Governance

Written by Steve Miller

Introduction

Governance in a cryptonetwork encapsulates the debates around how people coordinate to make decisions on changing the rules of a protocol. This includes anything from simple upgrades to changing the consensus mechanism to allocating block rewards. It involves many stakeholder groups such as node operators, network providers (miners), core developers, users, speculators, exchanges, and block explorers to name a few. These are diverse groups with varying incentives that frequently conflict with each other. For example, node operators want to keep block size low to reduce the costs of running a full node, while miners have incentives to increase the block size so each block includes more transactions and thus more transaction fees.

A core issue at the heart of cryptoasset governance is the decision of whether to conduct it on-chain or off. On-chain governance happens via a process implemented on the protocol itself. Most commonly by having stakeholders vote on whether to move forward with proposals made via a public forum designed for this purpose. Typically it is not enough to own a token to be considered a stakeholder. Usually tokens must be staked for their holders to become eligible to participate in the voting process.

Staking commonly entails locking the tokens for period of time, making them illiquid for the duration of the staked period. Demonstrating the stakeholders’ long term commitment to the project, by their willingness to give up their access to the tokens during the time period voting takes place.Successful proposals are then funded directly from the projects treasuries. Examples of projects implementing on chain governance include Decred, Tezos, and Polkadot.

Off-chain governance occurs indirectly in both formal and informal settings. Formal mechanisms include dedicated improvement proposal systems that exist for high profile projects like Bitcoin, Ethereum, Monero. Once a proposal is made to these systems a review takes place to determine whether the proposal is in the projects best interest. Participation in these reviews requires reputation within the project community signaling the reviewer is worthy of impacting the project’s future direction. Funding of successful proposals is not secured directly from the project’s treasury. If a foundation exists to support the project its assets will often be used to support successful proposals surfaced through these mechanisms. Informal governance takes place in the community around the project, in online places like chat rooms and social media or off-line venues like conferences.

Suggested Reading

The Crypto Governance Manifesto by Steven McKie

The Basics of Blockchain Governance by Haon

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