New research from Long Finance, sponsored by the Cardano Foundation and conducted by Z/Yen, shows that effecitve governance in mutual distributed ledger (MDL, aka blockchain) systems* relies on people rather than software.
MDL technology is in an emergent phase. New applications are under development; new uses are being researched; new consortia are being formed to explore MDL applications. Considering appropriate governance structures has had a lower priority so far, but trust in the increasingly popular systems will depend on their incorporating good governance principles. It was the aim of this study to identify those principles, in order to provide a roadmap for developers and users alike.
An analysis of the material collected through desktop research, as well as several discussions with practitioners and stakeholders, including a conference and webinar on the subject, has revealed that effective governance in MDL systems relies on people rather than software and rests on three pillars:
1. Architecture: The role of the governance structure, its composition, remit, powers, responsibilities, and its relationship with users, is a critical component.
2. Accountability: Effective governance of MDLs enhances trust. Trust is enhanced when a governance structure is accountable to its stakeholders, transparent in its decision-making, and subject to periodic audit and third party review.
3. Action: The governance structure must develop strategic and risk management plans, which are delivered through effective performance management frameworks. Trust can be further enhanced through the use of the voluntary standards market to independently verify performance metrics and the systems established to compile them.
Based on these conclusions, the report puts forward a simple checklist highlighting the key issues that organisations should consider in creating a strong and stable foundation:
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Public MDL |
State-Sponsored MDL |
Private MDL |
Consortium MDL |
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Architecture |
What is the legal framework for the MDL? |
Which department owns the MDL? |
What is the legal framework for the MDL? |
What is the legal framework for the MDL? |
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How is consensus created? |
How is policy made and rolled out? |
How is policy developed and rolled out? |
How are consortium members represented? |
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How are decisions made, particularly with respect to changing rules or software? |
How does MDL policy fit within the wider policy environment? |
How are decisions made, particularly with respect to changing rules or software? |
How are decisions made, particularly with respect to changing rules or software? |
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How are decisions enforced? |
Does the oversight committee have sufficient technical expertise? |
How are decisions rolled out? |
How are decisions enforced? |
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Does the network have paid employees? Who manages them? |
Who does the oversight committee report to? |
Does the board have sufficient expertise in both the technology and the sector where it is being applied to? |
Does the oversight committee have sufficient technical expertise? |
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How are user disputes resolved? |
What mechanism has been established to deal with complaints? |
How are user disputes resolved? |
How are disputes between consortium members resolved? |
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Is there a clear separation of the functions of power? |
Is the legislative branch sufficiently engaged? |
Has a service level agreement been developed? |
Does the consortium have paid employees? Who manages them? |
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Does the parent structure have a written constitution which details terms of use as well as governance? |
Does the legislative branch have sufficient technical expertise to understand the implications of policy changes to the MDL? |
How is delivery of the SLA monitored and what are the penalties for variance? |
Does the consortium have a foundation agreement which lays out terms of service? |
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Accountability |
Who are the stakeholders? |
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How are stakeholders concerns represented? |
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Is there a central record of decision making? |
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Is there a mechanism for stakeholders to challenge decisions? |
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Are there independent mechanisms for resolving disputes by mediation, arbitration or expert determination? |
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How are these mechanisms enforced? |
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Action |
Has a strategic plan been developed? |
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Has a Risk Management Plan been developed? |
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Has a Performance Management framework been created? |
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What arrangements have been made for reporting, third party audit, and verification? How will stakeholder access these reports? |
What arrangements have been made for reporting and auditing? Who will have access to these reports? |
What arrangements have been made for reporting, third party audit, and verification? Will users have access to these reports? |
What arrangements have been made for reporting, third party audit, and verification? How will consortium members have access to these reports? |
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To access the full report, please click here.
Footnotes:
*A mutual distributed ledger - often known as a blockchain - is a computer data structure with the following capabilities:
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Mutual - blockchains are shared across organisations, owned equally by all and dominated by no one;
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Distributed - blockchains are inherently multi-locational data structures and any user can keep his or her own copy, thus providing resilience and robustness;
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Ledger - blockchains are immutable, once a transaction is written it cannot be erased and, along with multiple copies, this means that the ledger's integrity can be easily proven.
Another way to think of blockchains is as permanent timestamping engines for computer records. Timestamps can be used to prove that data elements were entered at or before a certain time and have been altered.
