How Blockchain Governance Can Help Facilitate The Sustainability of Blockchain Networks and A Closer Look At 2 Types of Blockchain Governance Strategies

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The recent emergence of blockchain may be considered as a global revolution that could someday underlie everything from how we buy things, how we vote, and how organizations operate, among a plethora of other applications. Blockchain networks, specifically public blockchains like the Ethereum or Bitcoin Blockchain, exist as decentralized networks run by network participants who need to maintain the security of the blockchain to retain its authenticity. Considering the diverse nature of Distributed Ledger Technology, this isn’t easy and requires novel forms of distributed blockchain governance to achieve sustainability of the entire network by balancing human intuitions and algorithmic governance.

Governance of the Blockchain network is a fascinating technique and somewhat complicated to newbies in this space. Understanding which blockchain networks can adapt and how they can be adjusted to integrate effective governance models is vital to shaping the future of blockchain technology. In this article, we take a deep dive into what Blockchain governance is.

What is Governance?

House of senate

According to 101 Blockchains, governance can be described as the structure through which system participants agree to use the system. The users also agree to use the system according to some pre-set rules set by the participants to meet specific goals. However, unlike common governance in organizations and countries, blockchain governance is far more complex. There are different kinds of governance models implemented by organizations today, but they all stemmed from two main types:

1. Direct governance

As the name suggests, direct governance is where all participants are involved in the decision-making process. Within the blockchain space, direct governance is implemented on public blockchains like Bitcoin. All the involved nodes take part in verifying and voting on transactions on the blockchain network.

2. Representative governance

In this model, all the users or participants elect a few representatives who take the governing decisions on their behalf. In the blockchain space, this model is implemented on private blockchains and consortium blockchains where the network nodes choose a few known nodes to vote and verify transactions on the blockchain.

Decentralized Governance on the Blockchain

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Blockchain’s main value proposition is decentralization – the elimination of middlemen and central authorities in digital transactions. The technology’s main goal is to enable direct transactions and interactions between parties through smart contracts. On a large scale, this means eliminating central entities like banks, financial institutions, and governments, to mention a few. 

In the information age, decentralization acts as a driver towards a future designed to place authority in the hands of the people. For this reason, blockchain can be considered to be a digital extension of representative democracy. Decentralized networks are usually consensus-driven and enable users to take an active part in the decision-making process. Like Bitcoin, whenever a transaction is queued, it requires the collaboration of all the network participants to approve it to be deemed a valid transaction, rather than going through a centralized organization or groups to do so.

Besides direct transactions between network users and the elimination of intermediaries, a decentralized governance model also provides the benefits of direct network checks and balances on those with authority. Consequently, this increases the transparency and accountability of the network. A good example is the Ethereum blockchain, which allows users to track transactions through their Etherscan.io site.

Moreover, a decentralized governance model improves the efficiency and rate at which decisions are made on a large scale. Blockchains like DASH use a consensus-based voting system with a deadline to announce their decisions. This allows stakeholders on the network to validate transactions faster than centralized financial institutions that may take up to five working days.

To understand blockchain governance, we need to clearly understand the different technology layers that make up the blockchain, the participants involved, and the critical elements of the blockchain technology.

Who is responsible for implementing and enforcing Blockchain Governance?

Blockchain governance usually involves four key participants whose degree of involvement varies from one blockchain to another.

1. Core developers

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Core developers are responsible for maintaining the architecture code underpinning the blockchain. Core developers get to decide the initial governance model that will be implemented on the blockchain. However, they do not add, update, remove or modify the central code. They cannot deploy the features to the main network without the consensus of the nodes with the proper authority to approve or disprove the modifications. Once they develop the blockchain, the governance is handled as stated in the main code.

2. Node operators

On the other hand, Node operators handle any approval or disproval of changes on the network or transactions. Since they have a copy of the entire blockchain on their computers, they get to decide whether to implement features proposed by the core developers or not. Code developers are dependent on the decisions of node operators.

3. Token holders

Tangibal Cryptocurrency in the hand

Different blockchain systems have different degrees of voting rights. Within blockchains that implement the Proof-of-stake consensus mechanism, staking tokens (known as governance tokens) provides users with voting right. According to coinmarketcap, Governance tokens are tokens that developers create to allow token holders to help shape the future of a protocol. Token holders, who are generally the investors, have the right to influence decisions concerning the project, proposing new features to the project or even changing the governing model.

4. Blockchain team

People in an office

This is a versatile role taken by a non-profit, a tech company, or an established organization. Their primary role is to conduct the funding of the project and steer the project development. In most cases, the blockchain team also includes the latter participants.

For example, while Bitcoin and Ethereum blockchain have a foundation of all participants, Ripple is managed by a company.

Elements of Blockchain Governance

Multiple complexities come into play with blockchain governance. Many governance factors should be considered when designing the governance principles of a blockchain. Furthermore, the governance principles depend on the type of the blockchain, the project’s philosophy, utility, number of users, and the demand of the stakeholders.

Here are four key elements that every project should consider when designing a governance model:

1. Consensus protocol

A consensus protocol for blockchain governance

While large tech companies like Facebook and Twitter rely on a board of directors to govern the company decisions, blockchain distributes the governance to the network. This means that any governing decisions on a blockchain project are made by the network participants or a few selected nodes chosen by the network.

However, it is crucial to note that different blockchain systems implement different consensus protocols. The two most popular protocols include Proof-of-work (POW) on the Bitcoin blockchain and Proof-of-Stake (POS) on the Ethereum 2.0 blockchain.

2. Incentives

Incentives provide value for the different users that help run the blockchain. With the POW, this applies to miners, while in the POS, it applies to token holders. In simple terms, incentives act as a way to ensure users govern the blockchain honestly and as a driving factor to promote the wellness and functionality of the blockchain.

3. Information

To make effective decisions, any governance model requires information. As blockchain is decentralized, network data plays a crucial role when it comes to blockchain governance. Compared to traditional-centralized governance models, a lot of information is required to pass decisions on a blockchain network. Therefore, the decision between a public, private, or consortium blockchain should be considered thoroughly.

For instance, public blockchain requires all the data to be available on the network for all users to view, track or verify, giving governing rights to the entire network. On the other hand, private blockchain might choose to hide the transaction data but provide a mechanism to verify that the transaction is valid. A good example is the Monero Blockchain. 

4. Governing structure

The governing structure on the blockchain network is more flexible and can be co-related to the consensus protocol or incentive system implemented. Governing structures also consider the ever-changing dynamic of the network. They can be changed by simply proposing changes to the smart contract code or blockchain architecture code, as seen with the transition of Ethereum from POW to POS in Ethereum 2.0.

A closer look at the two types of Blockchain Governance strategies

Meeting hall for ambassadors

Having looked at the key elements to consider when designing a blockchain governance model, let’s have a look at how these elements are implemented on the types of governance strategies:

1. Off-chain

Consensus on an off-chain governance model is made informally, away from the blockchain’s underlying codebase. The network stakeholders vie for network control by coordinating other users through different avenues like community forums, social media groups, or the project’s official community channel. It is crucial to note governance obtained through an off-chain model is not bound by any code, but rather, the stakeholders choose to run the blockchain in their best interest.

Any project updates are submitted to core developers through formal improvement proposals, like Bitcoin Improvement Proposal (BIP) or Ethereum Improvement Proposal (EIP). The proposals are then submitted to the project’s official GitHub repository.

The various stakeholders involved approve or disprove the proposal through the community channels. This helps the core developers understand whether or not the node operators will agree to modify the project’s architecture. Within this model, everything should be announced publicly before any modifications.

In the case of disagreements, the stakeholders have two options:

  • Convince the opposing side of stakeholders to accept the modifications
  • Hard fork the protocol and keep the changes they deem necessary. According to Investopedia, a hard fork can be referred to as a radical change to a blockchain protocol that effectively results in two branches, one that follows the previous protocol and one that follows the new version. Moving forward, both brands will have to compete for network users, hash power, and developers.

While an off-chain governance model might attempt to consider all users, in most cases, the power ends up concentrated with the developers and miners. Although it might be slower than on-chain, it takes a more conservative approach since some high-value protocols do not always need to be altered.

2. On-chain

On-chain governance is a system that deals directly with the code running the blockchain system. Anyone can suggest code changes, but usually, it’s the core developers and token holders that get to decide on whether the changes will be implemented or not. This is mainly because most protocol changes are too technical for users who only interact with a blockchain project from a user interface perspective.

While on-chain governance has many proponents, it’s comparatively new, and a lot of the infrastructure needed to run on-chain governance has not been built. This is because it focuses more on a direct governance approach whereby all users need to participate in the consensus process. In most cases, creating a blockchain governance model can take a lot of time as things become more complex as a blockchain becomes more decentralized.

However, despite these hurdles, having a working on-chain governance model has the following benefits:

  1. A decentralized decision-making process: Any entity holding the blockchain’s respective token can vote on any changes on the blockchain protocol.
  2. Binding code changes: Any modifications or upgrades performed on the code are coded into the protocol. This is in contrast with informal decision-making, where the shareholders get to pass rules as they wish.
  3. Transparency: The process through which on-chain changes are made is recorded on the blockchain, and anyone can review, approve or disprove the changes. In this way, both users and stakeholders feel involved in the consensus process.
  4. Quicker consensus: Code changes are coded with a set voting time interval. Therefore, stakeholders and users know that they have a limited time to approve or disprove the changes.
  5. Fewer malicious hard forks: Hard forks are particularly damaging to a blockchain project since the newly formed ‘branch’ competes with users and developers with the existing main blockchain. On-chain eliminates this by ensuring all stakeholders feel more enfranchised if they have a fair say in the blockchain.

Some of the challenges with decentralized governance in blockchain projects

Decentralized governance models also have their issues

  1. First, it calls into question the interest of each user. All members have to have the same interest for the governing model to work seamlessly. However, in a large and disparate network, this might not be the case.
  2. Second, even with a working deadline-induced voting system, blockchains are still immutable. Therefore, once any proposed changes are placed and verified, they cannot be rolled back.
  3. Also, achieving long-term sustainability requires a lot of time, effort, and expertise to develop a working governance model.
  4. Since the nodes and stakeholders might be anonymous, the network might argue against stakeholders’ credibility representing the collective.

The future of Blockchain governance

2040 written on a typwriter

From the above discussion, it is apparent that there is no one solution to serve all the governance needs. Moreover, there is no way to manage one particular blockchain. Different types of blockchains require different types of governance models. Also, different use cases demand different approaches to govern their ecosystem. Since blockchain is still a novel technology, trial-and-error, and continuous innovation might be the best way to develop efficient blockchain, governance models.

While off-chain models are currently prevailing, it is clear that a user-centric model is better suited for any entity of the blockchain community as it will best suit their needs.

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