Business consortia: a lesser known but important layer in blockchain governance

Two weeks ago, I was lucky to participate in a two-day roundtable in Wharton, San Francisco led by a group of academics including Professor Kevin Werbach. Also attending was a varied group of 25 network operators, investors, software engineers, lawyers, academics and economists.

What is blockchain governance?

We were invited to discuss blockchain governance; what it is, key challenges being faced, and possible solutions — drawing on examples of “good” or “successful” governance. If you’re not already familiar with blockchain technology, here’s a good overview (or here).

Over the last 10 years, several varieties of blockchain have been developed, each with distinct processes and power structures by which to make decisions and steer themselves through change. How, and if, their governance works greatly impacts and interests their stakeholders and wider communities: core developers, investors, users and miners, business partners, and even governments.

A key discussion addressed was whether blockchain governance should be deemed “successful” based on its outcomes (e.g.: longevity, size and engagement of user base, value, the ability to change and grow, the preservation of security and stability) or on the process of involving key stakeholders along the way, ideally in an open way (this likely includes discussions on de/centralisation).

Rather than summarising our early frameworks and conclusions, tenuously applicable across all blockchains, instead I’ll focus on a key difference between the governance layers (and therefore power structures) explicit in Corda Network (which I help run), and other blockchain networks, including: Bitcoin, Ethereum, Cosmos, Libra, and Hyperledger Fabric’s networks.

That central difference is: unlike most other blockchains, business consortia play a key governance role when building applications and transacting together, on top of Corda Network.

Corda Network and its governing Foundation

Launched in January, CN is a global, open blockchain network, which includes:

• an Identity Manager (or intermediate Certificate Authority, which performs some sanctions checks and distributes identity certificates to nodes in order to participate — based on the network’s trust root)
• a network map, which lists all the nodes on the network
• a notary cluster — or consensus mechanism for nodes to transact through, which may be run either by participants themselves, or the Network Operator

Use of this infrastructure is shared by all nodes, resulting that any node on the network can transact seamlessly with all other nodes (otherwise known as ‘interoperability’). It’s being used by many types of legal entities across different industries to transact together (of which more below).

It is governed by an independent Dutch Foundation, set up in December. This is a not-for-profit with no shareholders, but with a governing Board: 9 directors who are early users of the network (from the B3i, Marco Polo and Contour business networks), and 2 from R3. The board is voted in by all participants and is elected on a staggered basis. The Netherlands was chosen due to its stable legal regime with a long history in financial services and being open to trade, combined with flexibility in how we can operate the Foundation.

The board’s objectives are to facilitate and preserve a secure, well-functioning network, while enabling it to grow to its potential. In reality, this currently includes assessing the network operator to make sure they’re doing a good job, deciding on pricing, scope (now also including a pre-production network), and will also involve changing policies or possibly the Foundation’s Articles of Association / Bylaws in future. Whilst the Foundation remains a key point of governance in the Corda Network, the more crucial governance may actually sit with business networks.

Business networks; and their governance mandate

The topic of business network governance was broadly unaddressed at the roundtable, as it’s uncommon outside Corda Network (and, in a different form, Hyperledger Fabric). This hasn’t been written about much, either (though this recent article by Mark Radcliffe provides an interesting overview.)

Consortia (or business networks) are groups of enterprises who are already transacting together (or wish to in future), who typically identify a business case for using blockchain to improve their coordinated workflows — prior to joining the network and developing applications. Many early adaptors have worked out cost savings & increased efficiencies, compared with their group status quo.

Several consortia are now transacting live on Corda Network, mostly in insurance and financial services, though there is also a diverse pipeline of projects joining over the next 3–4 months. These consortia have a level of governance over their networks separately to the Corda Network’s governance.

While business networks are leveraging the infrastructure of Corda Network (in turn governed by the Foundation), crucially, they’re in control of:

• designing and implementing their own membership criteria
• engaging and growing an ecosystem of participants
• developing and running applications
• policies, and legal agreements
• pricing

and in some cases:

• controlling their overall upgrade schedule
• running their own notary cluster (consensus mechanism).

In addition, business networks are also often the ‘channel’ by which legal entities (their group members) encounter blockchain, as they often act as an intermediary who creates the user experience (meaning that Corda Network may just be the unseen, underlying, and reliable infrastructure).

So far, we’re seeing a range of governance models at the business network level. As the networks become more developed & numerous, the Foundation hopes to provide templates of principles, agreements and policies for consortia joining, so they can more easily design detailed governance models.

1. Fully centralised (often with a medium-term goal to transition to decentralised governance)

A number of early-stage innovative tech companies are creating business networks composed entirely of nodes they are running on other legal entities’ behalves, due to expertise in blockchain technology. They intend to transition to having said companies run their own nodes in the medium-term future, however — and after this, transition to a more decentralised governance model will likely form.

In this early stage, however, these companies will be making decisions on behalf of their customers and this governance is fully centralised.

This includes early experimenters in farm-to-food tracking as well as procure-to-pay invoicing. (we’re holding off naming all business networks publicly now, since we’re still at an early stage.)

2. Has a leader, but with some political decentralisation

This is the most common model we have seen so far in Corda Network. One company or organisation “in the middle” leads the consortium and controls certain elements, but not everything. This will involve them deciding on a selection of the following:

• Who gets to be a member of the business network (they may use the business network membership service, for this)
• Pricing for services on the business network (transaction or membership pricing)
• Development of the app which the business network uses to transact together
• Technical policies and legal agreement — for example, responsibilities if they are running their own notary cluster
• Setting the strategy and vision
• “Sponsorship” of members onto the Corda Network — acting as an intermediary to all nodes joining the Network.
• Some of these are also running their own notary cluster service (confirming that transactions have not been double spent)

Examples:

• B3i — previously a consortium, now a shareholder-owned company and application developer, who provides legal, governance and technical support and frameworks to its customers, who include both companies and network application builders
• Contour — a Trade Finance focused consortium of 8 banks, mostly based in Asia; with a group of third-party partners leading on areas including technology and PMO
• Marco Polo — a ‘network of networks’ for global trade finance, providing infrastructure for asset managers, banks and B2B networks and service providers

3. “Fully decentralised” governance model

A number of Open Source tools have been created, to help business networks do all their voting in a decentralised manner: see Lab 577’s Digital Mutuals on Ledger for a great example.

This will likely suit smaller groups who do not need to do as much coordination. This is not as common so far, but we expect to see more as the network scales.

In summary…

The topic of blockchain governance typically refers to how the underlying platform/technology is governed. However, in Corda Network we see that business networks have a lot of control of their own destiny — creating a powerful second layer of governance.

When business networks are forming, it’s important they design their own governance in a deliberate manner (as otherwise, governance will still happen, but likely in an implicit & less focused way).

For information about how to join Corda Network, see here.

Thank you to Jason Rozovsky, Dave Sutter, Markus Tradt and James Carlyle!

Business consortia: a lesser known but important layer in blockchain governance was originally published in R3 Publication on Medium, where people are continuing the conversation by highlighting and responding to this story.