What is Blockchain Governance: Ultimate Beginner's Guide

Rajarshi Mitra

3 weeks ago
blockchain governance
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In this guide, we discuss blockchain governance! 


In simple terms, “Governance” is a structure that every user or participant agrees to follow. Everything we use is under some form of governance. Its core purpose is to meet the user or participant’s needs with available resources as efficiently as possible and achieve the long-term sustainability of the structure. It applies to any type of group, be it in the real world or digital.

Therefore, for any kind of institutions, organizations, or services, especially as it grows, governance becomes increasingly indispensable. The governance style also needs to keep evolving to be relevant to the current need, but this is far easier said than done.  

Initially, the blockchain used to be a governance-free system, given the small user base. But as the size and complexity have grown, better management calls for proper governance. To understand how decentralized governance works is a different ballgame. Hence it’s better first to familiarize yourself with the traditional formats of governance. 

Governance Format

There are different kinds of governance styles employed today, but all have stemmed out from basically two main types – 

  • Direct Governance
  • Representative Governance

Direct Governance:

As the name suggests, in its pure sense, it is direct. Every participant or user will directly vote on every decision and any action need to be undertaken, no exception. 

Pros –

  • Here every vote actually counts
  • Since there’s no intermediary, it offers total transparency
  • This offers minimal division and more collaboration opportunity and open discussion to reach a decision
  • Users/participants tend to have much more control over what they get
  • This also means the government is much more accountable
  • Any rogue official in the government can be removed quickly
  • Voting here is more of a responsibility than a privilege

Cons – 

  • Often proves to be very difficult to reach a consensus i.e. make a decision
  • It can be costly due to the need of educating everyone on the topic and the voting process
  • Some people can be unwilling to participate
  • Some users can selfishly vote without considering the greater good
  • There is a risk with extreme manipulation where an influential user or person can pressure others
  • People or users’ emotion may come into play here
  • The biggest problem of all is as the group grows in size, it becomes increasingly difficult to manage to the point of being non-functional
  • Information overload can occur due to short attention span observed in average people especially of today

Representative Governance

In this model, all users or people vote to elect a few as their representative who would take all governing decisions on their behalf – vote on new rules and implement them. The pros and cons of this governance model are as follows – 

Pros –

  • This model is efficient and decisions can be taken faster
  • It’s comparatively easier to address any problem
  • Usually, the final decisions are very balanced, for the greater good rather than 
  • Users or people get to choose their representatives 
  • Cost-effective since it’s easier to inform a small group of representatives and they are knowledgeable people
  • It’s relatively easier to manage a huge group

Cons –

  • The representatives may work in their self-interest once they are elected
  • They may not play according to the people’s trust 
  • Some sections of the users or people will always be unhappy with the decision since it benefits the majority
  • There is an inherent lack of accountability among representatives
  • Has a major chance of deceptive election practices

You will be needing these points later in the article to clearly understand how it is incorporated in blockchain governance. But first, let’s get the definition out of the way.

What is Blockchain Governance?

Most companies and governing bodies are centralized in nature, therefore a leadership team usually governs them. 

Blockchain, however, is a decentralized network with lots of moving parts and features. This is an ever-evolving system which should always try to adapt and adjust to the user need to offer better user benefit and user control. Therefore the mechanism of how blockchain can adapt and stay relevant to changing times and requirements is called blockchain governance. 

Why is it so Important?

Adaptability and upgradability become two crucial characteristics when it comes to blockchain governance. According to many experts, the ability of a blockchain network to evolve and upgrade amidst ongoing development is a key differentiator to stay current and competitive.

Who’s Responsible for Blockchain Governance?

Blockchain governance usually involves four central communities, though to what degree each is involved varies from blockchain to blockchain. These communities are as follows –

    • Core developers – They are responsible for maintaining the main code underpinning the blockchain. Though they can add or remove code to modify the central code, they can’t put it into effect network-wide. 
    • Node operators – That’s the job of the node operators. Since they have a full copy of the blockchain ledger and runs it on their computers, they can decide whether to implement the feature on their nodes or not. Code developers are dependent on node operators to agree on their provided features.

 

  • Token Holders – These are the user and entities who hold the blockchain token. Depending on the various blockchains they have various degrees of voting rights on what feature to implement, set prices, etc. Generally, investors form the major part of the main token holder community
  • The Blockchain Team – It can be a firm or a non-profit organization that takes on various roles. The primary role is to steer the fund and project development. They also represent the broader communities of investors and supporters to negotiate with code developers and node operators, as well as often take on a marketing role. For example, while Bitcoin and Ethereum each have a foundation, Ripple is an example of a project that is managed by a company.

Elements of Blockchain Governances

There are multiple ways governance methods can be categorized. In the case of blockchain, identifying the primary categories is crucial to evaluate and develop an effective blockchain governance structure. 

Comparing with the current governance of typical organizations, we can think of four categories that are very relevant to blockchain governance – 

  1. Consensus
  2. Incentives
  3. Information
  4. Governing Structure

We will discuss each of these in the next section and show how they are important parameters for optimal blockchain governance.

Blockchain Governance Strategies: Off-Chain Vs On-Chain

Blockchain tech is pretty new and therefore, except Bitcoin, there are no sure shot strategies available. So, in a broader sense, blockchain governance can be categorized into two types –

  1. Off-Chain Governance
  2. On-Chain Governance

Off-Chain Governance:

Off-Chain governance usually promotes a balance between a blockchain community, e.g. its core developers, miners, users, and business organizations. Bitcoin and Ethereum both follow this governance model.

This type of governance model resembles the traditional structure of governance, but there are some similarities and also some dissimilarities with traditional governance models. 

Off-Chain model is relatively centralized, meaning decisions are taken by a few. Many mainstream users either don’t have a say or enough influence in decision making due to a lack of technical knowledge or financial power. This resembles the Direct Governance we have discussed earlier, and such, rightly so many believe Direct governance poses a threat to blockchain sustainability.

However, the dissimilarities lie in the fact that though centralized, Off-Chain offers much more flexibility in operation than traditional structures. Take the hard fork, for example. A user is free to choose which blockchain to follow – the new diverged chain as decided by the centralized body or keep using the old classic protocol. The price of the splitting of the original chain protocol is very less compared to traditional governance scenarios in industries or the government.

Let’s check how the four components that influence the Off-Chain governance strategy.

  • Consensus – 

In Off-chain, leaders in the community usually take the decision. In the case of Bitcoin, large mining players such as Bitmain, core developers, and business entities interact with each other and reach a general consensus.

  • Incentive – 

Though a great motivator, the incentive type varies for different entities or communities of Off-Chain projects. While miners are after fees, developers want controlled incorporation of network change and its increasing success, and, on the other hand, businesses seek whatever is best for them. This disparate incentive has significant potential to cause problems resulting in a hard fork. The infamous Bitcoin Cash hard fork was primarily due to incentive issues.

  • Information – 

Information on Bitcoin and other public blockchains is a unique proposition. The inherent transparency and trustless, decentralized nature of Bitcoin offers insights into the mechanics of the platform not available with governments or major corporations. This transparency is profoundly useful, but can also drive polarized incentives by different parties once network effects solidify entrenched positions. Information is not perfect in blockchains, but it is much better than traditional models of governance and is capable of redefining the dispersion of information on the Internet.

  • Governing Structure –

Though not as centralized as typical Tech firms and other media organizations, Off-Chain incorporates a high level of centralization. What differentiates it from the hierarchical structure of traditional governance structure is the technically informed developers’ ability to contribute to the development decision. A great example of this would be Bitcoin’s BIP proposal mechanism.

Now, centralization strategy-wise, Off-Chain governance can be further divided into three categories – 

  1. Benevolent Dictator for Life
  2. Core Development Team
  3. Open Governance

#1. Benevolent Dictator for Life

This is a type of Off-Chain model where either the original creator or the lead developer of a cryptocurrency/blockchain project, i.e. a single person, has the final authority on all blockchain-related decisions. Aptly named as “Benevolent Dictator for Life,” this is the simplest governance strategy in place.

Facebook CEO Mark Zuckerberg has the power to approve or reject any decision, thus controlling Facebook’s future roadmap.  

#2. Core Development Team

Here all decisions regarding functionality and features are taken by a team of the most active core developers, and therefore, they shape the roadmap of the blockchain. All users can request features or offer them, but whether to finally implement that or make it available in the official release lies in the hand of the core developers Most open-source programming projects employ this type of governance. 

This governance method is usually employed in open-source programming projects.

#3. Open Governance

Open governance is like the representative governance or democracy. Here, the blockchain user community selects the team to make all governance decisions for the blockchain. The team usually contains core developers, leading investors, and blockchain owners.

For example, Corda uses an open governance method. Hyperledger is another blockchain employing open governance. The Hyperledger Technical Steering Committee (TSC), the final authority for technical decisions in Hyperledger, is selected from their active contributors and maintainers. 

The Off-Chain governance system is an amalgamation of many individual decisions taken over time and therefore tends to be a slowly evolving governance system. Also, these many pieces of decisions make it much harder to analyze from a macro perspective.

On-Chain Governance

This is the latest entry in the blockchain governance structures and explicitly created for blockchain, unlike other Off-Chain methods. Being far more democratic in nature, the On-Chain governance method offers some fascinating, promising, yet polarizing concepts into the game.

The direct democracy in On-Chain governance is achieved thanks to the blockchain’s built-in voting mechanism, which can be optimized as per the specific requirement of a network. Note that here, the node operators’ participation in governance becomes utterly unnecessary since they just have to follow the on-chain process. This makes default decisions powerful and provides a higher chance to avoid a hard fork. 

In the purest form, imagine that the community is divided into two completely different proposals: 

  • To increase the block size to maximize throughput on the base layer. 
  • Integrate a second layer like the lightning network. 

All the token holders will cast their votes on the matter and whichever receives most votes will be automatically integrated into the chain. 

The focus here is shifted to the user needs by giving them more control and power of decision-making. 

  • Consensus – 

The blockchain protocol in the On-Chain governance model allows for the reaching of consensus through a direct voting mechanism. This consensus method resembles more of direct democracy (as discussed before) with few small optimizations to suit each blockchain need. 

Voting results are governed algorithmically and their automatic execution is built directly into the protocol. This is an entirely new form of consensus for governance, so there is no real use-case available with enough time to evaluate whether or not it is or can be successful. 

  • Incentives –

The incentives in the On-Chain governance model are very different than that of the Off-Chain model. The decision-making power is transferred from the developers and miners to the general users in On-Chain governance. While democracy is achieved, now how effective this method will be to steer the development of the blockchain in the right direction is under question, just like one of the cons mentioned in the direct democracy. 

With disparate incentives at play, conflict of interest between users are bound to arise. Without the proper technical knowledge, which many users will not have for sure, users may not decide for the platform’s best interest.

  • Information

The transparency regarding information in the On-Chain system is much better than what is offered in Off-Chain governance. Since users are involved as well, various proposals for development and voting now open happen in the open. Any important, but a necessary decision like the decision to reduce the block reward will be proposed and get run through the voting from stakeholders or a hybrid On-Chain/Off-Chain mechanism with complete transparency.

Except for Bitcoin’s BIP proposal with its improved transparency,  there is no other blockchain that offers a similar level of transparency in its Off-Chain governance structure. 

  • Governing Structure – 

This is an amazing feature of the On-Chain model. The task of governance conducted on the blockchain itself. As mentioned, since the consensus is achieved through a decentralized voting mechanism, it allows the blockchain to be much more adaptable and flexible than their Off-Chain counterpart.  

Here, the protocols of how the blockchain operates are stored in on-chain smart contracts that have built-in capabilities and procedures written for modifications. The rules for blockchain operation are stored in the blockchain itself – proper decentralization governance for a decentralized network.

We have seen that, as a group or community size gets larger, democracies tend to start failing, due to the emotional or selfish nature of people. This poses a major risk to the On-Chain governance mechanism for many users here are anonymous or at best pseudonymous.

Challenges of On-Chain Governance

The scalability issue continues to be a major concern here. The larger the community, the more complex and difficult it becomes to govern it efficiently. 

The blockchain community has been pretty much divided regarding the value of on-chain governance. In theory, any changes here can be programmed into the blockchain itself and voted through the allowed entities, and then implemented automatically in the code.

But, in reality, this approach throws some serious challenges – 

  1. All members have to be acting in the interests of the group as a whole, which isn’t guaranteed in a large, disparate community. 
  2. Blockchains are immutable, so once the votes are placed for any proposed changes, it cannot be rolled back.
  3. A natural tendency to recreate legacy governance models onto on-chain dynamics raises a high chance of friction
  4. Achieving long-term sustainability with an experimental governance model will require much more time and effort in reality

Let’s now check out some of the blockchain projects that employes On-Chain governance.

Some On-Chain Governed Blockchain Projects

Though still in its infancy, there are more on-chain governed blockchain projects emerging every single day. Let’s look into some of these projects.

Tezos

Tezos is one of the primary players of the On-Chain governance model and seems like they have solved the question of self-governance.

Tezos is referred to as a self-amending blockchain because it can evolve according to the current needs without doing hard forks – meaning no fragmentation of the chain. The proof of stake model-based smart-contracts allows the users to vote for any platform changes, including chain rewrites. Since voting on the Tezos platform is a combination of on-chain governance and self-amendment events, the voting process can be amended according to the community needs.

Employing a version of the proof-of-stake model (liquid proof-of-stake) means the voting here is weighted based on user stakes. A stake-based voting system means the more financial resources a user has, the more valuable his decision is in the chain. But since average users don’t have enough financial strength, Tezos tend to tip towards centralization. This shows a similar “majority rules” issue of direct democracy. But there’s a feature called delegated democracies where users may choose to delegate their votes to others, making Tezos more of representative democracy.

Decred

The on-chain governance model used in Decred is rather complex as it aims to transfer power to both stakeholders and miners. The blockchain is based on ticket-holder voting governance. Decred incorporates a hybrid consensus mechanism based on proof of work and proof of stake to achieve that. 

The project is self-funded in nature just like Dash because a portion of each block reward goes to a project subsidy fund to support further development. Something unique here is that the shareholders have complete autonomy over how this fund will get allocated.

The community can submit various improvement proposals and then vote on funding specific developments through a ticket voting process. Here all the people who have invested in Decred coins can participate in decision making. However, the voting process doesn’t happen directly on-chain and therefore raises some concern over transparency. 

DFINITY

Termed as the “Internet Computer,” DFINITY is a decentralized cloud computer. It employs an algorithmic governing mechanism named “Blockchain Nervous System” (BLS) to simultaneously protect users from attacks as well as dynamically optimizing the on-chain governance and security. This feature enables DFINITY to allow chain rewrite feature in case of a hack.

It employs a heavily optimized proof of stake consensus mechanism. The voting mechanism, called quorum voting is a type of direct voting mechanism known as “mob rule.”

The project is yet to be launched properly. So, though the potential is there, it needs to be tested.

EOS

EOS is another example of On-Chain governance. It uses the Delegated Proof of Stake (DPoS) consensus mechanism. Every user or participant here must buy EOS tokens to open an account on the platform, which also gives them voting rights. EOS doesn’t give voting power to the miners.

Conclusion

It is evident from the above discussion that there is no one ring to rule them all. Also, there is no correct way to manage any particular blockchain. Different use cases require different governing processes. Trial-and-error, being creative with what methods are available, continuous innovation, and productive discussions, are our best bet to inch closer to the perfect way to govern blockchain.

As it seems at the moment, a hybrid governance system of Off-Chain and On-Chain is more likely to prevail, although nothing can be certain. No matter which methods developers decide to use, one thing will always remain true – any entity of the blockchain community will prefer those which suit their needs the best. 

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