How Blockchain Governance Works?

by | Nov 30, 2021

Disclaimer: Posts on the HyperTrader blog and associated HyperLinq websites are for educational and informational purposes only. These posts should not be taken as financial advice, nor are they meant to be viewed as trading advice. HyperLinq Inc. or the authors take no responsibility for any damages or losses.

In our earlier blog titled — Introduction to Blockchain Governance, we understood the basics of blockchain governance, its types, and its benefits. Now that you are aware of what blockchain governance is, we can dive deeper into the ocean of DeFi and learn about how blockchain governance works.

The blockchain needs to keep up with the ever-changing needs of its users and blockchain governance is the idea of doing the same.

The Four Pillars of Blockchain Governance

Blockchain team = They can be considered as the founders of a blockchain. Depending on the type of governance a particular blockchain uses (on or off-chain ), this team takes the important decisions concerning the future of a particular blockchain. Apart from governing the core code of a blockchain, they are also responsible for other important aspects of a blockchain like finance, marketing, etc. 

Core developers  = Core developers are responsible for maintaining and updating the fundamental code of a blockchain. The addition or removal of any feature in the blockchain is done by this team. Though the implementation of the changes throughout the entire network can’t be carried out by them, their actions affect every user in the blockchain’s ecosystem.

Node operators = This is the team that uses computers with high storage and processing power to regularly update and maintain the full ledger copy of a blockchain. They decide whether or not a feature will run on a particular node. They differ from miners because unlike miners, who work to verify the pending transactions, they keep the entire history of every transaction of a blockchain.

Token holders = Every user who possesses the token of a particular blockchain makes up the community of the chain’s token holders. Various new and innovative models are being used by blockchains today to take the opinions of their token holders more and more efficiently while making a decision concerning the entire ecosystem.

The Four Elements of Blockchain Governance

Consensus: Blockchains use various consensus mechanisms to verify every transaction done on it. Two common consensus algorithms are PoW ( Proof-of-Work ) and PoS ( Proof-of-Stake ). Bitcoin uses the PoW algorithm while Ethereum 2.0 will be upgrading from the previous POW model to the new PoS model.

Incentives: Incentives are a medium to reward the actions of a particular user that favors the overall development and smooth running of a blockchain. They encourage more and more people to get involved with the blockchain thus making the ecosystem stronger. In popular blockchains, incentives are generally given in the form of their respective cryptocurrencies.

Information: The availability of information on a particular blockchain plays a major role when it comes to blockchain governance. For a blockchain to be truly decentralized, maximum information needs to be present on the chain itself for easy access of its users. Better decisions can be taken if uncensored information is available to the users of a blockchain.

Governing Structure: Unlike traditional governing structures, blockchain governance is much more flexible and hence can adapt according to the needs of its users in a much more efficient manner.

Blockchain Governing Strategies

Unlike traditional centralized governance systems, blockchain governance is much more complex and demands great vision and dedication from its stakeholders. Let us now know about how these elements interact with different blockchain governing strategies.

Off-chain Governance

In the previous article, you were introduced to off-chain governance and can see its similarities with the traditional governance model. It acts as a moderator among the various stakeholders of a blockchain.

Here, the consensus is managed by community leaders. For example, in the case of Bitcoin, miners mine new blocks of transactions whereas the nodes verify the legitimacy of each and every block.

The means of incentives vary from blockchain to blockchain. Though incentives act as a wonderful motivator, differences in interests of various stakeholders can result in non-agreement and eventually a hard fork. Bitcoin Cash is one such example.

The transparent and decentralized nature of most blockchains allows every user to get an insight into the actual working of the blockchain. Though this makes the users more informed to take part in any decision, some cases show the polarization of opinions in the community. Though it has some minor flaws, most blockchain governance systems are far better than any traditional one in terms of efficiency.

Though the off-chain governing model is similar to the traditional model in many ways, what makes it different is that the technologically informed developers of a system take the decisions in a transparent environment. Strategy wise they can be further divided into the following :

Benevolent dictator for life = A single authority ( generally the founders of a blockchain) takes all the major decisions related to the blockchain.

Core Development Team: A group of the major developers of the blockchain discuss among themselves and arrive at a common decision.

Open Governance: Here the stakeholders choose a representative committee to take the decisions concerning the entire ecosystem. This system is similar to the representative model of governance in a democracy.

On-chain Governance

In comparison with off-chain governance, this system is more decentralized and delivers a better promise of survival in the long term.

Direct voting mechanism and automated execution protocol make it very similar to the direct governance model we studied in the previous article. The lack of use case scenarios of this fairly new algorithm has demanded more time in the evaluation of its success rates.

The incentives in on-chain governance are different from their off-chain counterparts. The decision-making powers shift towards the users in on-chain governance. One of its cons as mentioned in the case of direct governance can be a lack of proper technical knowledge among the users.

The transparency in on-chain governance is much more than in off-chain governance systems. As every action happens on the blockchain itself, all the participants are fully aware of the happenings of the blockchain and hence has a better probability of steering towards what’s best for the ecosystem.

In on-chain governance, the working protocols of the blockchain and its related modifications are stored on the blockchain itself via smart contracts and hence results in automatic, immutable execution mechanisms based on the data of the voting polls. 

You can learn further on this topic by studying the governance models of Bitcoin, Ethereum, Tezos, Decred, EOS, DFINITY, etc. Each one has employed innovative measures to its governance system.

Blockchain Stack and How It Affects Governance:

Every blockchain works on a stack that has the following components:

  • Internet Layer
  • Blockchain Layer
  • Application Layer
  • User Experience Layer

As the operation of a blockchain depends entirely on an internet connection, issues regarding net neutrality, ISP data caps, DPI ( Deep Package Inspection ), and Country-based firewalls affect it in a major way. 

In the Blockchain layer, every blockchain has its own set of rules steering its governance.

The Application layer consists of smart contracts and dApps. They act as a bridge between the stakeholders and the network and provide the necessary medium required to interact with a blockchain network.

The User Experience layer consists of devices like smartphones, laptops, and desktops which the users use to operate the dApps and interact with the blockchain.

Final Words

As we can conclude that there is no one ‘correct’ model of blockchain governance. Trial and error, constant innovation, and making unique governance models for specific use cases can be considered our only hope towards a decentralized world. 

New concepts like DAO are making their way into more and more use cases and this encourages me to wake up each day and be keener on the future.

Head of Content Marketing @ HyperLinq. His love for Chai and mountains precedes everything. Often wonders about things like, "why $1 earned through leverage feels 100x better than $1 earned selling your time?"

All You Need To Know About Bitcoin ETFs

Introduction to Bitcoin ETFs and their advantages & disadvantages.

Announcement: Now Trade on FTX Derivatives with HyperTrader

We, at HyperLinq, are delighted to announce the onboarding of FTX Derivatives as our newest crypto exchange to support trading on our native desktop app, HyperTrader. Thus enabling FTX Derivatives traders to supercharge their crypto trading and experience reduced...

Introduction to Blockchain Stack

What is blockchain stack and what are various layers of a blockchain stack?

Understanding Blockchain Governance

Understanding what is blockchain governance, its benefits, and how it works?

What is Bitcoin Taproot Update?

What is Bitcoin Taproot Update?

Metaverse 101: The Future is Here

All you need to know about Metaverse.

What are Blockchain Domains?

What are blockchain domains and what are their benefits over traditional domains?

Real-World Use-Case of Smart Contracts

What are the real world use cases of smart contracts?

What is IPFS?

What is InterPlanetary File System and how it works?

Now Trade on OKEx with HyperTrader

Announcement: Now Trade on OKEx with HyperTrader.

All You Need To Know About Bitcoin ETFs

Introduction to Bitcoin ETFs and their advantages & disadvantages.

Announcement: Now Trade on FTX Derivatives with HyperTrader

We, at HyperLinq, are delighted to announce the onboarding of FTX Derivatives as our newest crypto exchange to support trading on our native desktop app, HyperTrader. Thus enabling FTX Derivatives traders to supercharge their crypto trading and experience reduced...

Introduction to Blockchain Stack

What is blockchain stack and what are various layers of a blockchain stack?

Understanding Blockchain Governance

Understanding what is blockchain governance, its benefits, and how it works?

What is Bitcoin Taproot Update?

What is Bitcoin Taproot Update?

Metaverse 101: The Future is Here

All you need to know about Metaverse.

What are Blockchain Domains?

What are blockchain domains and what are their benefits over traditional domains?

Real-World Use-Case of Smart Contracts

What are the real world use cases of smart contracts?

What is IPFS?

What is InterPlanetary File System and how it works?

Now Trade on OKEx with HyperTrader

Announcement: Now Trade on OKEx with HyperTrader.

%d bloggers like this: