January 18, 2018 . 5 min read
Storecoin is proposing a governance model based on one-entity-one-vote, in which participating entities validate their identity through a “Know Your Voter” process. We believe that this model offers the best opportunity to enable governance to achieve finality without compromising on decentralization -- for an unlimited number of miners (voters), developers, merchants, ecosystem partners, and more around the world.
To understand how we came to this conclusion, we need to look back at some of the fundamental questions that we as framers of Storecoin governance asked first.
Why should we try to prevent centralization of power in a blockchain ecosystem?
One of the key tradeoffs in a decentralized system has to do with the ease and quality of decision making. Traditional businesses, with limited decision makers and centralized authority, can move quickly, but this efficiency comes with the risk of censorship. In fact, in many ways, the central premise and promise of blockchain ecosystems are to enable allow participants to do things that explicitly wouldn’t be allowed or enabled on platforms that are centrally controlled.
Blockchain ecosystems on the other hand are multi-sided ecosystems that require the participation of numerous actors each representing different needs and incentives. Healthy protocol networks include core developers writing software for miners to run for the purpose of securing transactions on a public blockchain; miners validating transactions and securing the network for users; users transacting and investing in the cryptocurrency produced by the network; third party developers building applications for users with the cryptocurrency; and, merchants accepting the currency in exchange for services or products.
If any one group has official or de facto authority over the others, it sets up an inevitable problem where those groups disenfranchised by that authority simply flee to a different protocol. In many ways then, a major question for governance becomes how to ensure that one group of stakeholders is prevented from consolidating power against the others.
This question is particularly pertinent in today’s moment. Right now in many of the major blockchains, the core developers have the lion’s share of influence. They shape the direction and functionality of the protocol, determining what is important to build and when to build it. There is no way for the other parties in the multi-sided blockchain network to overrule them. Even if there were, those developers could simply fork or leave.
This lack of a clear path for the involvement of miners and other network parties to influence the direction of the protocol - in a way that is respected and abided by those core developers - creates a major barrier to adoption. Major corporations who might wish to adopt the cryptocurrency as part of their payment rails have to simply trust the whims of those core developers, without having any clear path to drive things in a direction that makes sense for their business. App developers have to trust that the protocol they’re building on won’t change in a way that renders their efforts useless.
Put differently, without a clear governance that core developers both agree to but can be overruled by, it prevents the actors who could help grow the public blockchain to worldscale from investing their futures in the ecosystem.
What are the challenges of informal & social consensus governance models?
There are, of course, numerous efforts to address the challenges of how blockchain protocols evolve and adapt themselves over time. One method for solving the problem of stakeholders consolidating power is an off-chain social consensus process, which allow communities to debate proposed changes and decide whether to run update the protocol. The upshot of this type of model is that it doesn’t formalize roles or controls in a way that can be exploited for attack. What’s more, “governance by exit” in the form of choosing not to run software is a backstop of last resort that keeps protocols from changing wildly.
On the other hand, an off-chain social consensus approach brings with it three critical issues. First, it tends to be messy and inefficient. The lack of formality means there is no real transparency; processes cannot be replicated; and, there is no predictability. Second, by relying on exits and forking as a dissent mechanism, it can create drag on the growth of network effects required to make cryptocurrency protocols strong and secure. If every debate, for example, led to a fork, resources would constantly be splintered. And third, while their power isn’t formally enshrined, off-chain consensus approaches tend to reinforce the de facto control of core developers over the direction of the network. Those that control the code have disproportionate influence.
Why do one-token, one-vote models lead to plutocracy?
One way to address these challenges is to opt for a system that incorporates voting. The benefit to voting-based systems is that they give formal voice to all the actors in an ecosystem by empowering token holders to vote on issues, and can allow communities to reach finality in their decisions in a more efficient manner. Voting-based systems, however, bring their a new challenge: plutocracy, or rule by the rich.
In the physical world, the basis of democratic governance is one identity, one vote. Blockchains, however, are permissionless and historically, nodes have not needed to prove their identity to participate. In the absence of that identity, many protocols have adopted some version of voting power being apportioned to holdings –such as one-token, one-vote.
The argument in favor of this approach is that the benefit of token holder voting outweighs the downsides of possible centralization of power among the largest holders. Some have even argued that there are benefits to having those with the largest stake in the success of the network shape its direction.
We believe that plutocratic systems are doomed to get more centralized over time. Inevitably, those with the largest stake orient the network towards decisions that benefit them –regardless of whether those decisions are good for the network as a whole. This crowds out the space for smaller token holders, who – unable to influence the direction of the network – exit to more favorable protocol ecosystems. The result of this is to further increase centralization around those who have the greatest holdings already. Even if one would make an argument that this group has an incentive to vote measures that benefit everyone, such that their investment continues to grow, all of a sudden, we’re back to trust: Trusting a centralized party to do the right thing.
How does entity-based voting promote democratic decision-making without centralization?
An answer to the problem of plutocracy is entity-based voting. If a network could validate that node operators were who they said they were, it would allow them to institute a one-entity-one-vote approach that allowed the entire network to participate in decision making without centralizing control around a single group. A one-entity-one-vote approach would in fact allow a network to design a governance such that different groups provided checks and balances against one another and allowed consensus with finality through a democratic process.
But at what cost? Networks haven’t taken this approach to date for fear that instituting any sort of identity process is introducing a form of centralization. We believe that there is a key distinction between an identity process to validate that entities are who they say they are and an identity process that allows a central authority to censor or control who participates.
How can identify verification still be censorship resistant?
In our proposed “Know Your Voter” model, Storecoin nodes would take advantage of a third-party identity verifier to authenticate they were who they said they were. Storecoin would not have access to any of the information about who they were, nor would Storecoin be able to prohibit anyone from running a node on the basis of who they were. At the same time, once a node had been authenticated, the overall system would be able to apportion voting power in a one-entity-one-vote fashion.
We believe that the most important aspect of decentralization is censorship resistance. The proposed Know Your Voter authentication process doesn’t threaten to empower any stakeholder in the Storecoin ecosystem to censor who can participate, but it does enable a governance system that avoids plutocracy.
What benefits does Know Your Voter enable?
Importantly, once this democratic balance occurs, it opens up new possibilities. The first order effect of democratic governance based on one-entity-one-vote is that it allows the largest number of people to participate, In the inverse way that plutocratic centralization crowds out space for all but those already with the most power, a one-entity-one-vote system ensures that the voices of all are heard and incorporated in governance. This will be a key differentiator and will attract validators, users, merchants, enterprises and anyone else who wants to have a say in the future of the ecosystems they’re a part of.
The second order effects are also numerous. Take, for example, the role of miners. A Know Your Voter world in which miners are AML compliant by definition creates entirely new opportunities especially in coordination with the existing financial institutions that will feel more comfortable participating in this new compliant landscape. Banks trusting miners could, for example, create an opportunity for fiat-to-crypto exchange on-chain.
In a multi-sided stakeholder ecosystem like a blockchain, all participants have incentives to consolidate power such that they can orient the protocol in directions that benefit them. Off chain governance models suffer from this in the inflated power of core devs relative to other parties. On chain governance models where voting power is apportioned on the basis of holdings take this problem to a new level, enshrining plutocracy and virtually ensuring a feedback loop where the largest holders get more powerful, exert that power, and drive away the rest of the groups necessary to make the protocol network function.
Storecoin’s one-entity-one-vote governance model requires identity verification, but this “Know Your Voter” process is implemented without enabling Storecoin the ability to censor who participates. Once the network can verify that entities are who they say they are, it sets the stage for the broadest possible world scale contribution and engagement.
Nothing herein is intended to be an offer to sell or solicitation of offer to buy, Storecoin tokens or rights to receive Storecoin tokens in the future. In the event that Storecoin conducts an offering of Storecoin tokens (or rights to receive Storecoin tokens in the future), Storecoin will do so in compliance with all applicable laws which may include the Securities Act of 1933 and the rules and regulations promulgated thereunder, as well as applicable state and foreign law. Any offering for sale to US Persons in a regulated transaction will be pursuant to a registration statement qualified by the Securities and Exchange Commission, or an applicable exemption from the registration requirements.