in social coordination, their place has been taken by new forms of power and hence require new forms of governance.

Besides, the work of customary methods of Governance takes steps to sabotage the advantages of mechanical advancement, for example Blockchain and DLT.

I think decentralized network governance seeks to distribute governing tasks according to capability and exerted power, on a liquid basis. This implies that governance tasks are distributed neither on the basis of the identity of actors nor on the basis of the role they can perform in the governance process.

The distribution of power can become Variable and dynamic ward on the particular connection between at least two actors or entertainers.

As illustrated in this paper with cases from blockchain technology, decentralized network governance is by no means limited to DLT. It applies equally to all modern power relationships that are characterized by the preponderance of private actors that provide networks of communication for other private actors.

If the future of governance is indeed one of changing roles and power alliances, we should expect to see increasingly fluid dynamics within and surrounding digital networks.

I think we need to propose a network approach to governance that is more tailored to the decentralized nature of governance structures, and which can generally be common in blockchain arrangements and DAOs more specifically. My thoughts.

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Hi @Deborah_Oni, i just did a brief summary of your research summary for further discussion.
SUMMARY
• Decentralization refers to the transfer of control and decision-making from a centralized entity (individual, organization, or group thereof) to a distributed network. Decentralized networks strive to reduce the level of trust that participants must place in one another, and deter their ability to exert authority or control over one another in ways that degrade the functionality of the network.

• Blockchain is a decentralized database that stores a registry of assets and transactions across a peer-to-peer network. The “asset” may not only be money or transactional information, but also information regarding ownership, contracts, goods, and any other information

• The aim of the paper is to merge the literature on governance with social network theory, in order to conceptualize a new approach to governance: decentralized network governance

• Traditional and new modes of governance rely on the identity and roles of specific actors, while blockchain technology requires a re-appreciation of the powers exerted by different actors.

• Traditional modes of governance fail to appreciate changes in power relationships that result from the emergence of new actors, practices, and relationships.

• Blockchain technology is promising to reform digital currency, in order to improve logistics and help manage digital identity in a decentralized and trustless manner.

• The political and economic worlds are also becoming increasingly structured and regulated by the effects of AI and DLT, increased connectivity, and the services surrounding them. Researchers and professionals alike are prophesizing a data revolution that is as equal in impact and disruptive in force as the industrial revolution.

• DLT does not require any central control system, and it stores the transaction history in blocks of data that are cryptographically locked together.

• The emergence of blockchain technology has brought with, is the concept of DAOs (decentralized autonomous organizations). Blockchain technology and Bitcoin have been developed to make traditional financial governance mechanisms obsolete.

What are the governance components of DAO?

• Internal Governance Component

This is characterized by non-hierarchical modes of governance and has quasi-democratic features. These features are quasi-democratic rather than democratic because there is no guarantee of the principle one person, one vote

External Governance Component

• This is the reliance on clusters of servers and individual nodes for the functioning of the network and decision-making. In essence, actors can exert undue influence on decision-making, and in a stronger way than other actors, if they control more nodes and server capacity

Are there are strategies of which decentralized network governance can be conceptualized?

Yes, there strategies of which decentralized network governance can be conceptualized;

Platform Strategy
In which crowds, e.g., interest groups or one-issue parties, are enabled by the state (off-chain) to critique and protest about powerful actors within the network (on-chain). In this role, the state can also facilitate the education of under-informed individuals and institutions.

Private Strategy
in which crowds cooperate within a network to achieve certain goals, put certain proposals forward, or correct and counterbalance other power brokers in the network.

Legal Strategy

in which the state or the designer of a technology, e.g., the DAO with regard to blockchain technologies, enables actors to effectively protest against and critique powerful actors. This is done by exempting them from legal requirements when there are grave power imbalances in specific relationships.

The General idea of Decentralized Network Governance; Blockchain Technology and the Future of Regulation.

• The employment of traditional modes of governance threatens to undermine the benefits of technological innovations such as blockchain and DLT.

• Overregulation or the application of inadequate mechanisms often reduces the potential benefits of digital technologies

• The author proposes a novel network approach to governance that is more tailored to the decentralized nature of governance structures, and which can generally be found in blockchain solutions and DAOs more specifically.

• The approach of decentralized network governance seeks to distribute governing tasks according to capability and exerted power, on a fluid basis. This implies that governance tasks are distributed neither on the basis of the identity of actors nor on the basis of the role they can perform in the governance process

• The conception of decentralized network governance relies on social network theory.

The impact of Blockchain Technology and the Future of Regulation.

• The blockchain technology potentially allows individuals and communities to redesign their interactions in politics, business and society at large, with an unprecedented process of disintermediation on large scale, based on automated and trustless transactions.

• Innovations in the digital domain are increasingly shaping the daily processes and interactions of individuals, educational institutions, companies, and governmental organizations

• Governance is not easy due to the decentralized nature, immutability, lack of organizational or company structures, fluid and unknown actors in permissionless blockchains and the entanglement of application and infrastructure elements.

• The governance of the infrastructure is often controlled by different groups of stakeholders. This often results in a lack of effective governance actions as a whole

• Predominantly applications on permissionless blockchain protocols post potentially new governance challenges

Recommendation

• Modes of governance rely on conceptions of the relevant aspects of power relationships to be governed. In relation to the digital domain and blockchain in particular, power must be conceptualized as fluid, as different actors perform different governance roles within different contexts.

• Governance mechanisms must be flexible

• Informal organization investigation can give substantial experiences into existing blockchain and DLT applications. This examination likewise has the capacity to help further foster a hypothetical system with respect to decentralized network administration.

• There is a need to propose a novel network approach to governance that is more tailored to the decentralized nature of governance structures, and which can generally be found in blockchain solutions and DAOs more specifically.

• There is the need for governance to adapt to the technical innovations of the digital domain and to increase the use of blockchain technology

• This new mode of governance must be characterized by the changing and multiple roles of actors, and the necessity to identify roles depending on network clusters and policy domains

CONCLUSION

Throughout the long term, administration components have adjusted due to globalization, expanded specialized specialization, and practical separation. Be that as it may, administration additionally needs to adjust to the specialized developments of the advanced space as a rule, and to the rising utilization of blockchain innovation specifically. DLT and blockchain innovation are progressively shaping our social orders and power connections. Indeed, even when their maximum capacity is still discussed and dubious, the impacts of advances as administration instruments are progressively substantial. Hence, decentralized network governance, as a new Mode 3 governance, allows for the conceptualization of new forms of regulation of digitalized social affairs.The core critique is that both modes of governance do not take into account the fact that the roles of actors in DLT-based solutions are constantly changing, and that power is context-specific and relational. This became apparent in the off-chain solution sought to remedy the DAO hack.

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What I can gather from this summary is that Mode 1 and Mode 2 leadership models are positional leadership models. Mode 2 is different form Mode 1 to the extent that under Mode 1, possession of power is based on nominal status irrespective of actual function performed. Under Mode 2, power is a function of the role performed by a participant, and the allocation of roles could be either static or flexible.

Under Mode 3 (decentralized network governance), power is neither determined by status nor assigned role but by the actual function performed. Thus, the Mode 3 leadership model creates the right environment for situational leadership to thrive. Situational leadership is more likely to result in transformational leadership than positional leadership. Certainly, the world is need of transformational leadership. This does not mean that DAOs, as they are currently conceived and operated, are free from shortcomings. For example, while DAOs do not offer participants nominal positions of authority, they also do not offer the same opportunities to every participant for situational leadership. This is because the allocation of roles is often based either on computational power (proof of work) or the size of investment (proof of stake). While this may be justified on the basis that participants who have invested more in DAOs have more at stake and should have more decisional power, it raises the issue of minority protection that exist with traditional organisations. There is therefore still much room for improving the way DAOs operate.

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Of course, that only applies to the digital sphere.These were all created as a result of technology.

Decentralized networks are not something I see in the non-digital world.

Quite a thoughtful summary @Deborah_Oni

I believe that the future of blockchain technology will result in a trustworthy, unfilterable, and uncensorable repository of data and knowledge that is accessible globally. This characteristic will accelerate the creation of the third generation of the internet. And this is why blockchain is the internet’s future.

Blockchain technology continues to evolve and spread in the direction of a decentralized internet. It heralds the arrival of Web 3.0, which is defined by decentralized financing and can only be likened to the birth of the internet itself. The revolution has been compared to the early days of the internet. Proper regulation will be the key to blockchain technology’s true success.

Regulatory organizations must adapt to the rapid changes in blockchain technology and the crypto markets. On the subject of regulation, we’ve seen people take polar different opinions. Some people argue that decentralized technology and the rule of law are incompatible. A lack of regulation is bad for the sector, and its meteoric rise is catching the attention of regulators all over the world.

Current IT industry legislation is unsuitable for crypto and blockchain because it threatens the fundamental concepts of decentralized technologies. However, it is becoming clear that both decentralization and regulation are unavoidable. The ideal strategy is for regulators and innovators to collaborate to map a course forward. To strike the appropriate balance, the blockchain community requires a more in-depth and collaborative working relationship between regulators and innovators. Starting a conversation between the blockchain community and regulators and authorities will allow us to identify the best method to control the industry – smart regulation. Otherwise, destroying the fundamental concepts of decentralized technology will return us to square one.

Will blockchain and crypto lose their core values with the inception of regulations, or will regulations adapt to the decentralized technology and its immense benefits for society?

For a start, the blockchain industry should accept that no inherent aspect of the technology can go wholly unregulated. On the other hand, the technology cannot be overly regulated or banned because it’s new and embodies decentralization.

New technologies that cause a significant disruption tends to attract a regulatory crackdown. The distributed ledger technology heralds a new paradigm, such as through decentralized finance (DeFi).

Conclusion

The introduction of smart regulation in the blockchain industry will drive faster adoption and innovation within the sector . The growth of innovation is on an exponential trajectory. The entry of governments in digital currencies through central bank digital currencies (CDBCs) allows for visibility into the industry and programming of fees and taxes. The elimination of ambiguity in regulation will foster growth, further innovation, and attract investors . Adapting to rules will be necessary for any business in the blockchain industry that wants to operate globally.

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