- “[digital systems of government] decide on the rules over the system, rather than within the system”
- “There are parallels between what digital and material forms of government can do”
- “Forward looking companies can optimize their digital footprints to lower expenses and shape the operating environment in Web 3.0”
An enduring topic of conversation in America’s tribal political climate is the net migration pattern of citizens from liberally governed states to conservatively governed ones. Broadly speaking, this is attributable to conservative states having lower population density, lower cost of living, business friendly public policy, robust law enforcement, and much more. Additionally, this has been exacerbated by modern workplace initiatives and technology which have empowered people with more freedom to maneuver their lives as they see fit. While this topic is highly complex and nuanced, it does serve as a recent reminder that governing bodies can influence populations into and out of their jurisdiction. So, could a similar situation occur on the internet or digital plane of existence? I believe that it can and will have significant impacts to businesses’ operations on Web 3.0.
These digital systems of government preside over blockchain ecosystems and the token holders that operate within them. They decide on the rules over the system, rather than within the system. In more familiar terms, they decide on how a parking violation is enforced, rather than what constitutes a parking violation. The purpose of this delineation is the blockchain can continue to dynamically evolve long after its developers have moved on to other projects or died. Interestingly enough, this bears a striking similarity to the U.S. Constitution and the intent behind its creation. Now this begs the question, what about the decision of what constitutes a parking violation? Put simply, this decision is made when a blockchain’s software is being written. Therefore, whenever the blockchain’s processes are violated or compromised, “the law” so to speak has been broken. Explaining this concept further is beyond the scope of this article, however to illustrate how decisions are made on Polkadot observe the infographic below.
Now that the intent of blockchain ecosystem governance is understood, this leads to what it can actually do. A few categories are:
- Economic/Fiscal Policy- includes a financial incentive system for participants in the ecosystem as well as how the ecosystem’s token currency is minted or destroyed, commonly referred to as “tokenomics”
- Military/Law Enforcement Policy- includes the consensus algorithm to ensure the network remains safe from internal or external threats; slashing or negative reinforcement to punish those who disobey the consensus algorithm
- Social Policy- includes spending the ecosystem’s token currency held in its treasury to help fund a project that provides a common good such as a software developer kit or seed funding for a new blockchain
Clearly there are parallels between what digital and material forms of government can do. Therefore, both are subject to similar repercussions if they fail to govern in a manner that is beneficial towards their constituents.
However, these constituents are not similar. In the case of Polkadot, only token holders can cast token-weighted votes. For instance, an individual with 50 DOT and an individual with 100 DOT can both vote. However, the individual with 100 DOT has twice the voting power of the individual with 50 DOT. Additionally, the longer a token holder is willing to make their token balance illiquid the greater their vote’s value becomes. Ultimately, the rationale is similar to that of a corporate shareholder election in which those who have the most capital to lose receive the greatest share of representation. The result is a digital state whose constituents’ switching costs are proportionate to their power within it. As for a material state’s constituents, they more likely will have higher switching costs relative to their digital peers due to transfers of hard assets and the time necessary to complete them. A household’s relocation to another residence is one of many examples. Yet, domestic migration remains a growing concern for states like NY, IL, and CA. One should expect similar trends to form in the digital plane at a more rapid rate as blockchain ecosystems mature. This is due to lower switching costs and high velocity of information.
Over the last few years in the United States there have been highly consequential decisions made by some of the country’s largest corporations in terms of where to locate polarizing business infrastructure. Amazon’s HQ2 is one such example in which the firm decided to establish its second headquarters in Arlington, VA after having second thoughts about a potential NYC locale. The decision cost New York state 25,000 jobs and hundreds of millions of dollars in new investments. The underpinnings of this decision for Amazon were political in nature which stated:
“a number of state and local politicians have made it clear that they oppose our presence and will not work with us to build the type of relationships that are required to go forward with the project we and many others envisioned in Long Island City.”
Based upon my prior points, it is reasonable to predict that similar outcomes could take place between businesses and blockchain ecosystems such as Polkadot or its near peer competitor Cosmos. If a company is operating within one of these ecosystems it is implied that they maintain a token balance for the purposes of utility and representation. Therefore, it is incumbent upon executive leadership and their supporting teams to understand and engage with these ecosystems. The alternative to this would be to hire a third-party advisor that specializes in blockchain governance and/or a particular blockchain ecosystem similar to today’s political risk analysis or political advisory firms. In doing so, forward looking companies can optimize their digital footprints to lower expenses and shape the operating environment in Web 3.0.