The principle of operation of blockchain technology
The official birth of blockchain technology occurred on October 31, 2008, when an anonymous author or a group of individuals named Satoshi Nakamoto published an article “Bitcoin: A Digital Peer-to-Peer Cash System” (2008). In this article, Nakomoto proposes an innovative electronic payment system based on a peer-to-peer network and “proof-of-work” for publicly recording transaction histories. In this network, participants use their computing power to accept a particular block of payment information into the chain to lengthen that chain or to not accept if the block contains incorrect transaction data [35]. This ensures a secure, open, and distributed system of data verification.
Thus, Bitcoin—which is powered by the blockchain network—offers an effective solution to the main problem of electronic money: the double-spending of funds during non-cash payments. In other words, non-cash payments made through electronic wallets, due to the peculiarities of digital money, risk being easily replicated. As a result, these are not backed up by real money, since they may have already been spent on another, similar transaction. Before the creation of blockchain, this problem could be solved only through a centralized authoritative body, such as financial institutions that confirmed or rejected transactions by checking the balance in their clients’ accounts and not allowing double-spending.
A special feature of blockchain technology lies in the absence of a third party when verifying payments [4]. This function is performed by the peer-to-peer network itself, which puts timestamps on transactions, combines them into blocks, and attaches a hash to each block, the key to which is found thanks to the computational work of “proof-of-work” [21]. The data in the blockchain is immutable or cannot be changed without redoing all the work to calculate the hash for this transaction chain. Thus, the longest chain is a confirmation of the sequence of events and shows that it performed the most calculations in the network; in other words, it is verified authentic and free from fraud [3].
The network is resistant to malicious attacks thanks to a carefully designed system of motivation and reward, which is confirmed by game theory: the huge costs of equipment and electricity used by scammers to change the ever-increasing chain of blocks with stored transaction information will not bring benefits until they cooperate and achieve at least 51% of hash power in the network, which in itself is extremely unlikely [3]. On the contrary, for voluntary and honest participation in the peer-to-peer network for the verification of the same blocks, they will receive a guaranteed reward in the form of tokens (coins), such as Bitcoin or Ethereum. In other words, acting according to the rules of the network brings more profit than its cooperative attack for the sake of almost zero probability of hacking it [35]. Thus, blockchain technology provides a secure, transparent, and affordable method for but not restricted to making electronic payments.
The developer of the next generation of blockchain, Vitalik Buterin, made a substantial advancement to its initial idea by designing a completely new blockchain protocol with the goal of creating a decentralized global computer—Ethereum Virtual Machine [8]. The distinguishing feature of Ethereum lies in its flexible Turing complete programming language that allows execution of any function or task that in turn serves as a backbone infrastructure for new blockchain decentralized applications. This new protocol takes the idea of smart contracts to the next level, where one can program any condition for a transaction much easier and faster than in Bitcoin. In other words, Buterin made it possible to create a global decentralized computing platform not only for the payment system which was initially targeted by Satoshi, but virtually for anything. The examples of decentralized applications may include financial (insurance, ESCROW accounts, derivatives, etc.), semi-financial (gaming, bedding), and non-financial applications with tokens (supply-chain management, digital IDs, voting, decentralized governance). The latter is the main subject of interest in this paper.
In other words, blockchain is a distributed database, while cryptocurrency, such as Bitcoin or Ethereum, is a medium of exchange. Blockchain was invented to offer an effective, inflation-resistant, free, and non-regulated medium of exchange—cryptocurrency, but the blockchain technology is now applied in many other fields including governance.
Blockchain and governance
According to Fischer and Valiente [18], there is no common understanding of blockchain governance; it can be either used for defining the governance of blockchain technologies, or the use of blockchain technologies for governance. In this paper, we use Fischer and Valiente’s [18] definition of blockchain governance, which is regarded “as the integration of norms and culture, the laws and the code, the people and the institutions that facilitate coordination and together determine a given organisation.” Blockchain 2.0 has a potential for being a successful governance tool. Networks function as both pipes and prisms [44], and information exchanged via network mechanisms such as blockchain serve not only as a means of information conveyance, but also of status and reputation. In this capacity, blockchain serves as an effective means of sharing and authenticating the information critical for effective governance. Blockchain also has the ability to enhance data and governance infrastructures that reflect community participation and innovation for an increased diversity of voice in government and futures planning [23].
Blockchain is ideally suited to establish trust among unknown parties and can serve as a great help or even substitute for governments that are lacking trust in their institutions. Immutability, irreversibility, consensus mechanisms, cryptography, reward, and peer-to-peer systems create an ideal democratic society where everyone can contribute equally, and even malicious actors are forced to act in the best interest of the whole network. Thus, trust is created without the need of a third-party institution. This is especially attractive for countries where trust in government bodies is low, so blockchain technology can help to establish and enhance it through the use of smart contracts and non-financial applications for the better functioning of the society.
The successful example of application of blockchain in governance systems is electronic land auctions in Ukraine—System of Electronic Trading in Arrested Property (SETAM) that from September 2017 to February 2018 conducted 24,202 auctions, out of which 4471 were successful and generated 692 UAH million [5]. The use of blockchain in this particular case was aimed to combat corruption and nepotism in government auctions since they can be freely and openly monitored and verified in real time without the risk of public loss [5]. Since data enters the public blockchain, it cannot be later erased or corrected.
Blockchain can also serve as a handful technology for improving the conventional voting system. Computer scientists have proposed number of blockchain-based e-voting systems such as Blockchain-Enabled E-Voting (BEV) by Kshetri and Voas [30], Auditable Blockchain Voting System (ABVS) by Pawlak et al. [42], or even Platform-Independent voting system by Yu et al. [61] that can be executed on virtually any blockchain that supports smart contracts. The deficiency of the traditional voting systems such as lack of transparency and voter access can be addressed by a carefully designed blockchain-based e-voting that guarantees security, fairness, user-privacy, wider access to voting, and reduced cost of elections that is especially important for developing countries. Versions of this blockchain-based voting model meant to provide greater inclusion in the democratic process, such as MiVote, have been tested in Australia and elsewhere.
State land registers are another most commonly used area for application of blockchain technology. Land registers and administration suffer from corruption in more than 61 countries [58]. Blockchain can eliminate land register conflicts and even reduce the cost of transactions since all one needs to register is to have access to the Internet and a smartphone. Thus, such countries like Nigeria [14], Georgia [22], India [32], Dubai in the UAE [53], and Ukraine [5] are launching their pilot land registers on blockchain platforms to increase transparency and efficiency of land registration process and make it more accessible for people. This may be especially helpful in transition economies, with credible commitment and transparency associated with increased confidence in government and stability of property markets [20]. Thus, blockchain technology can eliminate corruption and frauds while keeping transaction costs low, which is ideal for such developing countries like Kyrgyzstan.
Kyrgyzstan as a governance case study
Kyrgyzstan is a developing country located in Central Asia that is facing the same governance problems as any post-Soviet state—corruption, nepotism, favoritism, and as a result, low level of confidence in its institutions [59]. Rent seeking and corruption are natural extensions of politically imposed restrictions in an economy [29] that is a critical problem in nations where democracy is compromised or non-existent, but these can be mitigated by increased information and transparency [52]. Blockchain can be a valuable tool in building democratic futures for Kyrgyzstan, with the current state of governance performing poorly along most any metric.
According to the estimates of the Freedom House organization [19], Kyrgyzstan’s democracy status is 16% out of 100 and democracy score is 1.96 out of 7; thus, it has called Kyrgyzstan’s current political situation as a consolidated authoritarian regime. National democratic governance has 1.50/7 quality score, electoral governance 2.25/7, corruption 1.50/7, and juridical framework and independence 1.50/7, while civil society was appreciated much better with the score of 3.25/7 [19]. The vocal civil society was the major factor for making three coup d’etats in 2005, 2010, and 2020, where presidents Akaev, Bakiev, and Zheenbekov and their corrupt regimes were fallen. Nevertheless, as Engvall [16] correctly pointed out “presidents come and go but corruption stays. As long as there is no commitment to cardinal reforms, especially in the judicial system, this produces a self-sustaining cycle of controlling corruption on the part of the incumbent coupled with selective anti-corruption campaigns spearheaded by a subservient judiciary against opponents.”
Political instability, absence of rule of law, and poor overall institutions (“the rules of the game”) [38] also contribute to more severe problems, including extremism. Though they only lived in the country for a short time, the Tsarnaev brothers, who were responsible for the Boston Marathon bombing, are of Kyrgyzstani origin. Over 4000 fighters for ISIS in Syria and Iraq are estimated to have come from Central Asia, including many from Kyrgyzstan [7]. Ethnic tensions and increased radicalization among groups is also a concern, leading some to claim the country is heading toward religious extremism [33], and unfortunately discussions about extremism are often inappropriately tied directly to ethnic groups in the country, such as the Uzbek minority [57].
Economic imbalances and insularity also pose significant risks. GDP per capita in 2020 was around $1200, with recent annual rates of inflation averaging 10%. Kyrgyzstan’s GDP is heavily dependent on immigrants’ remittances (27% of GDP) and gold exports from a single mining site, Kumtor (9% of GDP) [60].
In summary, Kyrgyzstan is a lower-middle-income country contending with extremism, political turmoil, low levels of trust towards governing bodies, and serious economic difficulties. Since achieving independence from the USSR in 1991, the country’s economic and political transition remains incomplete. This paper aims to examine scenarios whether and how blockchain technology can affect governance in Kyrgyzstan.