Rules Without Rulers: How Holistic Decentralized Governance Accelerates and Secures Digital Sovereignty
This article explores the emerging legal framework for decentralized governance in token networks. Effective decentralized governance requires the design and implementation of a holistic framework. Other components of a functioning decentralized blockchain network—including technical, operational, and economic components—are ultimately dependent on a well-designed system of decision-making rooted in principles of effective governance. Decentralized governance of a blockchain network must, above all, aim to protect and preserve the digital sovereignty and long-term independence of the network itself.
Decentralized governance is a recognized guiding principle for maturing token projects and is increasingly being stressed in budding policy frameworks, including the proposed CLARITY Act. The draft framework proposed by the CLARITY Act underscores that decentralization is not merely a technical, operational, or economic inquiry. Instead, the focus of any decentralization inquiry must be an analysis of the “transparent, rules based system”—i.e., the governance system itself, and the overall design of the applicable governance framework which regulates and maintains the digital sovereignty of the network.
Decentralized governance as a key component of “mature blockchain systems” and of digital sovereignty
Language contained in the CLARITY Act (which has been now passed by the US House of Representatives) would create a new Section 4(a)(8) of the Securities Act of 1933 that would exempt “the offer or sale of an investment contract involving units of a digital commodity by its digital commodity issuer” if the underlying blockchain system related to the digital commodity has been certified as a “mature blockchain system.” The act defines a mature blockchain system as “a blockchain system, together with its related digital commodity, that is not controlled by any person or group of persons under common control.” The existence of a decentralized governance system will likely be a highly relevant factor in any such certification. A decentralized governance system is defined by the CLARITY Act as “any transparent, rules based system permitting persons to form consensus or reach agreement in the development, provision, publication, maintenance, or administration of such blockchain system, where participation is not limited to, or under the effective control of, any person or group of persons under common control.”
The emphasis on decentralized governance—and the definition of such governance as a “transparent, rules based system”—is an important statutory innovation that creates a genuine framework for digital sovereignty of blockchain networks. At heart, all forms of governance deal with issues of who is in control and how do decisions get made. In international law, States are afforded “sovereign equality,” a concept linked to political independence, territorial integrity, the freedom to choose governance and economic systems, and equal rights with other States. (See, e.g., UNGA ‘Declaration on Principles of International Law concerning Friendly Relations and Cooperation among States in accordance with the Charter of the United Nations’ (Friendly Relations Declaration) (24 October 1970) UN Doc A/RES/2625(XXV), Principle VI (“The principle of sovereign equality of States”). Decentralized governance presents unique design challenges in that no one, in theory, should have complete control, but decisions must nevertheless be made and enforced. In our view, blockchain systems themselves, which create independent and permissionless digital arenas on the internet, represent new kind of sovereign spaces that possess “digital sovereignty” over the network itself. By “digital sovereignty,” we refer to the ability of a decentralized network to remain independent and in exclusive control over its infrastructure and digital economy without outside interference from other networks. Successful decentralized governance is therefore not predominantly a technical or engineering challenge, but instead, will be the outcome of effective governance mechanisms that can promote and protect digital sovereignty.
Identifying the network’s core needs and implementing a ‘separation of powers’
Decentralized governance frameworks must incorporate elementary insights related to sovereignty that have long been established in political science and political philosophy. This includes the need for “separation of powers.” More specifically, decentralized frameworks must design and create sub-mechanisms that can separate out powers to better preserve stability, independence, and adaptive capacity.
Building on preexisting user practices of “proto-governance”
As a digital network starts to mature, informal customs and governance practices naturally emerge on their own due to organic user activity. Formal decentralized governance should build on such preexisting user practices and seek to codify such “proto-governance” regimes. The most successful decentralized governance frameworks will not be ones that are implemented “top down,” but rather, seek to codify and hard-bake the successful practices that have emerged naturally “from the ground up.” Because each network has its own goals and values, no two decentralized frameworks will be the same.
Such preexisting user practices also reflect a far more complex understanding of governance than simply viewing governance frameworks as “monarchy versus democracy.” Proto-governance practices may give greater weight to certain stakeholders on certain issues or at certain times, deploying informal consensus mechanisms that oftentimes truly reflect the “general will” of the network. Rather than grafting an arbitrary governance model onto a budding network, proto-practices should be evaluated and strengthened by governance designers.
Accelerating execution by replacing ambiguous bottlenecks with clear rules
In our experience, the failure to implement a clear governance framework for a blockchain network becomes the chief impediment to growth, stability, and speed. When decision-making is based on informal authority, discretionary calls, or opaque practices, core contributors face uncertainty about how the network should take action. Uncertainty and ambiguity will then pollute critical decisions related to fundamental aspects of the network, including tokenomics, contractual authority, and communications with third parties. In other words, it is the lack of governance that creates bottlenecks, friction, and needless redundancy. This, in turn, increases legal costs (often across multiple jurisdictions), and can even centralize power in entities and individuals that were meant to disperse it. A clear decentralized governance framework accelerates execution, turning rules into rails that speed coordination and strengthen the network’s digital sovereignty.
Addressing and combating digital tyranny
According to Madison, “The accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, selfappointed, or elective, may justly be pronounced the very definition of tyranny.” In the context of blockchain networks, digital tyranny reflects a similar concentration of control—concentration which itself threatens decentralization. It arises when the powers to propose, enforce, and adjudicate the rules and acts of the network accumulate in the hands of a single actor or a small group.
A holistic decentralized governance framework is therefore the backbone of any resilient decentralized network. It prevents digital tyranny not by concentrating power in a few hands, but by distributing authority through clear, contestable, and enforceable structures. By embedding rules into a separation of powers framework, it is possible to limit abuse, ensure transparency, and allow for thoughtful change. Decentralization can move from an aspiration into a lived, durable reality, ensuring that no actor, internal or external, can dominate the network or erode its digital sovereignty.