BLOCKCHAINS AS INFRASTRUCTURE AND SEMICOMMONS.

• Author: Grimmelmann, James

Table of Contents Introduction 1100 I. Infrastructure 1104 A. Definition 1104 B. Ledgers as Infrastructure 1107 C. Blockchains as Infrastructure 1109 D. Decentralization 1110 II. Semicommons 1112 A. Definition 1112 B. Blockchains as Semicommons 1116 III. Governance 1118 A. Protocols and Software 1119 B. Turtles All the Way Up 1121 C. Resource Consumption 1122 D. Tyranny of the Majority 1124 E. Consensus Breakdown 1126 F. Inherent Instability 1127 Conclusion 1129 INTRODUCTION

Blockchains are black boxes--at least as far as legal scholarship is concerned. Large and growing bodies of literature discuss the potential applications of blockchains in fields including antitrust, (1) contracts, (2) commercial law, (3) corporate law, (4) financial regulation, (5) property, (6) securities law, (7) and more. (8) This scholarship largely takes blockchains themselves as given and instead asks whether and how law should regulate the various uses people make of blockchains.

When legal scholarship does discuss the inner workings of a blockchain, the details are treated primarily as a technical question. The computer science of consensus protocols, cryptographic signatures, mining, and transactions are described in enough detail to explain how the underlying technology works and then set to one side. This is the ambit of computer science, not of law. On this view, legal scholars should care about what blockchains enable rather than how they work.

We disagree. We believe that legal theory should pay close attention to the technical details of blockchains for two reasons.

First, what is inside the black boxes is interesting in its own right. Legal scholarship can illuminate how blockchains work. A blockchain is, at heart, a set of rules for how to use a shared resource, and this kind of coordination problem is a familiar subject for property theory and intellectual property theory. Similar to wikis and open-source software projects, blockchains are an important real-world example of collaboration in action. (9)

Second, black boxes do not always work. Legal scholarship can explain how blockchains break. Predicting blockchains' likely failure modes is a central question for regulating them. The same tools from legal theory that help explain when collaborations succeed can also help explain when they fail. The history of blockchain disasters--from the DAO hack to stolen apes--is most usefully explained in terms of their inner workings. (10)

In this Article, we give a careful description of blockchains as infrastructural semicommons. (11) Our description draws on two established lines of scholarship. First, we use Brett Frischmann's theory of infrastructure (12) to position blockchains in larger streams of production. (13) On the one hand, blockchains are useful to their users because they provide an infrastructural service: users can record transactions and run sophisticated applications without needing to trust a single centralized service operator. (14) On the other hand, blockchains themselves depend on a set of underlying infra-structural resources. (15) Some of this infrastructure (for example, worldwide internet connectivity) is preexisting, but some of it (for example, protocols and software) must be specifically provisioned for a blockchain to function. (16)

This infrastructural framework foregrounds the functional roles that blockchain systems play but tells us relatively little about how they are constructed. We fill in these details using Henry Smith's semicommons theory, which highlights the complex balance of private (for example, individual computers, cryptocurrency tokens) and commons property (for example, the blockchain protocol, the history of blocks) that make the construction and ongoing functioning of a blockchain possible. (17) Semicommons theory directs attention to the boundaries between different resources, the mixed incentives of different participants, and governance institutions. (18)

The two frameworks are complementary. The infrastructure story is demand-side. It explains blockchains from the outside in: why they provide useful outputs and what inputs they require to function. The semicommons story is supply-side. It explains blockchains from the inside out: how they are structured to overcome coordination and cooperation problems.

Our analysis highlights the roles of different and overlapping governance institutions in blockchains. (19) Governance has long been recognized as a key feature of commons management. (20) An essential task in mapping a commons resource is describing how its governance institutions are constituted and the rules they develop and enforce. (21) Although the commons form is sometimes treated as the opposite of private property, recognizing commons governance and private exclusion as two strategies for resource management is more helpful. (22) Infrastructural blockchain semicommons use both governance and exclusion in complementary ways. (23) In particular, this perspective emphasizes that socially based "off-chain" governance plays an essential role in making technically based "on-chain" exclusion work at all. (24)

Part I of this Article gives a description of a blockchain as layered infrastructure. It describes the essential features of a transactional ledger and shows how Frischmann's theory of infrastructure elegantly captures these characteristics. Then, Part II shows how blockchains overcome the coordination and cooperation problems inherent in making a ledger distributed. Here, Smith's theory of semicommons succinctly describes the relevant moving parts. Next, Part III complicates the story by demonstrating that blockchains display precisely the tensions and instabilities that semicommons theory predicts. These challenges are serious, and whether a blockchain fails or succeeds often turns on whether its governance institutions are capable of rising to the occasion. Finally, a brief conclusion reflects on the rhetoric of trust and community around blockchains--seeing them as infrastructural semicommons helps one understand what is really at stake in these conversations.

1. INFRASTRUCTURE

   1. Definition

      In Frischmann's definition, a resource is infrastructure when it has three characteristics. (25) First, the resource is nonrival: it "may be consumed nonrivalrously for some appreciable range of demand." (26) Nonrivalrousness means that the resource is capable of serving multiple simultaneous uses. (27) Second, the resource is valuable as an input: demand for the resource "is driven primarily by downstream productive activities that require the resource as an input." (28) Input resources are valuable for what they enable rather than for direct consumption. (29) And third, the resource is generic: it "may be used as an input into a wide range of goods and services, which may include private goods, public goods, and social goods." (30) Genericity means that analysis of the resource cannot be assimilated to the analysis of its sole productive use. (31) Classic examples of infrastructure include roads and other transportation networks, telecommunications networks, the natural environment, ideas, and languages. (32)

      But Frischmann also points to a pervasive dilemma of infrastructure. Many of the downstream uses that infrastructure supports create positive spillovers that have social benefit exceeding their private value to the user. (33) Many of these spillovers go beyond the consumer surplus that attaches to any good in a world without perfect price discrimination. (34) Some uses have network effects. For example, each additional user of a currency standard reduces the average information costs of pricing in a way that benefits all existing users. Other uses are true public goods that benefit everyone, whether or not they also use the infrastructure. (35) New ideas are public goods in this sense. (36)

      The problem is that the infrastructure users who create positive spillovers cannot and will not pay for all of the value they confer on society. (37) This means that the traditional property strategy of treating a resource as a private good, with a price based on a user's willingness to pay, fails for infrastructure. (38) Users will pay for the private value they individually realize from using the infrastructure, but that is less than the full social value their use creates. (39) The private owner of the infrastructure will price access above the point that would be efficient for society overall, resulting in under-use. (40) Some of the uses that the infrastructure could support (because it is nonrival) will be lost because the private infrastructure owner has too weak an incentive to allow them (because of unin-ternalized spillovers). (41)

      Frischmann's solution to this dilemma is commons management, "in which a resource is shared among members of a community on nondiscriminatory terms... that do not depend on the users' identity or intended use." (42) Anyone within the relevant community who wants to use the infrastructure can, and they can do so on substantially the same terms as anyone else. (43) Treating infrastructure as a commons encourages wider use, including publicly valuable uses that cannot pay their own way. (44) Frischmann traces the commons-management strategy in numerous infrastructural resources, including communications networks and knowledge resources. (45)

      Commons governance of infrastructure faces two characteristic challenges. On the demand side, it must prevent congestion due to overuse. (46) While pure public goods, such as ideas, are inexhaustible, other kinds of infrastructure, such as roads and telephone networks, have limited capacity. (47) When that capacity is reached or exceeded, their quality degrades and users suffer. (48) So some kind of mechanism should deter use beyond the point at which the use's marginal value is exceeded by the negative spillovers it causes for other users. On the supply side, governance must create sufficient...