Trustless or Trusted — The Inevitable Direction of Blockchain Governance
Trustless or trusted? Skepticism over centralized authority, especially following the near-collapse of the global financial system in 2008 led to the development of “trustless” networks. One example is the blockchain behind Bitcoin, where anonymity and distributed record keeping were centerpieces of an attempt to remove the role of, and interference from, centralized control. In the ten years since the crisis, governance structures in this blockchain world have been built and are being re-invented, almost daily. Based on a range of sentiments about the best way in which trust can be earned or instituted as the default condition across a wide range of disparate interests and the common goal of facilitating new and better ways to transact, governance innovation is one of the most exciting aspects of blockchain activity.
Of course, the 2008 financial crisis is not the only example of centralized governance or misaligned autonomous interests causing loss and stimulating adaptive reactions. But it was the most dramatic economic downturn since the Great Depression of 1929, and the speed and breadth with which failures occurred was unprecedented. It is, therefore, not surprising that new methods of governance would emerge and be tested for their ability to realize the promise of value creation that broad collaboration seems to offer.
My book, Governance Reimagined: Organizational Design, Risk, and Value Creation, was likewise written in the aftermath of the financial crisis and sought to examine governance concepts from a variety of disciplines and perspectives. Humans are not the first to experience governance failures and successes, but we are pretty good at contemplating why we fail and learning how to do better.
The research that I did in the more than two years I spent writing the book exposed me to some outstanding work done in systems theory, complexity, psychology, physics, biology, and even economics. Yes, economics, about which The Economist Magazine wrote in 2009, “Of all the economic bubbles that have been pricked, few have burst more spectacularly than the reputation of Economics itself.” [1] Across these disparate sciences, there was a realization that self-governance is an attainable ideal, but with limits — manageable limits, mind you, but limits nevertheless.
It turns out that when we create dense networks of relationships, much like the early blockchains such as the one behind Bitcoin, they begin to lose their ability to respond rapidly and to innovate. Unless they continue to reinvent themselves or to innovate and grow at a faster and faster pace, they die from their own weight. Taken as a whole, the blockchain world is experiencing just the kind of positive rapid innovation needed for its success. But individual, fully distributed, trustless networks, are likely to continue to struggle with density issues.
Multiple researchers have identified polycentric forms of governance as being more efficient and superior to either overly centralized or overly de-centralized governance models. Long ago, the question in economics was similar to the trustless or trusted dichotomy. The debate was around which option was best — markets or hierarchies? The answer has turned out to be markets and hierarchies. And, that’s where blockchain governance best practices are inevitably heading as well.
Markets can be re-labeled as distributed autonomy. Hierarchies don’t have to be centralized to whole ecosystems but can rather be centralized within units of distributed autonomy. Units of distributed autonomy, it turns out, are among the most creative and innovative ways in which humans and technologies can interact. So, the instinct behind distributed ledgers and trustless networks is spot-on. It just has encountered some natural limits.
EOS, Cardano, Etherium, emerging leaders like GoChain, and a whole host of blockchains are going about governance experiments that will lead to massive innovation and a proper balance between distributed autonomy and hierarchies. They will be more stable because of it and that fact alone will lead to greater use of blockchain technologies across traditional industries.
We should encourage this competitive innovation. As I noted earlier, in order to thrive and survive, innovation has to happen at a faster and faster pace. While perhaps not the most popular sentiment to express in the blockchain world, it is a fact that the U.S. political economy has been amazingly successful. It is a polycentric form of governance with centralized authorities all the way down from the national to hyper-local levels like neighborhood watch collaboratives and volunteer service committees. Polycentric governance models even exist within start-up companies and can be found in many mature businesses as well.
There is no denying that the U.S. economy (and its mimicry around the world) has suffered boom and bust, massively disparate distributions of wealth and potential wealth, and the bringing about of significant environmental damage. At the same time, this polycentric model has led to innovations that significantly extend life, improve living conditions, and give us access to goods and experiences that few, if any, could have imagined in the past. As a result of this model, more than 97 percent of global wealth has been created in just the last .01 percent of our history.[2]
Good governance is about creating the environments in which innovation thrives and where systems break well — even polycentric models of governance can lose their balance as historical evidence and experience confirms. And, some of the blame for the financial crisis is rightly placed on the distributed autonomy for self-regulation that was instituted in the financial sector in the decade leading up to the crisis. We’re right to be pursuing autonomy and an optimization of trust among parties to these systems. The higher the level of trust, the greater the potential becomes for collaboration and innovation. And with higher levels of trust, a network can become larger before it suffers from too much density.
The potential of the idea behind trustless networks is too great for me to give up on. But at present, it goes beyond what is ever likely to be optimal. Being trusted doesn’t have to mean being centralized or subject to a controlling central authority. But the combination of trusted networks and appropriate distributed autonomy leads to better outcomes.
Here’s to the rapid innovation in blockchain that is taking us to better places of trust and innovation. Let’s hope we learn from other successful experiments in innovation and wealth creation so that we can avoid many of the negative externalities those experiments have wrought. The world will be better for it.
David R. Koenig is the Founding Principal of (b)right governance, an advisory firm to boards and c-level executives around the world and the Founding Principal of TGF Analytics, a data analytics firm that assesses the trust in, and governance of, publicly traded companies. He is the author of Governance Reimagined: Organizational Design, Risk, and Value Creation (John Wiley & Sons, 2012), is a Research Fellow and member of the Executive Advisory Board of the Center for Corporate Performance at the IIT Stuart School of Business in Chicago, an editorial board member and special editor at the Journal of Risk Management in Financial Institutions, the founder of two global professional associations, and has decades of experience helping organizations to take risk better. He serves as a Governance Advisor to GoChain, a blockchain technology company.
[1] The Economist, What went wrong with economics, and how the discipline should change to avoid the mistakes of the past, July 16, 2009
[2] Beinhocker, Eric, The Origin of Wealth, Harvard Business Press; 1 edition, paperback, September 14, 2007,
