Pindar Wong is the chairman of VeriFi (Hong Kong) Ltd and a member of CoinDesk’s advisory board. An internet pioneer, he cofounded the first licensed Internet Service Provider in Hong Kong in 1993.
The following article originally appeared in Consensus Magazine, distributed exclusively to attendees of CoinDesk’s Consensus 2019 event.
From ethereum’s conflicted handling of The DAO attack to bitcoin’s block size “civil war,” to the new staking, baking and voting models for upgrading protocols and electing delegates in more recent blockchain projects, “governance” has long been a heated topic in blockchain communities
As pressure for capacity upgrades has grown along with blockchain adoption, communities have struggled to find an idealized “decentralized governance” model for agreeing on code changes and software forks. The difficulty is understandable. After all, the very idea of blockchain governance can seem like a paradox wrapped in a dilemma. The paradox: “How do you change something which is ‘immutable’?”
The dilemma: “In choosing between a hard fork or soft fork: do you split the very value of using a blockchain in the first place?”
I used to characterize the distinct approaches to these fundamental questions as either “on-chain” governance, where code change negotiations are baked into the protocol’s consensus mechanisms (Decred, DFINITY, EOS, Tezos), or “off-chain” governance (bitcoin, ethereum), where upgrade proposals are negotiated offline before being implemented. (Within the latter
camp I also saw further division, as some, particularly in the bitcoin community, forswear any form of off-chain governance at all.)
I say “used to” because I no longer think it’s productive to address this puzzle in purely ‘decentralized’ or ‘governance’ terms. Learning from the confusion and heartache of the past 20 years in which governments – the traditional, offline kind – have struggled to understand who “governs the Internet,” I think we need to change the taxonomy.
I suggest substituting “polycentric” for “decentralized,” and “stewardship” for “governance.”
Decentralized governance: ‘Polycentric stewardship’
While authorities took years to understand what “Internet Governance” meant, billions of hosts and multiple “stakeholders” continued to come online worldwide. This meant that, much like blockchain technology, the Internet had its own “scaling issues.” We didn’t run out of block weight or block gas limit, but we did run out of numbers to name each network interface
(IPv4 address exhaustion).
In addressing these challenges, a complex ecosystem of stewardship emerged, almost organically. The Internet’s governance came to comprise many independent but interrelated groups, each managing the development of distinctly different but equally important protocols.
The Internet Engineering Task Force (IETF) stewarded the core internet protocols that connect hosts on the network (TCP/IP, BGP, HTTPS); the World Wide Web Consortium (W3C) stewarded the standards for the Web (HTML); and the Internet Corporation for Assigned Names and Numbers (ICANN) stewarded the Domain Name System (DNS), to name but a few groups.
Today, the Internet is not a single complex legal protocol agreed to by 195 nation states, but a mix of technical protocols that are voluntarily adopted by over 70,000 Autonomous Systems(AS): each of which independently operates its own network.
This complexity in the stewardship ecosystem evolved as the demand for online commercial services generated it’s many scaling challenges. But while it meant there would be no single centralized body responsible for all the policies and protocols that Internet users’ rely upon, it did leave a concentration of authority within each group. Each organically evolved its own
distinct culture and community norms, its form, to follow its unique function and pursue a common goal of stewarding the development of specific protocols and policy standards.
Together, these groups now comprise a “polycentralized” ecosystem, having many centers. I see blockchain protocol development following a similar trajectory, with complexity growing as networks become more layered (e.g. the Lightning Network), as different consensus algorithms develop, and as different kinds of specific blockchain hardware such as hardware wallets are deployed. While it’s true that the overall blockchain ecosystem is “not centralized” – that it lacks an overarching center of power or control – I would argue that it is already polycentralized.
As such, it’s not helpful to fixate on a “decentralized” ideal.
Immutability and immunity
How then can we also frame and simplify reasoning about the different roles, and complex interests, within a single family of blockchain protocols? For example, between bitcoin’s multiple stakeholders: developers, exchange operators, full-node operators, miners and end-users.
One lesson I learned from helping organise the 2015 “Scaling Bitcoin” workshops was that thoughtful protocol designers gave careful attention to the overall sustainability of an immutable blockchain. They sought to address not only classic computational “space and time” tradeoffs, such as how to process an “optimally malicious block,” but also more specific concerns with how transaction costs are externalised to the network — for example, how to manage the unspent transaction output (UTXO) set.
In 2016, I shared my learning at the MIT Bitcoin Expo, but at that time I still felt that the rough and tumble of divisive debate and stressful challenges to the network would only make the bitcoin protocol and community more robust and immune to future challenges. Drawing parallels with the evolution of biological systems and the herd immunity they develop in response to persistent threats, I concluded that bitcoin’s “antifragile” framework was working.
Unfortunately, I didn’t then have a more thorough way of reasoning what a “healthy” – i.e. sustainable – network should look like. There was no mathematical theory for measuring an ecosystem’s sustainability. So, I wasn’t seeing the overall picture and missing some of the ecosystem’s more fundamental governance challenges.
I now believe that the foundational work of Nobel economist Elinor Ostrom and euro architect Bernard Lietaer, both recently deceased, may point the way forward, to better frame discussions so that we can ask the right questions at the right time, measure what should be measured and respond accordingly.
Blockchain: A common-pool resource
Ostrom, who passed away in 2012, studied what economists call ‘common-pool resources’ (CPR), such as pastures for grazing or water for irrigation, all of which risk contention and overexploitation if overused. I think it is helpful to consider blockchain transaction capacity, the blockchain itself, and other related resources such as computation power in the same vein, as CPRs.
Before Ostrom’s research, it was thought that the only way to sustainably steward such resources was either by establishing private property rights or with government regulation. After studying hundred of cases of sustainable CPRs worldwide, Ostrom found that complex systems aren’t necessarily “chaotic” by default. She found sustainable CPRs – in Maine lobster fishermen’s common governance of their fishery, for example — and discovered a third way was possible. She identified eight helpful common ‘design principles’ for managing sustainable CPRs, together with two frameworks for reasoning: the Institutional Analysis and Design (IAD) and the Social-Ecological Systems (SES) Frameworks.
I find Ostrom’s frameworks fruitful for thinking about the tradeoffs between different blockchain CPRs: collective bandwidth, memory, disk and computational capacity, etc. Though the mapping is not exact, or one-to-one, I believe it can help future researchers develop common design principles in blockchain incentive design.
Ostrom’s IAD and SES frameworks are not enough alone. They might help us ask the right questions and compare the sustainability of different blockchain ecosystems, but how does one actually measure it for a blockchain network? Here the late Bernard Lietaer has much to offer.
Blockchain: A complex adaptive flow network
Lietaer, who died earlier this year, co-designed and implemented the European currency system’s convergence mechanism, making him, in many respects, a key architect of the euro.
He was a monetary scholar and wrote four books on the future of money. He also did pioneering work in the pre-cryptocurrency field of “complementary currencies” and in 2017 was named Chief Monetary Architect of the Bancor Protocol Foundation, which oversees the ethereum- based Bancor liquidity network for token convertibility.
Lietaer’s definition of money as “an agreement within a community to use something standardized as a medium of exchange” is among my favorites. Most importantly, he and Robert E. Ulanowicz developed a single metric for measuring the sustainability of “complex adaptive flow networks,” such as those that exist in flows of nutrients in nature or financial flows in economic networks.
The practical takeaway from a lifetime of studying real-life ecosystems is that there appears to be only a small “window of viability” between optimizing a sustainable network for greater resiliency and greater throughput. In the case of a “monoculture in money,” the implication is that a small handful of different kinds of money are needed for optimal sustainability.
This bodes well for the wider adoption of cryptocurrencies.
A new rulebook
Like a sixth sense, I see ‘dead’ governance models everywhere, all laid waste by the collision of two worlds: the world of borderless networks, as embodied in the Internet, and the world of bordered nations. From Facebook’s crisis, which prompted its CEO to cry that “The Internet Needs New Rules,” to the UK’s Brexit crisis, it’s clear that a new stewardship rulebook is required.
With their capacity to automatically enforce rules across a borderless network, blockchain protocols offer potential solutions to these deep-seated problems. But if their own governance challenges prevent them from scaling beyond their current capacity limits, that opportunity will be lost.
When addressing such challenges, we need to design blockchain ecosystems as sustainable common-pool resources. It’s this third-way approach to negotiating complex competing interests – neither chaos nor centralized control – that will allow blockchains to sustainably scale into becoming a vital element of humanity’s economic future.
Our future is decentralized not disorganized, our future is polycentric
Japan to Solarize Its Burgeoning Digital Economy, Expert Take
Society is now witnessing the implementation of digital currencies, artificial intelligence (AI) and blockchain technology worldwide. These new digital technologies necessitate very high consumption of electric energy, which is currently produced with coal and fossil fuels that have adverse environmental effects. A global shift toward green energy will require the removal of the technological/infrastructural, financial and regulatory/tax-policy barriers. In this series, we evaluate the tax, digital technology and solar policies (including a space solar power satellite) of the top carbon dioxide-emitting countries.
In 2009, Japan — the Land of the Rising Sun — undertook important initiatives that set the tone for how it intended to solarize the world’s third-largest digital economy. Japan passed its Basic Space Law, which established a space power satellite (SPS) — the concept of collecting solar power in outer space and distributing it to Earth via satellites — as a national priority.
The Ministry of Economy, Trade and Industry (METI) of Japan sets the strategic energy plan for the world’s fourth-largest energy consumer and the sixth-largest emitter of CO2 — 90% of which is tied to hydrocarbon energy. METI believes that the impact of blockchain — which consumes large amounts of electricity — is huge and that its importance is similar to the emergence of the internet.
According to a World Economic Forum survey, global GDP stored on blockchain technology is expected to reach 10% by 2027. Therefore, in June 2018, Japan introduced a sandbox regime to accelerate the introduction of new business models and innovative technologies such as blockchain, AI and the Internet of Things.
The world’s largest technology investment fund — the $100 billion Softbank Vision Fund, which announced the launch of a second fund — and Japanese megabanks have been investing in and funding blockchain startups concerning applications in telecommunications, swift -payment system, solar energy, identity, health care, messaging, transportation, data security and fintech industries, both in Japan and globally.
Solar photovoltaic technology and its applications in solar energy in Japan
Japan’s Ministry of Technology and Industry (MITI) views solar photovoltaic power as an essential part of its digital economic transformation. Japanese science fiction author Haruki Murakami concurs “Japan, as an economic power, should find another source of power besides atomic energy. It may cause a temporary economic dip, but we will be respected as a country that does not use nuclear power.”
Solar photovoltaic (PV) technology — which converts light into electrical current — was born in the United States at Bell Labs when engineer Daryl Chapin, chemist Calvin Fuller and physicist Gerald Pearson worked together to develop the first silicon solar photovoltaic cell in 1954. The New York Times wrote that the silicon solar cell “may mark the beginning of a new era, leading eventually to the realization of one of mankind’s most cherished dreams — the harnessing of the almost limitless energy of the sun for the uses of civilization.”
First launched in 1974 by MITI, with METI joining in 2001, the Sunshine Project was a long-term comprehensive plan for the research and development of new solar energy technologies to resolve Japan’s energy and climate change problems. The program was heavily funded by the government because PV technology emits no CO2 while also being highly reliable and modular, and with lower construction and operational costs.
Starting in the 1980s, Japanese manufacturers began incorporating solar PV cells into electronic applications in various areas. In the late 1990s, Japanese government programs began promoting solar houses. In 2009, Tsutomu Miyasaka and his colleagues in Japan reported on perovskite compounds being light absorbers for solar energy applications, which outperform the efficiency of more established PV technologies and can be printed or woven into fabric. As a result, Japan emerged as the world’s third-largest solar energy power producer, with 45% of PV cells in the world being manufactured in Japan.
With the rise of Bitcoin and in the aftermath of the Fukushima nuclear plant disaster in 2011, the government encouraged the proliferation of decentralized solar energy by encouraging the production of more energy-efficient buildings, cars that combine solar panels with some form of energy storage as well as other devices. This compelled the solar energy sector to begin using blockchain technology. Professor Umit Cali of the University of North Carolina provided an exclusive comment, saying:
“In the solar energy sector, decentralized blockchain technology is used in person-to-person (P2P) energy trading, labeling, energy provenance and certification, smart metering and billing, electric vehicle charging and payments, and wholesale power trading and settlements.”
Reports published by Fitch Solutions Macro Research and Globadata conclude that over the next decade, decentralized solar technology may replace PV solar farms as the main growth-driver in Japan. Already, a blockchain-enabled solar energy-trading pilot project is set to link 100 solar rooftops of smart, zero-energy homes in the country, while another pilot project will administeran energy-trading marketplace using blockchain to connect a number of Japanese power production facilities with homes, offices, factories, batteries and electric vehicles.
Toyota Motor Corp. — which began testing high-efficiency solar cells for electric cars — has joined forces with the University of Tokyo and online renewable energy retailer Trende to test peer-to-peer vehicle-to-grid electricity trading using blockchain technology, which allows for electric vehicles to communicate with the power grid to buy and sell electricity to smooth out peak and low demand times.
Japan’s Marubeni Corp. has recently backed a blockchain-based power-purchasing platform called WePower that makes it easy for small- and medium-sized businesses to buy power from solar project developers, offering standardized, digital power purchase agreements to help underwrite new projects.
Japan is a predominantly mountainous land with varied weather conditions, and the area that a PV solar farm occupies is an important consideration, as it determines the yield. Accordingly, Japan has been creative in developing new PV solar energy generation stations at home and abroad — in seas, lakes, deserts and space.
Japan built the world’s first and largest floating solar plants. Its lakes and reservoirs are now home to 73 of the world’s 100-largest floating solar plants, which is up to 16% more efficient than land-based solar systems.
In cooperation with the National University of Mongolia, Japan is also participating in the project “Energy from the Desert,” with the Japan International Cooperation Agency (JICA) providing financial support covering up to half of the initial investment costs. Marubeni Corp. built the world’s largest PV farm, the Noor Abu Dhabi photovoltaic power project, in the Sweihan Desert of the United Arab Emirates, which recently began producing solar energy at $0.024 per kilowatt hour.
The Japanese Space Agency (JAXA) began its SPS program in 2009, with the goal to set up a one gigawatt solar farm in space that can transmit energy back to Earth by 2030. In 2015, Japan came closer to harvesting solar energy from space when it transmitted condensed solar power converted to microwaves to a receiving antenna, which converted only 5%-10% of the power required to power three PCs.
For space solar power generation to become commercially viable, 50% of the solar power generated in space needs to be transmitted to Earth. JAXA is also designing kite-like orbiters that will travel in low-earth orbit above the equator, with a transmitting antenna on the Earthward face and solar collectors on spaceward face in order to transmit solar energy to Earth. In 2010, JAXA has already successfully launched Ikaros, a solar space kite, that sailed through deep space and was propelled by solar energy. Small satellites are ideal candidates for this type of solar propulsion.
Environmental, regulatory and tax policy in Japan
Japan has inadequate energy resources and imports 87.4% of its hydrocarbon energy. It is the world’s largest importer of liquefied natural gas and third-largest importer of oil and coal.
Japan has lower levels of subsidies for fossil fuel consumption when compared to other G-7 countries, but higher subsidies for oil and gas exploration and coal production. Because efforts to compensate for the drop in nuclear power generation after the Fukushima nuclear crisis — which was triggered by the 9.1 Tohoku tsunami in Japan and which forced the shutdown of Japan’s entire fleet of nuclear 48 reactors, effectively terminating the plan to supply half the country’s electricity with nuclear power — resulted in far more support for fossil fuels and increased CO2 emissions compared to renewable energy.
Japan provides billions in taxpayer dollars for building highly polluting coal plants in Japan as well as overseas. Japan’s largest banks — MUFG and SMBC Group — along with other banks, have reportedly continued to finance fossil fuels with $1.9 trillion since the adoption of the Paris climate agreement. Therefore, Japan is the second-worst performer when it comes to reforming fossil fuel subsidies, according to a report by the Natural Resources Defense Council.
In October 2012, Japan implemented a carbon tax of 289 Japanese yen (about $3) per ton of CO2 equivalent. The government plans to use the revenues of $2 billion generated from this carbon tax to finance clean energy and energy-saving projects. Hydrocarbon air pollution is a drag for renewable energy. Dust and other sky-darkening air pollutants slash solar energy production by an estimated 11.5% to 13%. The haze blocks sunlight from reaching the solar panels, and if the particles land on a panel’s flat surface, they cut down on the area exposed to the sun.
Japan also introduced a feed-in tariff (FIT) system in 2012 to lower solar power generation costs, which are double that of Europe thereby shifting the price of solar energy on the public to the tune of 2.4 trillion yen (roughly $22 billion) in the 2019 fiscal year alone, with a cumulative total of about 10 trillion yen (nearly $100 billion) since its introduction in July 2012. The government’s steady lowering of the FIT purchase price, which stands at 14 yen ($0.13) per kilowatt hour in 2019, has brought a drastic drop in profits for solar energy companies, triggering a wave of bankruptcies, which have reportedly risen year-on-year for five consecutive years since 2013.
Globally, subsidies and financing for fossil fuels continue to remain stubbornly high. According to reports, 2018 actually saw an increase in money going into new upstream oil and gas projects, while investment in renewable power of all kinds dipped 2%. The World Bank still funds the fossil fuel industry at least three times greater than renewable energy.
This is despite G-20 finance ministers’ commitment to working together in redirecting public investments to renewable energies through fiscal policy and the use of public finance. Despite the International Renewable Energy Agency reporting that the cost of solar electricity has tumbled 80% in recent years and with three-quarters of coal production now more expensivethan solar energy, the fossil fuel industry still receives benefits from governments.
In the latest G-20 meeting in Osaka, Japan reiterated its dedication to the Paris climate agreement and to phasing out fossil fuel financing and subsidies in order to tackle climate change. Enhancing zero-carbon energy is an urgent task for the Japanese government, which is aiming to derive 44% of power from renewable (7% from solar energy) and nuclear power by 2030 to fuel its burgeoning digital economy. Fossil fuel subsidies significantly reduce the use of renewables, according to an OECD report.
According to scientific reports, earthquakes, volcanic eruptions, giant landslides and tsunamisbecome more frequent as global warming changes the Earth’s crust, swells sea levels, and triggers a repetitive cycle of severe natural disasters that cause extensive environmental and economic damage (e.g., it cost $315 billion to $728 billion to clean up the Fukushima nuclear reactor site alone).
On Aug. 12, Australian energy technology company Power Ledger and Japanese Kansai Electric Power Co. announced they completed a joint trial of a blockchain-based peer-to-peer trading system for post-feed-in tariff surplus solar power in Osaka. Their announcement came on the heels of a report that highlights multiple ways blockchain technology could disrupt the peer-to-peer solar energy trading sector. According to the report:
“Blockchain technology could alter the manner in which electricity customers and producers interact. Traditionally electric utilities are vertically integrated. Blockchain could disrupt this convention by unbundling energy services along a distributed energy system. For instance, a customer could directly purchase excess electricity produced from their neighbor’s solar panels instead of purchasing electricity from the utility.”
Japan intends to replace FIT’s fixed price system with a competitive bidding/blockchain-based peer-to-peer trading system for post-feed-in tariff surplus solar power system as soon as 2020. This would thereby reduce inequality and provide cheaper, cleaner energy that reduces CO2 emissions and would help promote digital development in Japan as well as across the world.
South Korea’s ‘Bit-Island’ Jeju Announces New Blockchain Initiative
South Korea’s “Bit-Island” Jeju announced the Blockchain Hub City Development Research Service on Aug. 13.
An island with blockchain ambitions
Local news outlet JejuDomin reported on Aug. 14 that Jeju announced the Blockchain Hub City Development Research Service on Aug. 13. Furthermore, the author of the report stated that cloud services provider Tilon will carry the research. Per the report, the budget meant to cover the costs of the project amounts to 175 million won (nearly $145,000).
In April local news outlet BusinessKorea reported that Busan — South Korea’s second most populous city — has been picked over Jeju as the preferred location for South Korea’s blockchain regulation-free zone.
The island that does not surrender
Jeju previously hoped to become the local initial coin offering (ICO) hub, after being granted the status of regulation-free zone. Still, the latest developments show that the island is still fighting for relevance in the blockchain and cryptocurrency industry.
As part of the project, parties involved will reportedly analyze and investigate advanced use cases for blockchain technology and derived services, and also develop a blockchain service model suitable for Jeju Island. Future strategy director of Jeju Island Noh Hee-seop commented on the development:
“We expect that this research service will contribute to the establishment of Jeju as a blockchain hub city that maximizes the potential of blockchain technology, the core technology of the 4th Industrial Revolution.”
After first banning ICOs in September 2017, South Korean state financial regulator the Financial Services Commission announced that it will not lift its ban on ICOs in the country at the end of January.
Busan looks to release local crypto
As Cointelegraph reported in July, Busan city authorities are seeking to develop a blockchain-based digital currency project in collaboration with BNK Busan Bank, a subsidiary of local holding company BNK Financial Group.
Court Allows Blockchain.com’s Trademark Lawsuit Against Paymium to Proceed
The New York Federal Court denied the motion to dismiss the ruling in the trademark infringement action by cryptocurrency wallet and exchange operator Blockchain.com against fintech startup Paymium and its CEO Pierre Noizat over the use of domain “blockchain.io”.
According to the court documents published on Aug. 7, the lawsuit, originally filed by Blockchain.com in September 2018, claimed that Paymium and its Blockchain.io platform not only infringed on the trademark, but also were involved in alleged unfair competition and false advertising.
Blockchain versus Blockchain
In February 2019, Paymium moved a motion “to dismiss the amended complaint for failure to state a claim upon which relief can be granted […] and for lack of personal jurisdiction over Pierre Noizat.”
In its turn, Blockchain.com successfully managed to argue that their marks were not inherently descriptive and acquired secondary meaning, and that Blockchain.com and Blockchain.io marks were substantially similar enough for the case to proceed.
The New York Federal Court denied the trademark infringement part of the Paymium’s motion and allowed the suit to continue.
You don’t mess with the SEC
The court also found Paymium’s advertising claims that the “filing has been accepted and [it is] now registered with the SEC!” to be false, so this part stays in the lawsuit too.
In reality, the only thing the startup registered at that time with the U.S. Securities and Exchange Commission was a Form D. Blockchain.com argued that “the filing of a Form D does not mean that a security is ‘registered’ or that it has been in any way scrutinized or approved by the SEC.” The court agreed.
At the same time, all claims against Pierre Noizat were dismissed due to the actual lack of personal jurisdiction. The court also argued that the advertising of “hack-free status and atomic swaps” was not false.
Recently, Cointelegraph reported that IT giant Oracle sued blockchain startup CryptoOracle alleging trademark infringement and cybersquatting in the Northern District of California.