February 7, 2022

Blockchain governance: Guide by experts

Since public blockchains function as decentralized networks, they need to maintain a high level of fault tolerance to assure authenticity. This proves to be challenging and requires new forms of distributed governance. Otherwise, achieving the long-term sustainability of the entire blockchain network is next to impossible.

The idea is to strike a balance between algorithmic governance and what our human intuition tells us. Blockchain governance is a fascinating topic that is going to shape the future of this tech landscape.

What exactly is blockchain governance? What role does it play in the blockchain ecosystem? And what types of governance are we talking about here?

Keep on reading to learn the essentials of blockchain governance and understand its impact on blockchain technology today and in the future.

Let’s start with the basics: what is governance?

To put it simply, governance is a structure through which a system participant or user agrees to use that system. Practically every form of social structure has some type of governance in place. It helps us to keep order and allows users to follow rules that benefit everyone.

Every type of governance includes three principles that dictate it: rulers, rules, and participants. A ruler is a party providing governance – it can be a local market, social system, blockchain network, or a country’s government. If the system works properly, all the three elements work together smoothly and without interrupting each other.

Governance and the tech industry: current trends

Before we move into blockchain, let’s take a look at how governance works within major institutions and in tech. This will give you helpful context for discussing decentralization.

Governance structures include four key elements: consensus, incentive, information, and governing structure.

  • Consensus – a form of hierarchical centralization in traditional governance. Companies like Twitter or Facebook operate as centralized hierarchies and have top-down power structures. In these governance models, consensus happens when a specific group of people agrees on something. A governance model needs to include consensus mechanisms.
  • Incentives – most major tech companies are driven by the idea of generating revenue. In government democracies, incentives facilitate cooperation between representatives.
  • Information – in the context of democratic governance, information is critical for voters as it allows them to adequately understand how representatives act on their behalf.
  • Governing structure – this entity correlates with consensus and is far more rigid in traditional institutions than it is in the blockchain.

These structures are explicitly defined and difficult to change. Most corporate structures are top-down hierarchies because this type of organization works really well for generating profit.

Now that we covered the basics, let’s move to discuss governance in detail.

Types of governance

Governance can be found in both the digital and offline world. We can categorize it into two major sections: standard governance and blockchain governance.

Standard governance

This type of governance applies to major corporations (like corporate governance), partnerships, business relationships, nonprofits, and similar groups. Within standard governance, we can further categorize activities into representative governance and direct governance.

Direct governance

This type of governance offers a direct approach where every user takes part in governance by directly affecting each decision. When an action takes place, users can participate in decision-making. The key aspect of direct governance is the absence of any centralized authority or intermediaries.

The advantage of this model is that every participant’s vote counts towards decision making. This opens the doors to collaboration, open discussion, transparency, and accountability.

However, reaching consensus is harder, and participants may need education before they can participate in direct governance. Voting manipulation is a threat as well.

Representative governance

In this type of governance, users choose their representatives first. Once they’ve chosen, the representative is allowed to make decisions on behalf of the users.

The key advantage of the system is that it’s efficient – it balances decisions and allows people to choose their representatives.

However, the chosen representative may not always work towards the interests of the people who chose them. And even if they do, satisfying a large group of people is difficult hard. Lack of accountability and the need for trust in the system are issues of concern as well.

Blockchain governance

One of the key features of blockchain is decentralization. This is what makes blockchain governance so challenging.

Most companies out there are still used to centralized governance, and governing a decentralized platform, network, or social group is just very new. On top of that, the blockchain ecosystem is constantly growing, and adapting to its fast pace of development is hard.

Blockchain governance aims to manage the constantly changing state of blockchain with user needs. It deals not only with different governance layers but also technology layers that make up the blockchain.

Why is blockchain governance important?

Blockchain is an evolving technology, and governance is there to ensure that all of its parts work seamlessly together. Blockchain-based solutions need to work efficiently while the technology is still being actively developed by people all over the world.

Who is responsible for setting up blockchain governance?

Blockchain governance relies on four communities (in most cases). Let’s take a look at each of these communities to understand the role they play in blockchain governance.

  • Core developers – this group is responsible for developing, managing, and maintaining the core code of the blockchain. Developers can write, update, and remove code that has a direct impact on the functionality of this blockchain.
  • Node operators – they carry out blockchain and ledger full copy to run operations from their computers and decide whether certain features will run or not. Core developers often need to work with node operators before deciding on adding any features.
  • Token holders – these are the people who are part of the blockchain ecosystem because they hold blockchain tokens. They can become part of governance processes because they have voting rights. Whenever changes are applied to the blockchain – think prices, features, or anything else – they have the right to vote on it.
  • Blockchain team – The blockchain team is a company or nonprofit organization that manages the blockchain. Most of the time, it’s established to attract funding to the project rather than to have direct managing responsibilities. However, this entity can mediate between the investor community, node operators, and core developers. The blockchain team also communicates the needs of investors to ensure that the product delivers on its promise.

Two types of blockchain governance: off-chain and on-chain

Off-chain governance

Off-chain governance provides stability to projects we all know, like Bitcoin or Ethereum. It works like a traditional governance structure because it focuses on striking a balance between different communities, including miners, users, business entities, and other parties.

Off-chain governance requires participants to have certain financial and technical knowledge to become part of the blockchain network. But this doesn’t take away the flexibility of this governance.

Let’s take a look at the four key elements of governance and how they play out here:

  • Consensus – the consensus mechanism is set and managed by leaders in the community.
  • Incentive – here’s an example of how it works in Bitcoin: miners get fees, and developers get the option to make changes in the blockchain network.
  • Information – in the public blockchain, the information flow is fully transparent and allows all parties to learn what is happening in the blockchain network.
  • Governing structure – this is a BIP proposal mechanism that offers developers the option to contribute to the open environment.

On-chain governance

On-chain governance is all about the internal aspects of the blockchain. It works like a direct democracy where the voting mechanism is used for the on-chain specific network.

This type of governance it’s quite difficult to achieve. Here’s how the governance elements behave in an on-chain governance model.

  • Consensus – the consensus mechanism is the voting carried out via a protocol and part of the direct democracy system.
  • Incentive – the incentive is the transfer of power from miners to developers to users.
  • Information –information is always transparent.
  • Governing structure – developers propose changes via code updates, and every node votes on whether to accept or reject it.

The future of blockchain governance

Blockchain governance has become a polarizing topic in the space, with many people sharing their serious concerns around its future. But the blockchain ecosystem is rapidly developing, and the question of decentralized governance is going to become increasingly relevant as more users start getting interested.

In the future, we’re going to see more and more teams trying to create successful decentralized systems that work well in both the short-term and have long-term sustainability thanks to proven blockchain governance principles.

February 7, 2022