You have probably heard of blockchain technology as that decentralised, trustless, and transparent way to store data. But have you ever wondered who actually controls a blockchain? Well, the truth is that the answer to this question is not so straightforward because different decentralised networks have their unique governance models.
However, you do not have to worry because I will be explaining all you need to know about blockchain governance in this article. I will discuss the existing models, how they work, and who really holds power on a blockchain network. Make sure you stick with me till the end.
KEY TAKEAWAYS:
- Blockchain governance refers to the system of rules, processes, and participants who are responsible for decision-making within a blockchain network.
- On-chain governance is a blockchain-based voting system where changes to the protocols are proposed and decided through smart contracts.
- Off-chain governance involves informal discussions and decision-making that happen outside the blockchain.
- Hybrid models combine elements of both on-chain and off-chain governance to create a more balanced system.
What Is Blockchain Governance?
Blockchain governance refers to the system of rules, processes, and participants who are responsible for decision-making within a blockchain network. These rules are such that they determine how the blockchain evolves, what updates are implemented, and how conflicts are resolved.
Unlike traditional organizations, where executives and board members make decisions, blockchain governance involves a distributed group of stakeholders. These include developers, miners, token holders, validators, and even users. The level of influence a stakeholder has generally depends on the governance model in place. Effective governance ensures network stability, while poor governance can lead to issues like hard forks, centralisation, and security risks.
Types of Blockchain Governance Models
Blockchain governance models are generally divided into two main types, and I will explain each of them in detail.
- On-Chain Governance
This is a blockchain-based voting system where changes to the protocols are proposed and decided through smart contracts. Every stakeholder, usually token holders or validators, can participate in decision-making by voting on proposals. Examples of blockchains with on-chain governance include Tezos and Polkadot. Here is a summary of how this type of governance works:
- A proposal for a change, which can include a change in transaction fees or a network upgrade, is submitted to the blockchain.
- Stakeholders vote on the proposal using smart contracts.
- The network automatically implements the changes if the proposal receives enough votes.
Pros of On-Chain Governance
- Transparency: All proposals and voting activities are openly recorded on the blockchain.
- Decentralisation: Governance decisions are made by the community, not a central authority.
- Efficiency: Governance is quick since decisions are automated using smart contracts.
Drawbacks of On-Chain Governance
- Voter apathy: Many token holders sometimes do not participate in governance, which can leave the decision-making in the hands of a small group.
- Smart contract immutability: Once a proposal is passed, it cannot be reversed, even if it leads to unwanted consequences.
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- Off-Chain Governance
Off-chain governance involves informal discussions and decision-making that happen outside the blockchain. Changes are suggested, debated, and approved through social consensus before they are implemented using codes. Bitcoin and Ethereum are popular blockchains with off-chain governance. Below is a summary of how the process works:
- Developers, miners, validators, and community members discuss potential changes on forums, GitHub, or governance calls.
- Once a consensus is reached, developers write the necessary code for the update.
- Miners and validators decide whether to adopt the change by upgrading their software.
- If most network participants agree to the update, the new version becomes the network’s standard.
Pros of Off-Chain Governance
- Less risky: Complex discussion can take place before any implementation is made, which reduces risks.
- More community involvement: It allows for more involvement from developers, researchers, and other stakeholders.
Drawbacks of Off-Chain Governance
- Centralisation concerns: Core developers, miners, and validators can have a significant influence on decision-making.
- Lack of transparency: Discussions made in private forums or meetings may not be fully transparent to the community.
- Slower decision-making: Off-chain governance relies heavily on building consensus among stakeholders, which can take longer.
Hybrid Governance Models
Blockchains like Cardano and MakerDAO combine elements of both on-chain and off-chain governance to create a more balanced system. This approach allows for community participation while ensuring that developers and experts have a say in important decisions.
Conclusion
So, who really controls a blockchain? The answer depends on the governance model. Some blockchains empower token holders through on-chain governance, while others rely on off-chain discussions where developers and miners play a major role. Irrespective of the approach, the key to successful blockchain governance is prioritizing decentralisation, efficiency, fairness, and security for every stakeholder.
References
- bitpanda.com – What is governance in Blockchain?
- futurelearn.com – Who Owns a Blockchain?
- rapidinnovation.io – Blockchain Governance Models Compared: On-Chain vs Off-Chain Decision Making
