Chapter 10. Governance, Necessary Evil of Regulated Industries

For those of you who have experienced projects without clear decision-making processes, you'll have felt the pain of the churns as decisions are constantly questioned and modified due to the influence of various stakeholders. Politics gets in the way and the objectives of the project end up getting challenged, budgets get cut, and the long-term vision is missing or confusing.

While this is something you can expect from a traditional IT project, a blockchain project has the characteristic of having a good deal more stakeholders. A typical business network will be composed of organizations that are sometimes competing and sometimes cooperating. In this context, it is not hard to see that there are high risks of finding conflicting perspectives, points of view, and interests.

Whether you are a developer or a CIO, understanding what you can expect from such projects and how a governance model can help alleviate some of the issues may...

Decentralization and governance

Some of you may be wondering why we are covering governance in a blockchain book. After all, aren't blockchain networks supposed to be decentralized, and thus guarded against the control of a single entity? While this is true from a technology perspective, the reality is that we are human, and for an enterprise-grade blockchain network to succeed, there are a lot of decisions that need to be made throughout the life cycle of the network.

Even bitcoin, the decentralized, anonymous, permissionless network, must deal with important and hard decisions. A case in point is the controversy around bitcoin block size. In the early days of bitcoin, a limit of 1 MB was set on the block size. As the network scaled up, this limit became problematic. Numerous proposals were issued, but the need for a consensus across the entirety of bitcoin nodes made the change difficult to agree on. This debate started in 2015, but the community had to wait until February 2018 for a partial...

Exploring the business models

A business model focusses on creating a structure that describes the flow of how an organization creates and captures value in a market.

In the context of a business network, it is interesting to look at the value chain and understand where that value originates. What makes a blockchain network so appealing from a financial perspective? Well, as we have seen in Chapter 1, Blockchain—Enterprise and Industry Perspective, blockchain technologies offer an opportunity to solve the issues of time and trust, thereby reducing inefficiencies and operational costs.

Blockchain benefits

What types of benefit can come from addressing the issues of time and trust? Let's look at a few examples of where and how these benefits can be implemented in the following sections.

Supply chain management

The supply chain is made up of many actors, from the producer to the logistic service providers, port authority, manufacturer, and ultimately, the consumer. The industry must deal with a...

Role of governance in a business network

Having reviewed the various business models, we can see that the control that each participant has will vary based on that model. By properly understanding the model and the interests of each party, we can create a decision process that makes sense to everyone.

So, while we understand that governance is about the process to reach a decision, should every single business, operational, and technical decision be managed and tracked by the governance process? Some would argue that only important topics should be covered by the governance process, but then what are the important topics? This is the role of a governance model: defining each decision domain and making sure everyone understands the level of ceremony (that is, the formalisms and official processes) to each category of decision. A bug fix to a smart contract may not require much attention, but an upgrade to the blockchain technology may require a heightened degree of focus. Agreeing upfront...

Business domains and processes

In this section, we will look at the scope of processes that a governance model should aim to address. Each of these areas of decisions should be considered by any network to avoid bad surprises. Not every decision needs to be bound by a formal process, but considering these elements will avoid bad surprises down the road.

Membership life cycle

As we know, a blockchain network is meant to be fully decentralized. Thus, the expansion of participants is a normal thing that we would expect to see in a healthy network.

However, since this is an enterprise-grade network that is subject to rules and regulations, there are things that need to be established upfront during network formation and the on-boarding of new participants:

• Who owns the privilege to invite organizations to the network? This should include considerations as to who can submit a proposal to create a new organization, but should also include considerations for channel-level invitation. Are there privacy...

Governance structure

So far, we have covered the various business models, looked at the impact of centralization versus decentralization, and explored the various kinds of decisions, along with the roles and responsibilities required to support those decisions.

We will now see how organizations have been structuring themselves to provide a coherent approach that deals with the different levels of focus that decision makers will have, depending on their role.

While the presentation of centralized and decentralized governance will appear very distinct from each other, in real applications there are shades of grey, where some functions may be centralized and others decentralized. Again, much of this will have to do with the business model and imperatives driving the network.

Centralized governance

While a network may adopt centralized or decentralized governance, each organization will also have their own mechanism to control who makes decisions. Typically, organizations will rely internally on...

Governance and the IT solution

So far in this chapter, we have been focusing primarily on the human side of governance. We have looked at the impact of the business model on governance, the business processes to consider, and the various potential structures, but what about the technology? What is the impact of the governance model on technology, and how does technology impact governance?

While blockchain projects might be primarily focused around solving business and enterprise issues, the foundation still relies on technology. In this section, we will look at the major phases of the life cycle of the network, from inception all the way to operation, and see how some of those activities can be automated and supported by technology.

We'll focus on the topic of on-boarding. As you now know, the system ledger is used to store the organizations, the policies, and the channels that make up the network. Storing configurations on the ledger means that any modifications need to be signed and approved...

Summary

In a sense, governance is the human side of a business network. It is about how people come together and structure the decision-making process to ensure that all relevant parties are either consulted or responsible for the decision. Governance needs to cover a wide spectrum of topics.

Technologists might be less enthused about the topic than others, but having a basic view of what it entails is useful to understand our working environment.

To sum things up, in this chapter, we have explored how business models can have a profound impact on governance. Using these models, we then looked at how we can derive structures that meet business needs by addressing the key business processes. We have seen how organizations need to consider the approach of a centralized versus decentralized governance model. Finally, we learned that governance is required to support IT solutions, but in turn, IT solutions need to support the governance process.

A final point to keep in mind is that business models...