Who has the ability to govern a blockchain network to make decisions on the future of the project? As you should know by now, a blockchain consists of a shared database operated by a network of computers. If you want to freshen up your memory regarding blockchain technology, you can check our dedicated article on the topic.
Our primary focus today is on blockchain governance and its tremendous significance in ensuring that a project has the right incentives, that it can develop an ecosystem successfully, and has the potential to expand constantly.
Defining blockchain governance
Governance in itself relates to the way decisions are made within an organization, whether authority is attributed to a few key people or equally distributed amongst different actors. When it comes to projects based on blockchain technologies, governance dictates who is involved in the decision-making process that sets the tone for the project and defines all future directions.
Regarding the governance structure of blockchain networks, there are several models to take into account: centralized, decentralized, on-chain, and off-chain. The first two revolve around the authority structure, while the latter two regard the involvement level of human beings versus automated decision-making processes. All governance models mandate blockchain regulation concepts like network access, funding allocation, voting procedure, reward systems, etc.
Centralized and decentralized governance
Any blockchain-based system should be focused on decentralization by eliminating any third-party involvement in transactions, allowing users to transact directly via smart contracts. Not only does it reduce transaction fees significantly, but it also removes the need for a central authority like governments, financial institutions, etc.
Blockchain’s decentralized governance is the first step to a future where authority is no longer in the hands of the selected few but equally vested in the hands of all people.
Let’s take into consideration the consensus mechanisms that are used to validate transactions in distributed ledger technologies. In order for a transaction to be verified, it must be approved by the collective nodes of the network instead of a single central authority. This way, decentralized networks enable participants to take an active role in the collective decision-making process.
The obvious benefits of a decentralized governance system are transparency and accountability. If all blockchain community members are aware of the changes and have the right to vote on them, there is no risk of behind-closed-doors decisions that are not in the majority’s best interest. On the other hand, centralization might have the benefit of faster turnarounds. A central authority can move faster as it does not need to submit all improvement proposals to extensive voting.
On-chain versus off-chain governance
On-chain governance is a type of decentralized governance model where any proposed changes are encoded into the blockchain protocol. Project developers are the main force behind the organization’s decisions. They submit changes through code updates, and each node of the network has the power to accept or reject those changes. There is no central body in charge of the public interest rulings. Each node is incentivized to participate in the voting with on-chain rewards.
The main stakeholders involved in on-chain governance are:
- Miners - they operate the nodes that validate transactions
- Developers - in charge of core blockchain algorithms
- End-users - cryptocurrency or other digital assets holders
Not all nodes have equal voting power in this type of governance process. The number of coins a node has, impacts their voting rights.
The off-chain model bears more similarities to traditional governance structures. It is based more on centralization, as only a few community leaders or stakeholders have a say in things. Decisions are made outside the network, with only the agreed changes making it onto the blockchain. This model relies on human involvement instead of automated processes, as you can already guess. Therefore, it involves way less transparency than its on-chain counterpart.
Managing the power relations between several stakeholders involved in a blockchain project is not an easy task. As digital assets take the world by storm, we can observe the imperative need for a governance model to regulate all parties’ decision processes and authority levels.
The on-chain governance model seems to be the cornerstone of the future, where personal empowerment is vital. Hopefully, each of us will have more control over the social coordination of systems and organizations that are part of our lives.
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