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Natasha Muilenburg

Blockchain Governance and the Risk of Collusion

By | News

1 September 2019

For many, the promise of blockchain lies in the idea of a truly open source platform, designed in such a way that it opens up the potential for innovation and healthy competition in an ecosystem free from centralized control. In this model, blockchain is a trust machine, built on transparent, decentralized governance. Proponents of this idea like to contrast blockchain with the centralizing tendencies of incumbent platforms, such as Twitter and Facebook. But a danger lurks in the attitude shown by some leading blockchain networks toward governance. That danger is that certain initiatives, which profess to follow principles of transparency and accountability, in fact collapse into opaque, consortia-based governance models and create, at best, a ‘synthetic trust’ – partially decentralized, but unsupported by any solid principles.

In this age, tech giants are the incumbent trust providers. Platform businesses – scalable networks of users and resources – have a near-monopoly on the interchange of information that connects consumers to producers. This was previously most obvious in retail marketing on social media, where Facebook, Twitter, and others have grown to wield huge influence over consumer spending habits. But it is increasingly clear that a new economic paradigm is emerging, in which the platform model itself facilitates the exchange of digitized goods and services (including both information and physical goods) between producers and consumers. For the distribution of news media, a case in point is the personalized newsfeeds delivered by Facebook. In this economic paradigm, the digital platforms are becoming the keepers of our digital identities and the focal point of trust between market participants. 

But recently, they have lost credibility as repositories of trust. Most obviously, a series of high profile hacks and data leaks from the likes of Facebook, Experian, and others have damaged consumer faith in the security of our digital identities, a trend which has been exacerbated by frequent allegations of surveillance and data misuse against many of these same platforms. In some cases this activity is compounded by platforms acquiring potential challengers before they become a threat, preventing the emergence of a healthier market for innovations in users’ data privacy. At the same time, the network effects of platforms have accelerated the centralization of information flows across the internet. This often manifests in limits being placed on what kind of content users can (and do) interact with online, these limits attracting a spectrum of labels from “content curation” to “internet censorship”. The result is power being concentrated in a few dominant platforms, who act as gatekeepers to the digital market. This is a model that requires us to put our trust in Facebook, Twitter and others to provide us with commercially and politically impartial digital products.

Is blockchain a solution? The idea of blockchain as a “trust machine” views the foundations of DLT as being (i) transparency, and (ii) decentralized governance. With these two qualities comes the possibility of an open source innovation platform designed such that everyone can build on it applications and products, and add value through their services. Where this model is successfully implemented it can provide an answer to Hobson’s choice, between entrenched private monopolies and state-controlled platforms: the third way is an ecosystem that is decentralized by design, where users control both their data and their power to choose between producers (of content, news, goods, services, etc.), all without any commitment to a centralized authority. 

But is this achievable? Blockchain faces a conundrum: in decentralized markets, trust and growth are at odds with one another. This closely relates to the well-known ‘trilemma’, which suggests that blockchain can maintain only two characteristics out of decentralization, scalability, and security. The success of network business models depends on there being a growing number of users (for which scalability is key), and the implication is that either security or decentralization must be compromised in a blockchain’s attempt to scale toward mass adoption. Either way, the more a network grows, the less trust each user can be said to have invested in the network.

A compromise on decentralization can already be seen in some leading blockchain networks, manifesting as governance models that lack transparency and concentrate power in the hands of select individuals who have no direct obligations to the users of the system. Some of these are accidental: for instance, the fact that the top five largest ETH pools secure around 80% of transactions on the Ethereum ledger is a consequence of market forces, not of code design. In other cases, a lack of transparency is clearly intentional. In Hyperledger’s Open Governance Model, the Governing Board’s meeting minutes are confidential and voting power is allocated according to financial contributions to the initiative. Libra’s governance model is centralized and controlled by invested members who meet certain eligibility criteria, including a market valuation of at least $1 billion USD and a consumer reach greater than 20 million people per year. These are two examples where control over the ledger protocol is restricted to just a few individual entities.

These factors combine to increase the risk of collusion in blockchain networks; and where there is a real risk of collusion, the promise of blockchain as a “trust machine” has not been realised. It is, at best, a synthetic trust, unsupported by the principles of open, transparent, free-to-use and universally accessible blockchains. Until the decentralized model is fully realised, trust in the digital market will continue to face a dilemma: either we bargain away our privacy to centralized, but commercially accountable trust providers (the ‘platforms’ of the current model); or we keep direct control over our data in a trust machine designed and run by anonymous entities who are unaccountable to users of the network. 

By Paolo Tasca

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By | Posts

30 June 2019

No industry is exempt from the blockchain revolution. Of all the traditional sectors, education may prove to be the one that is most transformed by today’s digital shifts. But how this transformation plays out will depend on how far universities and other institutions are able to embrace developments such as cloud storage, big data and blockchain to improve learning experiences and offer better services to their students. Many of the challenges facing the education sector are not new. But two in particular stand out which may find solutions in blockchain: verification and institutional identity.

First, a fundamental purpose of an educational institution is to provide its graduates with credentials which they can use to prove their completion of a course of study. Traditionally, these take the form of paper diplomas and transcripts. But they are rarely in a digital form, and prospective employers often do not have the resources to manually verify an applicant’s academic history. One consequence of this is an increased possibility of fraud.

Secondly, there has in recent years been a surge in the number of unverified degrees issued by legitimate-sounding institutions. These pretenders advertise themselves using names that closely resemble those of famous universities or institutions, so that the distinction between them is not immediately apparent. Often they will issue diplomas with few details as to the course of study pursued or their students’ achievements. The problem is aggravated by an increase in the outright counterfeiting of diplomas and certificates. These and similar problems might find solutions in distributed ledger technologies (DLT).

Initially introduced as a digital payment system outside the brokering circuit of banks, DLT have since evolved in both quality and quantity. New blockchain architectures go far beyond the simple transfer of funds, implementing numerous additional functionalities. There are currently thousands of blockchain systems of various kinds in production, and for the sake of simplicity it is common to refer to them collectively as ‘blockchain technologies’.

But despite variations and even technical rivalries, the underlying philosophy remains largely the same: blockchain technologies permit a new form of distributed software in which agreement as to the state of transactional data can be established across a decentralised network of peers. Consensus is built according to pre-defined rules that govern the updating of the shared registry of data (the ledger). Past transactions are sequentially ordered, and cannot be altered except by agreement of the majority of peers. Cryptographic technologies create trust in the system by ensuring the validity and authenticity of each transaction. There is no central authority that can change the data or arbitrarily change the rules. No single point of trust, no single point of failure.

A conservative attitude toward innovation in the educational sector has hindered the adoption of new technologies in general. Partly this is due to the fact that the benefits of a new technology are undermined if there is a high cost of training people in its use. But with blockchain the trade-off weighs decisively in favour of its adoption, since it addresses each of the key administrative challenges facing high schools and universities: data transparency, auditability, availability, immutability and efficiency. 

Blockchain therefore benefits many participants in the educational sector. For students, the use of high-security cryptographic techniques ensures that students’ personal information is never manipulated, or subject to malicious data leaks or (unauthorised) commercial surveillance. Universities and other educational bodies can free up staff time by automating the data verification process for administrative records relating to, for instance, attendance, grades, immunization, and transcript requests. And employment agencies and job seekers can greatly speed up the complicated and lengthy processes involved in background checks and evaluations of job applicants.

Of these, the clearest benefit of blockchain can be seen in the processing of academic and other credentials. These must be universally recognized and verifiable. Taking the examples of student transcripts and certificates, the current system of checking these remains mostly a manual process, heavily reliant on paper documentation and case-by-case checking. By contrast, a blockchain solution could streamline the process by automatically verifying any record, without human intervention. Moreover, the digital records would be highly resistant to fraud. Cryptographically secured credentials are cheap to produce, but extremely expensive to reproduce for anyone other than the legitimate issuer; changing the data record itself, for instance by manipulating the date of issue, would be simply impossible. Similar uses for blockchain technologies can be envisaged for the management of library catalogues, peer reviewing, publishing, and intellectual property rights.

Despite these benefits, obstacles remain to the adoption of blockchain technology in the education sector. There are, in particular, areas of tension between the use of blockchain as an immutable registry for digital records, and data protection laws that grant individuals certain legal rights over the use of that personal data. Raw personal data may need to be stored off-chain to provide some mechanism for the deletion of private keys where these give access to an individual’s data. Whether regulators would find such an implementation compliant with data protection law is an important question that has yet to be answered.

By Paolo Tasca

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