From ad hoc governance to better governance

@iang wrote a nice piece on blockchain consensus mechanisms, defending, of course, delegated proof of stake. I'd like to expand a little bit one point that he makes.

Fallacy that there is no governance layer in other chains. In practice there are governance layers, but they are unwritten, denied, and inconstant or abused. In essence, we are replacing ad hoc (anarchic? captured?) governance with written, constitutional, formal and transparent governance. The question is not whether this adds governance, but whether explicit governance is better than the hidden intrigue.

First I have to say that "ad hoc governance" is a great term in this context. I try to remember to use it from now on.

Why ad hoc governance doesn't work

Many people in the blockchain world are very much in favor of decentralization. But in many cases, it's not clear why decentralization should be applied. And if it should, what's the best way to do it in a particular case.

Hierachies exist for a reason. They make decision making much more effective. When it's not necessary to have wide and long discussion with lots of equal peers to reach a consensus, the whole process is much more faster. Those who are in power just decide what to do and make it happen.

If you are familiar with Ronald Coase, you might see how this is in line with his thoughts about the nature of the firm.

According to Coase, firms exist because they lower transaction costs of cooperation. When there is a central party that hires workers and tells them what to do, shit gets done much faster compared to a situation where everybody acts as a contractor and makes individual contracts with everybody else. Transaction costs include non-monetary costs like negotiation cost: it requires time and effort to find suitable business partners and negotiate contracts with them.

This is something that decentralization fanatics don't usually understand. If there is a highly decentralized system, cooperation costs might become quite big. This is why many ad hoc governance systems will get stuck with decision making: it's just too expensive to get an agreement with everybody involved. With blockchain many of the participants are anonymous and pseudonymous, which makes it even more impossible.

The governance structure should match actual power structures

People behind Urbit are probably the best at digital community governance design stuff. For example, in Design of a digital republic: part 1, goals they write:

A republic needs a constitution — a set of formal processes that guides and shapes the real questions of governance, which are always informal.
The republic is in a healthy state if its actual power structures match this constitution.

If a blockchain (or any other virtual republic) lacks constitution or other document that defines and formalizes power structures, it doesn't necessarily mean it's decentralized. It just has ad hoc governance. Power structures pop up and change somewhat randomly.

It is also possible that a blockhain has a constitution (or something similar) but the actual power structures are something else. Rulers defined in the constitution are just puppets and the real power is elsewhere. Having a shadow government is not a good situation either.

It should be noted that young systems don't necessarily have very good governance process and the real power structure might be ambiguous. That just means that the system hasn't matured yet. People are still trying to learn how the system works and should work. That's why participants in a young community should understand the difference between unmatured power structure and a target power structure, which is a goal that the system should be going towards.

Different governance structures produce different outcomes

It's not enough to replace ad hoc governance with written, constitutional, formal and transparent governance. If the community has a clear goal, a little bit of thought should be given to the actual mechanism that governs the community. How easy it will be to achieve the goal with a particular governance mechanism?

The goal for blockchains is usually some kind of profitable business. The governance mechanism should be able to support business development in its all stages. From early technical development to gaining viral traction and finally to serve a huge base of global users.

That's why it might be even desirable to change the governance system, depending on which state the development is. A governance mechanism that is efficient at producing technological innovations that attract early adopters might not be good at preserving the market share in matured markets by producing a high-quality user experience.

If the constitution and the governance mechanism defined by it are very rigid, they should be pretty much perfect when the blockchain is launched. Because this is really hard, probably a better way is to admit that the system will need changes and think in advance what is the best way to make those changes.