On embracing governance complexity in web3

web3 polycentricity is underappreciated and expanding

Web3 governance is polycentric. Groups make, enforce and are subject to many centres of decision making. These overlapping semi-autonomous centres include modular layers (layer 2s), working groups (pods, teams) and other infrastructure (file storage, oracles). 

Claiming that blockchains are polycentric is not new. In this post I argue that this polycentricity is underappreciated (more extensive across the web3 stack) and expanding (because of technological trajectories). The emergent complexity of web3 governance should be embraced, not supressed.

Web3 polycentricity is underappreciated

Web3 governance is coordinated through a stack of nested, evolving, polycentric institutions.

This polycentricity is typically understood to exist within blockchains (e.g. the consensus process) and how blockchains relate to jurisdictions (i.e. government rules). But polycentricity can be seen up, down and across the stack. Depending on where we look, we can identify polycentric governance structures at many nested scales.

At the scale of the typical layer 1 blockchain, polycentricity is somewhat obvious. The consensus process relies on governance stakeholders (e.g. miners, delegates) that each have their own governance processes (both on and off chain).

This layer 1 polycentricity is also clear in the development of streams and working groups focused on specific tasks (e.g. protocol development, treasury management). Each of these centres of decision making are semi-autonomous, often with their own governance processes.

The development of modular blockchain architectures seek to separate settlement, consensus and data availability. Examples of this, including L222, make such ecosystems more polycentric.

But layer 1 governance also underpin governance strucutres and different scales.

DAOs, for instance, have treasuries, working groups and grant programs. Governance happens not only through token holder voting, but through informal off-chain structures.

The composability of DAO governance also links once-separate DAO communities together into polycentric system. This can generate meta-governance pressures through vote escrow style models. 

It’s clear that web3 polycentricity is already extensive. But this polycentricity will expand as web3 evolves.

More polycentricity

Composability and permissionlessness drives polycentricity. 

Some technological developments in web3 are both enabling and pushing us towards polycentric governance structures. There are at least three of these trajectories.

• Bridges. More bridges means more wrapped governance tokens, which opens possibilities of cross-chain meta-governance. As ecosystems grapple with multiple governance token holder communities their governance will (whether they like it or not) become more polycentric.

• Vote Escrow. New vote escrow models (pioneered in the Curve Wars) push economic value into governance tokens. This incentivises new layers and platforms to realise and trade that value. This layering of platforms from vote escrow models also tips us towards more polycentric systems up and down the stack.

• Tooling. DAO tools facilitate polycentric coordination. Treasury management and diversification tools, for instance, will mean more token swaps and index investing, creating complex governance dynamics cross-DAO and even cross-chain. Internally, better tools for pods (e.g. Orca) and teams enable DAOs to more effectively implement and evolve polycentric structures.

Polycentricity in web3 can be both a positive claim (web3 governance is polycentric) and a normative ideal (web3 governance should be polycentric). The complexity I have described above is desirable from the perspective of entrepreneurial discovery. We have argued elsewhere that web3 is a stack of toolkits for entrepreneurial discovery. This composable stack enables new forms of polycentricity to emerge and evolve, rather than to be designed and imposed.

Embrace complexity

How should we study all of this polycentric governance complexity? Should we embrace it, or simplify away from it?

One approach to study governance is to draw analogies to more familiar forms. Web3 ecosystems are like companies, or democracies. This approach has limits. It might explain some parts of web3 governance, but it fails to capture the scale, nestedness and emergence of rules. 

The alternative approach is to embrace the complexity. Here we acknowledge that we don’t really know what blockchains are. And to understand what they are, and how they evolve, and how their polycentric systems relate, we must engage with them empirically. This is not to say that existing theories of governance are not applicable, but that they are applicable in different ways, and at different scales.

This intellectual problem has parallels to the challenge that formed the Bloomington School of Political Economy. Elinor Ostrom and colleagues are most famous for studying common pool resource governance (of forests, fisheries, and knowledge commons).

But the problem that Elinor, Vincent and colleagues faced was broader than common property regimes. It was the problem of understanding an evolved system of institutional rules that sat somewhere between the then-familiar forms of firms, markets and states. The institutional systems they studied were not only nested and complex, they were evolving.

The same challenge faces us today in understanding the polycentricity of web3 governance. This should guide us in several directions. First, towards empirical analysis using the tools outlined in Understanding Institutional Diversity. Second, towards applying theory at scales of governance, rather than seeking to fit web3 institutions into existing categories.

Most of all, we should be intellectually humble. We should be cautious of one-size-fits-all solutions. Indeed, the Bloomington School regularly pushed back on sweeping external solutions to coordination problems, such as through top-down property rights or regulations. Those impositions crushed the complexity of the evolved systems.

A similar threat exists in our approach to web3 governance. The external threat here is not only from governments, it is through centralised and planned governance changes that seek to supress complexity. Web3 must be designed to enable emergent layers of polycentricity. 

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Darcy W. E. Allen, RMIT Blockchain Innovation Hub

Thanks to my RMIT Blockchain Innovation Hub colleagues for discussions about these topics, including Chris Berg, Sinclair Davidson, Aaron Lane, Trent MacDonald and Jason Potts.