The key promise of blockchain is simple: to create a decentralised and democratic system that would empower the masses. Yet, as the technology matures, it has become increasingly possible that it could lead to the creation of a new elite. If left uncontrolled, the rise of plutocracy in the blockchain industry can become quite a concern as it threatens to undermine the original ideals of the technology. Blockchain-based systems promise to create trust, transparency, and security. However, the same technology could also be used to create a new form of “cryptocracy” - one that is even more insidious and difficult to detect.

So this begs the question: is blockchain becoming increasingly susceptible to cryptocracy, where anons with the most assets and computing power have the most say? While some facts back up such assumption, I would argue that it’s too early to say. In principle, it is completely possible to design rules and mechanisms that would prevent such outcome. But we would need to diligently experiment with different ideas that could eventually be coded into the system.

First up, what is cryptocracy? Here I use the term as part of a theory based on the notion that secretive and powerful groups are operating behind the scenes. Essentially, a so-called shadow government is manipulating events and controlling officially elected governments, industries, and financial systems. While the concept of cryptocracy has been around for centuries, the emergence of blockchain technology could give rise to new concerns about the potential for abuse.

It’s not that hard to think of arguments for how blockchain could generate a new form of cryptocracy. A couple of possible arguments:

1. Control by a small group of individuals or organisations. Despite systems being largely decentralised, they still require validation by a network of nodes, or computers, that are controlled by a limited number of entities. This creates the potential for these entities to collude and manipulate the system to their advantage, creating a new form of cryptocracy.

2. Concentration of wealth and power in the hands of a few - the so-called crypto whales. Through on-chain governance and consensus mechanism, blockchain strives to create a more equitable distribution of wealth and power. Yet, they can also be used to create new forms of economic inequality. Those who control the nodes in a blockchain network could amass significant wealth and influence, creating a new form of financial oligarchy.

The industry is entering a new phase where more focus should be channelled into ensuring that blockchain platforms do not end up creating a new class of elite in the same way that traditional-based systems have done. Building consensus mechanisms is doable, but coding public good incentives into the system is challenging.

Let’s first run through the arguments mentioned above. Although both are similar, they pertain to distinct issues regarding on-chain governance. Argument #1 is simple to see from blockchain-based voting systems. Due to their permissionless design, blockchains cannot effectively prevent Sybil attacks. A single user is able to create multiple identities to manipulate the network. As a result, the traditional “one person, one vote” system of representative democracies is replaced by a “one token, one vote” rule.

As expected, this system tends to become cryptocratic since those with more tokens (likely anonymous) have a disproportionate amount of voting power. In turn, those with fewer tokens may become apathetic since their vote is unlikely to affect the outcome. This creates an environment in which block producers (BPs) or miners can bribe voters with a share of their rewards in exchange for their votes. To avoid a race to the bottom in which BP or mining profitability is reduced to the cost of running the necessary hardware, BPs and miners may collude and agree on a rate at which they will share rewards with voters.

Some examples:

1. Coinvote. Votes of participants are weighted by the amount of funds they hold, but such polling models are fundamentally flawed. They do not account for how funds are managed and distributed, such as the legitimacy of participants, vote buying, and other potential manipulation. In such case, it is difficult to properly gauge the community’s opinion. What’s more, Coinvote’s polling results are often cited in crypto publications as if they represent the broader community.

2. Polkadot Governance. Like many others, the multi-chain platform utilises a governance system that allows token holders to vote on proposed network upgrades and parameter changes. Voting power is determined by the number of DOT tokens held. This has sparked debates around bribing and plutocracy, as large token holders can have a significant impact on decision outcomes. This potentially sidelines the voices of smaller token holders, centralising power within a few wealthy entities.

3. Tezos Voting System. The open-source chain implements a delegated proof-of-stake (DPoS) consensus mechanism where token holders can delegate their voting power to bakers (i.e. block validators). Once again, the voting power is directly tied to the number of tokens held. Those with more tokens have a greater ability to influence the network's governance decisions, creating a system where wealth potentially determines the extent of voting influence.

This is why blockchain governance design matters as it can significantly impact decisions and outcomes. However, we need to understand that governance is not a design problem. It is, first and foremost, a social issue. As different actors participate in the process, they learn more ways and tips on how to maximise their incentives - sometimes at the expense of others.

Argument #2 looks at how on-chain voting and governance can accumulate wealth in the hands of a select few. This is easy to observe in proof-of-stake (PoS) networks. Much has been said about how the design of PoS algorithms is plutocratic. In PoS systems, mining shares are granted based on how much capital a miner has committed to the system. This means that those with the most money have the most influence over the network.

An often cited example is the EOS, a blockchain that has been criticised as heavily-centralised and controlled by insiders. In this case, the top 10 holders of the network's native token control over 50% of the voting power. This effectively means that a small group of individuals have a disproportionate amount of power over the network.

Some criticisms of EOS:

• Concentration of Token Ownership. EOS has faced scrutiny due to the unequal distribution of tokens. A relatively small number of token holders, or crypto whales, possess a substantial portion of the token supply. The blockchain’s creators and early backers get prioritised, leading to concerns about the creation of an oligarchy.

• Barriers to Entry. Becoming a BP on the EOS network requires a substantial investment in infrastructure and token holdings. This high entry barrier can discourage smaller players or newcomers from participating in the governance process, limiting the diversity of voices and reinforcing the influence of established, wealthier entities.

• Token-based Voting. The governance model of EOS dictates that token holders can vote for the BPs. However, the voting power is directly proportional to the number of tokens held. Once more, this means that those with larger token holdings have a more significant say in selecting BPs and shaping the network's governance.

With more wealth comes more power, which comes more wealth and so on. It’s a vicious self-perpetuating cycle.

As blockchain technology evolves and more players enter the space, the stakes are becoming higher. This is why it’s important to talk about governance. If the above issues are not addressed, plutocracy and collusion could create uncertainty for developers and users. On-chain applications and transactions may be subject to censorship by a largely unknown cryptocratic oligarchy.

But assuming blockchain would simply lead to another form of plutocracy discounts existing governance processes and how they are improving over time. Despite some inherent challenges, blockchain can still provide stronger mechanisms to combat plutocracy than traditional-based systems. Vitalik Buterin introduced the concept of “credible neutrality” as a guiding principle for governance on Ethereum.

"Essentially, a mechanism is credibly neutral if just by looking at the mechanism’s design, it is easy to see that the mechanism does not discriminate for or against any specific people. The mechanism treats everyone fairly, to the extent that it’s possible to treat people fairly in a world where everyone’s capabilities and needs are so different."

Essentially, neutrality is when all stakeholders on the network see that the mechanism is fair. Credibility is when all stakeholders see that everyone can also see the fairness.

While current blockchain algorithms may seem to favour the wealthy, they can be designed with checks and balances to limit the influence of a few dominant participants. We can implement maximum token holdings to prevent excessive concentration. Reputation systems can be incorporated to promote a more equitable distribution of power.

As for governance models, voting power can be weighted based on factors beyond just token holdings. Reputation, contribution, and a quadratic voting system can give more weight to the opinions of smaller stakeholders.

Interoperability is another vehicle to develop further. Figuring out how multiple distinct blockchains can communicate with each other is touted as one of the next great industry challenges. It would give rise to cross-chain governance, where decisions are made collectively across multiple chains. This helps dilute the influence of any single network, promoting healthy competition while reducing the risk of monopolies.

This post is not aimed to provide step-by-step blockchain governance solutions. Rather, it is to highlight both the possibility of a cryptocratic oligarchy and the possibility that this issue will be addressed with time.

Ultimately, the potential for blockchain to combat or perpetuate cryptocracy depends on how the technology is used. Like any tool, blockchain can be used for good or for ill. If used correctly, it has the potential to create a more transparent and equitable society. But if it falls into the wrong hands, it could create a new form of cryptocracy that is even more difficult to detect and combat.

As we move forward with the adoption of blockchain-based systems, it is important to remain vigilant and aware of the potential for abuse on a political and social basis. The fact that these issues are on the minds of key builders in the space is encouraging. Perhaps with time and effort, blockchain could prove its power in eradicating the detrimental influence of cryptocracy in our society.

The key promise of blockchain is simple: to create a decentralised and democratic system that would empower the masses. Yet, as the technology matures, it has become increasingly possible that it could lead to the creation of a new elite. If left uncontrolled, the rise of plutocracy in the blockchain industry can become quite a concern as it threatens to undermine the original ideals of the technology. Blockchain-based systems promise to create trust, transparency, and security. However, the same technology could also be used to create a new form of “cryptocracy” - one that is even more insidious and difficult to detect.

So this begs the question: is blockchain becoming increasingly susceptible to cryptocracy, where anons with the most assets and computing power have the most say? While some facts back up such assumption, I would argue that it’s too early to say. In principle, it is completely possible to design rules and mechanisms that would prevent such outcome. But we would need to diligently experiment with different ideas that could eventually be coded into the system.

First up, what is cryptocracy? Here I use the term as part of a theory based on the notion that secretive and powerful groups are operating behind the scenes. Essentially, a so-called shadow government is manipulating events and controlling officially elected governments, industries, and financial systems. While the concept of cryptocracy has been around for centuries, the emergence of blockchain technology could give rise to new concerns about the potential for abuse.

It’s not that hard to think of arguments for how blockchain could generate a new form of cryptocracy. A couple of possible arguments:

1. Control by a small group of individuals or organisations. Despite systems being largely decentralised, they still require validation by a network of nodes, or computers, that are controlled by a limited number of entities. This creates the potential for these entities to collude and manipulate the system to their advantage, creating a new form of cryptocracy.

2. Concentration of wealth and power in the hands of a few - the so-called crypto whales. Through on-chain governance and consensus mechanism, blockchain strives to create a more equitable distribution of wealth and power. Yet, they can also be used to create new forms of economic inequality. Those who control the nodes in a blockchain network could amass significant wealth and influence, creating a new form of financial oligarchy.

The industry is entering a new phase where more focus should be channelled into ensuring that blockchain platforms do not end up creating a new class of elite in the same way that traditional-based systems have done. Building consensus mechanisms is doable, but coding public good incentives into the system is challenging.

Let’s first run through the arguments mentioned above. Although both are similar, they pertain to distinct issues regarding on-chain governance. Argument #1 is simple to see from blockchain-based voting systems. Due to their permissionless design, blockchains cannot effectively prevent Sybil attacks. A single user is able to create multiple identities to manipulate the network. As a result, the traditional “one person, one vote” system of representative democracies is replaced by a “one token, one vote” rule.

As expected, this system tends to become cryptocratic since those with more tokens (likely anonymous) have a disproportionate amount of voting power. In turn, those with fewer tokens may become apathetic since their vote is unlikely to affect the outcome. This creates an environment in which block producers (BPs) or miners can bribe voters with a share of their rewards in exchange for their votes. To avoid a race to the bottom in which BP or mining profitability is reduced to the cost of running the necessary hardware, BPs and miners may collude and agree on a rate at which they will share rewards with voters.

Some examples:

1. Coinvote. Votes of participants are weighted by the amount of funds they hold, but such polling models are fundamentally flawed. They do not account for how funds are managed and distributed, such as the legitimacy of participants, vote buying, and other potential manipulation. In such case, it is difficult to properly gauge the community’s opinion. What’s more, Coinvote’s polling results are often cited in crypto publications as if they represent the broader community.

2. Polkadot Governance. Like many others, the multi-chain platform utilises a governance system that allows token holders to vote on proposed network upgrades and parameter changes. Voting power is determined by the number of DOT tokens held. This has sparked debates around bribing and plutocracy, as large token holders can have a significant impact on decision outcomes. This potentially sidelines the voices of smaller token holders, centralising power within a few wealthy entities.

3. Tezos Voting System. The open-source chain implements a delegated proof-of-stake (DPoS) consensus mechanism where token holders can delegate their voting power to bakers (i.e. block validators). Once again, the voting power is directly tied to the number of tokens held. Those with more tokens have a greater ability to influence the network's governance decisions, creating a system where wealth potentially determines the extent of voting influence.

This is why blockchain governance design matters as it can significantly impact decisions and outcomes. However, we need to understand that governance is not a design problem. It is, first and foremost, a social issue. As different actors participate in the process, they learn more ways and tips on how to maximise their incentives - sometimes at the expense of others.

Argument #2 looks at how on-chain voting and governance can accumulate wealth in the hands of a select few. This is easy to observe in proof-of-stake (PoS) networks. Much has been said about how the design of PoS algorithms is plutocratic. In PoS systems, mining shares are granted based on how much capital a miner has committed to the system. This means that those with the most money have the most influence over the network.

An often cited example is the EOS, a blockchain that has been criticised as heavily-centralised and controlled by insiders. In this case, the top 10 holders of the network's native token control over 50% of the voting power. This effectively means that a small group of individuals have a disproportionate amount of power over the network.

Some criticisms of EOS:

• Concentration of Token Ownership. EOS has faced scrutiny due to the unequal distribution of tokens. A relatively small number of token holders, or crypto whales, possess a substantial portion of the token supply. The blockchain’s creators and early backers get prioritised, leading to concerns about the creation of an oligarchy.

• Barriers to Entry. Becoming a BP on the EOS network requires a substantial investment in infrastructure and token holdings. This high entry barrier can discourage smaller players or newcomers from participating in the governance process, limiting the diversity of voices and reinforcing the influence of established, wealthier entities.

• Token-based Voting. The governance model of EOS dictates that token holders can vote for the BPs. However, the voting power is directly proportional to the number of tokens held. Once more, this means that those with larger token holdings have a more significant say in selecting BPs and shaping the network's governance.

With more wealth comes more power, which comes more wealth and so on. It’s a vicious self-perpetuating cycle.

As blockchain technology evolves and more players enter the space, the stakes are becoming higher. This is why it’s important to talk about governance. If the above issues are not addressed, plutocracy and collusion could create uncertainty for developers and users. On-chain applications and transactions may be subject to censorship by a largely unknown cryptocratic oligarchy.

But assuming blockchain would simply lead to another form of plutocracy discounts existing governance processes and how they are improving over time. Despite some inherent challenges, blockchain can still provide stronger mechanisms to combat plutocracy than traditional-based systems. Vitalik Buterin introduced the concept of “credible neutrality” as a guiding principle for governance on Ethereum.

"Essentially, a mechanism is credibly neutral if just by looking at the mechanism’s design, it is easy to see that the mechanism does not discriminate for or against any specific people. The mechanism treats everyone fairly, to the extent that it’s possible to treat people fairly in a world where everyone’s capabilities and needs are so different."

Essentially, neutrality is when all stakeholders on the network see that the mechanism is fair. Credibility is when all stakeholders see that everyone can also see the fairness.

While current blockchain algorithms may seem to favour the wealthy, they can be designed with checks and balances to limit the influence of a few dominant participants. We can implement maximum token holdings to prevent excessive concentration. Reputation systems can be incorporated to promote a more equitable distribution of power.

As for governance models, voting power can be weighted based on factors beyond just token holdings. Reputation, contribution, and a quadratic voting system can give more weight to the opinions of smaller stakeholders.

Interoperability is another vehicle to develop further. Figuring out how multiple distinct blockchains can communicate with each other is touted as one of the next great industry challenges. It would give rise to cross-chain governance, where decisions are made collectively across multiple chains. This helps dilute the influence of any single network, promoting healthy competition while reducing the risk of monopolies.

This post is not aimed to provide step-by-step blockchain governance solutions. Rather, it is to highlight both the possibility of a cryptocratic oligarchy and the possibility that this issue will be addressed with time.

Ultimately, the potential for blockchain to combat or perpetuate cryptocracy depends on how the technology is used. Like any tool, blockchain can be used for good or for ill. If used correctly, it has the potential to create a more transparent and equitable society. But if it falls into the wrong hands, it could create a new form of cryptocracy that is even more difficult to detect and combat.

As we move forward with the adoption of blockchain-based systems, it is important to remain vigilant and aware of the potential for abuse on a political and social basis. The fact that these issues are on the minds of key builders in the space is encouraging. Perhaps with time and effort, blockchain could prove its power in eradicating the detrimental influence of cryptocracy in our society.