Blockchain Governance

Governance is the process which outlines the governing framework of a community — what is the decision making process like; when, where and by whom are these decisions made; and how is the reached consensus carried out. So, governance is all about the decision-making process and the resolutions that affect people of the governed community. Governance of a network can take place through societal norms, incentives, power, language, politics, or formal laws prevailing in the governed network.

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The most common governance structure that we have heard of is a government — an institutional body that is in charge of creating binding decisions by passing legal amendments. Another example is a corporation — a company governed by the CEO and the board of trustees who make decisions about future goals and strategies of the organization.

The list can go on endlessly — tribe, family, religious institution, so on and so forth. These governance models all share one common theme — they tend to evolve around centralization and consolidated power. For example, if we take a governmental structure of any state we can see how decisions are made, coordinated and enacted in the specially designated institutions ruled by a powerful elite that constitutes only a minority of the society. The significant part of centralized governance is that consensus is achieved by a small group of people and then is implemented in the community as an enacted law that shall not be bypassed.

Governance in blockchain is very important. The revolutionary nature of blockchain lies in its ability to serve users best interest and combat highly centralized and consolidated governance that is prevalent in today’s world. To achieve this, it is significant for the community to have solid governance structure where the decisions are made by fellow members in tandem, concerning when to upgrade the software, what is allowed and what is banned across the network, how to deal with unexpected circumstances, etc. Governance in blockchain aims to be decentralized and distributed and it has a potential to stand out from the traditional models with its formalized structure that is enhanced by smart contracts and transparent voting system, allowing network members to fully part take in the decision making procedures.

TypesAs of today, there exist two different types of blockchain governance: off-chain governance and on-chain governance.

Off-chain GovernanceThe off-chain governance structure is currently deployed by the major cryptocurrencies such as bitcoin and ethereum. The model proposes a balance of power between core developers, users, miners, and businesses, as all these parties represent stakeholders of the blockchain platform. This governance type allows for slower, steadier and gradual evolution towards fully decentralized governance by proposing different changes and upgrades step by step rather than all together. This approach perfectly fits the agenda for the wider blockchain adoption and on-boarding of current non-technical members of the community. The off chain governance resembles the traditional model, as the consensus is usually achieved by the community leaders. These leaders include large mining companies, core developers, business entities, etc. These big players come together, discuss proposed changes and make agreements concerning the upgrades. While off chain structure is not as centralized as the traditional model it still retains some power to the players that belong to the upper echelons. The downside of this system is that it omits those non-technical members from fully participating in the decision making process, which is understandable on one hand, as this people lack technical or finance related knowledge much needed to adequately evaluate the proposed change. However, if these members of the community are dissatisfied with some upgrades they have the right to fork the chain and implement their views using the open-source protocol and rewriting the code. Thus, forking represents freedom of choice of the member users.

On-chain GovernanceThe on-chain structure is pretty novel and innovative take on governance concept and aims to entirely dodge the structure of legacy institutions and democratize the system by on chain voting mechanism. After voting ends the results are automatically executed according to the rules embedded in the protocol. This consensus structure represents a very novel take on governance and might be associated with risks in terms of lack of use cases and consequently hardships related to evaluating the success/failure of the system. In the on-chain governance, not only developers and miners but also regular users are fully engaged and the power over the network is more balanced, creating an equally distributed power structure with no hierarchy. Even though on-chain structure seems fairer and more relatable to the blockchain ideology of decentralization, there are some doubts arising due to its newness. Some argue that it might be hard and challenging to actually execute the decision using on chain governance, a user participating in decision making might not have appropriate background much needed to evaluate the proposed changes and projects for the software upgrade and maintenance.

ExamplesSome of the prime examples of blockchain governance are Dash, Decred, Horizon, and EOS.

DashDash is one of the first decentralized blockchain governance organization managed by the master nodes — users who run the open source cryptocurrency. Dash is an altcoin based on bitcoin protocol, which forked from Bitcoin to focus on the governance management in cryptosphere. The crypto coin has a two-tiered system composed of miners, nodes, and master nodes. Both nodes and master nodes are responsible for regular mining task such as holding the blockchain copy, broadcasting transactions and undertaking transmission validation; however, master nodes additionally are in charge of decision making and they vote on the proposed projects to upgrade Dash.

Currently, Dash is one of the top cryptocurrencies and has a market capitalization of $734,634,792 USD (11/26/18). The currency supports faster transactions with a fully private option available and takes pride in a prompt governance structure. However, as only some members of the community participate in decision-making procedures, some perceive Dash as a not fully decentralized platform. If a user wants to become a master node s/he has to own 100 Dash coins. This buy-in price to become a master node is not seen as fair by many.

DecredLaunched in February of 2016, Decred is a distributed open source public ledger. It is the first cryptocurrency that has used the on-chain governance when in June of 2017 the coin community voted on a proposed protocol project using a binding on chain vote. This way, Decred was the first of its kinds to allow all members to control and decide on which upgrade would get pushed through by establishing the agreement between all the stakeholders. It is required all the community members to adopt the new software version in order the upgrade to become valid. Additionally, the governance model of Decred allows community members to decide not only upon the validity of software related upgrades but also upon any matters related to the protocol. Such events include budget allocations, new contractors onboarding, etc. However, as a bigger number of members is involved in decision making, more time it takes to process the update. Thus, the speed and efficiency of the system significantly drops. In addition to this, some opponents argue that those community members who do not have tech background might have a hard time fully comprehending the perks and drawbacks of a project, consequently making it challenging for them to evaluate a proposal.

HorizenAnother example of blockchain governance platforms is Horizen (previously ZenCash). The cryptocurrency offers a variety of use cases and aims to become a universal platform used to execute thousands of real-life services with absolute privacy, high levels of security and censorship-resistance qualities. The payment system, file-sharing, content-sharing and messaging are a few of its use cases that are currently available. Down the road, the platform aims to open up its governance model and offer it as a service for interested parties.

EOS.IOLast but not least is EOS.IO. This governance platform is hosted on EOS blockchain platform that allows vertical and horizontal integration of dapps. The EOS technology aims to become a blockchain software that quickly scales, executes millions of value transfers per second for no cost, and serves as a canvas to build new decentralized applications. EOS.IO is one of those dapps which focuses on governance. EOS.IO governance platform allows the token holders to elect 21 block producers (miners) who are in charge of hosting a constitution — a peer-to-peer end-user License Agreement. This agreement will serve as an official document reflecting the expectations of the community members regarding how block producers should control, upgrade and modify different aspects of the network. Opponents of this governance system suggest that sometimes the election procedure involves bribery, as the candidates for block producer positions promise voters a fraction of the reward they will get in case they assume this position. The community will vote for that delegate that promises the highest bribe. Some even suggest that there exists a threat of candidates forming an alliance like a cartel and controlling and coordinating the bribe amount. In either case, the opinions highly contradict promises made by the proponents of this governance structure.

ConclusionGovernance in blockchain is in its nascent phase, just like the blockchain industry itself. As the market reaches wider audiences and the rate of adoption starts increasing we will be seeing more revolutionary changes to the system. Until then we should expect many innovative ideas submerging around how to manage governance in blockchain — some feasible and others not so feasible. But, It is important to remain critical of every novelty and evaluate all of them with fresh and unbiased perspective; only then we would be able to distill the best version of how to govern decentralized distributed ledger of the blockchain.