Presented at 2nd International Workshop
P2P FINANCIAL SYSTEMS 2016, University College London, Research Centre for Blockchain Technologies.
The Fiduciaries of Public Blockchains
Blockchain euphoria is in full bloom, with luminaries of all stripes hailing the technology as a solution to virtually every human problem in existence, from financial inclusion, to identity management, voting, health records, and of course, currency and essential finance functions.
If blockchain technology achieves even a small amount of its projected potential, then it is possible that it may soon undergird many critical infrastructures within our societies, from property records, to payment and voting systems. Thus, the governance processes for creating, maintaining, and altering the technology deserve careful scrutiny, as they will affect the resilience of the technology as well as the infrastructure that comes to rely on it.
This paper focuses on the governance of public blockchains, which, in this strange new world, occurs through software development and transaction verification (e.g., through the “miners” in Bitcoin). It explores what obligations the software coders and transaction verifiers of public blockchains should owe to those that rely on them to keep the systems functioning properly (and to determine what it means for the system to function “properly”). The urgency of this matter has become screamingly evident with the recent creation of and attack on The DAO, with the Ethereum core developers and transaction verifiers engaged in a fierce debate over whether and how to remedy the attack.
The paper first describes the activities that the software coders and transaction verifiers perform, and explains how those activities function as the de facto governance of public blockchains. Although both the coding process and the transaction verification process are said to be decentralized (one of the most celebrated virtues of public blockchains), in practice, a relatively small group of both coders and transaction verifiers determine the path the systems will take – i.e., which bugs will be fixed, which new features will be adopted, etc. Among the coders, the decision-makers are known as the “core developers,” and in the Bitcoin world, at least, the transaction verifiers with power are those mining pools with significant percentages of the computing power. This means that an identifiable group of parties is making decisions that impact the lives and fortunes of those who rely on the systems they manage (as the saga of The DAO demonstrates). And these parties already acknowledge the power that they hold in many ways, such as through their disclosures of potential conflicts of interest, or by taking pledges (among transaction verifiers) not to exceed a certain threshold of computing power.
The paper then evaluates the implications of this concentration of power in the core developers and dominant transaction verifiers. In traditional entity structures, such as the corporation, those with the power to make decisions (the directors, officers, and majority shareholders) are viewed as owing certain obligations to the corporation/shareholders – i.e., those impacted by their decisions. These “fiduciary duties” include a duty of care (i.e., to act with competence), a duty of loyalty (i.e., to act in the interests of those they serve rather than in their own interest), and, according to some schools of thought, a duty of good faith. In the nominally decentralized structure of public blockchains, it is easy to be distracted by the (lack of) form of the governance process, and to miss that at least some of the coders and transaction verifiers are substantively governing the blockchain, very much akin to a traditional corporate structure.
The paper argues that it is helpful to view certain coders and transaction verifiers as fiduciaries of certain participants in the public blockchains they manage. It outlines the benefits of considering them to be fiduciaries, such as setting a clear standard for performance, furthering accountability for highly significant actions in relation to the public, and ensuring that these parties take very seriously the actions they are performing in operating potentially critical infrastructures.
The paper then explores some of the many questions that must be answered if we were to consider these parties to be fiduciaries. To whom are they fiduciaries? Solely to the owners of any tokens that trade on the applicable blockchain? What about parties who build structures on top of the blockchain, such as those running businesses atop the Bitcoin and Ethereum blockchains? Further, precisely which coders and miners should be considered fiduciaries? There is a significant difference between committing a few lines of code and holding the passwords to make actual changes to the core software. Similarly, there is a difference between transaction verifiers who hold a material portion of the computing power in a blockchain network, and those who hold a de minimis amount. Perhaps only the core developers of these public blockchains should appropriately be considered fiduciaries, given the greater power they wield, and one might set a minimum percentage of computing power threshold that would trigger a transaction verifier’s fiduciary obligations. The difficulty of line-drawing here should not deter us from seriously considering the categorization.
The paper then considers some of costs and counterarguments to such a categorization. Assuming that we could resolve the questions about which coders and which transaction verifiers were fiduciaries, and to whom they owe their duties, the strongest argument against treating these parties as fiduciaries is that holding them to this standard would deter people from engaging in the activity, and thereby inhibit innovation and economic development. And, this argument is likely to prove true – the entire tort system is premised on the idea that being responsible for harms reduces harmful behaviors. With the default presumption that software developers are not responsible for harms caused by their code, the proposal to treat certain developers as fiduciaries would likely be met with strong criticism from the software and larger technology communities.
Although this proposal may be controversial, it is crucial to consider how to address core issues of duty and accountability in decentralized structures like public blockchains, particularly when these structures begin to underlie critical aspects of our societies. This paper seeks to further that discussion by looking through the nominal lack of governance structure to the actions that actual, identifiable people are taking in creating and operating public blockchains, and querying whether we should treat these actions as we treat similar actions outside the blockchain setting.
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