Do you think that blockchain will survive without proper governance? If it does, how will it survive? Is governance necessary? To answer these questions we have to delve deeper into blockchain governance.
In simple terms, governance is a structure that every user or participant agrees to follow. Its core purpose is to meet the user or participant’s needs with available resources as efficiently as possible and achieve the long-term sustainability of the structure. Sustainable governance systems tend to survive and the ones that are not disappear. Also all governance pertains to dynamic systems; if a system is completely static and no change is introduced, governance is not required. Blockchains are ever-evolving systems that should always try to adapt and adjust to the user’s need to offer better user benefit and user control. The mechanism on how blockchain can adapt and stay relevant to changing times and requirements is called blockchain governance. We have to note that private chains also have governance where their owners vote on decisions.
A typical public blockchain has four typical stakeholders namely Developers, Node operators, Token holders, and blockchain team. These four entities operate within three main areas of activities — Consensus mechanism, Funding, and Project governance. The Consensus Mechanism decides how the nodes agree with each other and add new blocks to the chain. Funding focuses on the decision on how the money is distributed in the network and within the organization. Marketing, legal compliance, strategic changes come under Project governance. Node operators can elect not to operate the nodes and hence they have a passive influence on the chain. Token holders influence the price by buying or selling the coins. We bring up governance as a third big obstacle to adoption as it can have significant influence over all the other factors contributing to DLT success. It is said that the user limit for a direct democracy in which all participants have an equal stake is somewhat around thirty thousand which is exactly the right amount of citizens eligible to vote in the ancient city of Athens
Compliance is another aspect of blockchain development that depends on governance with more and more requirements for regulatory oversight sometimes a need for a quick and sometimes unpopular decision arises. Another key area is volatility and market confidence although the blockchain is frequently described as immutable, it is the case as long as it’s creators doesn’t intervene. This immediately brings up the issue of hardforks. Price ends up fluctuating anytime a hardfork happened since volatility is one of the key criticisms levied against crypto. The constant risk of a fork can serve as a major obstacle to widespread adoption.
The Two Common Governance Models
Two fundamentally different governance models are frequently quoted as the way ahead of DLTs. They are off-chain and on-chain governance.
Off-chain governance is similar to a standard management model. The decision process happens outside the blockchain and the underlying code. The crucial decisions are made by a group of stakeholders pertaining to technology. Bitcoin (Bitcoin improvement protocol) and Ethereum (Ethereum improvement proposal) use this type of governance where developers can suggest changes. The changes are then approved or rejected via community feedback.
On-chain governance aims to transfer incentives from miners, developers, and node operators to the users. Tezos is an example of on-chain governance. The users are allowed to vote on everything including chain rewrites. On-chain governance aims to truly distribute and decentralized voting power. A much faster decision-making process can be implemented if we add smart contracts and complete governance automation.
Governance is an important factor to overcome hardforks, fluctuations in the price, etc. A typical governance system will be efficient, accountable, transparent, responsive, consensus-oriented, and also follows the rule of law. Maintenance of byzantine fault tolerance is also an important factor for a blockchain to survive.
Governance is necessary for a blockchain to survive. A blockchain will survive if there is a good governance structure. Governance is necessary for both private and public blockchains. A well-thought out governance design will be always sustainable.