Is Blockchain Social? a Polycentric Governance Perspective for Rule Setting in Crypto Environments

Abstract: Over the last decade blockchain has attracted a lot of attention due to its potential applications in the economy. The technology behind blockchain promotes fully decentralized systems where individuals can interact in an atomic, secure, and anonymous fashion to the point that market exchanges become “trustless”. This is in contradiction to the traditional view of transacting, characterized by the need of centralized authorities that regulate, oversee and help to establish trust among parties which reduces frictions related to value exchange. The dichotomy between the virtues of decentralized blockchains against the problems of centralized governance has monopolized the discussion around the economics of blockchain, driven by disintermediation, efficiency and privacy. Drawing from the work of Elinor Ostrom, we argue that this is a fundamentally false dichotomy. As Ostrom reminds us, governance is very much a social problem that goes beyond the rhetoric of decentralized market efficiency against centralized state authority. The work of Ostrom and her colleagues draws attention to the fundamentally social processes of rule setting in the governance of complex economic systems. All blockchains require governing consensus rules that define their operation, but the question about the rule setting process within blockchain ecosystems has largely been neglected in the literature. To illustrate our argument, we will analyse the rule setting process in two crypto based environments: public (Bitcoin) and community-based (Ethereum). This paper represents a first theoretical attempt to investigate how we can use Ostrom’s fundamental arguments about markets, states, and polycentric governance to understand the social processes of governance in blockchain.