Blockchain governance is an elusive concept for many. One of the pillars of blockchain is that the system is decentralised, meaning there is no overarching power that controls it. But, it is essential not to confuse these two concepts, as they can exist simultaneously.
At first, when blockchain was starting up, and the community using the technology was much smaller, there was no need for governance. However, as the technology has significantly grown in popularity and complexity, the need for blockchain governance has increased.
It has become necessary to introduce governance to ensure that the system works as efficiently as possible and is sustainable in the long term. This governance has been incorporated into various blockchains. But understanding the way blockchain is governed is a bit complicated. This article introduces the blockchain governance concept and explains how it works.
Understanding Governance
Before digging into the complex concept of blockchain governance, it will be helpful to grasp the general concept of governance and how it works in society. Every group of people or society (be it a tribe, empire, country, or village) has certain social rules and norms.
These rules and norms are principles everyone must follow and are enforced by certain people (leaders, most commonly). This enforcement is called governance. Different groups have different ways of enforcing rules. However, all the styles have resulted from two categories. These are direct governance and representative governance.
Direct Governance
With direct governance, every participant in the system has a direct say (or vote) in every choice concerning society. No actions can be taken without having everyone’s input in the decision. Here, participants’ voices are heard, they have control over results, transparency and accountability from the higher powers, and more collaboration.
However, it is often difficult to conclude that using this method can be costly, and people can be selfish. Most significantly, however, this method gets increasingly difficult as more people join the group or society and more voices are to be heard.
Representative Governance
In a system of representative governance, participants use their votes to select several people to act as representatives for them when decisions are being made. The representatives are responsible for voting on actions and new rules for their constituents (or the people they represent).
This system is often more efficient and results in faster and easier decision-making. Growing numbers of participants don’t affect the efficiency of the system. However, there are risks. There is also a lack of accountability of representatives. The most significant is that people are forced to put their trust in representatives who could act in self-interest or maliciously rather than in the people’s interest.
Understanding these systems will help you to understand how blockchain governance works.
Moving On To Blockchain Governance
Now that you understand how governance works let’s look at blockchain governance specifically.
No matter where a blockchain is being used, whether a small business, a large organisation or anywhere else, it needs to evolve with the users’ needs. As such, changes need to be made periodically. Therefore, there needs to be a way to decide what these changes will be.
When organisations commonly use blockchains, a leadership team or CEO will make the final call for these decisions. But, as you know, blockchain has been structured so that its nature is decentralised. In other words, no one person or group should control the decisions on a blockchain.
Therefore, there must be another way to effect change and make decisions about the blockchain. For blockchain governance to work, members must have a method through which to coordinate, without which it would not be possible for networks to reach agreements on changes. Blockchain governance must also include incentives, without which members would not participate, and the chain would become outdated.
Methods For Governance
As it has become necessary, there have been quite a few suggestions for (and implementations of) blockchain governance thus far. Currently, there are four main strategies into which the governance of the systems can fit. It is important to understand all four so that the best option can be implemented for each case where there is a need for blockchain governance.
Off-Chain Governance
The three methods listed below are all off-chain governance methods. Off-chain methods are relatively centralised. It’s because a structure that resembles direct governance, where everyone will have a say, threatens the sustainability of the blockchain due to a lack of knowledge and understanding of the technology of most users.
Incentives vary broadly on off-chain governance methods since each stakeholder might want something different. However, fees and some control of the network are common incentives. The methods of governance are as follows:
1. Benevolent Dictator For Life
In this method of governance, the individual or group who created the blockchain or led the blockchain project’s development makes the final decisions regarding changes on the network. In other words, there is only one single person who makes the final calls. It is the most simple strategy for the governance of a blockchain.
2. Core Development Team
Here, a team of developers is given the power of the final decisions on how a blockchain will be changed or upgraded. In other words, the network and its future lie in the hands of the “Core Development Team”. Any user or participant can make requests for features, but it is up to this team to decide if they will be implemented or not.
3. Open Governance
This type of blockchain governance strategy is similar to representative governance. Essentially, the full group of users or participants on the network come together to choose a team responsible for making decisions about the blockchain. Often, the team is a mixture of people, including investors, core developers, and blockchain owners.
On-Chain Governance
It’s the most recently established blockchain governance method and possibly the most democratic one. The rules which govern how the network functions and moves forward are stored on the blockchain.
These rules and regulations are often enforced through smart contracts on the blockchain. This method can also be quite similar to direct governance, as there is a built-in voting system that can be altered based on the needs of users and the network as a whole.
Here, incentives are a bit tricky, as the power to make decisions is in the hands of everyday users rather than developers. Each user may want different things, and thus there is potential for the blockchain to get steered in a direction that is not in everyone’s best interest.
There are a few other challenges that come with this method of governance. Most significant is how complex governance will become as more and more users join the network (similar to the negatives of direct governance).
Who Governs The Blockchain
As we’ve seen above, a few different groups of people might govern a blockchain and make final decisions. It includes core developers, elected representatives, the main creator, or all users. However, four groups of people are commonly important to overall governance and the efficiency of governance. Let’s break them down.
- Core Developers – This group ensures that the blockchain’s code is always maintained. They can add code or remove it to modify the code, but they cannot put these into effect across the network.
- Node operators – These are the people who implement features to the network since the ledger runs on their computers. Core developers provide features, but node operators choose to use them or not.
- Token Holders – This group encompasses users who own the blockchain token. Their voting rights in various blockchains vary. However, it is usually investors who form the majority of this group.
- Blockchain Team – This group’s role is to direct the funds and project development. In certain cases, this group also encompasses investors and other stakeholders who liaise with developers and node operators.
Usually, blockchain projects encompass all of these teams to help ensure that governance is done well.
Governing A Blockchain Is A Trial-and-Error Task
It’s probably clear to you by now that there is no one correct way to implement blockchain governance. Depending on the type of organisation and the purpose of their blockchain, different solutions will work for each organisation. In most cases, you’ll find that organisations try a solution and shift to a different one if the initial strategy does not work out.
With this overview, however, the general concept of blockchain governance should be much clearer. It is important to remember that the way the chain is governed is always changing and evolving. The mechanisms adapt to fit with the times and increasing requirements.
