Decentralized Governance

By Craig Calcaterra and Wulf Kaal

Abstract

Chapter 7 introduces governance designs for decentralized systems. Decentralized governance is the process of keeping decentralized organizations stable and on track to achieve their goals, without letting them devolve into a centralized organization. Decentralized organizations are naturally more difficult to control than centralized organizations. They are more difficult to govern. Very few existing PCP project have anything close to a sophisticated governance process.

The authors show that reputation is the key to achieving effective decentralized governance. Reputation gives the promise of future rewards. Reputation can be objectively valued, by estimating the probability of future business deals, taking the expected value of that probability, and calculating the present value of those business deals. Yet this value can seemingly be created from nothing, in a place it didn’t exist before, based solely on whether the participants choose to display good will toward each other. This makes reputation a positive-sum property from the game-theory perspective. A reputational system that is formally linked to profits makes the members forward-thinking and cooperative, to combat the natural tendency of competition to separate members. It also motivates members to self-police their past investments. Reputation changes the incentive structure from a single-stage, zero-sum game to a repeated positive-sum game.