Polycentric Governance

= "polycentric systems encompass a multifaceted network of interactions at various levels through power, incentives, rules, values, and individual mindsets" (Aligica & Tarko 2012 p. 247). [1]

Definition

By Primavera De Filippi, et al. :

"Polycentric governance systems are characterized by multiple autonomous decision-making centers with overlapping areas of responsibility, which both compete and cooperate within a common overarching system of commonly agreed-upon rules, spontaneously or deliberately generating a shared social order."

([2])

Description

Morshed Manna et al. :

"This section aims to dissect the roots of the term, notably its development and popularization by scholars Vincent Ostrom and Elinor Ostrom. We will examine the fundamental characteristics of polycentricity, highlighting its context-dependent advantages and drawbacks. The focus will be on empirically identifying these traits and understanding their interrelationships. Furthermore, the discussion will emphasize that polycentricity exists along a spectrum, rather than being a simple binary concept, and will explore how polycentric governance evolves over time

The concept of ‘polycentric governance,’ developed across disciplines such as legal theory, economics, and political science, refers to the management of a social system where various decision-making centers operate independently but are interconnected within a framework of shared rules. This concept traces its roots to Michael Polanyi, a Hungarian-British polymath known for his contributions to physical chemistry and philosophy. In 1951, Polanyi laid the groundwork for ‘polycentricity,’ which has since significantly influenced the understanding of polycentric systems, especially in scientific communities and societal structures. Polanyi posited that multiple social systems, including law, market, science, religion, and the arts, are inherently polycentric. He argued that abstract ideals like justice, efficient resource distribution, objective truth, transcendental truth, and beauty drive these systems. According to Polanyi, these abstract ideals cannot be effectively imposed by a central authority on the members of a social system. He believed that centralized efforts to enforce these ideals are likely to fail due to inherent inefficiency or because such imposition is fundamentally undesirable. Polanyi’s perspective suggests that, for instance, a religious body like the Church cannot genuinely change individuals’ beliefs by imposing its version of ‘transcendent truth’ unless people choose to accept it. Similarly, centrally planning the optimal distribution of goods and services is challenging for a singular entity, lacking a comprehensive overview of every aspect within a community. Even when central imposition is feasible, it remains undesirable. For example, the pursuit of ‘justice’ is better achieved not by a single court of law but through the free interaction of multiple entities and agents, engaging in an ongoing dispute resolution process through trial and error and mutual adaptation. This approach allows for a more dynamic and responsive understanding of abstract ideals, aligning more closely with social systems’ diverse and evolving nature (Aligica & Tarko 2012, p. 238-240).

Vincent and Elinor Ostrom, notable political economists, revitalized the concept of polycentricity by examining how complex social and economic systems could be structured to facilitate the efficient, sustainable, and accountable use of resources. They challenged the then-dominant belief that centralization was the most effective governance model. In their landmark study of American metropolitan governance in the 1960s, Vincent Ostrom, along with colleagues Charles Tiebout and Robert Warren, countered traditional public administration theories. They argued that local communities often possess the necessary knowledge and incentives to manage common resources sustainably. According to their findings, a system of multiple, overlapping private and public decision-making centers could outperform a single, centralized authority. This is particularly true in scenarios where different services necessitate varying operational scales (Ostrom et al. 1961). In the subsequent decades, Vincent and Elinor Ostrom further developed polycentricity into a comprehensive social theory, underpinned by a series of innovative empirical studies. Elinor Ostrom's work on common-pool resources, which earned her a Nobel Memorial Prize, is a notable example. Her research highlighted the effective governance of these resources (Ostrom 1990, 1998, 2009). Additionally, they developed the Institutional Analysis and Development (IAD) framework, which offers a systematic approach to analyzing the governance of common resources. This body of work challenged existing paradigms and provided a new lens through which to view and understand the complexities of managing shared resources in diverse contexts.

...

"In the ongoing exploration of polycentricity, scholars have also focused on its normative aspects, particularly the debate over whether polycentric governance is generally preferable to monocentric governance. Elizabeth Baldwin, Andreas Thiel, Michael McGinnis, and Elke Kellner (2023) emphasize that while empirical studies show polycentric governance to be effective in certain situations, its efficacy varies. They highlight the need for more research to understand the conditions under which polycentric governance thrives or falters. The authors summarize findings from various studies, identifying several positive traits associated with polycentric governance. The positive traits of polycentricity include adaptability (the ability to tailor governance to local conditions), learning and experimentation (enhanced opportunities for innovation and knowledge acquisition), resilience (greater capacity to withstand external shocks), legitimacy (outcomes are often more accepted by the public), collaboration (easier identification of reliable partners), and existence of diverse options (accumulation of successful adjustments over time, offering a variety of choices). Conversely, the authors outline the cited drawbacks of polycentric governance, such as transaction costs (increased expenses in coordinating unified responses to significant challenges), democratic accountability (potential for reduced clarity in assigning responsibility), exploitation risks (opportunities for influential individuals to manipulate the system for personal gain), exclusion of marginalized groups (risks of overlooking non-institutionalized or disenfranchised communities unless they are intentionally integrated), veto points and conflicts (proliferation of stages or positions within governance where a decision can be halted or lead to unresolved conflicts, impeding collective actions), complexity (high level of intricacy in how governance flows, maintaining the status quo), and externalities and disputes (increased chances of conflicts and externalities spreading across various forums).

...

In conclusion, from Polanyi’s initial theory to more contemporary frameworks developed by Baldwin and other co-authors, the journey of the polycentricity concept reflects an ongoing, enriching dialogue among scholars from different disciplines. This evolution underscores the relevance of polycentricity in addressing the complexities of governance in a range of social, economic, and environmental systems, including those built upon novel technologies such as blockchain."

([3])

Characteristics

By the authors of the Report on Blockchain Technology and Polycentric Governance:

The three key attributes of Paul Aligica and Vlad Tarko

"Paul Aligica and Vlad Tarko (2012) took a significant step in the empirical application of polycentric governance principles formulated by the Ostroms. They introduced a framework of three key attributes, each with specific indicators, to evaluate and understand polycentric systems. Their framework, detailed below, allows for a detailed analysis of whether a system is polycentric, its evolutionary trajectory, and its interactions with other polycentric systems:

Polycentric systems comprise multiple decision-making centers, which

(a) can actualize their unique perspectives practically,

(b) can make operational decisions independently from higher-level authorities or entities, and (c) can have individual or shared goals.

Polycentric systems operate through an overarching system of rules or institutional framework characterized by

(a) a jurisdictional scope, which can be either territorial or non-territorial,

(b) a rule-making process involving either “insiders” or “outsiders,”

(c) decision-making methods, which could be grounded in consensus, individual decisions, or majority rule, and

(d) the correspondence between the established system of rules and the incentives for those governed by these rules.

Polycentric systems are not anarchic but rather spontaneous orders generated through the evolutionary competition and cooperation among the decision-making centers where

(a) the capacity to exit the system may be free or constrained,

(b) the criteria for entry into the system may be free entry, merit-based entry, or spontaneous entry, and

(c) the nature of the system’s information flow may be public or private (Aligica & Tarko 2012 p. 256-257)."

The three distinct components of Michael McGinnis

"Michael McGinnis, the former Director of the Ostrom Workshop, advanced the concept of polycentricity in 2016 by categorizing it into three distinct components: structure, process, and outcomes.

According to McGinnis:

Structure: The architecture of a polycentric system is characterized by the presence of multiple autonomous decision-making centers, each with overlapping areas of responsibility. This structural aspect defines the basic framework within which the system operates.

Process: The functioning of a polycentric system is governed by the interactions between these decision-making centers. These interactions involve processes of mutual adjustment, which are influenced by competition and cooperation, as well as formal and informal relationships among the centers.

Outcomes: The results of polycentric governance manifest as emergent patterns in social order. These patterns can arise naturally or through coordinated efforts, maintaining the overarching set of rules while allowing for distinct subsystems to coexist. This emergent order optimizes efficiencies of scale at various levels, from local to global, while also supporting the self-governance capabilities of the individual centers.

McGinnis (2016) highlights that these three components are interrelated: the system's structure influences the processes, which determines the outcomes. However, he also notes that polycentric systems face inherent challenges. For instance, different groups within a polycentric system may experience varying costs for collective action, and successful groups can impose higher costs on others. The presence of multiple "veto points" can limit the scope for mutual adjustments. As systems grow more complex, the cost of participation increases, often favoring existing experts. This complexity can also hinder coordination for improvements across governance areas. Additionally, collective action dilemmas are particularly pronounced at higher levels of aggregation, and there is often no single objective uniformly pursued by all participants at every level. Due to these challenges, McGinnis argues that polycentric governance often needs to fully meet the ideal structural, procedural, and outcome-related criteria. Thus, measuring the degree of polycentricity in a given system is not a matter of a straightforward binary distinction but a matter of degree, reflecting the varied extent to which these criteria are met."

Baldwin's temporal and spatial dimensions

"Baldwin et al. (2023) also emphasize the importance of considering temporal and spatial dimensions to understand the effects of polycentric governance fully. They acknowledge that these systems are dynamic and evolve over time. To facilitate a more comprehensive analysis of polycentric governance, the authors propose a framework built upon four key factors:

Contextual Conditions: This factor focuses on the specific socio-ecological challenges that the polycentric governance system aims to address, as well as the broader governance environment in which it operates. It includes the characteristics of the actors and communities involved and the overarching institutions that allocate authority and decision-making power. Understanding the context helps identify how the governance system is positioned to meet its challenges and interact with existing structures.

Operational Governance Arrangements: This component examines the tangible governance structures within the polycentric system, including the number of decision-making centers, their respective scopes of authority, and the nature of governance processes. These processes can range from cooperative to competitive, conflictual, or hierarchical. Analyzing these arrangements provides insights into how the system functions and how power and responsibilities are distributed.

Outcomes of Polycentric Governance: This aspect evaluates the social, environmental, and governance impacts of the polycentric system. It also considers how participants perceive these outcomes. This dual focus on actual outcomes and perceptions is crucial for understanding the effectiveness and acceptance of the governance system among its stakeholders.

Feedback Mechanisms: This factor addresses how change occurs within polycentric systems over time, across different spaces, and through various jurisdictions. Change can be driven by bottom-up mechanisms (like individuals exercising their rights to exit, voice opinions, or self-organize), top-down approaches (such as reforms and policy changes), or emerge organically from the outcomes of the governance itself. Understanding these feedback mechanisms is essential for comprehending how polycentric systems adapt and evolve (Baldwin et al. 2023)."

([4])

Non-Monocentricity Threshold for Assessing Polycentricity on the Blockchain

Blockchain Technology and Polycentric Governance:

"Because polycentricity exists on a spectrum, rather than labeling blockchain systems as endogenously and exogenously polycentric, it is better to test whether they meet a minimum criteria to label them non-monocentric. This exercise involves assessing attributes and indicators. Attributes represent broader conceptual understandings, while indicators provide empirical means to operationalize these attributes.

As we briefed in the introduction, a system is considered non-monocentric if it fulfills the following criteria:

• Multiple Decision-Making Centers: The system must have more than one center where decisions are made independently.

Active Decision-Making: The decision-making centers must actively exercise or implement different opinions and preferences. Autonomy from Outsiders: The decision-making centers need to be able to make operational decisions autonomously from the higher level or without direct influence from external entities, including those that might enforce rules.

• Unified Rule Set: Despite the autonomy of various centers, there should be a coherent and overarching set of rules that applies across the entire system.

• Rule Set Utility and Transparency: The rules of the overarching rule set need to be deemed useful by the agents subject to them, and the repercussions of non-compliance should be clear and understandable.

• Spontaneous Social Order: The system should exhibit a social order that emerges spontaneously through coordination or competition among the various decision-making centers (Aligica & Tarko 2012, p. 255-256)."

Negative Characteristics

Blockchain Technology and Polycentric Governance:

Interest Misalignment

"Interest misalignment can refer to interests within a decision-making center, between decision-making centers or concerning the higher ideal driving the overall blockchain system. The Bitcoin scaling debate, which took place between 2015 and 2017, illustrates the challenges that can arise in polycentric blockchain systems when interests within and between different decision-making centers become misaligned."

States of Exception

"A state of exception is a situation where the law is suspended or overridden by the sovereign power. The DAO Hack, which took place in 2016, is an example of a “state of exception” within the Ethereum network. After a hack into The DAO, community members voted in favor of a hard fork to reverse the transactions that led to the theft, an action seen by some as a violation of the tenet of immutability. Some community members who fundamentally disagreed with the decision remained in the original blockchain ledger, now referred to as Ethereum Classic."

Systemic Risks

"Systemic risk refers to the potential for a widespread collapse within an ecosystem, triggered by the failure of a single component, which then has far-reaching consequences across the entire system. The collapse of the Terra/Luna stablecoin in 2022 affected the DeFi ecosystem as a whole. Likewise, the downfall of FTX, a centralized cryptocurrency exchange, had ripple effects across the ecosystem, which attempted to self-regulate through informal norms and standards by doubling down—albeit temporarily—on their commitment to “decentralization.”

Example

• see: Customary Law Communities

Typology

Endogenous and Exogenous Polycentricity

From the report on Blockchain Technology and Polycentric Governance:

"Exploring the internal and external aspects of polycentricity in blockchain systems requires a deep dive into the concept of “boundaries,” essential for distinguishing between insiders and outsiders within these frameworks. Within polycentric and blockchain systems, boundaries are defined by the overarching system of rules. As Aligica and Tarko articulate (2012, p. 257), insiders are subject to the system’s rules, rights, and obligations. In contrast, outsiders are not bound by these rules, either by their own choice or due to limitations or external constraints that preclude their participation as insiders. From this perspective, endogenous governance refers to the mechanisms and decisions that occur within the boundaries of the blockchain system, as defined by its rules. It encompasses the internal operations and policies directly controlled and influenced by the system’s participants – the insiders. In contrast, exogenous governance pertains to external factors and influences that impact the blockchain system but originate outside its established boundaries. Exogenous governance can encompass regulatory decisions, market dynamics, technological advancements, and broader socio-political factors shaped by outsiders. While insiders of the blockchain system might not directly control external factors, external factors still affect the system’s operations.

When considering a specific blockchain system, such as the Ethereum network, the distinction between its endogenous and exogenous governance is contingent upon the Ethereum overarching rule system, which defines roles and incentives.

* Endogenous Governance: Internally, Ethereum's governance relies on its on-chain rules, such as the Ethereum protocol and smart contracts code. Alongside these are off-chain rules, which include formal structures like Ethereum Improvement Proposals (EIPs) and informal practices, such as ad hoc online meetings among software developers. Collectively, these rules and practices form what is often referred to as the “constitution” of the blockchain system (Mannan et al. forthcoming, Zargham et al. 2023, and Alston et al. 2021).

Exogenous Governance: Externally, Ethereum's governance is influenced by different types of off-chain factors. These include national and international laws and policies aimed at overseeing blockchain technology, including measures implemented by entities such as the United States Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC). Market dynamics, notably the supply and demand fluctuations of Ethereum's native cryptocurrency ($ETH) in relation to alternative ones such as like Bitcoin ($BTC), Solana ($SOL), or Avalanche ($AVAX), play a significant role as well. Furthermore, the governance mechanisms, both on-chain and off-chain, of rival blockchain initiatives providing analogous services or targeting similar user bases, also impact Ethereum's governance landscape (Alston et al. 2021).

Insiders and outsiders roles: Within this governance framework, stakeholders, including founders, software developers, validators, nodes, investors, token holders, and users are categorized as the “insiders” of the Ethereum blockchain system. Conversely, entities not directly integrated into the Ethereum network, such as competing blockchain organizations, as well as policymakers, lawmakers, and regulators, are considered “outsiders.” Insiders and outsiders are not fixed individual identities but roles played within and around the (blockchain) polycentric system (Aligica & Tarko 2012, p. 254). An individual can occupy multiple roles simultaneously. For example, a person can technically be a “core” Ethereum software developer and a U.S. policymaker, barring any legal restrictions due to possible conflicts of interest.

Blockchain systems exhibit unique aspects regarding the nature and meaning of boundaries, distinguishing them from more traditional polycentric systems:

Entry and Exit in Blockchain Systems: In polycentric systems, entry into the system can be open, merit-based, or spontaneous, whereas exit may be unrestricted or constrained (Aligica & Tarko 2012, p. 257). However, when it comes to public and permissionless blockchain systems, entry and exit are typically free but not without cost. The principle of “permissionlessness,” a fundamental technical and value among some blockchain advocates, refers to the ability to participate in using, developing, and governing a system without requiring authorization from a central entity, by adhering to publicly established procedures (Nabben and Zargham 2022). This freedom in decision-making enables individuals and entities to navigate into and out of blockchain systems as they wish, without the need for external authorization or coercion. Our report on blockchain and legitimacy (De Filippi et al. 2022) contextualizes permissionlessness in blockchain systems within Albert Hirschman's framework of “Exit, Voice, and Loyalty.” Hirschman (1970) posited that individuals facing organizational decline had the choice to either exit (leave the organization) or voice (express dissatisfaction), where loyalty—or a sense of belonging—may decrease the likelihood of choosing to exit. Blockchain systems, in contrast to more centralized entities like nation-states or conventional corporations, tend to have lower entry and exit barriers, thereby facilitating stakeholders’ ability to depart for or join other systems with relative ease.

Outsiders’ Influence in Blockchain Systems: In polycentric systems, outsiders sometimes hold specific rights that are not available to insiders, such as the authority and capacity to offer formal dispute resolution services (Aligica & Tarko 2012, p. 255; Carlisle & Grugby 2017). However, outsiders frequently face difficulties in enforcing rules and regulations within blockchain systems.

This difficulty is mainly due to the unique characteristics of blockchain technology, which introduce two principal obstacles to external regulation and enforcement: identifying the relevant legal framework and effectively implementing these laws (Alston et al. 2021).

Firstly, identifying the applicable legal jurisdiction for blockchain-related activities can be problematic. Given the decentralized nature of blockchain, multiple states might assert jurisdiction based on the domicile of blockchain “insiders,” yet confirming such presence or operational bases proves challenging. The ongoing discourse regarding classifying cryptocurrencies—as currencies, securities, or commodities—further complicates establishing a precise legal framework for crypto-related enterprises and transactions.

Secondly, even when the applicable legal parameters are clear, external entities cannot unilaterally interrupt the operation of blockchain protocols or smart contracts. This limitation has led to viewing blockchain technology as “alegal” or somewhat beyond conventional legal boundaries.

The legal challenges presented by blockchain can be:

1. Spatial: Allowing stakeholders to collaborate across state borders despite legal constraints.
2. Temporal: The immutability of transactions and self-executing rules via smart contracts alters the traditional sequence of legal actions.
3. Material: Enabling transactions with otherwise sanctioned individuals or organizations.
4. Subjective: Challenging the determination of legal status for insiders due to the pseudonymous nature of blockchain transactions (De Filippi et al. 2022c).

Despite these complexities, policymakers and regulators retain significant influence in blockchain systems. While they may not be able to directly “stop” the operations of a blockchain protocol or smart contract, they can impose sanctions on individuals and entities they consider to be associated with these systems. This dynamic highlights the nuanced and multifaceted nature of regulatory power in blockchain technology."

Discussion

Decentralization versus Polycentricity

From the Report on Blockchain Technology and Polycentric Governance:

"Undoubtedly, “decentralization” stands out as a critical technical characteristic and a core value celebrated by many proponents of blockchain technology, often touted as a revolutionary aspect (Bodó & Giannopoulou, 2019). However, the definition of decentralization, along with its measurement and application in different blockchain systems, remains a subject of debate. Vitalik Buterin famously differentiated between “architectural decentralization” and “political decentralization” in blockchain systems (Buterin 2017). Architectural decentralization, sometimes termed “disintermediation” (Swan 2015), refers to the distribution of ledger data across multiple nodes rather than a single server, forming the technical cornerstone of blockchain technology. However, the question of political decentralization in blockchain systems is more complex. Various methodologies, from the Nakamoto Coefficient (Srinivasan & Lee 2017) to recent comprehensive taxonomies (Sai et al. 2021; Karakostas et al. 2022), have been employed by practitioners and academics to explore the distribution of political power within blockchain systems. This analysis necessitates thoroughly examining the intricate web of governance areas, stakeholders, and mechanisms within these systems.

Moreover, while related, the concepts of “decentralization” and “polycentricity” have distinct meanings in the context of governance and organizational frameworks. These concepts are spectrums rather than binary states addressing the distribution of power and authority. Decentralization primarily concerns the structural dimension of governance, referring to the delegation of authority from a central body to various subordinate entities or levels. It highlights the power shift away from a singular locus but does not inherently ensure a multiplicity of independent decision-making entities. Polycentricity, as elucidated by McGuinnis (2016), represents a more expansive notion encompassing structure, process, and outcome. It is characterized by multiple and independent decision-making centers, each operating within a collective framework of rules. This structure facilitates a dynamic and evolving social order where these centers interact, collaborate, and sometimes compete. In a polycentric system, governance is not just decentralized but also diversified across multiple autonomous yet interrelated nodes."

More Information

• Polycentric Governance. By Bruce L. Benson.

URL = http://www.cato-unbound.org/2007/08/16/bruce-l-benson/polycentric-governance

• No State Required? A Critical Review of the Polycentric Legal Order. John K. Palchak* & Stanley T. Leung.

URL = http://blogs.gonzaga.edu/gulawreview/files/2011/02/PalchakLeung.pdf