The Downside of Democracy

Following acrimonious debates within the bitcoin and ethereum communities over the past few years regarding governance decisions that ended in forks, there has been a wave of projects offering on-chain governance.

Prominent examples of protocols with on-chain governance include Tezos, EOS and Decred.

While these projects may have some value, I believe the push for on-chain governance is, in large part, the result of an intuition carried over from environments like nation-states and private companies, both of which are very different from crypto networks.

Implicitly, their belief is that we are seeing too much exit and not enough voice and we need to build better mechanisms for voice via formal on-chain governance.

Members of an organization, be it a nation, a business or a crypto network, have two possible responses when they're unhappy with its governance.

In crypto networks, users can try to change the way that the protocol operates through governance or they can choose to exit by either leaving the network or forking.

The tradeoff of prioritizing voice over exit is that democracies tend to be very inefficient compared to more technocratic forms of governance.

Open-source software governance tends to be technocratic with a relatively small group of stakeholders controlling the project.

Returning to blockchains, introducing on-chain governance to crypto networks is likely to make them more like nation-states with the inefficiencies that entails.

Off-chain governance may seem more unpredictable, but may prove more fertile ground for innovation for just that reason.