To understand the importance of blockchain governance and the debate surrounding it, we first need to define what blockchain governance is, its role and goals. Blockchain governance in the cryptocurrency space consists of two parts: the rules of the protocol (code) and the economic incentives on which the network is based.
Blockchain protocols have evolved significantly since their inception, but there is no denying the fact that they are still in their early stages of development and there is significant room for further improvements. Every day, innovative solutions appear and are implemented in areas such as scalability, privacy, etc. Some of these solutions are extremely popular, some of them have failed. Adaptability is the key to success.
The latest clear example of such a solution is the recent hard fork of Monero, aimed at blocking ASIC miners in order to avoid centralization of mining. This case shows us that a blockchain protocol must be able to adapt and improve in order to stay afloat in the long term. Such an ecosystem obviously needs a management system that will administer proposals, implement technologies, etc. Some of the large blockchain projects such as Tezos, Dfinity, Decret have already introduced on-chain governance models in which governance is an integral part of the protocol, like any other component. However, before agreeing to their proposal, it is important to first understand how the current management scheme works, as well as its pros and cons.
The key to blockchain management is the analysis of the different classes of network participants, their individual incentives and the coordination of interaction between subjects.
Different classes of network participants:
Miners
Miners are the basis of the network, they help maintain its operation. Their incentives are block rewards and transfer fees. As a result, miners are more likely to favor changes that will increase the value of their existing assets, increase/maintain block rewards and transfer fees.
Developers
Developers play a very important role, from the idea of the protocol to maintaining the operation of the network after launch. Their incentives are the potential to increase their existing assets and being known in the community/area for their contributions...
Users
Users, like other participants, favor upgrades and developments that not only increase the value of their current assets, but also improve the functionality of the system.
Obviously, all the different participants have some common incentives, but asymmetries in incentives do arise, and this causes many management problems. For example, users and developers may push for changes that would dramatically reduce fees, which is clearly not to the taste of miners, resulting in the network being unable to sustain itself economically. Likewise, miners may push for changes that will increase block rewards, but this could hurt the network in the long run. It is important to study such asymmetries and find a middle ground. Let's look at how already existing protocols such as Bitcoin and Ethereum are governed.
Bitcoin
Bitcoin has an off-chain approach to governance. Its developers are coordinated through a mailing list, and they also maintain a Bitcoin Proposal (BIP) repository where anyone can share their ideas for improving the system.
They have access to private funds and contributions from people who want to fund open source projects. However, there is no set reward mechanism for developers in this system. The lack of such an incentive system has led people to say that Bitcoin's development has not met their expectations, and that the direction of the entire system is being shaped by a relatively small group of developers.
It is also very important for developers to understand user reactions to protocol updates. The Bitcoin-talk forum has been a hub for cryptocurrency discussion since the inception of Bitcoin. Portals such as Reddit and Twitter can also be used to gauge community opinions and reactions.
Ethereum
Ethereum has a similar governance systemto Bitcoin. Its development is sponsored and managed by the Ethereum Foundation, located in Switzerland. Developments are financed from funds raised during the ICO in 2014 and ether previously mined by the organization.. It is also important to mention that the Ethereum community has survived hard forks several times and is valued for its openness and rapid adaptation to protocol updates. One of the reasons for this is the simple fact that Ethereum was born out of several failed attempts to implement the concept of smart contracts on the Bitcoin blockchain.
Despite the fact that the off-chain governance model has been around for a long time and that it has served as a means of improving and updating existing protocols, proponents of the on-chain governance model believe that the lack of strong incentives for developers may significantly reduce their number, leaving only a small group of core developers. And when a centralized group of people leads the development process, the community becomes vulnerable to bribery and other influence factors.
Let's take a look at proposed and existing governance protocols and ideas to compare both sides of the issue.
Tezos
Tezos is a decentralized smart contract marketplace like Ethereum, but with a built-in governance model and formal mathematical verification of smart contracts. Tezos takes a fundamentally different approach by creating rules that allow shareholders to approve protocol updates, which are then automatically implemented into the system.
When a developer proposes protocol updates, they can attach an invoice payable upon approval and implementation of their update. This approach provides a strong incentive to participate in the development of Tezos and further maintain the network in a decentralized manner. Anyone can propose an idea for improving the protocol and, after it is approved and tested on the test network, this idea can come to life. Upon completion of the update, the participant receives payment in Tezzies for his contribution to the system. This is a huge step towards creating a reward mechanism to support work on the protocol.
Dfinity
Dfinity is an “intelligent decentralized cloud”. The company aims to become the next generation Ethereum platform by replacing the concept of “code is the law” with “AI is the law.”.. As for the governance mechanism, Dfiniti follows a similar model to Tezos, but also allows changes to be made to the ledger, subject to both parties reaching an agreement. Although this contradicts the “immutable” nature of the blockchain, participants in the system argue that problems that have appeared in the past, such as the TheDao fork, might never have happened if such a system had been in place at that time.
Proponents of this system praise it for its ability to seamlessly remove illegal materials brought in by attackers. However, some people believe that there is a second side to this issue, asking questions like: “What material should be considered illegal given that there are multiple jurisdictions?”
Decred
Decred is a hybrid PoW/PoS cryptocurrency that uses autonomous on-chain governance models. Decred, unlike Tezos and Dfinity, has a fully functional main network. It also allows interested parties to make changes to the protocol and make changes to blocks, with bipartisan consent.
Even though the new governance model seems incredibly useful, many people are skeptical about it. One of these people is Vitalik Buterin The most common argument of such people is that the presence of such a governance model may deprive miners (and subsequently users) of the opportunity to contribute to the management of the system. In the off-chain model, operators must manually update the client to match it with the new chain. This allows miners to decide which project they want to participate in. However, in an on-chain management model, updates occur automatically and do not require any intervention. Another problem with on-chain governance may be that it reflects a plutocracy. Protocol updates are decided according to the “1 token - 1 vote” scheme, this leads to the fact that people with a significant share of the total supply may have greater rights than other network participants.However, these issues may be related to the fact that the blockchain space is still in its infancy, and a more developed on-chain governance ecosystem could exist without the challenges associated with rewards and risk.
Vitalik Buterin arguesthat the governance system off-chain is guided by several factors (road map, consensus between the development team, voting by network participants, established norms), unlike the on-chain voting system, which is poorly suited for blockchain governance. Despite this, Naval Ravikant tweeted: “Most coins would not have been born if Bitcoin or Ethereum had future development incentives built into the protocol.”
No matter what control system a particular platform uses, it will take a lot of time to fully study them and bring them to perfection. Regardless of their pros and cons, both management models should be studied in detail and implemented in a variety of projects.
Read also: CRYPTO COMMUNITY: EVERYTHING LIKE PEOPLE
According to https://coinjournal.net
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