Written by Malik Corbett
As blockchain and cryptonetworks technologies evolve, we must not lose sight of the fact that these networks are controlled by humans. Hence, investors should be aware of what governance mechanisms are baked into a cryptonetwork’s protocol, if any. Whether the cryptonetwork implements an off-chain or on-chain solution, blockchain governance is critical.
In a traditional cryptonetwork such as Bitcoin, the network handles its governance off-chain. For example, any proposals for improvement to the cryptonetwork are submitted by a core group that consists of miners (who operate nodes and secure the network) and developers (who are responsible for core blockchain development). Miners or block producers in any public blockchain are the de-facto central bank for each currency: not only do they secure the network transactions, they upgrade the network’s software (forks) and are a big factor in setting and maintaining cryptonetwork policy.
On-Chain vs. Off-Chain Governance
In cryptonetworks, governance refers to how decisions are made throughout the entire network. In a off-chain governance system such as Bitcoin and Ethereum, there is an informal process which involves a combination of offline coordination and online code modifications to effect changes, which leads to concerns of transparency. In contrast, other cryptonetworks such as EOS which implements a DPoS consensus protocol, has governance built right into the native token. Hence, token holders have the direct ability to vote for witnesses who implement any system changes.
In theory, on-chain governance systems are more democratic and promise to scale more efficiently because businesses can build on top of a system that is less likely to cause a hard fork. So businesses and developers are more likely to invest the time, money and resources when building against stable code-base that have well-defined governance mechanisms, and are thus not subject to arbitrary changes at the whims of opaque insiders.
Governance as a Fundamental Factor
Investors should consider the network’s governance mechanism when considering investing in a token. The governance of a cryptonetwork should be viewed as a risk factor which directly impacts scalability. For example, will companies want to invest billions of dollars building on top of a public blockchain that is not stable because at any moment in time the network can (fork) without a voice in the governing process? Another example of risk is the centralization of power.
For all the talk of decentralization as it relates to Bitcoin which is an off-chain system, the truth is that only a few people in the world really control the Bitcoin network’s hashing power, and they’re mostly concentrated in China due to the low cost of power. To that end, governance is an extremely important factor to consider when investing in a blockchain network.
Some times blockchain politics get really nasty, last year we saw governance issues flare up with the Cardano project. As issues were brewing for months until they came to a head in October 2018 for the Cardano network when it experienced a leadership split between the three entities that are responsible for the platform’s development.
Also, Ethereum has had difficult forking the network and is a long way from the promised Casper and the Proof-of-Stake consensus mechanism, allowing for a smooth transition from PoW to PoS.
On-Chain Solution is The Future but we are Still in the Early Stages
On-chain governance provides a more democratic process for allowing cryptonetworks to make decisions. Although on-chain solutions offer a lot of benefits, on-chain governance solutions have their problems as well. For instance, last year when EOS launched its mainnet there was a lot of concern when the EOS block producers (miners) froze fraudulent accounts with little transparency into the process. This brought up legitimate concerns about transparency and censorship. To that end, on-chain solutions such as EOS implementation, although immature, provide a promising governance mechanism and potentially could revolutionize the token economy.