Blockchain Governance in Cryptocurrency Market

 

Governance can be considered one of the most important principles of the blockchain world and is changing in line with the evolution of this world. However, governance for cryptocurrencies is more than just a concept. What governance is and who handles it in digital currency projects are the topics that are discussed in this article ( Blockchain Governance in Cryptocurrency Market ) from CoinMarketSIG .

 

What is the governance of blockchain?

Most companies and governing bodies are centralized in nature so a leadership team usually manages them. However, blockchain is a decentralized network with many moving parts and features. Blockchain is an ever-evolving system that should always try to adapt to the needs of users to provide them with better benefits.

Hence, the mechanism of how blockchain can adapt to and stay in line with changing times and requirements is called blockchain governance.

 

Types of Governance in digital assets world

Both in the digital world and in the real world, one can see some kind of domination. For this reason, the types of governance can be divided into the following two main categories:

• Standard rule
• Blockchain rule

Standard rule

Standard governance is found in companies, nonprofits, partnerships, project teams, business relationships, and other similar groups. This means that standard governance exists in all human groups pursuing a creative or purposeful activity.

The tandard rule can also be classified into two types:

• Direct Governance
• Representation Governance

Direct Governance

Direct governance is a direct approach to governance. In this method, each user or participant participates in the governance model by directly participating in all decisions. To participate in the decision-making process, the participant must vote on what is being done or how the activities are to be carried out. The actions to be taken are determined by the votes of the participants.

Another unique aspect of direct governance is the lack of an intermediary or centralized authority. The most similar example is the model of direct rule of ancient Athens in 500 BC. Athens was a semi-direct democracy at the time. A more modern example is the cantons of Glaros and Appenzell Inerhuden in Switzerland.

Representation Governance

Now that you are somewhat familiar with the method of direct governance, it is time to take a brief look at representative governance.

The difference between direct governance and the direct rule is that users choose a representative by voting. This representative decides after being selected to represent the users. The representative is also responsible for overseeing the new rules and then enforcing them throughout the system.

 

The reason for the importance of the governance system

Adaptability and scalability have become two key features of blockchain governance. According to many experts, the ability of a blockchain network to evolve and improve during continuous development plays a prominent role in staying up to date and competitive.

 

Who is responsible for blockchain governance in cryptocurrency?

Blockchain governance usually consists of four main communities, but the degree of participation of each community varies from one blockchain to another. These communities are as follows:

• Major developers; these people are responsible for maintaining the original code of the blockchain infrastructure. Although they can add or remove code to modify the original code, they cannot execute it across the network.
• Node executors; this (code execution across the network) is the task of the node executors. Since they have a complete copy of the blockchain general office and run it on their computers, they can decide whether to implement a new feature in their nodes. Code developers depend on the node executors’ agreement to their proposed properties.
• Token holders; these are users and entities that have blockchain tokens. Depending on the type of blockchain, this group has different degrees of voting rights over the features to be implemented and pricing. Investors generally make up a large part of the token holder community.
• Blockchain team; This team can be a company or a non-profit organization that takes on different roles. The main role of the blockchain team is to manage capital and project development. The team also represents a wider community of investors and fans to negotiate with code developers and node executors, and often plays the project-marketing role. For example, while Bitcoin and Atrium each have a foundation, Ripple is one company-managed project.

 

Elements of blockchain governance

There are several ways to categorize governance methods. In the case of blockchain, identifying the primary categories is critical to evaluating and developing an effective blockchain governance structure.

Compared to the current governance structure of ordinary organizations, four categories can be identified that are highly related to blockchain governance:

1. Consensus
2. Encouragement
3. Information
4. Governing structure

In the following, we will deal with each of these cases and examine the reasons for the importance of these parameters for optimal blockchain governance.

 

Blockchain governance strategies

Blockchain technology is very new, so no reliable strategy is available except for Bitcoin. Thus, from a broader perspective, blockchain governance can be classified into two types:

1. Extra-chain sovereignty
2. Intra-chain sovereignty

 

Governance outside the chain

Off-Chain Governance usually strikes a balance between a blockchain community, such as its main developers, miners, users, and business organizations. Bitcoin and Atrium both follow this model of governance.

This type of governance model is similar to the traditional governance structure but has similarities as well as differences with this governance model.

The off-chain model is relatively centralized; In fact, a small number of people makes network decisions. Many mainstream users do not have a role in decision making or do not have enough influence to do so due to lack of technical knowledge or financial strength. This situation is similar to the direct rule we talked about earlier, and many rightly believe that direct rule is a threat to the stability of the blockchain.

However, the difference between this model and traditional governance is that the out-of-chain model, despite being centralized, has much more flexibility in practice than traditional structures. Take Hard Fork, for example. The user has the option to choose and use one of the new-branched chains and the old classic protocol. The cost of a detached chain from the original blockchain protocol is much lower than in traditional industry or government governance scenarios.

We examine the following four components affecting the strategy of extra-chain governance:

Consensus

In the out-of-chain model, leaders in the community usually make decisions. In the case of Bitcoin, large miners such as Bitmain, major developers, and businesses interact with each other to reach a consensus.

Incentives

Incentives, although a great incentive for participants in blockchain networks, vary in the type of out-of-chain project in different institutions or communities. While miners are looking to be paid, developers want controlled implementation of network changes and increasing success, while businesses are looking for benefits.

This uncoordinated motivation of different groups is likely to cause problems that lead to the formation of hard forks. The infamous Bitcoin Cash Hard Fork was created primarily because of incentive issues.

Information

Information on the Bitcoin network and other public blockchains is a unique case. The inherent transparency and decentralized nature of bitcoin provides insights into the dynamics of the platform that are not available in governments or large corporations. This transparency is extremely useful, but may lead to the formation of conflicting incentives between different parties.

The information in the blockchain network is not complete, but it is much better than the information in traditional governance models, and can redefine the scatter of information on the Internet.

Governing structure

The out-of-chain model, although not as centralized as conventional technology companies and other media organizations, strives to achieve a high level of centralization.

What distinguishes this model from the hierarchical structure of the traditional governance model is the ability of its technically aware developers to participate in decision-making about network development. A great example of this is the Bitcoin promotion proposal mechanism.

Governance within a chain

Intra-chain governance is the newest area of ​​activity in blockchain governance structures and, unlike other extra-chain methods, has been created specifically for blockchain. The method of governance within the chain, which is much more democratic in nature, has introduced attractive, hopeful, and at the same time polarizing concepts.

Direct democracy in intra-chain governance is achieved thanks to the blockchain internal voting mechanism, which can be optimized according to the specific needs of the networks. Note that in this method, the participation of node executives in governance becomes unnecessary because they only have to follow the process within the chain. This approach makes my default decisions more powerful and reduces the likelihood of creating hard forks.

In ideal terms, imagine that society is divided into two completely different groups, each of which makes one of the following two propositions:

• Increase block size to maximize throughput in the base layer
• Add a second layer such as Lightning Network

All token holders vote on this issue and any bid that gets the most votes execute in the chain.

It focuses on meeting the needs of more users by giving them more control and decision-making power.

• Consensus

The blockchain protocol in the intra-chain governance model allows consensus to be reached through a direct voting mechanism. This method of consensus is more like direct democracy (discussed earlier) which has several small optimizations to meet the needs of the blockchain.

Voting results are controlled algorithmically and their automatic execution command is directly included in the protocol. This is a completely new form of consensus in the governance structure, so there is no real use of it that has been implemented in sufficient time to judge its success or failure.

• Encouragers

Incentives in the in-chain governance model are very different from the out-of-chain model. In this model, decision-making power is transferred from developers and miners to public users active in intra-chain governance. Democracy has been achieved within the chain, but now what is at stake is how effective this approach will be in advancing the development of the blockchain in the right direction.

Despite the different motives, the issue of conflict of interest arises between users. Without proper technical knowledge, which many certainly lack, users may make decisions that do not actually benefit the platform.

• Information

The transparency of information in the intra-chain system is much better than the situation in the extra-chain governance. Because they also participate in the in-chain model of users, various proposals related to outdoor development and voting take place. Every important and necessary decision, such as the decision to reduce the reward of the block, is first made and then implemented through the shareholders’ vote with full transparency.

Except for the proposed bitcoin promotion (BIP), which has high transparency, no other blockchain offers such a level of transparency in its out-of-chain governance structure.

• Governing structure

The governing structure is one of the interesting features of the in-chain model. Sovereignty is exercised over the blockchain itself. As mentioned, since consensus is reached through a decentralized voting mechanism, this blockchain can be much more adaptable and flexible than its counter-chain counterpart.

In this model, protocols related to how blockchain works are stored in smart contracts within a chain that has internal capabilities and procedures for making corrections. The rules for blockchain operations are stored in the blockchain itself.

As a group or community grows in size, democratic structures often begin to disintegrate due to the emotional or selfish nature of individuals. This is a major risk to the intra-chain governance mechanism because many users in this structure are anonymous or at best nicknamed.

 

Challenges of intra-chain governance

The issue of scalability remains a major concern in this model of governance. The larger the community, the more complex and difficult its efficient management becomes.

The blockchain community disagrees about the value of sovereignty within the chain. In theory, any change can be programmed into the blockchain itself and voted on by authorized entities so that it can be automatically implemented in the code if approved.

Yet, this approach actually poses serious challenges, including:

1. All members must act in the interests of the group as a whole, which is not guaranteed in a large and heterogeneous society.
2. Blockchains are immutable, so after the proposed changes are approved by the vote of the participants; they cannot be returned to the previous state.
3. The natural tendency to recreate old models of governance on intra-chain dynamics increases the likelihood of disagreement.

Achieving long-term stability in a pilot model of governance, in reality, requires much more time and effort.

 

The future of blockchain governance

It is very difficult to balance the interests of all stakeholders in blockchain networks. As you can see, there are different ways to design a blockchain governance model, and their sustainability largely depends on various factors.

While some models aim to address the importance of informed and expert opinion, others focus on the user community component and try to be more inclusive in discussing stakeholder participation in governance.

New contemporary models of governance will surely evolve in the future. Some projects are currently trying to offer optimal alternatives such as inter-chain governance to meet the needs of the digital currency market and its community.

What can be said with certainty, however, is that Blockchain has redefined the classical concept of sovereignty and shaken the foundations on which our “old” world is built.

The future will undoubtedly test the flexibility of today’s centralized institutions, and it will be geared towards greater personal empowerment and greater involvement of all relevant stakeholders rather than the few who are responsible for decision-making.

Even in institutions that are more suited to operating under centralized governance models, factors such as controls and balances play a key role in promoting transparency and accountability among decision-makers.

Innovative composite structures of government may be able to solve these problems, but it remains to be seen whether this space, which is characterized by a move toward decentralization, will evolve towards its original purpose.