What is governance?
Governance in public blockchain networks or DLTs refers to the set of rules, procedures and practices that define how decisions are transparently operated and made within a network.
This framework is essential to ensure that decisions are made fairly and transparently among stakeholders, with no entity exerting undue influence, facilitating greater autonomy and decisiveness, and allowing communities to tailor their governance structures to their specific needs and values.
Origins of decentralized governance
In the early days of bitcoin, governance was virtually non-existent and, in many ways, centralized. Satoshi Nakamoto made the major decisions about the direction of the project. With Nakamoto’s passing and the arrival of Gavin Andresen, governance began to evolve into a more structured model based on the Python Enhancement Proposals (PEP).
The introduction of the Bitcoin Improvement Proposals (BIP), with BIP-001 created by Amir Taaki and extended by Luke Dashjr, marked a milestone in formalizing the governance of bitcoin and other cryptocurrencies based on the same model, such as Ethereum, in this case through EIPs.
Importance of decentralized governance
In a community where participants interact in different ways and for different purposes, the need for a set of rules and norms that allow for the healthy coexistence of those who make life in that community possible becomes apparent.
In the context of distributed networks, where decentralization is a key feature, governance is particularly challenging, ensuring that all decisions are made by broad consensus among network participants. This is essential to prevent a single entity or small group from having total control, which could jeopardize the security and integrity of the network.
On-chain and off-chain models
Decentralized and distributed technologies open the possibility of new governance options known as “on-chain” and “off-chain” governance.
On-chain governance
On-chain governance refers to an integrated voting system that manages and implements changes in the network. In this model, any member of the community can propose changes, and voting participants decide whether to accept or reject the proposals.
In some forms of on-chain governance, proposed protocol changes are already written into the code and are automatically implemented when stakeholders approve the changes.
For example, Tezos uses a “self-amending ledger” where changes approved by the community are implemented in a testnet. If the changes are successful, they are finalized on the main network. This approach ensures that changes are properly tested before final implementation.
Off-chain governance
Off-chain governance, on the other hand, is more similar to traditional government structures. This model consists of all protocol change decisions being made through an informal process of social debate, which, if approved, would be implemented in the code and is used in both Bitcoin and Ethereum, where the balance of power is distributed between developers, miners, users and entities.
While this model allows for slower and more meticulous development, it maintains a relatively centralized aspect that excludes many users who lack the technical expertise or financial power to participate in decision-making.
Consensus
Consensus is a fundamental governance principle. It represents the mechanism by which network participants agree on the single, true state of the network, ensuring the integrity of the recorded data.
The following are the two most popular in the industry:
- Proof of Work (PoW): Used by Bitcoin, PoW requires participants (miners) to solve complex mathematical problems. The first miner to solve the problem adds the block to the chain and the network validates it. This method is robust and secure, but consumes a large amount of energy.
- Proof of Stake (PoS): In PoS, validators are selected to create new blocks and validate transactions based on the number of cryptocurrencies they own. This approach is more energy efficient than PoW.
The underlying technology and consensus algorithms are evolving daily, driven by a continuous effort to improve the efficiency, security and usability of these networks.
Forks
Forks, on the other hand, occur when there is a lack of consensus within the community about a proposed change to the protocol. These disagreements can be due to philosophical, technical, or economic differences about the future direction of the network.
If the community cannot reach consensus on a change, it can lead to a fork in the chain, where the network splits into two distinct versions, each with its own protocol and set of rules.
Thus, governance plays a critical role in managing forks by providing the framework and processes for collective decision making. Effective governance can help avoid divisive forks by facilitating communication and conflict resolution within the community and promoting broad consensus on proposed protocol changes.
Conclusion
Governance is essential to the management, success, and integrity of decentralized and distributed networks. It enables fair and transparent decision-making and ensures that power is not concentrated in a few hands. As technologies continue to evolve, governance will remain a critical issue, with on-chain and off-chain models offering different benefits and challenges.
One notable example of improved governance of these networks is Tezos, which eliminates the possibility of forks in its protocol through its self-amending ledger system. This ensures that changes are efficiently tested and validated before final implementation, improving the stability and cohesion of the network.
The key to any governance system is consensus, which ensures that changes are made in a way that is inclusive and fair to all network participants.
Want to learn more about blockchain technology? Don’t miss these resources!
- Exploring the blockchain technology
- The ultimate guide to the Bitcoin blockchain
- Consensus algorithms in blockchain technology
- DLT: Distributed Ledger Technologies
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