11 May 2021 · 19 min
In this Armada Podcast episode, host Nik Almond reads and discusses his article “Governance Optimization” from The Crypto Space. He frames blockchain governance as an emerging, critical discipline that will shape future organizations. The episode first outlines the dominant “governance minimization” paradigm—embodied by Bitcoin’s “code is law” stance—highlighting its rigidity and potential for ossification. It then contrasts this with “governance maximization,” which emphasizes constant deliberation, frequent rule changes, and a proliferation of committees, but risks complexity, capture, and decision fatigue. Almond proposes a third, nuanced approach: “governance optimization.” This model treats governance as a tunable, adaptive system that balances agility, upgradability, and resistance to capture, moving between periods of rapid innovation and consolidation. He illustrates the spectrum of organizational complexity using the “biscuit factory” (highly ordered, low creativity) versus the “creative university” (highly chaotic, high creativity) analogies, and maps these onto blockchain examples—Bitcoin as a static biscuit factory and Ethereum as a more adaptive platform. The core of optimization is a robust voting and signal‑collection infrastructure that can funnel diverse participant input into actionable decisions while maintaining transparency and antifragility. The episode concludes that effective governance is inevitable, urging designers to plan for adaptive, open‑innovation‑friendly systems rather than defaulting to extreme minimization or maximization.
Welcome to the Armada Podcast, where we are focusing in on DAO governance.
This episode, we're reading an article by Nick Allman, the author of The Crypto Space. You can subscribe to his newsletter by going to thecryptospace.substack.com. You can find him on Twitter @DrNickA. Governance Optimization. It's time to nuance the blockchain governance narrative. Introduction. Blockchain governance is about to become one of the most important topics in the crypto space. After that, it will become one of the most important topics in business and finance. Why? Because of the following: A. Blockchains will be utilized to make decisions in decentralized organizations. B. Organizations will trend towards becoming decentralized. That means on a very fundamental level the ways in which we as humans will organize and collaborate will change. It doesn't get any bigger than that. So how we conceptualize the frameworks for blockchain governance and our attitudes to it is important. Very important. The work we do here will set the foundation for how organizations are formed and transformed in the future. It's time to start taking it seriously. Governance minimization. The most dominant paradigm for blockchain governance by far is governance minimization. The best articulation of this stance has been made recently by Fred Ehrsam, co-founder of Coinbase and Paradigm Ventures. You can summarize the stance as this: Do as little governance as possible. Humans are inevitably bad at governance; eliminate them from the game. Code is law. This is very much a Bitcoin narrative. and has been around since the early days of crypto. The untouchableness of 21 million Bitcoins arises out of or from this philosophy, and it has permeated the space so profoundly as to become a tacit value structure. There are very few vocal critics of this paradigm, with Vlad Zamfir being a notable exception. But really we need to take a hard look at it. Otherwise we might end up getting ourselves into a pickle and legitimizing and subsequently hardcoding some pretty negative behaviors At the very protocol layer of the future. This article proposes the more nuanced stance of governance optimization. Let's visit governance minimization land to see why. Life in governance minimization land. Let's say you move into a new digital realm. You plan on setting up shop here, hanging out here, communicating, trading. You're gonna trade NFTs. Only the rarest items. High-quality stuff. After you've bedded in for a while, you realize the developer has set the rules for the town. The monetary policy, the standards, the language, the rules. The developer is a governance minimization guy. The rules are fixed. No changing them now. Fair enough, looks pretty good. It's cheap rent and transactions are rapid. Let's do it. You set up the NFT barn, and to start with, things are going well. After a while, you realize some of the rules are a bit annoying. As a shopkeeper, you need to run a validation node, which means you have to press a button every 108 minutes to validate your transactions. If you don't, you get cancelled, your savings get wrecked, and you're ostracised from the community. The button itself is a pain in the arse too—you have to keep upgrading it. Also, NFTs are called flibbles for some reason, which is weird. You've renamed your shop to the Flibble Barn, and you haven't slept in weeks. Pressing that button. People keep getting canceled for sleeping through their button press, and your customers are running off to that other blockchain that does that yield farming thing that you can't do here. You petition the developer to change the rules, but he's exited to the community, and there's no way to upgrade them. Like it or lump it, there is no mechanism to change the rules, ever. Organizations are complex adaptive systems. If you're trying to do anything other than the reproduction of a known process or product, Then you're going to need governance. That's because organizations are complex adaptive systems. You can conceptualize organizations on a continuum between order and chaos. On the ordered side of the continuum, you're in the realm of technical and rational decision-making. At the complex side of the system, you're optimizing for innovation and creativity. Go a bit too far and you're into the complexity zone and you hit chaos. Anarchy reigns. Organizations in the Order Zone do what they are intend to do and probably use some hardcore productivity optimization processes with highly centralized decision-making. In other words, maximum value is extracted from the workers. They have very limited control over the situations that arrive on the day-to-day— until they throw a spanner in the works, that is. Organizations in the Complexity Zone are normally trying to do something radically new, Probably have a far more distributed governance structure, and are less focused on predictable outcomes. Some extreme examples: The biscuit factory. You want quality biscuits for as cheap as possible and nothing else. You don't want anyone down the production stack randomly deciding to jazz up a batch of biscuits with their own interpretation of the recipe. You've spent years building your production line to do this, and it just runs. The humans in the game are just the ones you haven't turned into a robot yet. They do what they're told to and ship biscuits. You've thought about adding chocolate to your biscuits at one point, but it was too much effort. You are the king of the biscuit factory and you like it that way. Everyone wants to be king of the biscuit factory. The Creative University. You want creativity and learning. You fly as close to chaos as possible because that's where the universe presents the most novel outcomes. Every day is different. You have no idea what is happening where. Individual creative freedom is almost total. You have complete agency to work on what you want, when you want. What happens at the end of the day is almost perfectly unpredictable. It might be nothing. It might be a heartbreaking work of staggering genius. It's a great place to work, but don't anticipate getting much done. The latter of these examples is an environment where rules are fluid, If there are any rules, they've been arrived through complex, diegetic interactions. In the former, you do what the king says. There is obvious payoffs to both environments. Bitcoin makes biscuits or bitcoins and keeps account of their movements, and that's pretty much it. If you want to build a system that facilitates more complex activity, like programming that money for example, then you need a more dynamic rule set. This is the Satoshi in your digital realm. There's always one, the ideator, the king of the biscuit factory. Whether we like it or not, these guys hold a lot of power in blockchain systems, especially if you're working on novel tech. A novel network will have emerged from the mind of an individual or small group that has designed the system within a specific design paradigm and value structure. Any adopters after that initiating group. then either need to like the rules as set, called minimizers, or change them as much as they want, called maximizers, or go through an experimental and iterative process for changing them, called optimizers. Let's check out the mindset of each of these approaches. The governance minimizer. For the governance minimizer, code is law. Once the code is pushed, it's done. It is sacrosanct. Immutability is the paradigm, and it is dogma. Propose changes and you will be ostracized. Fork off. The governance minimizer seeks to eliminate capture through automation. If the rules are set and immutable, there is no changing the rules mid-game. The payoff is the loss of agility. But who needs agility when it was done right in the first place? Developers are elevated to demigods, masters of their domain. To the governance minimizer, the users have a choice: play the game or don't. You don't like the law? Find another place to play. Voting is for infidels. The governance minimizer recognizes that some governance is necessary, but it's pushed out to a game-theoretic battleground where crypto-economic and market power is required to shift the network into a new reality where new code is new law. Power trends towards the code creators into an almost pure technocracy. They are Deified, obtaining hero status. As the earliest adopters, they hold the most network assets and the code that becomes law, are designed to protect themselves against dilution at all costs. The Utopia is Ossification. Peak decentralization is achieved. The network is now fully autonomous and unchangeable by anyone. It is so perfect that it can never be improved. The network stays as is. To the heat death of the universe, and everyone is happy. The governance maximizer. The governance maximizer seeks constant change. The best use of time is decision-making, so it's what is done all the time. There is a broader set of human players, and in this game, dialogue rules and agency is maximized. Constant deliberation takes place on how to improve the network. Meetings proliferate. In fact, It's pretty much all that happens. There's meetings for this, meetings for that. Every possible avenue has a decision-making track designed to capture ideas, and almost everybody has total control to propose one. Process and bureaucracy spiral into complexity. There's a few people who understand this game, and they get to extract the maximum value from the network. Capture occurs, but it's not considered that, just expertise. These experts become the power in the system and find new ways to extract value from the network and brand it as fees. If you understand the game, you can do this too. New rules ship weekly, new network functionality, new token economics. Users need to be constantly switched on to keep up with the activity, which of course they aren't. Power trends towards the proposal creators who are so smart that they lead on a dominion of socially constructed reputation. And asymmetric knowledge. Votes are meaningless. Decisions are a fait accompli. Power trends towards the influencer S in the network. Using social control, they can manipulate the governance systems into any direction that they want. There is innovation in the network, but it's so plentiful as to never be effectively incorporated into the system. Anything good that happens is washed away by the next thing. Utopia is relentless committees where everyone gets paid for perpetual bickering. The network ossifies out of inertia and confusion rather than optimization. No one is happy, but no one is particularly sad either. It is what it is. The Governance Optimizer recognizes that decentralization is a spectrum and that it should be utilized to a point that maximizes agility upgradability and contextual responsiveness, whilst minimizing the risks of capture and censorship. The network trends through periods of shifting rules and iteration, to periods of consolidation and learning. Each wave trends towards a sweet spot of decision-making frequency, optimizing for innovation but reducing complexity. Decision-making structures are spun up and wound down as dialogue transitions to periodic votes of high engagement and fidelity. Where tunable parameters are optimized and chat is kept to a minimum. Inclusivity of decision-making is optimized, meaning that transparency of core system rules is not only presented in technical documentation, but clear systems are in place to ensure that, that the population of network participants understand the processes fully, and that this population is continually broadened through education. Sociotechnical systems are recognized as complex and adaptive, And that ossification towards functionality can only be temporary as the needs of participants changes by context. Threats are constantly appraised and existential risks are mitigated against through the development of antifragile tooling. Decisions are ossified through the production of decentralized tools that are maximally designed for disintermediation. Network creators have a clear plan of irrelevancy, and the network has a monetary policy that can extend beyond the medium term towards long-term sustainability. Utopia is a decentralized system that is maintained by the crowd. It does what it is designed to do, and what that is has moved beyond what any network creator has imagined. Shared meaning is negotiated and a common goal is agreed upon, and there is constant progression towards it. A sustainable monetary system is arrived upon and system GDP grows with adoption. The value producers obtain emission share meritocratically. Not merely by virtue of being an early adopter. Rent-seeking is minimized. Governance optimization. This is used in good organizations everywhere. The idea is that you build a set of rules that are reached upon by consensus. You then try those rules for a bit and iterate upon them to find some kind of optimum. A really advanced organization will constantly upgrade itself by exploring new potentiality, And then executing on the good stuff. This means a good governance system will have periods of complex self-organization into periods of ossification and consolidation of the rules that worked. In other words, you dial in your governance processes over time. Dr. Nick has a graph that we will attempt to describe. There's innovation on one axis, with entropy from low to high. Alternatively stated, from ordered to chaotic. There's a negative parabolic curve on the graph, perhaps better stated as a hill shape line. Along the curve are stars that zigzag back and forth moving upward the hill. The stars represents moments in time of organizations that are balancing innovation and order or chaos. The point here is that organizations may jump from order to chaos, but over time they will ascend upwards on the innovation axis as they begin to find a balance between order and chaos. Platforms for open innovation. Platforms for open innovation, which is surely what post-money blockchains are intended to be, need to be responsive to context. 2020 has proved in abundance that mad shit happens and decentralized organizations have the potential to be far more robust than their legacy counterparts. Public blockchain systems are leagues ahead in the antifragility stakes, and this is undoubtedly why money is flowing into these networks at a time where legacy institutions have their fragility exposed. And are crumbling under the weight of their overt centralized decision-making that lacks the knowledge to respond to context. Platforms with agile governance systems will be able to harness collective innovation in ways that extend beyond the hardcore engineering level and move to the social level, reaching a perpetual state of product-market fit driven by consensus-seeking dialogue. It's all semantics. The reality is, That this design space is more complex than any of the 3 approaches described here. You could argue that the minimization position of reducing the power and reliance on governance wherever possible is essentially what is being argued here, just that the optimization point is not set at the absolute minimum. The difference is that the optimization approach readily engages with the systems and processes required to deal with the messy collaborations that form norms and technologies that cope with unknown situations when they arise. Setting your target governance point towards open innovation sets the tone of participation and expected levels of user agency within this system in the future. Governance minimization as a narrative tool could easily trend towards the rules being set by network creators, a position used to amusing levels in the Bitcoin Satoshi's Vision fork. The words we use shape our actions, and we need to be careful not Not to legitimize ourselves into a corner that gives the developers too much power. Governance leads to accountability, and if power is shifted from that, it just goes somewhere else. Summary. If you want humans to use blockchains, you're going to have to get used to dealing with what they want to use them for. That will change by context, both in the social world and in the digital. To think that a system that is built now is suitable for some distant future and that it won't need to upgrade is foolhardy. The exception to this may be Bitcoin, which is as close to the digital biscuit factory as we're ever likely to get. The king of the biscuit factory buggered off a long time ago, and it's automated to the point that all it makes is money. Whether people are happy with the capabilities and limitations of that money will remain to be seen, but it's doubtful to upgrade substantially any time soon. Layer X solutions might take us to the end of time. Let's see. Elsewhere, there's blockchains like Ethereum, which are clearly wrestling with these problems directly and stepping cautiously into the zone of complexity. Ethereum allows people to play whatever governance games they want at the application layer, and that's led to the DeFi blue chips, which make regular decisions about monetary policy and whether to give out Gucci slippers. Degens are the future of finance. Uncritical strides towards governance minimization leads to centralization and autocratic control, pushing all the inescapable human complexity into off-chain smoky rooms. What we need is better social coordination and consensus systems that curate human needs into a development funnel that operationalizes the vision of a collective. The key to expanding into the adaptive realm of governance optimization in my opinion is voting technology. With the ability to collect signal from a vast array of network participants alongside transparent layered processes that funnel it into action, a new era of network governance could emerge. Yes, things will break and get captured, but that's why you need processes for optimization. Governance is what will take us until a new realm of social coordination and move us away from the asymmetric power systems of current financial institutions. TL;DR: You end up governing whether you like it or not. It's best to plan for it. As a reminder, this episode was a reading of an article by Nik Almond, the author of The Crypto Space. You can subscribe to his newsletter by going to thecryptospace.substack.com. You can find him on Twitter @DrNikA.
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