An institutional map of VeChain governance
The team on this project are an experienced group of academic economists and lawyers who specialise in the economics, regulation and governance of digital technologies. They have a demonstrated track record on the study of blockchain governance, having written many books, journal articles and research reports on the topic.
Dr Darcy W.E. Allen is an academic economist researching frontier technologies. He is currently a Senior Research Fellow at the RMIT Blockchain Innovation Hub, Melbourne, Australia. He has published 4 books and over 15 journal articles on self-governance, innovation and blockchain (including publications in top journals such as the Harvard Negotiation Law Review). He has appeared as an expert witness before parliamentary inquiries five times (including on the economics of new technologies). His latest book is The New Technologies of Freedom, published with the American Institute for Economic Research. He has raised and delivered on over $500,000 in funded research projects with industry, governments and foundations. Website: www.darcyallen.net. CV available online.
Dr Chris Berg is co-founder of the RMIT Blockchain Innovation Hub, Melbourne, Australia, the world’s first social science research centre into blockchain technology. He is a recognised authority on blockchain governance, public policy and institutional cryptoeconomics. He is the author of eleven books, including Understanding the Blockchain Economy: An Introduction to Institutional Cryptoeconomics. Dr Berg is a Research Fellow with the University College London Centre for Blockchain Technologies. He is a member of the Steering Committee of the Australian government’s National Blockchain Roadmap, and is co-chair of the committee’s working group into blockchain for credentials. Website: www.chrisberg.org. CV available online.
Dr Marta Poblet is an Associate Professor at RMIT's Graduate School of Business and Law. She is one of the co-founders of the Institute of Law and Technology at the Autonomous University of Barcelona and past researcher at ICREA (Catalonia). She holds a JSD in law (Stanford University 2002) and a Master in International Legal Studies (Stanford University 2000). Her research interests cover different areas at the intersection of law, political sciences and sociology, and technology. She is also interested in the connections between technology developments (AI, blockchain, human computer interaction) and the different theories of democracy, participation, and citizenship. She has been the PI of a number of national and international research projects and has published over 80 scientific articles on these topics in journals and books. CV available online.
Corresponding applicant: Dr Darcy W.E. Allen.
A USDT (ERC 20) payment address: 0xa527caf3f6253F5cE421FD0469A3e20bd2c999d8
This project will deliver a detailed and comprehensive understanding of VeChain’s unique governance mechanisms by applying a framework from institutional economics. This will be the first comprehensive map of blockchain governance applied to any blockchain of any type, using a Nobel Prize-winning framework. The project will give the VeChain community an unprecedented understanding of the VeChain’s governance system, allowing for governance enhancement and evolution to be based on a solid social scientific basis.
The main output is a detailed map of VeChain’s governance rules, framed using the Institutional Analysis and Development (IAD) framework. This project benefits the VeChain ecosystem by providing a coherent dissection of existing VeChain rules, thereby informing iterative changes to existing mechanisms (e.g. voting weights) and the potential integration of new governance mechanisms (e.g. committee endorsement of blocks), as well as placing VeChain at the frontiers of blockchain governance research.
Blockchains are complex socio-technical systems that need governance mechanisms to respond to changing conditions (e.g. high transaction volumes) and new information (e.g. the discovery of protocol bugs). Blockchain governance has largely emerged through ad hoc iteration (i.e. creating new mechanisms in response to failures in existing mechanisms) and through analogy to other forms of governance (e.g. corporate governance). Today we need a coherent understanding of blockchain governance rules so that they can be iteratively improved and compared across ecosystems.
VeChain’s governance is complex, nested and unique. It includes a proof-of-authority consensus process, all-stakeholder-voting with asymmetric weighting, and other mechanisms such as emergency powers. These complexities make VeChain perfectly suited as the foundation for a new framework of blockchain governance that can be applied across different blockchain ecosystems. This project applies the Institutional Analysis and Development (IAD) framework to VeChain. The IAD framework was designed by Nobel Laureate in Economics Elinor Ostrom as a tool for the analysis of rules, incentives, positions and processes of shared governance (see Ostrom 1990, 2005).
In this first-of-its-kind study, we will use the IAD to map different parts of VeChain governance (e.g. consensus, protocol upgrade processes, authorisation of nodes) using a range of data (e.g. whitepapers, data from voting events, online forums). This analysis will include both a static understanding of the existing rules (e.g. which positions have which authority) as well as a dynamic understanding of events (e.g. how stakeholders historically voted). The main output is a detailed case study report on VeChain governance that will form the first contribution to a repository of future IAD case studies. This project is the basis for a broader research program across different blockchain ecosystems, creating the building blocks for blockchain governance analytics (e.g. through simulations).
Economical models / Incentive mechanisms / Governance
Governance, Institutional Economics, Institutional Analysis and Development Framework, Governance Rules, Polycentricity
Blockchain governance is necessary to deal with unexpected information such as the discovery of a new attack vector (e.g. a protocol vulnerability), changing conditions (e.g. need to change parameters such as VTHO generation), or to impart accountability (e.g. voting for positions such as an authorised node). Blockchains deploy different governance mechanisms (e.g. voting, boards, committees, foundations) to deal with these governance challenges (see Potts et al. 2021). Those governance mechanisms have varied purposes, including to reveal information about different courses of action (e.g. whether to roll-back the chain, or which public goods to fund) and to facilitate and overcome coordination problems (e.g. to coordinate around decisions to prevent excessive forking).
But blockchain governance today is poorly understood. This lack of understanding is compounded by the nature of blockchains as polycentric systems with many centres of decision making (e.g. see De Filippi et al. 2020, Howell and Potgieter 2019). It is difficult to conceptualise blockchain governance partly because blockchains are complex and nested systems of rules (for a recent review of blockchain governance see Liu et al. 2021). While there have been various efforts to apply other forms of governance to understand blockchains through analogy (e.g. on corporate governance see Allen and Berg 2020), it is timely and urgent to develop an overarching framework of blockchain governance. Some insights can be gleaned from other organisational domains to inform blockchain governance design choices (e.g. the optimum size of a board, or game theoretic analysis). Today we require a framework that is compatible with other tools (e.g. game theory, simulations) to answer specific questions (e.g. voting design), but which also provides an overarching understanding of the entirety of a blockchain governance ecosystem. We first need to conceptualise blockchain governance as an evolving and interjected system of governance rules before we can reliably improve the design of each of the parts.
Our proposed project is ambitious but it does not start from scratch. We leverage an existing theoretical framework that was designed and developed over decades to disentangle the complexity of nested shared resource governance. Nobel Economics Laureate Elinor Ostrom and colleagues spent decades analysing the collective governance of common pool resources (Ostrom 1990, 2005, 2010; Herzberg et al. 2019; Tarko 2016). The research program began by studying the group governance of resources such as fisheries and irrigation systems, and later moved to study resources such as law (Madison et al. 2009), knowledge (Frischmann et al. 2014), help (Poblet and Sierra 2020) and innovation (Allen and Potts 2016, Potts 2019). This research program pushed back on the mainstream view that communities would be stuck in the tragedy of the commons (Hardin 1968), and could not develop systems and agreements to achieve optimal outcomes.
A major output from the commons research program was a framework, methodology and grammar of institutional analysis, outlined in detail in Ostrom’s 2005 book, Understanding Institutional Diversity. The Institutional Analysis and Development (IAD) framework was developed and iterated over decades to facilitate the understanding and design of community governance works in practice. The framework provides the tools to disentangle nested polycentric systems of rules though rigorous mapping at different scales (for a simple introduction see McGinnis 2011).
The IAD was designed for the study of common pool resources, but it provides us the foundation to conceptualise and understand blockchain institutions and the rules by which those rules are collectively governed. Analysis using an IAD involves deep observation and classifying of how rules work in practice (i.e. evaluate various patterns of interaction that emerge from different governance events) as well as examining how the rules structuring those systems change through collective action. The core of the IAD framework is the analysis of different ‘action arenas’ where participants coordinate, cooperate and compete. Those action arenas are structured by various conditions (i.e. rules, physical limitations, community norms), and the outcomes of those action arenas can be evaluated. Figure 1 is a high-level conceptual representation of the IAD framework.
VeChain is not a single action arena, but a series of different action arenas (e.g. election of the Board, all-stakeholder-voting, consensus process). Each action arena has different participants (e.g. enterprise users, speculators, founders) and different positions (e.g. Authorised Masternode, Economic X nodes, Committee Member) with different incentives (e.g. to act honestly in proposing a block, to increase or decrease VTHO prices).
Each action situation is constrained and enabled by a set of rules (see Figure 2), which will be the focal point of analysis in the proposed project. The IAD provides a detailed classification of rules that enable us to map blockchain governance in a range of different action arenas. These rules shift the way that participants interact (e.g. do they vote?) and therefore change the patterns that emerge from repeated governance processes (e.g. voting deadlocks, token price changes). For example:
- Blockchains have position rules determining what different positions participants can hold in a given governance choice (e.g. governance token holder, core developer, enterprise user). Importantly the formal position rules may differ from more informal ‘rules-in-use’ that leverage reputation and other resources to coordinate (e.g. core developers have greater weight).
- Blockchains have boundary rules outlining how participants can or cannot take part in governance (e.g. staked tokens required to vote, transaction fees, delegated rights). VeChain, for instance, has specific levels of Economic Nodes and Economic X nodes that are given different rights to vote.
- Blockchains have choice rules that outline what choices are available to different positions (e.g. proposing an upgrade, voting yes or no, delegating or selling votes). For example, in VeChain the Board of the Steering Committee has the choice to execute emergency actions.
- Blockchains have aggregation rules that determine how inputs to governance are aggregated into a collective choice (e.g. one-token-one-vote, quadratic voting). In VeChain, different positions hold different weights in an asymmetric voting system.
This project will adopt this rule classification system (including further rules such as scope rules and information rules) and the IAD framework to outline a case study of VeChain blockchain governance. Multiple ‘action arenas’ will be identified and analysed including: (1) all stakeholder voting event; (2) adding a block through the proof of authority consensus process; and (3) the election of the Board. We will analyse the various rules, positions and choices in these action arenas, and how those action arenas relate and are interconnected with each other. These case studies will rely on mixed data, with a reliance on synthesising existing public resources such as the Governance Charter, VeVote outcomes, VeChain Stats, Discord and Telegram channels.
This project is viable based on the skills, publication records and experience of the project team. Each of the team members have published widely on the governance and institutional economics of blockchain and distributed ledger technologies (see attached CVs). The team has been collaborating with VeChain on the frontiers of governance research. Dr Allen has published several articles and books that leverage institutional analysis of shared governance (including in the premier journal on the topic, the International Journal of the Commons). Dr Poblet has also published in the International Journal of the Commons on commons-related scholarship, and has deep expertise in democratic theory. Dr Berg has written extensively on political economy, democratic governance and blockchain technologies, including the landmark application of institutional economics to blockchain, Understanding the Blockchain Economy: An Introduction to Institutional Cryptoeconomics, and a co-authored book with Dr Allen, Cryptodemocracy: How Blockchain Can Radically Expand Democratic Choice.
There are no major risks associated with this proposal.
The project approach has been designed in a way that is both timely and realistic. There are three core members of the team as well as leveraging a research assistant. We expect the project to span over approximately 16 weeks, centering around three core milestones (with associated payments):
- Week 1-8. During weeks 1-8 of the project the team will collect gray data on VeChain governance rules. This will be primarily through desktop research of rules across a range of sources. The team will identify the relevant action arenas for analysis and initially outline the rules for those action arenas utilising Ostrom’s rule classification system. Payment 1: $13,972 USD ($18,005 AUD)
- Week 8-12. During weeks 8-12 of the project the team will expand on the rules classification of the VeChain ecosystem by adding dynamic analysis of different action situations (e.g. descriptive analysis of various events, such as all-stakeholder-voting events and controversial governance events). This will add dynamics to the case study. Payment 2: $6,984 USD ($9,002.5 AUD)
- Week 12-16. During weeks 12-16 of the project the team will work towards the delivery of two outputs: (1) A detailed report outlining an IAD analysis of the VeChain ecosystem (synthesising the elements above); and (2) A short popular article describing the findings of the project (for an outlet such as Medium or Substack). Payment 3: $8,690 USD ($11,202.5 AUD)
The total requested budget for the project is $29,646 USD. Each of the items are listed below.
- Dr Allen research services ($698 per day for 14 days). Cost: $9,772 AUD
- Dr Berg research services ($840 per day for 14 days). Cost: $11,760 AUD
- Dr Poblet research services ($840 per day for 14 days). Cost: $11,760 AUD
- Research assistant services (50 hours). Cost: $2,718 AUD
- Report design. Cost: $1,000 AUD
- Medium post write up for popular outlet. Cost: $1,200 AUD
Allen, D. W. E and Berg, C. (2020). Blockchain Governance: What we can Learn from the Economics of Corporate Governance. The Journal of the British Blockchain Association, 3(1).
Allen, D. W. E. and Potts, J. (2016). How Innovation Commons Contribute to Discovering and Developing New Technologies. International Journal of the Commons, 10(2), pp. 1035-1054.
Allen, D. W. E., Berg, C., and Lane, A. M. (2019). Cryptodemocracy: How Blockchain Can Radically Expand Democratic Choice. Rowman & Littlefield.
De Filippi, P., Mannan, M., and Reijers, W. (2020). Blockchain as a Confidence Machine: The Problem of Trust & Challenges of Governance. Technology in Society, 62, pp. 101284. Frischmann, B. M., Madison, M. J., and Strandburg, K. J. (Eds.). (2014). Governing Knowledge Commons. Oxford University Press.
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Howell, B. E., and Potgieter, P. H. (2019). ‘Governance of Blockchain and Distributed Ledger Technology Projects: A Common-Pool Resource View’. Conference paper, Workshop on the Ostrom Workshop (WOW6) Conference, Indiana University Bloomington.
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McGinnis, M. D. (2011). An Introduction to IAD and the Language of the Ostrom Workshop: A Simple Guide to a Complex Framework. Policy Studies Journal, 39(1), pp. 169-183.
Madison, M. J., Frischmann, B. M., and Strandburg, K. J. (2009). Constructing Commons in the Cultural Environment. Cornell Law Review, 95(4), pp. 657-710.
Ostrom, E. (1990). Governing the Commons: The Evolution of Institutions for Collective Action. Cambridge University Press.
Ostrom, E. (2005). Understanding Institutional Diversity. Princeton University Press.
Ostrom, E. (2010). Beyond Markets and States: Polycentric Governance of Complex Economic Systems. American Economic Review, 100(3), pp. 641-72.
Poblet, M., & Sierra, C. (2020). Understanding Help as a Commons. International Journal of the Commons, 14(1), pp. 481-493.
Potts, J. (2019). Innovation Commons: The Origin of Economic Growth. Oxford University Press.
Potts, J., Allen, D. W. E., Berg, C., Davidson, S., and MacDonald, T. J. (2021). An Economic Theory of Blockchain Foundations. Available at SSRN 3842281.
Tarko, V. (2016). Elinor Ostrom: An Intellectual Biography. Rowman & Littlefield.