• CFRED CUHK Law

Blockchain Technology and the Decentralized Future of Regulation

Andrej Zwitter – University of Groningen;

Jilles Hazenberg - University of Groningen

-- Advancements in the digital domain, for example, in blockchain technology, big data, and machine learning, are increasingly shaping the lives of individuals, groups, organizations, and societies. These developments call for effective governance to protect the basic interests and needs of these actors. Simultaneously, the very nature of governance is also changing. Policy-making is increasingly moving away from top-down governance by the state toward more horizontal modes of governance. This change is in part caused by new forms of digital communication, such as social media, and new forms of digital decision making and contracting, such as through blockchain technology. In addition, the power balance particularly in the digital domain has shifted from state agencies towards tech companies, who provide these digital solutions, and other digital interest groups and actors. Power relations become more networked and relational than ever before. This new form of understanding and exerting power and control online and offline (or on-chain and off-chain) is yet to be conceptualized.

Our recent paper, "Decentralized Network Governance: Blockchain Technology and the Future of Regulation," reviews the literature on governance theory in order to conceptualize governance as a mode of decentralized, networked regulation. We argue that the current dominant modes of governance are inadequate in understanding governance in the digital domain and are poorly equipped to conceptualize novel forms of governance such as decentralized autonomous organizations (DAOs). Traditional forms of governance rely either on hierarchical power structure - Westphalian command-control or Mode 1 governance. Or it is conceptually captured by various forms of Mode 2 governance; this mode is characterized by a move away from the vertical command-and-control structures of the state toward more horizontal modes of policy-making with the inclusion of a more level playing field between societal actors, both private and public. Also this mode of governance has difficulties explaining cases such as The DAO hack and other problems of power balance in and around digital networks and infrastructures. Furthermore, it is ill equipped to consider the role of code as regulatory artefact and digital infrastructure as a power structure.

Therefore, our study proposes a new mode of governance based on the regulation of new power relationships between the state and actors in the digital domain. This model explores the role that blockchain technology can play in what we term “decentralized network governance” or Mode 3 governance.

We analyzed The DAO project and the deliberation of its stakeholders in response to The DAO hack. This case provided a unique view into deliberations of different actors and their changing roles and powers on-chain and off-chain. In this case, we particularly observed how actors outside (off-chain) and inside (on-chain) the DAO blockchain network forged new alliances to roll back the hack through a hard fork. These shifting alliances were paired with changes in the effective roles of different stakeholders and of power balances. These observations and the theoretical underpinnings of network power and network governance lead us to formulate the theoretical conception of decentralized network governance.

Decentralized network governance, as Mode 3 governance, applies to all forms of regulation that rely on digital networks, including social networks and digital ledger technologies. This concerns power relations within a network as well as power over networks and over their hardware and software design. Following, Lessig’s idea of “Code as Law” and combining it with the idea of Castell’s forms of power in and around networks, we merge the more recent concept of network governance with network theory and social network analysis. Decentralized network governance, thus, provides a better conceptual understanding of how the different roles of actors shift within networks as well as their power over others. Furthermore, Mode 3 governance also delivers the methodological approach and methods through social network analysis to better investigate actors and power relations in and around digital networks.

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