=Paper=
{{Paper
|id=Vol-2574/short14
|storemode=property
|title=Governance in Peer-to-Peer Networks Is a Design Problem (short paper)
|pdfUrl=https://ceur-ws.org/Vol-2574/short14.pdf
|volume=Vol-2574
|authors=Fadime Kaya,Jaap Gordijn,Roel Wieringa,Marc Makkes
|dblpUrl=https://dblp.org/rec/conf/vmbo/KayaGWM20
}}
==Governance in Peer-to-Peer Networks Is a Design Problem (short paper)==
https://ceur-ws.org/Vol-2574/short14.pdf
Governance in peer-to-peer networks is a design
problem
F.Kaya12 , J. Gordijn13 , R. Wieringa34 , and M.X. Makkes1
1
Vrije Universiteit Amsterdam, The Netherlands
{j.gordijn, f.kaya, m.x.makkes}@vu.nl
2
Tymlez, Amsterdam, The Netherlands
3
The Value Engineers, The Netherlands
{jaap,roel}@thevalueengineers.nl
4
Twente University, The Netherlands
Abstract. Peer-to-peer networks are gaining momentum, and its revo-
lution is accelerating. Examples of peer-to-peer systems are Bitcoin and
Corda, which are enabled by blockchain technology. Even the firmest
supporters of blockchain, acknowledge the most significant challenge for
successful adoption and growth of peer-to-peer networks is governance
in a decentralized way. A lack of governance design poses a risk, as the
decentralized network will not prevail in the long term which can even
lead to a centrally orchestrated system. In this paper, we argue that the
finding an appropriate governance structure is a design problem.
1 Introduction
Even the firmest supporters of the blockchain revolution have conceded that the
biggest challenge for the growth of distributed ledgers will be governance [10].
Blockchain technology is an important example of peer-to-peer technology, which
is a technology that proposes decentralized solutions to avoid centralized com-
ponents such as brokers and alike. In case of blockchain projects, decentralized
solutions boil down to avoiding intermediate parties such as banks, insurance
companies and travel agencies. As such, blockchain is not only a technological
debate but also a business- and eco-system discussion, namely about removal of
the middlemen. In practice, many eco-systems are effectively governed by one,
or at most a few parties. For example, Apple governs the eco-system of iPhones,
Google does the same for Android, and Cisco is an eco-system of hard- and
software suppliers, consultants, system integrators and customers, led by, indeed
Cisco.
Peer-to-peer eco-systems in general, and blockchain technology in particular,
are seen by many, e.g. the European Commission, as the answer to the large tech
companies such as Facebook, Amazon, Google, Netflix and Amazon. Addition-
ally, Tim Berners-Lee announced in his Turing Award acceptance speech that
the current formation of the world-wide-web, with a few very dominant players is
not how the inventors envisioned the web initially. Instead, the idea was a much
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Copyright © 2020 for this paper by its authors. Use permitted under Creative Commons License
Attribution 4.0 International (CC BY 4.0).
F. Kaya et al.
more equal level playing field. Question is how to arrive at such a situation with-
out exceptional power concentrations as we currently have. We argue that an
important requirement for arriving at a level playing field is that the governance
of peer-to-peer- and blockchain networks is decentralized, hence preventing the
emergence of power concentrations that can control the eco-system.
In this paper, we claim in Sec. 3 that finding an appropriate governance
solution for a blockchain enabled eco-system is a design problem, meaning that
several artefacts have to be designed that reflect the selected governance model.
We show by means of two very different blockchain platforms, namely the Bitcoin
and Corda, that the design is, as usual, dependent on the context of problem,
which for Bitcoin and Corda is very different. Bitcoin as a community-based
movement, which wants to remove middlemen like banks. Corda on the other
hand is initiated by large banks, and therefore compliance, and related to that,
governance, is very important. In Sec. 2, we explain what we understand by the
idea of ‘governance’ in general, as well as how governance works out in peer-to-
peer eco-systems.
2 Governance in peer-to-peer eco-systems
2.1 Governance
We apply the control paradigm of Blumenthal (see e.g. [1] and later [4]) to arrive
at the governance paradigm. Fig. 1 shows our governance paradigm. Essentially,
there is a governed system (such as the operations of a company) that has to
obey to rules, regulations and laws set by the governing system (e.g. the man-
agement of that same company). In most cases, the governing system does not
make the regulations and laws itself, but only directs the governed system to
follow the regulations and laws. The latter are set by an environmental system,
e.g. the government. However, the governing system defines a set of rules the
governed system should comply to. The governed system provides monitoring
information to the governing system, which that system uses to changes rules,
and/or to provide monitoring information the environment (e.g. the government
and the shareholders of an enterprise). Parties in the environment may use that
information to change the rules, regulations and laws. The governed system per-
forms value adding operations, such as providing a video stream to customers in
return for money (Netflix), providing user contributed content in return privacy
sensitive data (Facebook), etc. The idea is that by doing these operations, the
governed system generates a net positive cash flow. It is very well possible that
the governed system and the governing system are part of the same legal entity,
e.g. as the workforce of a company (governed system) and its board of directors
(governing system). The governed system directly interacts with the environ-
ment, e.g. in terms of customers and suppliers. Furthermore, it is important
that we understand system as in system’s theory: A system consists of entities
with relationships. The governed system can be a single person, an enterprise, or
even a country. In our work (see also the next section) we consider the governed
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Governance in peer-to-peer networks is a design problem
system as a network of enterprises (also called a networked value constellation
[7] or as of today, an eco-system [6]).
Fig. 1. The governance paradigm
Regulations and laws are usually set by the government or organizations un-
der control of that government. Rules however are determined by the governing
system, e.g. based on the monitoring information, or by internally set (strategic)
goals. The scope of the rules is very broad, in fact anything that is needed to
control the governed system. It can be about the hire & fire policy of a company,
about rules concerning the internal administrative controls, targets in terms of
profit, revenues, and costs, roles with corresponding responsibilities of the staff
and much more.
2.2 Governance in peer-to-peer eco-systems
In many cases, governance is considered from a single actor perspective. Take
for example a large bank. In such a case, the bank has governance mechanisms
in place to ensure that the operations comply with rules, regulations and laws,
and more specifically with the regulatory frameworks for banks. However, the
focus is still on the single enterprise, in this case the bank. In contrast, our work
focuses on governance on networks of enterprises end-to-end users which are also
called eco-systems. Following Moore [6] we define an eco-system as a collection of
companies that work cooperatively and competitively to satisfy customer needs.
Additionally we concentrate on peer-to-peer eco-systems. A peer-to-peer driven
eco-systems are eco-systems where one or more intermediate functions are re-
moved. Well known intermediate functions are payment & transaction processing
(banks) to facilitate lack of trust between buyer and seller, insurance to facili-
tate risk sharing, clearing of intellectual property rights, search, etc. Intermediate
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F. Kaya et al.
functions sit between the customer(s) and supplier(s) of goods and services, and
in most eco-systems, an intermediate function is performed by a single enter-
prise. Intermediate parties can become quite powerful, e.g. large banks, Google
(intermediate between searchers and suppliers of goods and services), Netflix
(intermediate between private persons who want to be entertained and content
owners), etc.
In many cases, intermediate functions are required (for example, often a
payment processor is needed) but it is not necessarily the case that it should
be performed by single parties; in contrast, they can be performed by peers
themselves, or even by the network as such. This is precisely what Bitcoin does;
it removes the assignment of the function of payment processing to a single bank
and instead assigns the function to the nodes in the Bitcoin network. Note that
even Bitcoin did not succeed to remove the middlemen completely, as identifiable
parties are needed to convert bitcoins in to fiat money and vice versa.
Peer-to-peer eco-systems are often enabled by peer-to-peer technology. Block-
chain technology (e.g. as used by the Bitcoin) is an example of peer-to-peer
technology but certainly not the only one. For example, peer-to-peer technology
was and is used to (illegally) share and download music and videos. Whereas in
the previous section, we considered the topic of governance in the scope of a single
enterprise, however this is different for eco-systems. First of all, the system to be
governed now is the eco-system, consisting of a number of enterprises. Moreover,
it is likely that the governing system is also an eco-system, perhaps, but not
necessarily, with the same parties who participate in the governed eco-system.
Since governing eco-system in case of peer-to-peer eco-systems usually consists
of multiple independent actors, hierarchically coordination as used in a single
enterprise is not an option. Instead, all parties in the eco-system want to have a
say in the governance of the eco-system at hand. With as a result, the governance
becomes much more a negotiation process.
In the past few years, we have visited a number of blockchain projects, which
are supposed to be peer-to-peer eco-systems. In practice however, there often was
one dominant player in the eco-system, namely the company who operated the
blockchain. We admit that this is fully against the underlying design philosophy
of blockchain technology, but in reality we see it happen often. It also means that
the governance, if thought about it at all, is under control of a single enterprise.
We argue that the lack of distributed governance in such eco-systems is one of the
main reasons why so many blockchain projects fail. Consequently, we consider
the design of peer-to-peer governance mechanisms, and the associated software
tool support, as crucial for the development of peer-to-peer systems in general,
and blockchain systems in particular.
3 Peer-to-peer governance is a design problem
In [8], a distinction is made between governance by design and governance by
dynamics. The latter case of governance recognizes that governance is not a static
construct, but rather emerges and continuous to develop as a result of a changing
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Governance in peer-to-peer networks is a design problem
environment. Although important, in our research we consider governance first
as a design problem,in the philosophy of Design Science [3] as an artefact to
be (re)designed. To understand the design problem to be solved in somewhat
more detail, we study the governance in two well-known blockchain platforms,
namely the Bitcoin and Corda. We use these two platforms because they are
very different in terms of governance.
3.1 Bitcoin
Bitcoin is a decentralised currency and payment system that seeks to eliminate
the need for trusted third parties. It relies on a peer-to-peer network and crypto-
graphic protocols to perform the functions of traditional financial intermediaries,
such as verifying transactions and preserving the integrity of the system [2]. The
most important impact of Bitcoin is that it decreases the need for a trusted third
party, namely a bank. This has consequences for the network at hand, because
a powerful actor (e.g. bank) becomes much smaller or even obsolete. In terms
of governance, Bitcoin is the world’s first blockchain driven open source sys-
tem, with all the governance problems that typically come with an open source
project. The main artefact in terms of governance is the Bitcoin protocol. This
protocol determines how participants are added or removed from the network,
how consensus amongst participants is reached (this is needed because the ad-
ministration of bitcoin transactions is fully decentralised), and how the mining
process of bitcoins works (this is needed to generate bitcoins, to validate transac-
tions, and to solve the double spending problem). Obviously, the protocol should
be resistant to attacks from malicious parties (under certain conditions). Ulti-
mately, the most important parties regarding governance are the Bitcoin miners.
These miners run the Bitcoin network by executing software, and they decide
whether to run a new version of the Bitcoin protocol by means of upgrading their
software. In case sufficient miners decide not to run the newest (or: a competitive
version), and the newest version relaxes the protocol, a hard fork occurs, which
in worst case results in a new currency. One could consider the occurrence of a
hard fork as a failure in the governance process.
It is interesting to understand how a new version of the Bitcoin protocol is
developed and, more importantly, decided upon. Initially, Bitcoin protocol devel-
opment and decision power was end-to-end in the hands of Satoshi Nakamoto,
this entails that all proposed changes are reviewed only by Satoshi. In 2011,
Satoshi left Bitcoin and handed it over to one lead blockchain developer. We do
not know if Satoshi is a single individual or a group, but it gives the impres-
sion that initially, the decision power concerning the Bitcoin protocol was in the
hands of a few persons, and quite centrally led. In 2011, the Bitcoin Improvement
Proposal (BIP) was introduced. It entails a standardized process to review new
submissions to the Bitcoin protocol. Changes to the Bitcoin protocol are seen
as a continuous innovative process which are implemented after consensus has
been reached. BIP’s main objective is basically everyone can propose changes
to the protocol and submit improvements regarding security and stability of the
network. A BIP should comply to a predefined format before it is considered
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further. First, an editor should approve the proposal, and then 95% of the active
miners. The role of the editor can be considered as a centralized component in
the governance process; s/he might censor what the miners would see to approve.
A criticism regarding the choice to give the miners final decision power re-
garding governance issues, is there is a tendency that miners seem to concentrate,
e.g. in China, and therefore facilitate centralisation of decision power. Ethereum,
which is quite similar to Bitcoin in the sense that it is also a permissionless sys-
tem, but however Ethereum has a more centralized governance system. The lead
developer of Ethereum, Vitalik Buterin has quite some decision power, which was
demonstrated how DAO disaster was handled by him. The DAO disaster was
dealt with by rolling back the Ethereum blockchain to undo the damage done by
the disaster[5]. It led to a hard fork in which Ethereum Classic remained faithful
to the idea that code is law and the forked Ethereum followed the idea that the
DAO as implemented was not the intention of its designers. In both branches of
the fork, people took responsibility for a decision.
3.2 Corda
Corda is a permissioned open source blockchain platform specifically designed for
the financial industry and it is enabled by distributed ledger technology. Corda
is worlds first enterprise DLT platform. When comparing Corda with other open
source blockchain platforms, Corda is specifically built to overcome privacy and
governance problems in a peer-to-peer network. Corda is designed to promote a
transparant governance structure, which is referred as ”Corda Network Founda-
tion”. Corda explicitly refers in their governance documentation that its network
should not be controlled by a single enterprise. They promote a fair, transparent
and open governance foundation, accessible by every enterprise within the net-
work. It is also stated that this type of governance structure is a crucial aspect
for a sustainable and long term existences of the network. In 2018, Corda’s gov-
ernance structure took a significant step. The governance which was previously
under control of the R3 consortium, has now been set in an autonomous inde-
pendent foundation which is a non profit organization. The Foundation, oversees
the governance of the Corda network and it has no stakeholders. Furthermore,
the foundation provides openness and transparency regarding decision making,
costs of running the system and a flexible approach in managing the network.
In figure 3, the governance structure of Corda is summarized 5 .
1. A Governing Board (‘the Board’) of 11 representatives (‘Directors’).
2. A Technical Advisory Committee (‘the TAC’), comprised of representatives
of Participant organisations.
3. A Governance Advisory Committee, comprised of representatives of Partic-
ipant organisations.
4. A Network Operator (‘the Operator’), charging the Foundation reasonable
costs for providing network and administration services, paid by the Foun-
dation through membership funds, and accountable directly to the Board.
5
https://corda.network/governance/index.html
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Governance in peer-to-peer networks is a design problem
Fig. 2. Corda Network Foundation
5. Foundation is operating on behalf of: Participants (‘Participants’), open to
any legal entity participating in Corda Network, and independent of R3
alliance membership.
3.3 Discussion
Bitcoin and Corda have a very different view on governance. In case of Bitcoin,
the parties (e.g. the miners, submitters of improvements to the protocol, and
editors in role of approvers) are often not known, at least not as parties with a
name and address. Their public key is known, but not necessarily their personal
details. In the case of Corda, parties are known, and can be traced back to per-
sons and/or organizations, which has consequences in terms of liability. Although
Bitcoin has a governance process in place by means of a workflow for submitting
and approving BIPs, the process is quite informal, as can be concluded by the
many debates of participants at e.g. Reddit. In contrast, the governance of Corda
is much more formal, with an extensive organization structure and procedures.
Design Science is about developing one or more artefacts, which solve real world
problem in particular context [9]. The context explains why the governance of
the Bitcoin is so different than the governance of Corda. Bitcoin has a history of
developers and ideologists who wanted to remove the middlemen, e.g. the banks
for financial transactions. Initially, it was a small community, driven by anony-
mous people (Satoshi her/himself is the best example), who wanted to fight the
traditional banks, with all their compliance issues. Governance was not really an
issue. Later on, when the Bitcoin scaled up, governance procedures were needed.
However, the development of governance procedures for the Bitcoin protocol was
an evolutionary process. In contrast, governance was an explicit concern during
the design of Corda. Corda was initiated by large financial institutions, and these
institutions have serious compliance issues. In conclusion, governance solutions
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for peer-to-peer governance systems can be very different and depending on the
context.
4 Conclusion
What can be concluded is that (1) governance is a serious issue in blockchain /
peer-to-peer eco-systems that (2) has to be designed. Governance design can be
done from the start of a project as we have seen with Corda, or can gradually
emerge (Bitcoin). Furthermore, we found in our consultancy experience with
blockchain projects that after the proof of concept phase, in which the technol-
ogy has been demonstrated with a viable product, the project does not gain a
momentum, amongst other by neglecting the required governance model for the
project at hand.
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