ADN Analysis: The Evolution of Blockchain Governance
Blockchain technology has allowed us to create different governance structures. In this blog, we highlight the evolution it has undergone.
Governance is one of the most essential factors in any blockchain ecosystem. One particular blockchain may have exclusive features that can help it stand out. However, if it doesn’t convince possible investors and members of its governance structure, it will have more detractors than it knows how to deal with.
Considering the recent news and developments in the crypto sphere, we at ADN have noticed a profound interest in various communities regarding blockchain governance. We will discuss some of the most common trends today to help our ADN community understand what to look for in blockchain-based projects that will be held on our platform later on.
Decentralization is one of the key ideals of cryptocurrency and blockchain technology. But most of us have different implementations of it. However, there are two general types of governance structures: off-chain and on-chain.
Governance Structures: Off-Chain
Off-chain governance is the older structure and is implemented by many cryptocurrencies today, including the two most popular cryptos, which are Bitcoin and Ethereum. In an off-chain structure, blockchain developers and miners assume important roles in every decision that the ecosystem makes.
Bitcoin and Ether holders may, theoretically speaking, have a say on the network. But it is the core developers and the miners — major stakers, in Ethereum’s case — who dictate the direction of the network.
Additionally, core developers will have to manually work on the system for the updates to be made. These are initially stored in repositories for suggestions. Examples are the Bitcoin Improvement Proposal (BIP) and the Ethereum Improvement Proposal (EIP).
Not long after the establishment of the said cryptocurrencies, we have found out ultimately, that the system is only as stable as its members are. Bitcoin experienced a handful of hard forks, signifying the lack of consensus, while Ethereum also had one major split, which caused the birth of Ethereum Classic.
As cryptocurrencies became mainstream, more and more miners, developers, and crypto users joined Bitcoin and Ethereum. A lot of them left as well, hence the emergence of on-chain governance.
Governance Structures: On-Chain
On-chain governance relies on the proper execution of smart contracts. The ecosystem usually has another organization that has a native token. This token warrants voting power to its user, and when there are changes to the platform, members of the organization vote on which direction it will take.
In this framework, holders of a particular token can have a better say in the directions that the network will take. Examples are Decentralized Autonomous Organizations (DAOs) like Maker, a platform built on Ethereum.
Over time, DAO has had a couple of variants that have yet to go mainstream. But there is one variant — delegated decentralized autonomous organization (dDAO) — that has gained popularity, particularly because it is being used by the cryptocurrency Dash.
Why Governance Structure Matters
Every crypto enthusiast who plans on getting acquainted with a particular network needs to consider the governance structure. This is very important because the stability of a particular blockchain, as well as the price of its native cryptocurrency, could very well depend on it.
There are plenty of examples in the past wherein the cryptocurrency and blockchain’s stability have been put on the line due to these issues. Let’s take Bitcoin Cash and Ethereum for example.
1) Hash Wars
Late in 2018, the Bitcoin Cash community was split into two warring sides when upgrades to the network were proposed. One is the new opcode which allows the use of oracles and cross-chain atomic contracts. Another is the introduction of canonical transaction ordering.
A significant part of the community, led by nChain’s Craig Wright, and CoinGeek’s Calvin Ayre, disagreed with the changes, saying that these weren’t secure and that they would tamper with the original vision of Bitcoin. They formed the Satoshi Vision (SV) group.
The other camp was led by Bitcoin.com’s Roger Ver and Bitmain’s Jihan Wu. They were the ones who agreed to the changes. Together, they were identified as the ABC group.
SV threatened ABC that they would roll back the protocol changes by mining the blocks in reverse and that they would take all of Bitcoin Cash’s hash power. ABC responded to the threat by pooling all of the mining power that they had for Bitcoin to double down on their hashing power.
For 10 days, the two camps fought in terms of hashing power. Most of the time, it was ABC that appeared victorious, but their times when SV out hashed it. Both camps bled millions of dollars, and by the end of the war, SV conceded and split off from Bitcoin Cash.
What is daunting about the event is that Bitcoin Cash suffered so much in terms of market capitalization. Prior to the Hash Wars, BCH reached up to $600 per piece. One month after the war, it plummeted so much that it even sank to $80 each.
2) The Ethereum Dilemma
The major problem that Ethereum faced goes a long way before Bitcoin Cash. This began when the DAO, a complex smart contract-powered organization running on Ethereum, was hijacked by an entity that then extorted about $50 million worth of Ether. While the DAO didn’t allow the entity to cash it out yet, the stolen amount lingered in the DAO for 28 days.
The Ethereum community was shaken by the event. Even though the DAO incident had nothing to do with Ethereum, the trust of the community on the ecosystem was being eroded.
For that, the community thought of three possible actions: do nothing, perform a soft fork, or perform a hard fork. Obviously, the community didn’t like the first option because they were just going to let the entity get away with $50 million when there was something, they believed they could do about it.
Vitalik Buterin, one of the chief creators of Ethereum, suggested that the blockchain undergo a soft fork instead. Initially, the community thought this was viable until they realized that this would allow the possibility of a Denial of Service (DoS) attack.
Only one action was left: perform a hard fork which will allow the return of the stolen funds back to their rightful owners.
While this sounded brilliant at first, there emerged a camp that developed growing fears about the integrity of the Ethereum blockchain in terms of the motto “code is law”. The camp believed that if Ethereum would hard-fork just to resolve a single hack, then it presents a dangerous precedent: for every hack that occurs, would the developers have to alter the codes?
The said camp was adamant with their protest against the hard fork because they thought the change would defeat the very purpose of Ethereum. In its introduction, Ethereum was idealized as the system which will be immune to financial corruption. For them, code is really law.
This resulted in the Ethereum blockchain being split into two. Those who wished to stay in the old blockchain called themselves Ethereum Classic, while those who proceeded with the hard fork became Ethereum as we now know it.
Governance is Everything
Every crypto enthusiast needs to look at the consensus and governance of a specific cryptocurrency before he invests in it. If one was to invest in Ethereum at that time, and such an event happened, which chain would he have supported?
More often than not, a cryptocurrency’s standing will depend on how strong its governing structure is. That is why each user needs to conduct proper research and commit only those that he is willing to invest — and lose if ever the blockchain ecosystem goes downhill.
As for us at ADN, we are considering the governance structure to figure out the best one to implement in our ecosystem. Even though we are planning to implement the Delegated Proof-of-Stake (DPoS) model, we are not shutting our doors completely to other alternatives.
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