Decentralized Governance Mechanisms

Decentralized Governance Mechanisms

The enforcement of decentralization is the underlying premise that spurred the creation of blockchain technology and, ultimately, the first cryptocurrency, Bitcoin. In theory, blockchain technology envisions a transactional world without the influence of third parties.

In practice, however, there have been multiple hurdles, a few failures, and a partially-decentralized digital currency economy. With Bitcoin recently celebrating its 10th birthday, , some may, understandably, argue that we are still in the initial stages of the digital currency phenomenon.

Despite some setbacks, all is not lost. In the spirit of open-source collaboration, people with divergent views have come together to create even better decentralization guidelines. This article, therefore, looks into the history of decentralized governance mechanisms in blockchain technology.

How Do Decentralized Governance Mechanisms Operate?

Blockchain technology relies heavily on innovation to move forward. Its main attraction, as was envisioned by Satoshi Takamoto, was the decentralization aspect. Since its creation, there has been a ripple effectthat has extended the use of blockchain and new cryptocurrencies to a number of other industries.

There are three main methods of governance in blockchain technology: founder-based, council-based, and expressive representation. Further, the type of decision-making is divided into two types: on-chain and off-chain. In the case of a founder-based governance approach, it is  only one person, usually the founder, who is left with the final vote. This is not a new concept and stems from the traditional startup management structure.

In the tech scene, founders are bestowed with the title of Benevolent Dictator for Life (BDFL) for their creation and immense contribution to the projects. However, as the program, or, in this case blockchain technology, matures, more people are brought in.

When a group of people govern a blockchain, this group is referred to as a council. The council consists of an elite group of founders, early adopters, and easily recognizable contributors. These people are mandated to govern the blockchain, including making high-level decisions that involve upgrades or updates.

The final form of governance is expressive representation. In this form of governance, people either vote directly or delegate their power by voting for representatives who will exercise this role on their behalf.

Most blockchains follow the last method of governance, which emulates the on-chain and off-chain form of governance well.

Off-Chain and On-Chain Governance Mechanisms

Off-Chain Governance Mechanism

Ethereum and Bitcoin rely on off-chain governance for all their transactions and management. Similar to decentralized blockchain management, there are many different people involved, including miners, developers, node operators, and users.

These stakeholders will naturally place checks and balances on each other, since there must be a consensus among all of the stakeholders in order for the off-chain mechanism to move forward. Furthermore, every single transaction on these blockchains must follow this rule.

Full consensus is also required for execution of any upgrades or updates as well. So, what happens if there is opposition among the contributors? Well, that is where there often is  a split, or what is referred to as a fork, in the blockchain.

For example, when Bitcoin split into two separate blockchains, Bitcoin Cashformed. This type of fork is known as a hard fork. and is what individuals typically recognize as a software update.

However, the more precise technical term is “backward-incompatible software update.” Ultimately, the blockchain with the most transactional hashing power is deemed the successor to the original.

Stakeholders generally feel that they have more power in off-chain governance because each of their votes count. The off-chain mechanism is also attractive because it does not require users to pay a transaction fee, which, with some blockchains, can be up to $30.

Some blockchains allow the use of both off-chain and on-chain mechanisms. In these cases, the group picks “trusted” delegates to make any changes on their behalf.

Off-chain mechanisms can often be difficult because a consensus is hard to achieve even in normal day-to-day living. This drags out the decision-making process, as was the case with Bitcoin Cash, and requires every user to have access to various means of discussion in order to participate.

On-Chain Governance Mechanism

The major difference between on-chain and off-chain governance is that the first requires participants to have a token to vote. Off-chain governance also uses a proof-of-work formula, while on-chain governance uses the proof-of-stake formula.

Each cryptocurrency and blockchain has unique tokens. With on-chain governance, each token gives the holder the power to vote. Likewise, the more tokens a participant has, the more voting power they get. With on-chain transactions, the users, transaction validators, and developers are all involved.

Furthermore, all transactions under on-chain governance must be agreed upon by all parties in order  for them to go through. These transactions can be accessed by all of the stakeholders through a public ledger. The public nature of the ledger ensures that there is no change or reversal of agreed-upon changes.

Some blockchains allow proxy voting, where users confers their voting power to other users, particularly if they do not wish to participate in the vote. On-chain governance result in less forks because of the great number of people involved.

In some instances, on-chain transactions may borrow from off-chain mechanisms. For example, some proposals may be put to scrutiny in conferences or public forums, whether online or offline, before they are subjected to a vote.

Critics  argue, however, that this kind of system is far from democratic because those with more tokens get more power. They suggest that token-endowed stakeholders base their voting decisions on the profitability of the decision, rather than the long-term benefits of the blockchain.

Still, there is an ongoing fear token-based voting power will continue to be abused with any on-chain mechanism. There is also the risk of token holders not participating in the voting process altogether. However, in the short time that on-chain mechanisms have been around, they have been a relative success.

Decentralized Governance Mechanism: Are We There Yet? 

While there is consensus on the power of decentralization within the framework of blockchain technology, there is alsoagreement that the technology is not quite there yet.

To some extent, an outsider may not be able to differentiate a traditional hierarchy from some blockchain governance rules. For example, the idea of voting for delegates to vote on a participant’s behalf is not much different from shareholders electing a board of directors in various publicly-traded companies.

Likewise, a new blockchain and cryptocurrency are either dependent on venture funding or founder-run entities, making them quite centralized at the beginning, but later transition on to more community-run programs.

In other words, new blockchains rely on a centralized form of governance for not only quicker decision-making but also survival. However, they eventually end up decentralizing their management in order to live up to the existing blockchain reputation.

The fact that blockchains have not fully evolved into decentralized entities can be blamed at least partially on the lack of technological innovation. Some have taken this as a sign that centralization may be better than decentralization.

Whatever the case, full decentralization will help blockchain technology live up to its enormous expectations. There are multiple ongoing studies hoping to ensure that decentralization happens sooner rather than later.

In 2016, Ethereum introduced the decentralized autonomous organization (DAO) as a solution to the decentralization problem. Ethereum users have embraced the new governance with much enthusiasm.

However, within a few short months, tragedy struck. Hackers exploited the DAO’sprogramming errors, resulting in a loss of 3.6 million ETH . This example is one of the ways they want to make decentralization more efficient.

Final Thoughts on Decentralized Governance Mechanisms

Blockchain technology has evolved tremendously since the original white paper Satoshi Nakamoto wrote back in 2008. In his original paper, Nakamoto envisioned a fully functional and completely decentralized blockchain technology.

Similarly, Bitcoin has birthed not only similar cryptocurrencies but also multiple blockchain applications. Just as a blockchain’s existence is dependent on millions of users for changes or execution, so is its evolution.

Millions of researchers, industry experts, and stakeholders are working hard enough to ensure that complete decentralization comes to fruition. The adoption of blockchain technology in other applications besides cryptocurrencies means more innovation overall.

That said, individual cryptocurrencies tend to cater to particular groups of users. The regular user is not concerned with overarching philosophies and governance mechanisms but rather the accessibility and functionalities of their choice of coins.

Regardless, society must not be overly critical of a technology that is still in its infant stages. There is a lot that has not been done yet, and the trial-and-error format may help improve blockchain technology for the better.

Meanwhile, users can use the existing decentralized technology, provided that it offers a level of trust that they are  comfortable with. Blockchain has become part of the present and future that even governments can no longer ignore.