Chapter 11. De-Governance

Securing Digital Rights for Communities (Game Theory and Governance of Scalable Blockchains for Use in Digital Network States)

Chapter 11. De-Governance

Where Consensus Meets Human Judgment

Audio Version:

https://3speak.tv/watch?v=networkstate.mp3/hdjldect

Introduction

Blockchains inevitably require a consensus mechanism some form of governance to decide how data is validated, how upgrades occur, and who ultimately exerts control. Yet many projects misunderstand governance, defaulting to simplistic models that invite centralisation. This chapter examines three major paradigms Proof-of-Work, Proof-of-Stake, and Delegated Proof-of-Stake while highlighting how true decentralisation for communities and social systems requires more refined “parameterised” voting systems. We then show why neutral, ownerless blockchains must avoid founders, VC's, and pre-mines, and how community-driven governance can act as a counterbalance against takeover attempts and regulatory threats.

11.1. Governance Is Unavoidable

Why We Need It
No matter how “hands-off” a blockchain claims to be, someone must decide on software patches, security fixes, and emergency measures. Even “code-is-law” projects have humans writing and changing that code. When attackers strike or improvements are needed, effective governance enables swift, community-backed decisions rather than letting one party (like a founder or corporation) take over.

De-Governance?
Some blockchains say they have “no governance” or “minimal governance,” but that usually means governance is hidden or de facto centralised. True decentralisation conducts its governance out in the open and spreads it among stakeholders, rather than pretending it can be removed entirely, or conducted on a separate, web2 layer such as Reddit, which is often the case in existing blockchain systems.

11.2. Proof-of-Work (PoW)

Otherwise Known as Infrastructure Voting

In PoW, computational power (energy plus hardware) is the mechanism to secure the chain. Nodes around the world expend resources to compete for block rewards, effectively “voting” with their electricity bills.

Security vs. limitations:

Advantages of Proof of Work: - Highly resistant to censorship If enough miners operate globally it is difficult to fake mining since you need real hardware and energy expenditures.
- Good for large amounts of permissionless liquidity and collateral. It allows everyone access to liquidity as long as they can afford the high fee. - Global Infrastructure and High Security: The sheer capital required to replicate or outvote the network discourages attacks.
- Censorship Resistance: Dispersed mining pools and hardware prevent easy shutdown or forced compliance (in theory).

Disadvantages of Proof of Work: - Centralising Tendencies
Over time, mining typically coalesces into a handful of pools (e.g., two or three major ones). Smaller participants must join these pools, eliminating the grass-roots, democratic element.
- Limited Governance Flexibility
PoW is primarily designed to confirm transactions and maintain an immutable ledger. It does not inherently solve on-chain governance it cannot easily upgrade network rules or incorporate dynamic features for social media or consensus-driven proposals.
- Scaling Constraints
Storing large volumes of data or performing fast transactions under PoW is cumbersome. Blocks with high throughput require more computational and energy overhead. Miners rarely want to expand block sizes indefinitely because it increases node storage demands and can hamper decentralisation. - Exclusive to Elites Only Exclusive to those elites who can afford the fee, by design. It must be high fee to preserve the security budget, since there is no other way to incentivise this with the dominant PoW chain at present (Bitcoin) having a capped supply.
- Centralised Mining Mining typically centralises into large pools or in it being expensive to operate a validator, since everyday people can’t afford specialized infrastructure. - Validators Not Accountable to Community The validators are not accountable to the community, since they vote themselves into consensus with their own hardware power. - 51% Attacks Cost Money to Defend During a money attack (51% hashing rate) takeover, there is no way to fork away from the attacker without it costing the community money since the defender must out-compete the attacker and gain back 51% of the hashing power on the new fork. You also cannot identify the attacker since you cannot see who they are due to the fact that there is no on-chain reputation system.

Replicating Bitcoin’s Scale
Bitcoin’s success in censorship resistance rests on a massive, expensive global mining network. Starting a new PoW chain at that scale is nearly impossible today, because you’d have to attract billions in hardware investment. Smaller PoW chains can be 51% attacked more easily by the main chain, unless they can convince PoW miners to switch to their own hashing algorithm. There is therefore, most likely only one winner in PoW mining.

Using the most expensive hardware, with the most resource intensive hashing algorithm to secure the network is the most logical solution since it makes the network more expensive to attack. If an alternative fork attempts to go to a cheaper hashing algorithm, then the dominant chain can 51% attack the new fork if it was seen as a threat.

11.2.1 Mitigations for Proof of Work Attacks

• Non Custodial Layer 2 Options Make sure Layer 2's are non custodial, since Layer 1 fees will be so high, there will be a tendency for exchanges and Layer 2 systems to custodialise funds. With enough custodial funds collaborating and unsuspecting people operating on them, it is possible for the custodial stakes to fork the original chain and dictate which version of Bitcoin will be accepted on their custodial systems.

11.2.2 Longer Term Accumulation Attacks on a PoW Chain

In a Proof of Work chain, a group of people who collaborate with a large amount of the total stake can collude with other major stakeholders, exchanges and businesses to create a new fork of the original chain and dictate which version (their version during an attack) that the on and off ramps will use, excluding the original (and legitimate fork). This can be more easily defended against on DPoS chains where human readable, named accounts that have built reputation via long term stake distribution and voting mechanisms can form a popular, community fork made up of reputed community members, regardless of their total stake size, around which the legitimate community can gather to continue on away from the attackers.

Conclusion (PoW): Proof of Work is a powerful security solution analogous to a “Panzer tank” but is less flexible and not easily repurposed for rapid governance, high-volume social use, or swift on-chain decision-making.

11.2.3 Attacking the Largest Bitcoin Block Producers

There are only a few large block producers on Bitcoin where most of the hashing power that secures the chain is centred. Coordinating governments could therefore physically cut the honest actors of those block producers off from the network, write legislation that prohibits them, or force them to operate under mining licenses, while setting up competing, government compliant block producers. Small “free” block producers could then try to “pop up”, but the larger governments would potentially overpower them.

11.2.4 Why We Call PoW "Infrastructure Voting"

This system should also be referred to as Infrastructure Voting, since the community recognises the longest chain when forks split the consensus. The longest chain is normally formed only by the chain which has been able to deploy the most infrastructure and thereby the most computing power to secure the consensus. Eventually infrastructure operation becomes expensive and resource intensive, making it economically viable only to those who have the money to invest in large amounts of expensive equipment. Such a system is only therefore able to account for liquidity and collateral, but not the social nuances of communities and social governance.

11.3. Proof-of-Stake (PoS)

11.3.1 Otherwise Known as Un-Parameterised Coin Voting

In basic PoS, whoever holds the most tokens wields the most influence. Stakeholders “lock” coins to validate transactions or produce blocks. Over time, large holders typically become even larger, leading to potential centralisation around wealthy interests.

11.3.2 The Fundamental Idea

Pure Proof of Stake (PoS) equates the proportion of tokens owned to governance power. Each stakeholder’s influence stems solely from the size of their balance. On paper, this creates a “skin-in-the-game” scenario: attacking the network undermines the value of one’s own stake.

However, early real-world implementations of PoS often introduced no parameters; no rules to prevent or discourage centralising forces. Large token holders or custodial services (exchanges, pooling services) quickly dominate, rendering the chain effectively controlled by a few “whales.”

This makes PoS systems excellent for financial services and liquidity systems where there is no social nuance involved in making decisions. Money and yield are generally non political and do not directly affect culture and social systems. Having the top validators in a finance system those who have the most to lose is one of the best ways to make sure your financial yield stays neutral.

(For further information on PoS and UPCV see Annex I – Glossary of Terms and Acronyms).

11.3.3 Why Un-Parameterised Coin Voting (PoS) Tends to centralise

In “Un-Parameterised Coin Voting (UPCV),” staking pools become inevitable:

• Pooling of User Funds
  The paradox with PoS is that you do not want too many validators as it can necessarily overburden the network and validators with small stakes are not really contributing to the security of the block production process with such small skin in the game. Therefore, often a minimum staking for governance threshold is set where if users stake above this amount they can earn when mining in the network (on Ethereum for example, this limit is set to 32ETH or $80K as of time of writing). However this results in people who want to run validators but don’t have enough to stake and so they pool their stakes into mining pools in order to share mining rewards.
• Most small participants lack enough tokens or technical know-how to run a validator node. They deposit stake into large third-party pools, which then yield better returns through economies of scale. Eventually and naturally, one to three major pools emerge, dominating block production, making the chain far more centralised than it appears.

• Staking to Vote Delays
  Without mandatory waiting periods, exchanges can temporarily “power up” user funds to vote in governance without users’ explicit consent. This has happened historically on certain chains, allowing custodian-led attacks or hostile takeovers (for further information on Powering up and Powering Down see Annex I – Glossary of Terms and Acronyms). Both DPos and PoS chains must have lock up delays for governance voting when staking to vote in order to defend against custodial stake attacks by entities such as centralised exchanges. The same issues are true for hostile attackers with large stakes. The idea is that the delay for voting after staking to vote (often 1 month) allows the community time to determine if the entity staking significant amounts is hostile and take action to protect the chain.

• Long Lock-ups PoS (and DPoS) chains that do not have long lock ups when staking to vote often are susceptible to takeover by those holding custodial stakes (such as large, centralised exchanges). This is because exchanges can use custodial, user funds that are deposited into their accounts for trading and stake them for short periods of time without the permission of the depositors in order to take control of the chain’s governance and carry out hostile takeover. There have been several instances of this occurring in the past and so this threat is very real. Exchanges can do this since they can use the short un-staking period to make depositors whole in a timely manner when they request to withdraw funds. With long lock up periods for governance, this type of attack is not possible. PoS chains that are not susceptible to this type of attack typically have 3 to 6 months lock ups for governance.

“Coin voting is amazing if parameterised correctly. UPCV (Un- Parameterised Coin Voting) is lazy: it centralises over time into massive staking pools that overshadow smaller individual stakeholders.”

11.3.4 Mitigations for PoS Attacks

In order to avoid centralising governance issues, users should be encouraged not to stake with large staking validators or exchanges and be informed on which forks that suit them ideologically in order to follow their best suited fork.

11.3.5 Danger of Centralisation

• Staking Pools Dominate: Users often stake through third-party pools (like lido Finance), which ends up resembling the pool dominance also seen in PoW mining.
• VC & Founder Advantage: Early insiders can hoard tokens cheaply, keeping governance under their control.
• High Fees, Slow Upgrades: Many proof-of-stake chains aim for “general-purpose” Layer-1 smart contracts processing not only transactions but also computation on the Layer 1. This often results in high fees to reward infrastructure operators and stakers, making day-to-day usage expensive and discouraging broad adoption.
• Fat Nodes: A common occurrence in blockchain where the operation of smart contract processing as well as transaction processing on all base layer nodes becomes the norm. This makes the standard on the chain the operation of large, heavy duty and therefore expensive, unprofitable nodes that have to be kept afloat by constantly minting new tokens (inflation) due to the chain charging artificially low fee transactions on the base layer. The point here is that most such chain validators are uncompetitive and as they scale, they have to charge proportionately higher fees which over time cannot compete against systems that keep the base layer simple and light weight and move the computation layer to the Layer 2.

11.3.6 The Necessity of Guardrails

To avoid these pitfalls, PoS (UPCV) needs constraints, time-locks, minimum validator counts, voting delays, and so forth. We’ll see in the next section how Delegated Proof of Stake introduces precisely these guardrails to preserve the core “skin-in-the-game” feature while preventing consolidation into a handful of players.

11.3.7 Why We Call This "Un-Parameterised Coin Voting (UPCV)"

The method should also be referred to as Un-Parameterised Coin Voting (UPCV) since consensus is set by stakeholders voting with their coins meaning the largest stake holder has the biggest influence on the governance of the chain, hence there are no parameters in place to prevent a “rich get richer” scenario or to incorporate any social nuance of the community into the governance system.

11.4. Delegated Proof-of-Stake (DPoS) or Parameterised Coin Voting (PCV)

Otherwise Known as Parameterised Coin Voting (PCV)
DPoS starts with the premise: Staked coins = skin in the game. Then it adds parameters to prevent the pitfalls of raw PoS.

Delegated Proof of Stake can be considered an evolution of coin voting. Rather than letting raw stake automatically produce blocks:

1. Named Validators
   Stakeholders elect a fixed number of block producers, commonly called “witnesses” or “validators.” They are elected by the community using stake weighted voting (not one account one vote) and the top 20 or 21 block producers are paid for securing the network and upholding consensus.
2. Parameter Constraints
   - Stake Lock-ups: Voters must stake tokens for a certain duration (e.g., 13 weeks). This prevents custodial wallets (such as exchange accounts holding users funds) from freely flipping user deposits into governance attacks. This process is known as Powering Up on some DPoS chains. Un-staking is known as powering down (for further information see Annex I – Glossary of Terms and Acronyms). - Voting Delay: The chain might enforce a waiting period, say, one month before newly staked tokens can actually cast votes. This gives the community time to spot potential aggressors powering up a suspiciously large stake.
   - Minimum Validator Requirement: The protocol guarantees multiple active validators, e.g., 20 block producers instead of an unlimited or undefined number. The chain can then sustain high throughput (thanks to a limited set of block producers) but remain decentralised enough to prevent collusion.
3. Community Accountability: Stakeholders can remove validators at any time if they fail or collude. This fosters an ongoing “immune system” against malicious actors.
4. Many Elected Equally weighted Top Validators: A top 20 elected validator set are more akin to having 20 equally weighted staking pools, even though each validator can have a different stake size in the ecosystem. They are elected in and so, for example, the largest account in the ecosystem at best has equal influence to the other 19 elected validators, even though their stakes are likely much smaller in comparison. This is in contrast to most chains using other consensus mechanisms that cumulate into 2-3 more centralised staking pools staking custodial stake on behalf of users and thus becoming over bearing forces on governance, while having provided no value to earn such a position.

11.4.1 Community Reputation and Named Accounts

A key feature of many DPoS systems is human-readable account names. This fosters a social aspect:

• Users Earn Reputations: Engaging in core development, running reliable infrastructure, or promoting the ecosystem can earn community trust, which translates into witness votes.
• Social/Community-Driven: Instead of the “richest account wins,” smaller players can rally around a witness candidate who has proven contributions but may not hold much stake personally. The entire system becomes more social and less purely financial as a result.

11.4.2 Advantages Over Basic PoS

• Battle-Tested Against Exchange Attacks
  By requiring lock-up periods or a “period of time before vote,” the chain can detect malicious power-ups (like large exchanges powering up user deposits to sway governance).
• Faster and Cheaper Transactions With a limited, predictable set of elected block producers, block times can be short, fees minimal or non-existent, which is critical for social networks or content-based Dapps.
• Continuous Distribution
  Many DPoS systems reward users for content creation or running infrastructure, enabling them to acquire stake organically. This counters a “rich-get-richer” scenario.
• Faster Block Production: A fixed number of well-equipped witnesses can confirm transactions quickly.
• Neutral Base Layer: Protocol-level parameters (lock-up times, voting delays) prevent centralised takeovers.
• Human Element: Probably the most important distinction is that reputable people with smaller stakes, or even no stake at all can rise to validator positions without having the largest stake, because the community can delegate tokens to them or vote for them. This adds social nuance to the raw coin-vote mode