Since you have made your way to this article, we are assuming that you are already aware and versed with a basic understanding and working of blockchain technology. If you need some catching up, check our explanatory piece on the topic.
What is governance?
At an organizational level, governance relates to decision-making processes – the formulation and implementation of decision framework, role-distribution – who is responsible for what? power-distribution – is authority bestowed upon a select few or distributed among all participants? and so on.
Each of these questions has different implications on an organization’s operational system, at a micro or macro level. Any decision taken by the governing body/entity affects the participants of that organization.
A successful governance mechanism is the cornerstone of a successful organization. Not one-size-fits-all — A governance model is highly situational and may vary between different organizations. While a participative democracy could work for some, having powers vested in a central authority may be preferable for others.
Though they may be extremely diverse, super successful governance models are often centered around a set of qualities: Transparency, Integrity, Effective performance, and Collaboration.
Governance in blockchain
The blockchain governance model defines the project’s level of decentralization, accessibility, equitability, and how it balances the interests of various stakeholders.
Just like consensus between nodes is required within a decentralized blockchain network to continue validating and securing data, the consensus is required among networks of stakeholders to change its laws and processes. Because there is no centralized authority, decentralized networks and platforms rely on increasingly innovative governance mechanisms to make decisions on updates and roadmaps, and to resolve disputes in an equitable and inclusive manner.
Governance mechanisms in blockchain are relied upon for making essential decisions like extracting irreversible chain forks and adjusting token policies.
Broadly categorized into on-chain governance and off-chain governance, blockchain governance defines whether the decision-making process takes place via staking and transactions on the blockchain to off the blockchain through informal discussion and through a proposal process for suggesting improvements.
Off-chain governance mechanism
Most Proof-of-work blockchain systems utilize the off-chain governance mechanism. The core stakeholders of these blockchains are users, node operators, developers, and miners, and they all exert checks and balances on each other.
Off-chain governance for a blockchain ecosystem functions when all stakeholders agree and make all relevant updates and implementations in unison. If consensus cannot be reached, the network is liable to fork or split into two chains running different versions of the software, and the chain with the most transactional hashing power is considered to be the successor to the original chain.
With an off-chain model, protocol development takes place at conferences, online forums, and mailing lists, among other means. You must use these channels to get involved.
On-chain governance mechanism
In contrast, on-chain governance is a mechanism that enables a decentralized community to update a blockchain by voting directly on-chain. On-chain governance for a blockchain ecosystem typically takes place on Proof-of-stake blockchains in the form of a vote, and you usually must hold the blockchain’s native coin to participate in its governance. The weight of your vote is determined by the number of coins you hold. The stakeholders in on-chain governance typically include users, developers, and transaction validators.
On-chain governance widens the group of people who participate in blockchain governance processes, limits the threat of chain splits and forks, and allows individual users to register their input.
But how are these governance mechanisms implemented? We need to find answers to a few of the many questions, to get a simple understanding of the process:
- How to choose the decision-makers?
- Choose them
- Have them make decisions.
This makes it sound rather straightforward, but in reality, things are a little more complex. Governance revolves around four principles:
- Governing Structure
In this article, we want to give an overview of decision-making mechanisms used in a decentralized environment.
Choosing the decision-makers
Ideally, there should be a fair voting system where every stakeholder can express their opinion on choosing the decision-makers for a project or organization. But in reality, a process like this will not be viable. Blockchain projects are usually conceived by a group of few like-minded people. As these people start contributing towards the project, they build goodwill and identity. This reputation they’ve built helps in identifying the decision-makers of the group. Contributors who put in most time and effort in building and shaping up the project are naturally recognized as leaders and represent and maintain the projects from a very early stage.
Some projects have a process in place for deciding who does and does not participate in decision-making. When a form of delegated governance is used, a fixed number of validators or block producers is chosen. These entities take care of maintaining the blockchain and influence decisions around the code, especially its consensus critical parts.
Choosing a Consensus Mechanism
An important process in setting up the governance mechanism is the choice of consensus mechanism, and in the case of Proof of Work, the mining algorithm. These decisions affect the ecosystem and the economy around the protocol.
The decision to extend and enhance core client, choosing the language, etc. are some challenging early stages the decision-makers stumble upon, and choosing a consensus mechanism wisely could prove to be a game-changer.
Deciding How to Scale
The block size limit controversy is by far the best example to narrate the problem of scalability.
Neither can we create a “decentralization score” for a public blockchain, nor come up with a desirable level of decentralization necessary for any public network.
Depending on the use case, different levels of decentralization are required. For a network mainly providing verifiable scarcity of in-game artifacts, decentralization is arguably less important than a protocol providing a global store of value.
The robustness of a system is proportional to its points of control. A single point of control leads to a single point of failure and low robustness, whereas many distributed points of low influence lead to more robust systems. On the other hand, fewer points of control lead to faster decision-making and greater adaptability to external stimuli. As mentioned above: the use-case will determine the most desirable properties.
In a delegated governance model, users vote on a fixed number of delegates. On paper, delegated governance looks similar to representative democracies where the user casts a vote for their representatives, which in turn makes decisions on their behalf. They differ in that blockchain delegates do not have fixed terms, and the processes for choosing the delegates are not legally binding.
Projects using delegated governance models often resemble corporate structures more than they resemble community-driven open-source projects. The relatively small number of delegates enables efficient collaboration, but also has drawbacks of centralization. Most delegated governance systems to prefer performance over robustness. In the end, users vote with their time and attention on projects they find valuable.
Before diving into decentralized governance, we must define criteria as to what decentralization means.
An online definition explains “ Within the Bitcoin network, decision making structures (chiefly orchestrated by Core developers) can be understood as political, nodes enforcing rulesets can be understood as administrators, and fiscal power is wielded by miners.”
Bitcoin is the prime example of decentralized governance because its ecosystem grew organically, it had the most time to evolve, and had minimal attention at launch.
Repository maintainers have to sign every contribution with their private keys. Only contributions signed by one of the trusted maintainers can be merged into the main codebase. This prevents people with extended access to the repository, such as GitHub employees, to insert malicious code without being noticed.
Bitcoin doesn’t have a formal specification because no central authority defines what the system should do. Formal specifications are used to describe a system, analyze its behavior, and aid in its design by verifying key properties of interest.
DAO – Decentralized Autonomous Organization – An experimental governance approach
The Decentralized Autonomous Organization (DAO) is an entity governed by rules written into the code. It acts predictably according to a predefined “constitution” and is controlled by its shareholders.
Shareholders have the power to change the rules of the DAO, but only if making changes to them was foreseen and enabled at the DAO’s inception. Rules might just as well be hardcoded, without the option to adapt them later on.
Building a DAO is no simple endeavor. The code governing a DAO is public and anyone can review it. This also means anyone can analyze the code to find potential vulnerabilities. Fixing the code after launch is difficult, as any decision related to rule changes is subject to building consensus.
The idea versus real-life blockchain governance
The Bitcoin example shows us how real-life blockchain governance can differ significantly from how it is envisioned. For transaction submission and validation, as well as protocol updates, enacted governance appears to be considerably more centralized than envisioned governance. Even if decentralization is envisioned, it may not materialize. We can see that in practice the dimensions that are design-related (protocol development and updates) tend to be marked by particularly centralized governance, while those that are related to the actual use of blockchain (transaction validation and submission) tend to be somewhat more decentralized.
Since blockchain technologies debuted, we’ve learned that despite how they were envisioned, governance is often more centralized in practice since decision-making power is often costly to acquire and exercise. Expertise, reputation, time, or money can all be required to gain decision-making power. The higher these costs are, the fewer are the people who want to participate, which contributes to centralization in practice.
Bitcoin is a permissionless blockchain. For permissioned blockchains such as IBM’s Hyperledger Fabric, which restrict who can propose protocol updates, validate transactions, and submit transactions blockchain governance is envisioned to be more centralized than for permissionless blockchains such as Bitcoin’s.
If technology can be a powerful tool to promote individual freedoms and autonomy, it can not—by itself—constitute the basis for a free and decentralized society.
The decentralized infrastructure of blockchain technology may well increase the opportunities for people to organize and coordinate themselves more openly and less hierarchically, but it does not constitute, as such, a sufficient condition to ensure a sustainable decentralized governance structure.
Accordingly, despite its potential for disintermediation and decentralized cooperation, the social and political implications of blockchain technology are difficult to predict. In particular, it remains unclear whether technological decentralization will lead to a more decentralized and democratic society—one where people can freely organize themselves in an open and decentralized manner, freed from the control of governments and corporations—or whether it will instead lead to a society where most of our social interactions and economic transactions are mediated by trustless technological systems controlled by a few dominant players.