The importance of governance is well-recognized in every industry.
According to Wikipedia, this term refers to “a process of interactions through the laws, norms, power or language of an organized society over a social system. It is done by the government of a state, by a market, or a network.”
Almost every social structure has a governance that helps us to live in a better community space, following the rules for everyone’s benefit.
This article focuses on the importance of governance in the blockchain industry, including models, characteristics, and related future perspectives.
What is blockchain governance and why is it important?
Blockchain Governance (BG) refers to the process by which changes are made within a blockchain network, determining how the network is maintained and updated and how conflicts are resolved. This process typically involves a decentralized community of stakeholders (including core software developers, miners, nodes, and token holders) who use a consensus mechanism to make decisions about the network and the protocol, such as adding or removing features or the resources’ allocation.
A well-designed governance system can ensure that the network remains decentralized, secure, and resilient while allowing for new features and improvements. It also allows the community to make decisions on the future directives of the project and ensure the alignment of that network with the interest of the majority. It is crucial for ensuring the long-term stability and growth of the whole blockchain.
The difficulty of blockchain governance lies in the inherent feature of blockchain itself: its decentralization. Managing and governing a decentralized, peer-to-peer system is much more difficult than a centralized one with its own internal hierarchy. In this regard, any community needs to find an optimal governance system to make better decisions and grow as an ecosystem.
The various forms of blockchain governance and their key characteristics
There are three main types of blockchain governance
On-chain governance allows token holders to vote on protocol changes through smart contracts.
Off-chain governance provides decision-making through off-chain mechanisms such as community discussion, voting, and consensus-building.
Hybrid governance combines elements of both on-chain and off-chain governance.
Usually, the most used models are on-chain governance and off-chain governance.
The first term refers to a process in which the decision-making and protocol upgrades are made through smart contracts and the number of tokens held. This means that token holders can vote directly on the blockchain according to the number of the network’s native tokens. The protocol calculates the votes, and the outcomes are recorded on-chain, respecting the transparency nature and the tamper-proof feature. This BG model is usually employed in DAO (Decentralized Autonomous Organization) and PoS blockchains.
Instead, off-chain governance refers to a process in which decisions are made through an off-chain mechanism -outside of that blockchain- but results are still reflected on the blockchain. Nowadays, the majority of PoW networks employ off-chain systems, by which developers submit changes through formal improvement proposals (also knowns as IPs), network stakeholders coordinate through community channels (social media and forums), developers integrate new features in the code and nodes signal their support or dissent for the changes. If the consensus cannot be reached, the network will make a hard fork (splitting the blockchain into two chains running different software versions).
The greatest example can be Bitcoin and the issue of the block size that generate the hard fork and the birth of Bitcoin Cash.
Both models have their own advantages and disadvantages. A project may use one or the other governance model, or a combination of both, depending on their specific needs and goals.
Examples of successful and unsuccessful governance models in the blockchain industry
There have been several examples of both successful and unsuccessful governance models in the blockchain industry.
Some examples of successful governance models include
Ethereum's on-chain governance
Bitcoin's off-chain governance
Tezos on-chain governance: Tezos has a unique governance model based on a cyclical voting system -one for each quarter of the year-that allows token holders to vote on proposed changes to the network and receive a reward for participating in the voting process. This incentivizes community participation and has successfully allowed for the Tezos network's rapid development.
Some examples of unsuccessful governance models include
The DAO was a decentralized organization that was built on the Ethereum blockchain. It was designed to be governed by token holders through a voting mechanism built into the blockchain's protocol. However, a vulnerability in the smart contract code was exploited, resulting in the loss of millions of dollars worth of Ether. This incident highlighted the need for a more robust governance model in decentralized organizations.
EOS has a unique governance model that relies on a small group of "block producers" to make decisions about the network. However, this system has been criticized for being centralized and increasing the potential of collusion among the block producers.
Bitfinex uses the Federated Governance model, where a small group of pre-selected node operators governs the network, which has been criticized for being too centralized as the EOS governance.
It's crucial to note that these examples are not exhaustive; just because a governance model has failed in one project doesn't mean it's a failed model in general.
The future of blockchain governance and its potential impact on the industry
Blockchain governance is a rapidly evolving field that is gaining more and more attention as the technology matures and more organizations and teams begin to adopt it. While the concept of blockchain governance is still relatively new, it has the potential to significantly impact the way we manage digital assets and conduct business.
One of the most significant future perspectives of Blockchain Gov is surely DAOs, which will significantly impact decentralized decision-making and more equitable power distribution.
Another future perspective of BG is the increased use of on-chain governance that is becoming more popular as it allows for more transparent and tamper-proof decision-making.
Off-chain governance will continue to evolve in the future and will continue to be used in projects requiring more centralized decision-making, such as private blockchain networks.
In addition, the Hybrid Governance model will be widely adopted, combining on-chain and off-chain governance elements. This will allow for a more flexible decision-making process that can adapt to the specific needs of a project.
As blockchain technology continues to mature, we must continue to explore and experiment with different governance models to find the best solutions for different use cases.
What do you think about this topic?
Do you have some examples of successful/ unsuccessful Blockchain Gov models?
