Blockchain Business Series: Understanding Governance in Business Networks Powered by Blockchain

In my previous post, I discussed governance as one of my focus areas in 2018. In this post, I will attempt to discuss the challenges and anatomy of governance structures in blockchain networks. In my past post, I discussed governance models from self-governance networks to consortium-defined semi-autonomous governance structures. Again, find a befitting governance model to progress the agenda of blockchain-based business networks. But the conversation of governance presents an interesting paradox in the blockchain context. Let me explain at the outset that, in the genesis of a blockchain-presented value network that is self-governed, censorship-resistant, and whose governance structure was defined by control points and incentive economics to maintain a balance between network-based coordination and network-based decision on transaction finality, the consensus algorithms of these decentralized networks presented a distributed governance structure where the input (transaction initiation) was from various stakeholders (owners of assets, assigned or delegated ownership or simply delegated authority), the input in form of a transaction that went through a series of network-based decentralized processing, and the decision was the output in the form of a transaction finality. The governance structure was fundamentally being based on devised incentive economic driven by consensus in hopes of governing the network. This leads to defining governance—a body (centralized or decentralized) whose sole responsibility is to make binding decisions in a given system by establishing set of law or rules.

While the genesis of blockchain, which was largely permissionless (e.g., crypo-asset based networks such as Bitcoin, Litecoin, etc.), relied upon technology-based systemic governance comprising incentives and mechanisms of coordination, this systemic governance has its own set of challenges in the enterprise business networks attempting to exploit the tenets of blockchain technology. In the enterprise world that is largely regulated and relies upon (mostly) permissioned blockchain models, the checks-and-balances system is complicated by transactions between competing entities, often with regulated data and a fiduciary responsibility, which can neither account for the tangible or systemically generated incentives (crypto-assets) nor have network-wide mechanisms of coordination due to privacy and confidentiality issues.

On the enterprise side of the divide, the focus was on understanding the technology and reimagining the ecosystems, business network, regulatory compliance, confidentiality and privacy, and business models that impact industry networks. The governance structure is hence an interesting challenge and emerging discipline in the enterprise blockchain world, where the debate around the spectrum that ranges between full decentralization and quasi-decentralization to fully centralized blockchain networks hinges upon the governance structure. In other words, the governance structure and landscape will determine the interaction models, growth (centralized or decentralized), technology design, and overall business operations of the enterprise blockchain network.

In my post on Blockchain Business Models, I briefly discussed a platform that facilitates co-creation and new synergies that will need to be managed, operated with defined levels of SLA, and a robust governance structure that will not only attract new participants but sustain the confidence and business benefit of its founders and existing participants. So there is a close-knit dependency on business models and governance structure that govern various facets of blockchain network operations. A well-thought-out governance structure for blockchain networks provides an important avenue for business continuity, funding and sourcing models, and overall growth driven by the economic and financial structure of the business network powered by the tenets of blockchain technology.

Governance Structure and Landscape

As discussed, the systemic governance that relies on purely incentive and network coordination is just inadequate to address the more structured and regulated industries and their use cases. So, based on my experience and work with clients, I have taken the liberty of defining a governance structure and landscape that not only leverage the known and proven existing practices but stitch together a model that is modular and facilitates progression and yet provides a layer of separation of competency concerns between various practitioners. As I discuss this simplified governance structure, I draw inspiration from core tenets of blockchain design and propose a governance model that is inclusive of the core tenets that include principles of incentives, penalties, flexibility, delegation, and network mechanisms of coordination. After all, we are leveraging blockchain technology to device trust networks and attempting to flatten the distinction between the miner and user, and yet enforcing rules of engagement that not only incentivize technology upgrades and security updates but penalize non-compliant systems/nodes, including similar business network rules of engagement, thereby creating an incentive mechanism to ensure continued participation and resulting business benefit and growth from blockchain-powered business networks. This business governance model not only governs participation in business networks, but also an equitable cost structure that is fairly spread based on participant activity. In this section, I am drawing from my past work around Design Principles of Blockchain Network and Blockchain Adoption in Enterprise.

(Information) Technology Governance

Information technology (IT) governance is a discipline that is focused on IT infrastructures, performance, cost structures, and business risk. In a blockchain network, as opposed to a centralized entity, this can be a challenging task, as the governance framework should focus on specifying an accountability framework to encourage desirable behavior and functioning of the IT infrastructure that defined the lowest layer of the blockchain network. Per some of the design principles discussed above, any technical design should accommodate the flexibility of various participants when it comes to choices around technology and infrastructure. Blockchain networks thrive and aim for certain levels of decentralization/quasi-decentralization; the IT governance should thus accommodate for a model that is inclusive of distributed flexibility and distributed control. IT governance includes, but is not limited to:

a.    Devising a distributed IT management structure

b.    Model for distributed maintenance – software/HW updates, upgrades, path management

c.    Framework utilizing industry standards—COBIT, ITIL, ISO, CMMI, FAIR, etc. – driven by the consortia, JV, or any such business model

d.    Resource optimization – includes technology procurement, supplier–vendor relations, SLA management, skills, and talent management

e.    Technology adoption and assessment – leads to keeping up with technology evolution and economic deployment models, including deployment and operational risks

f.     Network deployment strategy – Not as simple as an application upgrade; includes a model that can encourage and enforce continual technology and security updates and upgrades

g.    Network support services – these are business networks, so the governance model should include network support services, IT SLA enforcement, and membership services

h.    Risk optimization – operational support services (OSSs) and business support services (BSSs), IT infrastructure continuity services/planning, technology alignment to legal and regulatory requirements, etc.

The IT governance model should not only incentivize technology upgrades and security updates but penalize non-compliant systems/nodes, thereby creating an incentive mechanism to ensure continued participation.

(Blockchain) Network Governance

These business governance models not only govern participation in business networks but also an equitable cost structure that is fairly spread based on participant activity. This also involves a structure that allows for autonomous and likeminded business entities to engage in business transactions, contracts, and value creation. The governance structure should include rules of engagement and social contracts that promote fair behavior and reputation systems to enforce it. Blockchain network governance includes, but is not limited to:

a.    Membership onboarding/off-boarding

b.    Equitable and fair cost structure – chargeback models

c.    Data ownership structure – for business entities joining and leaving the network

d.    Regulatory oversight provisioning – including a model to act as a delegate to generate regulatory compliance reporting

e.    Permissioning structure – key management that can include a model

1.    that is vote-driven but centrally managed;

2.    has a federated structure – members inviting other business entities; and

3.    has a delegated structure – includes services providers that can delegate to other members

f.     Business and SLA management – the blockchain business network management

g.    Network support services – these are business networks, so the governance model should include network support services, business network SLA enforcement, and membership services

h.    Risk optimization – OSSs and BSSs, business continuity services/planning, network alignment to legal and regulatory requirements, etc.

Business Network Governance

Business networks powered by blockchain need a governance model that is industry- and use case-specific and need to factor various facets and evolution of the industry itself. It is an important form of multi-organizational governance. The governance structure includes a wider understanding of network functions, and these collective functions by various participants leads to network outcomes. In my previous post, I discussed various network co-creation models as one of the desired network outcomes. As blockchain networks evolve and grow, and as new participants are added or removed, the dynamics of the network change, and there are several bilateral and multilateral relationships that emerge. Co-creation is a concept that brings different parties together (for instance, a company and a group of customers) to jointly produce a mutually valued outcome. Co-creation brings the unique blend of ideas from direct customers or viewers (who are not the direct users of the product), which in turn gives a plethora of new ideas to the organization. Business network governance includes, but is not limited to:

a.    Common/shared services management, such as KYC, audits, reporting, etc.

b.    Network-related charter and communication

c.    Quality assurance, performance, and network security

d.    Product and business network evolution

e.    Enforcement of legal and regulatory frameworks

f.     Adherence to industry-specific requirements

g.    Framework, charter, and stewards of technology and network governance frameworks

h.    Formulate appropriate business models, legal charters, and rules of engagement for network business operations

Conclusion

The governance structure is thus an interesting challenge and emerging discipline in the enterprise blockchain world, where the debate around the spectrum that ranges between full decentralization and quasi-decentralization to fully centralized blockchain networks hinges upon the governance structure. In other words, the governance structure and landscape will determine the interaction models, growth (centralized or decentralized), technology design, and overall business operation of enterprise blockchain networks. A platform that facilitates co-creation and new synergies will need to be managed, operated with defined levels of SLA, and a robust governance structure that will not only attract new participants but sustain the confidence and business benefit of its founders and existing participants. So there is a close-knit dependency on business models and governance structures that govern various facets of blockchain network operations. A well-crafted governance model will restore balance and smooth interaction between various entities that compete with some network participants and need to cooperate and co-create with some other network participants.