Blockchain governance is one of the most widely discussed and controversial topics in the blockchain industry.
That’s because it deals with… well, governance. But what exactly does it mean when we say “blockchain governance?” To understand it, let’s have to look at a definition of governance itself, which according to the British Council, is this:
“Governance refers to a process whereby elements in society wield power, authority, and influence and enact policies and decisions concerning public life and social upliftment.”
Blockchain governance means the same thing, but for blockchain networks. It asks questions like:
- Who will make rules in a blockchain network?
- Who will decide what changes to accept or reject in a blockchain?
- Who will have the authority to legitimize or delegitimize a decision – and on what basis?
Questions like these aren’t easy to answer. Because in its basic sense, blockchain governance is about deciding who gets the power in a blockchain network. But before you can understand that, let’s take a quick look at who participates in a blockchain network.
Blockchain and its stakeholders
There are three basic stakeholders within a blockchain network:
- Node operators: Node operators are the ones who provide the technological infrastructure and computing power which allows a blockchain network to function. In exchange for this service, node operators get rewarded with cryptocurrency or simply with transaction fees for each transaction (or task) they process.
- Developers: Developers are the ones who update the blockchain ecosystem by building software updates for the blockchain network which add changes to the source code.
- Users / Owners: Users, as the name implies, are the people who use the blockchain network.
Together, these three are the stakeholders who impact – and are impacted by the blockchain. And as of now, each has a specific power in their hands:
- The node operators govern over the nodes (i.e., computers) that process transactions within the blockchain. If there are no node operators, the blockchain network won’t be able to function.
- The developers govern over the blockchain network’s software and software repositories. If there are no developers, the blockchain network will become outdated, and as a result, dysfunctional over time.
- The users govern over the blockchain network ecosystem. If there are no users using the blockchain network, it and its assets will have no value over time.
The controversy surrounding blockchain governance
The controversy of blockchain governance revolves around who should have the power and authority to rule over the stakeholders within a blockchain network? For example, in the case of Bitcoin, who has the power to rule over node operators and decide how many bitcoins they can mine or what their transaction fees should be? Or what updates by a developer are to be implemented or ignored?
Right now, there is no definitive answer. However, there are two popular governance methods in existence that are up for consideration.
On-chain governance: A brief explanation
In on-chain governance, the blockchain network operates as a decentralized network. There is no central organization or group that governs the network. Instead, every stakeholder who has ownership of the blockchain’s tokens can vote to have changes added or removed from the blockchain network.
Similarly, changes can also be proposed by anyone – and not just the developers operating on the blockchain. And once a change has received a majority vote, it will be irrefutably implemented into the blockchain.
The benefit of such a form of governance is that:
- Every single stakeholder in the blockchain has the ability to vote for or against a change.
- The network as a whole can reach consensus much faster.
- It reduces the chances of the blockchain getting a hard fork.
If you’re wondering what a hard fork is, here’s a brief explanation:
When the stakeholders of a blockchain network can’t reach consensus, a new version of the blockchain is formed separately and is implemented with the changes that the stakeholders weren’t able to agree on.
This basically divides the blockchain into two – and the people who were against the proposed changes stay in the original blockchain while the people in favor of the changes move to the new blockchain “fork.”
This weakens both of the blockchain networks since the users get divided.
On-chain governance prevents this fork from happening thanks to its all-inclusive voting system.
Off-chain governance: A brief explanation
In a blockchain network, off-chain governance is more like today’s democracy. This is because not every stakeholder gets the right to vote for or against a proposed change. Instead, only a specific group of people have the power to vote.
In this case, the people who have the power to vote need to have discussions to determine what changes the stakeholders are demanding – and keeping that in mind – accept or reject changes to the system.
This means that although the power to make changes resides with a select few voters, they are responsible for getting other stakeholders on board.
Because it isn’t a requirement that the developers coordinate with the voters and make the changes they request. But even worse, it isn’t a requirement for the users, i.e., nodes, to update to the latest software that includes the new changes.
In this case, voters can either vote to have a new fork developed, or convince the stakeholders to reach consensus.
Which blockchain governance system is better?
In off-chain governance, changes get made slowly, which can be good or bad depending on what you plan to do with the blockchain and how the network is being used. For example, if the blockchain network is used to store cryptocurrency, the off-chain governance system can ensure that the power to make changes only resides with the core developers and miners who, using the off-chain governance system, can ensure that the rest of the stakeholders, i.e., bitcoin owners, don’t vote to increase the production or rewards of bitcoins released upon creation of a new block.
But if, for example, the blockchain network is being used for something like storing records of supply chains inside a multinational company, then an on-chain governance system would be better suited. Because then all the stakeholders operating within the blockchain network could quickly push for the changes needed and have them implemented in the blockchain network. The result would be that the supply management system would be updated more quickly and with less hassle.