BLOCKCHAIN AND CONSTITUTIONAL GOVERNANCE

Constitutional Law- II

Submitted by: 
 Brahm Sareen
(01716503820)
And
Shivesh Saini
(05916503820)

Submitted to 
Prof. Ravinder Kumar
Year II, Semester IV
University School of Law and Legal Studies
Guru Gobind Singh Indraprastha University

Blockchain technology and constitutional governance

I. Introduction:
The world was in shock by the financial crisis of 2008 when big businesses were hard-hit and
financial institutions were failing.1 The bankruptcy of the Lehman brothers was a devastating
phenomenon for the world economy so much so that the sharp increase in the high-risk
mortgage causing the subprime bubble was blamed on the growing trust of people in
centralized financial institutions.2 This led to a decentralized innovation of blockchain
1
Charles Collins, The Crisis Through the Lens of History, 45 F&D 20, 20 (2008),
https://www.imf.org/external/pubs/ft/fandd/2008/12/pdf/fd1208.pdf.
2
Nathan Reiff, How Blockchain Can Protect the Global Economy, INVESTOPEDIA (Oct. 28, 2021),
https://www.investopedia.com/tech/how-blockchain-can-protect-global-economy/.
technology leading to the creation of the world’s first cryptocurrency named Bitcoin. In his
white paper, Satoshi Nakamoto expresses that this move of introducing a peer-to-peer
(Hereinafter referred to as “P2P”) network was to enact an “electronic payment system based
on cryptographic proof instead of trust”.3 In other words, there was a growing need for
decentralized technology so that the global economy won’t have to depend on centralized
financial institutions. However, this raises greater issues of risks involved in the decentralized
mechanisms as it would lack the regulatory oversight of these financial institutions allowing
direct transactions from person to person without any authorization of a third party.4

In its initial years, bitcoin along with other cryptocurrencies was perceived to be in the murky
waters of uncertainty and financial crimes raising questions on its legality.5 While the clouds
of risks involving anonymity, volatility, and legality still surround the concept of blockchain-
derived crypto assets, many international business retailers have accepted cryptocurrencies.6
Some states also have shown their silent acceptance to cryptocurrencies7 among which some
have tried to actively regulate crypto assets to facilitate transactions such as the US through
the Securities and Exchange Commission (“SEC”) and Commodities and Futures Trading
Commission (“CFTC”).8 However, the other side of the coin is full of examples where many
states have imposed restrictions and even banned cryptocurrencies.9 India’s stand on
regulating cryptocurrencies has not been clear. However, the Reserve Bank of India had
issued a circular banning all cryptocurrencies owing to the risks involved in 2018. This
notification had a direct effect on the investment worth 6.6 billion USD by Indian retail
investors according to the report of NASSCOM10. This notification also meant that all the
creditor-debtor relationships involving crypto assets or virtual currencies will not be dealt

3
SATOSHI NAKAMOTO, BITCOIN: A PEER-TO-PEER ELECTRONIC CASH SYSTEM,
BITCOIN.ORG (2008), https://bitcoin.org/bitcoin.pdf.
4
Id.
5
Victoria K. Sandberg, Regulating Cryptocurrencies in International Insolvency Law, 17,UNIVERISTY OF
TURKU (2020), https://www.utupub.fi/bitstream/handle/10024/150515/opinn%C3%83%C2%A4ytety
%C3%83%C2%B6.pdf?sequence=1&isAllowed=y.
6
Anthony Cuthbertson, Bitcoin now accepted at Starbucks, Whole Foods and dozens of other major retailers,
INDEPENDENT (May 14, 2019, 4:50 PM),
https://www.independent.co.uk/life-style/gadgets-and-tech/news/bitcoin-stores-spend-where-starbucks-whole-
foods-crypto-a8913366.html.
7
Usman W. Chohan, Assessing the Differences in Bitcoin & Other Cryptocurrency Legality Across National
Jurisdictions, CBRI DISCUSSION PAPER SERIES 1, 2 (2020), https://ssrn.com/abstract=3042248.
8
Id. at 3.
9
Id. at 2.
10
Cryptotech Industry in India- Decentralized Systems at the Center stage of Digital
Evolution, NASSCOM (2021), https://nasscom.in/knowledge-center/publications/cryptotech-industry-india-
decentralized-systems-center-stage-digital.
with by regulatory oversight. Therefore this decision was then challenged by the Internet and
Mobile Association of India along with others involving crypto-exchanges and their
shareholders and was then dealt with by the Hon’ble Supreme Court in the case of IAMAI v.
RBI11. Applying the proportionality test of English law while simultaneously referring to the
European Union’s approach towards the regulation of virtual currencies (“VCs”)12, the court
lifted the indirect ban on VCs declaring it as unconstitutional and violative of the
fundamental right to do business under 19(1)(g) of the Indian constitution.

Long before RBI’s stance of imposing a ban on VCs, the Ministry of Finance (“MoF”) had
warned about the risks involved in dealing with VCs in its report in 2019 on the account of
money laundering issues.13 In response, a draft bill on banning cryptocurrencies was
introduced before MoF by its Inter-ministerial committee which was set up in 2017. This bill
had defined cryptocurrencies broadly without taking into consideration its nature and
included digital tokens in the ambit of crypto assets too.14Even though in its essence, digital
tokens are neither generated nor controlled through cryptography. Thus, the stance was clear
that the Indian government and RBI perceived regulation of cryptocurrencies as playing with
fire. However, Supreme Court’s judgment changed the scenario and the Indian government
announced a new bill in 2021. At the time of writing, this bill has not been in the public
domain therefore, it is difficult to ascertain the approach the Indian government would be
taking in the future while dealing with VCs and cryptocurrencies. Therefore, it becomes
imperative to study blockchain derived structures and analyse private governance features of
blockchain systems. Further, it is also important to understand whether these systems could
replace substantial functions of state governance? Other questions that shall be considered are
if blockchain’s private governance would operate akin to state governance procedures and if
these systems are analogous?

11
(2020) 10 SCC 274.
12
Id. at 165.
13
Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies, MINISTRY
OF FINANCE (2019), https://dea.gov.in/sites/default/files/Approved%20and%20Signed%20Report%20and
%20Bill%20of%20IMC%20on%20VCs%2028%20Feb%202019.pdf.
14
Uday Walia, Crypto-Assets in India: A Case for Regulation, TOUCHSTONE PARTNERS (2021),
https://touchstonepartners.com/wp-content/uploads/2021/10/Crypto-assets-A-Case-for-Regulation-Google-
Docs.pdf.
Constitutions are the most well-known example of secondary rules, as defined by legal
academics. Secondary rules, to put it another way, are the rules concerning establishing
rules.15

These rule sets dictate how laws are enacted in the case of constitutions. In a given society,
decisions are made, administered, and judged. As a result, constitutional norms apply because
they are assigned a high amount of priority in a country's legal system are the bedrock upon
which all future legislation and regulations are built and government action is at a halt.
Because of the essential character of constitutional rules, this ordinary law is more
susceptible to modification than regulations, which is by design. To put it another way,
Constitutional norms are the most stringent set of regulations in any legal system. However,
constitutions differ in terms of the methods and convenience with which they may be altered.
Thus, a constitution's comparative flexibility is an institutional design decision that has long
been discussed in comparative constitutional design studies, which has connected flexibility
to both durability and a reduced need for informal constitutional adjustment procedures.

In the context of private government, there is a separate understanding of the basic principles
controlling human interactions—perhaps due to a lack of a consistent standard of comparison
and public availability of underlying regulations. This might be because one of the
advantages of a firm structure is that policy changes are usually verified by a centralised
procedure rather than a democratic one, which eliminates the need for "governance of
governance" because the "law" is whatever the central company authority says it is. The
company is the archetypal illustration of private governance from an economic standpoint.
Previous researchers such as Coase and Williamson have showed how corporate governance
is an important subject of study for understanding how businesses work.16
In this paper, we examine the variations in blockchain governance systems using ideas from
constitutional architecture in general and amendment procedures in particular. We argue that
blockchains may be viewed as a form of constitutional rule set that both specifies and
legitimises the permission less distributed ledger technology-enabled activities. The departure
costs and amendment processes specified by the "constitutional" regimes created by

15
See generally Lɪᴏɴᴇʟ Aᴅᴏʟᴘʜᴜꜱ Hᴀʀᴛ & Lᴇꜱʟɪᴇ Gʀᴇᴇɴ, THE CONCEPT OF LAW (2012).
16
See Ronald Coase, The Nature of the Firm, 4 ECONOMICA 386–405 (1937); Oliver E. Williamson, The
Theory of the Firm as Governance Structure: From Choice to Contract, 16 JOURNAL OF ECONOMIC
PERSPECTIVES 172–95 (2002).
blockchains, in particular, create a distinctive competitive margin that will determine a
specific cryptocurrency's comparative performance.

II. Blockchain and constitutional framework

The majority of our actions are not directly guided by constitutional norms. Instead, the
legislative, executive, and judicial output of public entities outlined by these fundamental
standards governs our conduct. The "rules about establishing rules," as Hart characterised
them, are secondary in this sense17. Main rules control our daily activities, as well as the bulk
of our disagreements and forbidden conduct; secondary rules describe the system that
establishes, executes, and adjudicates the primary rules that govern our behaviour. This is
because there are huge advantages to agreeing on the methods for defining and changing
future regulations.

Creating new rules would be far more difficult, if not impossible, if every rule modification
also required a dispute about how the rule would be defined. To put it another way, the game
cannot be played if no one can agree on the basic rules. This is the most compelling case for
the formation of constitutional rule sets in government systems all over the world. In this
sense, Buchanun and Tullock have discussed as to how and why constitutional rule-sets may
also be driven by the self-interests of the constituents.18. More particular constitutional design
aspects that lower the costs of collective decision making at scale include rule entrenchment,
citizenship (or membership) rules, and amendment processes, which are all found within
these rule sets. The multi-tiered structure of constitutional norms in general, as well as certain
design aspects in particular, have similar intended roles to blockchains, which expose crucial
governance trade-offs for various coins.

A. Rule entrenchment
The first common constitutional design component is rule entrenchment, often
known as insulation. The causes for rule entrenchment stem directly from the
logic of secondary rules in general. Due to the additional costs and strategic
motivations already described, leaving decision rules up for grabs can severely
stymie collective decision making. Even if a rule is not provided more protection
against change than conventional decision rules in a particular group, decision-
17
Supra note1.
18
See Jᴀᴍᴇꜱ M. Bᴜᴄʜᴀɴᴀɴ & Gᴏʀᴅᴏɴ Tᴜʟʟᴏᴄᴋ, THE CALCULUS OF CONSENT 60–80 (University of
Michigan Press, 1962).
 making procedures tend to confine a given meeting to a known range of subjects,
in part to avoid decision rules from being vulnerable to opportunistic
modification.

This gives rise to the assumption that certain rules are legitimately constitutional.
Before decisions regarding ordinary rules may be made, the rules for establishing
rules must be stated. Secondary rules, on the other hand, must both empower and
restrain the individuals who make decisions on behalf of the group in order to
guarantee that decision-making follows a recognised and established procedure.
Because secondary rules both define and constrain individuals who are uniquely
empowered in comparison to ordinary group members, another institutional
design choice that is nearly ubiquitous in these contexts is the insulation of
secondary rules from ordinary processes of collective decision-making. In
actuality, there are several options for less severe amending rules. Adjusting the
threshold necessary for passing is a typical decision if occuring through legislative
reform, with a higher threshold making passage more difficult, and vice versa.
Another criterion characterising the difficulty of amendment is the extent to which
different stakeholders' participation is necessary; if an amendment can only occur
once it has successfully cleared the legislative threshold and a popular vote, it is
more difficult than needing either of those alternatives.19

In practise, this usually takes one of two forms. First, changes to secondary rules
often need a higher level of agreement among group decision-makers than
changes to regular rules. In reality, the canonical example is the requirement in
political systems that constitutional modifications require a parliamentary
supermajority.20 The engagement of a bigger section of the group, or a distinct
subset of group members, in such choices is the second type of rule
entrenchment.21 The involvement of sub-national units in constitutional
amendments (similar to the role of state governments in the United States)22 or the
requirement that proposed constitutional amendments pass a public referendum
19
See Bjørn Erik Rasch & Roger D. Congleton, Amendment Procedures and Constitutional Stability, 12 DEM.
CONST. DESIGN & PUB. POL’Y: ANALYSIS AND EVIDENCE 536–49 (2006).
20
See Tom Ginsburg & James Melton, Does the Constitutional Amendment Rule Matter at All? Amendment
Cultures and the Challenges of Measuring Amendment Difficulty,13 INT’L J. CONST. L. 691 (2015).
21
See id. at 692.
22
See Supra note 5, at 326.
 before enactment are clear examples of rule entrenchment from constitutional
design around the world.23 The formal articulation of fundamental group values
and beliefs usually receives this level of entrenchment,24 even if this level of
entrenchment is not necessarily essential from the functional standpoint of regular
group decision-making.

Instead of a particular constitution's inadequacies eventually leading to it being

overturned and replaced, a lower-cost result is the constitution being adjusted to
avert outright constitutional rupture.25 As a result, the precise amount of rule
entrenchment becomes an essential constitutional design challenge. Despite
numerous comparable and identical amendment procedures across the world, the
quantity of change that a given level of constitutional flexibility delivers in
practise varies significantly. This shows that, like many constitutional design
issues, rule entrenchment interacts in intricate ways with the political and social
context in which it is established and administered.26 Because constitutional norms
are more entrenched than ordinary legislation, modifying them in practise serves
an expressive role in communicating that a cornerstone component of government
is vulnerable to prospective alteration.27

In other words, the process of altering a constitution elevates the relevance of the
specific regions in question (as well as inflaming "constitutional emotions"
regardless of the underlying political or socioeconomic issues at stake).28 The
power to edit a basic charter also provides for dynamic legitimization; if
individuals now governed by a particular constitution have the potential to change
it, they are more likely to see the constitution as representing their wants and aims
towards government. This idea of the continual "fit" between the written
constitutional instrument and societal preferences around governance clashes with

23
See Supra note 6, at 692.
24
See Heinz Klug, Model and Anti-Model: The United States Constitution and the Rise of World
Constitutionalism, 2000 WIS. L. REV. 597, 601 (2000).
25
See generally Richard Albert, The Expressive Function of Constitutional Amendment Rules, 59 MCGILL L.J.
225 (2013) see also SANFORD LEVINSON, RESPONDING TO IMPERFECTION: THE THEORY AND
PRACTICE OF CONSTITUTIONAL AMENDMENT (Sanford Levinson ed., 1995).
26
See Supra note 6, at 692-701.
27
See Supra note 5, at 325-326.
28
Rosalind Dixon & Tom Ginsburg, Deciding Not to Decide: Deferral in Constitutional Design, 9 INT’L J.
CON. L. 636, 636–72 (2011).
 the current strength of governance preferences, vs. the necessity for the inter-
temporal power to modify this fit. Which parts of the constitution, if any, should
be so protected that they can never be changed in the future? In Indian context,
judiciary has played an important role in defining the jurisprudence of
constitutional boundaries, be it the basic structure doctrine defined in the
Keshavnanda Bharati case or the likewise such as pith and substance doctrine of
colourable legislation etc. However, how constitutional structures would come
into play in a blockchain based distributed ledger is the question that would play
major role in its application.

Constitutional scholars have extensively explored the contrast between loyalty to

the letter of constitutional law and adherence to the ongoing social governance
ideals that drove the establishment of the constitutional system writ large. Simply
said, citizens in general, and political actors in particular, are influenced by their
opinions about what the constitution should (and should not) accomplish.29Just as
sufficiently heinous government conduct can result in regime change, significant
modification to the constitutional concept of government (and its checks and
balances) has long been believed to be capable of annihilating or abolishing the
present constitutional system entirely. In this context, Carl Schmitt's 1928 critique
of the paradox of substantively unfettered amendment procedures has been
connected to the creation of unamendable sections in the 1949 German Basic
Law.30 This could further be understood in Indian context wherein the Basic
structure of the constitution is deemed to be universal. Fortunately, Indian
legislations are not exempted from judicial scrutiny and are subject to elimination
or reconstruction in case invalidity arises.

The justification for making some provisions unamendable clearly distinguishes

between unwritten constitutional principles that are implicit in the written
constitution through a constituent process: "the immutability of the principles...

29
See NORMAN SCHOFIELD, ARCHITECTS OF POLITICAL CHANGE: CONSTITUTIONAL
QUANDARIES AND SOCIAL CHOICE THEORY 260–62 (Stephen Ansolabehere ed., 2006); see generally
Eric Alston, Lee Alston, & Bernardo Mueller, INSTITUTIONAL AND ORGANIZATIONAL ANALYSIS:
CONCEPTS & APPLICATIONS 273–313 (2018).
30
See CARL SCHMITT, CONSTITUTIONAL THEORY 150–51 (Jeffery Seitzer ed. & trans., Duke University
Press 2008); e.g., Ulrich K. Preuss, The Implications of Eternity Clauses: The German Experience, 44 ISR. L.
REV. 439, 439 (2011).
 marked out a normative core that defined the constitutional identity of the
polity."31 In the case of public constitutional systems, unamendability, even
though anti-democratic plays an important role, Indian constitution being an
exception. Although unamendability establishes a clear relationship between the
formal constitution and the constitutional concepts driving its development, the
existence of an underlying set of constitutional beliefs is not established confined
to circumstances where a subset of fundamental principles are inherently
unchangeable. Fundamental ideas regarding the immutability of blockchains and
the necessity to punish bad actors in the framework of, performers serve as
examples of these constitutional ideas in context of cryptocurrency groups.

There are two options for an individual to legitimize constitutional rules as per
his/her interest: One is to migrate to a state with better set of rules governing
citizens which would mean revocation of citizenship and other is to change the
existing rule-set of state where that individual dwells. While former is possible in
all the cases, latter is more complex. Therefore, when an individual cannot modify
the constitutional rule-set, then the former option is viable i.e to change the rule-
set by migrating to a different state. However, changing the state could involve
exit costs when it comes to private governance. The supremacy of constitutional
rulesets has an essential corollary: leaving a national constitution's ruleset, or
cancelling one's own citizenship, sometimes bears considerable penalties. Moving
from state to state might provide a citizen a lot of freedom in terms of the
regulations that regulate their conduct; nevertheless, the rules of the United States
Constitution do not vary from state to state. The same is the case in India.

The greater the departure costs, the more crucial the process of dynamic
constitutional legitimization outlined so far becomes, and vice versa, because the
only option without a realistic capacity to modify the rule-sets that regulate one's
life is to quit the ruleset. The Amendment guidelines address this issue in part and
offer a framework within which the constitution might be altered. Constitutional
amendment methods can range from declaring the constitution unamendable to
subjecting constitutional reform to the same conditions as regular legislation.
Constituents would have considerable certainty as to the finality of constitutional
31
Preuss, Supra note 20, at 441.
 rules governing them at any given time if the constitution were unamendable,
whereas constituents could easily adapt the constitution to suit new circumstances
and changing beliefs about governance if the constitution were amendable.
Modern national constitutions, in reality, achieve a compromise between these
two extremes. Even if the drafters intend to lean toward unamendability, one
scholar observes that the need for constitutional amendment is so fundamental that
"all constitutions admit the possibility of amendment,"32 in large part because the
option of exit is so costly for the vast majority of people governed by a
constitution. Choice based set of rules and regulations for citizens are still a
utopian concept. This can be understood by analysing private international laws
and their application.

B. Amendment processes
However, these specific constitutional design concerns interact with one another
in profound structural ways. The membership trade-offs influenced by entry and
exit costs are also shaped by the selection of amendment rules: a constitution can
be comparatively more flexible or rigid, depending on how difficult it is to amend,
which is a question of the extent of rule entrenchment originally chosen by
constitutional drafters.33 Indian constitution in this sense provides for the
amendment procedures under Art. 368. Similarly, US constitution provides for the
amendment procedure under Art 5 which requires the assent of 2/3 of the states to
ratify the amendment. Amendment provisions have been described as inevitably
remedial, acknowledging the possibility that a constitution will be found to be
defective in the face of unforeseeable future circumstances. However, the
necessity for constitutional modification is ultimately determined by how
successfully early constitutional design decisions dynamically allow economies of
scale in governance while limiting agency costs.

Beyond the most fundamental structural trade-off between flexibility and rigidity,
constitutional scholars have advanced their comparative knowledge of amendment
rule options. Thus, the trade-off between flexibility and rigidity has also been
32
Andrew Roberts, The Politics of Constitutional Amendment in Postcommunist Europe, 20 CONST. POL.
ECON. 99, 99 (2009).
33
See Sanford Levinson, RESPONDING TO IMPERFECTION: THE THEORY AND PRACTICE OF
CONSTITUTIONAL AMENDMENT, 110–134 (1995).
 described as a trade-off between stability and flexibility;34 however, this definition
of stability focuses on the stability of the underlying rule set rather than the overall
stability of governance. The underlying intuition is simple: a constitution that
faces more adjustment barriers is less likely to be adaptable to changing societal
circumstances, and thus is more likely to necessitate a wholesale constitutional
overhaul in cases where it does not fit the needs and beliefs surrounding
governance in society. Nonetheless, too much flexibility weakens the fundamental
premise of constitutionalism as a set of fixed constraints on ordinary politics at
some level. Because of the complexities of these trade-offs, constitutional scholars
have emphasised on distinguishable consequences from different amendment
procedures, as well as the velocity of change implied by more or fewer
amendment obstacles.

Choice based amendments would go in two ways, first would be frequent self-
interest driven modifications caused by political pressure and second would be too
much flexibility. It is to be noted that political change and constitutional change
go hand in hand. Therefore, amendments are also caused by changes in political
atmosphere of the state. Further, the frequency of amendments depends on the
same.

If one has to fit an analogy between blockchain governance and a state

governance system, the issue of choice and amendment in rule-set plays a
substantial role. In blockchains too, the constituents face low exit costs allowing
both an enduring rigid rule-set and a frequently amended one. When and how an
individual wants to be governed would be his/her own decision based on his/her
own interests. As discussed, amendments also depend on the political atmosphere
of the state. This also applies in blockchains wherein amendments in fundamental
rules are based on complex governance decisions of the constituents and the
cryptocurrency output.

It is to be further noted that amending the constitution and amending the

procedure of amending the constitution are two different things. Amending the

34
See Eric Alston, Constitutions and Blockchains: Competitive Governance of Fundamental Rule-Sets, 11 JLTI.
131, 141 (2019).
 constitution is akin to amending ordinary legislations whereas amending the
amendment procedure could go beyond ordinary amendment and could also cross
the boundaries of basic structure. An example of 24thAmendment of the Indian
constitution can help us understand this concept. In 24th amendment, amendments
under article 368 were exempted from judicial review under article 13. Herein, the
amendment was amending the procedure to amend itself, wherein the judicial
review could strike down a part or whole of the legislation in case of violation of
fundamental rights was debarred from applying onto amendments. In blockchains
too with the consent of constituents, a rule-set may be amended or the procedure
to change a rule-set may also be changed therefore allowing more flexibility.

In the case of permissionless blockchains, network members who process and

validate cryptocurrency transactions are the equivalent of representative agents
who are only bound by network rules and user preferences for transacting and
storing value in one cryptocurrency or another.

C. Entry costs and exist costs

Entry cost is a concept which relates to the fulfilment of certain criteria or
eligibility for a person to become a citizen of a state. Each state gives its
citizenship based on certain factors. People often migrate to states where
citizenship is provided without barriers such as Canada. On the other hand, the US
doesn’t provide for citizenship easily. Such conditions for providing citizenship to
individuals are to be decided by the state itself. Similarly, certain restrictions or
costs are imposed onto citizens who want to revoke their citizenship. For example,
taxes are imposed on individuals revoking citizenship from the US in search of
burden deficit tax jurisdictions. Higher entry costs have pros as well.

Membership can be shaped or members' incentives can be shaped in ways that

improve governance results by conditioning membership on a given degree of
commitment or traits. If the expenses of becoming a member are high enough,
other members can get more certainty about the amount of desire for membership
on the part of new members. If one has made a significant financial investment in
membership, one's incentives to influence governance outcomes for the better are
likely to be greater than in the case of an organisation that is free to join. Getting a
 substantial stake would also mean greater responsibility and would provide the
organisation with better incentives and greater level of expertise.

The lengthy procedure of changing citizenship also limits individuals' capacity to

escape — one may effectively only change citizenship after a significant period of
time has elapsed. The functional impact of such financial and temporal departure
costs is that by making leave more expensive, members of an organisation are
more likely to engage in the costly process of governance. If a particular "citizen"
is unable to leave, they may as well influence the rules that will govern them.
Members of the bitcoin community currently suffer very modest entry and
departure fees, which will most certainly rise when cryptocurrency blockchains
compete directly on governance options. The next part discusses the analogy
between blockchains and constitutional governance.

III. Competitive constitutional framework and blockchain

Participants, or network nodes, in a particular blockchain act as the government,
whilst users of a given blockchain might be viewed as constituents. While network
members are not necessarily representative agents in the same way that politicians
are, they do undertake governance tasks on behalf of consumers who request
transactions or store value on the bitcoin blockchain. The blockchain's core principles
generate a type of agency control by confining participants in the interest of the users,
resulting in an equilibrium that benefits the constrained participants. Changes to
cryptocurrency blockchains may thus have an impact on any of the following: (i) the
fundamental essence of the inherent unit of value; (ii) the method of transaction -
oriented validation by members of the network; (iii) network participant incentives
(almost always complicit by modifications to transitioning process); or (iv) the
relative capacity of a given blockchain to obtain network objectives in comparison to
competing blockchains.

The complete lack of separation of powers is a significant difference between

blockchain governance and existing constitutional democracies. Participants in the
blockchain exercise executive, legislative, and judicial duties at the same time. As
partcipants solve the cryptographic hash underpinning the proof of work algorithm,
they are processing transactions and able to generate network resources (the
 underlying cryptocurrency) at the same time, whereas other participants structurally
validate suggested transactions' conformity with underlying network rules.35 Each of
these processes is analogous to a different duty of government. The creation of
cryptocurrency and the suggestion of modest regulatory modifications are similar to
legislation. Processing existing bitcoin transactions is analogous to the enforcement of
the law. Ensuring compliance with network regulations is analogous to the court job
of eventually assessing law infractions by constituents.

Presently, the reasons to execute these activities are related to the production function;
miners participate in costly transaction processing because of the expected reward for
successfully solving the underlying cryptographic hash function that comes with it.
Unlike government processes and judicial review, blockchains do not allow for
informal remedies for changes to the rule structure to better fit the needs and goals of
those governed by the ruleset. To be sure, blockchain participants can modify their
usage of the blockchain to some extent, but they cannot directly interpret the
underlying fundamental rule structure in the same way that government and court
actors can in terms of constitutional application and interpretation. To put it another
way, the amount of leeway given to the government to make the Civil Rights Act a
reality, or the amount of judicial interpretation that the Bill of Rights has required
(and will continue to require), far outweighs the amount of leeway given to
blockchain network participants in terms of the scope, form, and frequency of
transactions to undertake. Coherence and dominance are almost assured in blockchain
operations, which may be a double-edged sword when it comes to penalising bad-
faith individuals on the network, as the ensuing discussion over the DAO attack on
the Ethereum blockchain highlights. Under present governance mechanisms,
reversing a poor action requires a constitutional revision.

One of the most notable contrasts between blockchain alterations and constitutional
amendment procedures is around the concept of forking the chain of code. There are
three main, major means36of forking: (i) a soft fork, which results in compatibility for
network nodes that have not yet adopted the new rule change; (ii) a hard fork, which
results in network nodes that have not accepted the new rule change rejecting blocks
35
Arvind Narayanan et. al., Bitcoin and Cryptocurrency Technologies: a Comprehensive Introduction (2016).
36
See, e.g., Sean Stella, What is a Hard Fork? Hard Forking Explained!, HARDFORKING.COM,
https://www.hardforking.com/what-is-a-hard-fork/.
 created under the new rule set; and (iii) hard forks, which result in two permanently
separate versions of the underlying blockchain, one using the old ruleset and one
using the new ruleset.37 Major rule changes, such as changes to the block size, result
in hard forks, which raise the prospect of degradation in network operations and
outright mistakes, and as such, are the subject of much debate in a specific blockchain
community prior to acceptance. In the second situation of hard forks, unlike
constitutional amendments, two blockchains can coexist, and participants and users
can then choose which chain to support (through their support of network processes
and choice of transactional medium). These rule update options each have an impact
on the exit fees that participants and users face if they do not agree with a specific rule
modification.

Both with soft and hard forks which do not result in the formation of a new
cryptocurrency, parties involved and users can only exit the underpinning blockchain
entirely, rather than proceeding their enrollment and use on the chain of the forked
cryptocurrency which they prefer. The decision as to whether a hard fork will result in
a viable second chain (and associated currency) is clearly used in cryptocurrency
communities, with an announced hard fork of Ethereum (Constantinople) that will not
result in a viable second chain, accompanied by discussion of whether a second chain
would emerge. The amount to which participants accept or reject the proposed rule
modifications, as well as the exact changes to the protocol layer itself that the
proposed update makes, determine the result. Constituents are consistently regulated
by the new constitution following a constitutional amendment, whereas the old
constitution exclusively regulates legal claims that arose when the previous version of
the constitution was in existence. This means that fundamental changes in blockchain
rule sets are vulnerable to competitive forces after the fact, with the previous rule set
possibly remaining a functional transaction and currency network, allowing for
eventual disclosure of the perceived worth of the network change.

This contrast implies that blockchains are vulnerable to competitiveness on a number

of margins that constitutional governance is not, notwithstanding constituents'
restricted capacity to switch from one constitutional regime to another (to the extent

37
Narayanan et al. supra note 39, at 73–75; Noelle Acheson, Hard Fork vs. Soft Fork, COINDESK (Mar. 16,
2018), https://www.coindesk.com/information/hard-fork-vs-soft-fork/.
 they can afford to do so). This also means that when a cryptocurrency forks to
represent different governance preferences on the part of different groups of members
of the network, it acts as a minimal form of exit—both groups can be governed by
their preferred set of constitutional rules, but they can no longer transact on the same
blockchain as before. All of this suggests that the decision to split provides a
significant strategic margin for blockchain network players contemplating rule
modifications. The extent of operations governed by a blockchain is much narrower
than that described by the legislature in modern constitutional orders; the
aforementioned is limited to a small number of processes, whereas the latter is only
limited by the constraints imposed by the constitution on government action. This
variation in "legislative" scope has a parallel implication: as legislative breadth grows,
so does the relative importance of the judicial role. If a governance regime has a well-
defined and restricted collection of functions, interpreting their adherence with
underlying network rules is a reasonably straightforward task.

This results in a greater certainty of implementation of blockchain rules when

particularly in comparison to constitutional rules; however, to the extent that
blockchains implement suggested amendments to include decentralized transactional
processing and validation, this is likely to create specific challenges, as discussed
further below in the section on the Lightning Network and Sharding. This means that
modifications to the underlying blockchain regulations are far more likely to be
implemented. Blockchain rule changes require less interpretation in subsequent
periods, but they are also less susceptible to downstream political pressures than
constitutions, which require executive discretion in application, as well as judicial
interpretation to ensure the constitutionality of this application.

Unlike those regulated by a national constitution, those governed by a specific

blockchain suffer far lower departure costs and can even be governed by numerous
blockchains at the same time if they mine or trade in more than one
cryptocurrency.38This is an intriguing analogy to the decentralized governance
structures that have been investigated in a variety of circumstances.39Consider the
extent to which blockchain participants and users can freely enter and exit a given
38
See Nick Cowen, Markets for Rules: The Promise and Peril of Blockchain Distributed Governance 9(2) J.
ENTR. & PUB POL’Y 213 (2019).
39
Tom W. Bell, Special International Zones in Practice and Theory, 21 CHAP. L. REV. 273 (2018).
 cryptocurrency's governance arrangements, and compare it to proposed and existing
real-world governance schemes intended to reap similar governance benefits as a
result of their constituents' largely voluntary presence; there is significant overlap
between the two.40 The relatively low-cost exit option both disciplines blockchain
network users in their rule change decisions and provides as a margin of
competitiveness when rule changes directly include exit costs. The mechanisms for
constitutional amendment in regular political systems serve as a model for
considering equally substantial governance changes on permissionless blockchains.

Finally, the consistency of the execution of blockchain network rules, as well as the
comparably low departure costs faced by bitcoin users, diminishes the usefulness of
ex-post constitutional interpretation as a means of modifying the ruleset itself. In the
case of judicial review, for example, there is no clear equivalent due to the distributed
network in which network transactions are validated; without an ex-ante agreement
among more than half of network participants, a given network node (run by a
network participant) couldn't even use its own autonomy to verify transactions at odds
with the blockchain rules.41

Modifications in government procedures and conventions are the next informal

method of constitutional change; in the case of blockchains, this entails participants'
and users' comprehension of network capabilities and limits, as well as their capacity
to adapt their network usage appropriately. One example would be consumers
restricting their Bitcoin network transactions to a specific required minimum, below
which the network fees do not make economic sense. Following that, it is
theoretically feasible to create secondary layers of code regulated by independent rule
sets (or simply rules that do not need to be validated by the entire network); in each
instance, these would function similarly to administrative and political
decentralization. Various network nodes (or a set of nodes) would function their own
rules or procedures in the particular instance of distinct rule sets, though this would
create coordination costs in reconciling different underlying processes with the
primary chain itself; this is something the Ethereum blockchain may be better suited
to facilitating, given its focus on more complex transactional processes. In the
40
Mark Frazier, Emergence of a New Hanseatic League: How Special Economic Zones Will Reshape Global
Governance, 21 CHAP. L. REV. 333 (2018).
41
Supra note 39.
 instance of the identical rules, a selection of network nodes would be in charge of
processing and validating network processes, rather than the entire network being
validated.

Furthermore, in order for these decentralized procedures to take place, a significant

majority of network users would need to support the blockchain's equivalent of a
constitutional amendment. Finally, in the most well-known process (given the debates
around formal network rule changes), if a sufficient number of network nodes adopt a
suggested change in the rules or changes, the primary blockchain will be governed by
these rules accordingly (with those set of network nodes that rejected the rule change
operating under the old set of rules if a specific type of hard fork occurs).

As a result, when it comes to governance, permissionless blockchain participants have

three options for changing governance. They can change the rules underpinning the
blockchain itself (including forking, which has a significant impact on exit costs),
they can create subsidiary governance processes that eliminate the need for the main
blockchain to be adapted, or they can adjust their use of a given blockchain, either
directly or by choosing to exit and take part in or use another blockchain whose
governance better resolves that participant's basic aims.

IV. Conclusion
These discussions concerning the optimal set of rules for constructing regulations, or more
commonly, constitutions, are not new. Developing generalizable insights about substantially
superior governance methods is more difficult in the setting of private governance, because
rule sets are often more fluid, centrally regulated, and live in the shadow of law and
regulation. Blockchains with no permissions provide an interesting framework in which to
investigate these issues. These blockchain ecosystems can be thought of as a form of
constitutional rule set that both specifies and legitimises the permissionless distributed ledger
technology-enabled activities. The evolution of cryptocurrencies As a result of blockchains,
new types of competition in private governance have emerged. Due to this, Entry fees and
rule entrenchment are anticipated to become more important as different chains continue to
alter their governance options in response to the demands of network players and users,
despite the fact that they are now less prominent in design proposals.
As a result, neither constitutional nor political theorists should be perplexed nor uninterested
in the current innovation in governance processes on permissionless blockchains. These
procedures are quite similar to constitutional processes, and lessons from constitutional
design around implementation and amendment shed a lot of light on what's going on in the
communities that support big cryptocurrency blockchains right now. The trade-off between
flexibility and rigidity has split these communities as they argue how to extend network
processes while staying true to each blockchain's collectively declared understanding of its
constitutional rule set. Some network process changes that necessitate the consent of a
significant number of network participants do not fundamentally affect the rules that govern
network processes. Instead, they have an impact on the costs and advantages network players
expect as a reward for assisting network functions such as currency generation, transaction
validation, and continuing governance. Other adjustments entail more basic additions or
changes to governance procedures, such as the definition of subsidiary governance or a
complete revamp of the governance change process itself. While the most significant
proposed changes to the Bitcoin network have been limited to creating a sublayer of
governance, Ethereum's proposed changes include not only a related form of decentralised
governance but also wholesale changes to the means by which future changes to network
processes will be implemented.
The study of public and private governance has been around for a long time. As a result,
although blockchain processes raise new governance problems, they also raise old ones.
It's not as if achieving consensus on a topic isn't difficult in some situations. The processes
and governance of the group are new. This implies that a comprehension of the fundamental
trade-offs involved in constitutional design issues, with a focus on Blockchain might greatly
benefit from an emphasis on modification processes. Participants and designers Amendment
flexibility is viewed as allowing for essential changes. An whole constitutional order can be
invalidated if an adjustment is not made. Nonetheless, amendment thresholds should be set
high enough to ensure that fundamental rights are protected. Ordinary pressures are shielded
from rules. Constitutions are viewed as a compromise between facilitating governance
economies of scale while at the same time causing a slew of issues for those that give services
and direct input to legislative, executive, and judicial governance. Decentralization is one
method that provides for better representation while avoiding a level of centralization that
makes it impossible to regulate the number of procedures requested by a nation's citizens.
Thus, recognising the trade-offs that have long been contested in the context of constitutional
drafting and subsequent revisions clarifies the connection between blockchain players and
users as a result of the mechanisms controlling them.
Finally, given the economic scale and complexity found on permissionless cryptocurrency
blockchains, decentralised processes analogous to those of governance via executive,
legislative, and adjudicative functions may never have been automated. As a result,
blockchains might be viewed as an early example of constitutional law as code. As a result,
competition among blockchains, which leads to distinct governance solutions, could be a
useful and informative forerunner to the use of automated governance in the public sector.
The rules of blockchain network participation and use, which determine entry and leave, will
become key competitive margins, shedding light on the plethora of institutional forms of
digital citizenship and exit that are projected to arise throughout the twenty-first century. Of
course, it should be highlighted towards the end that the advantages outweigh the
disadvantages. Of course, the advantages of this competition can only be realised if there is
widespread informed adoption of cryptocurrencies, resulting in the competitive pressures
indicated here yielding efficiency and benefits of improved governance.