Blockchain Governance 101
Governance in any organization is essential. After all, it’s the way decisions are made, which in turn is how things get done. In developed societies, governance refers to the democratic process. In a modern multinational company, it relates to the decision-making rights of people in the organization.
However, both of these examples are centralized models of governance. In modern democracies, elected governments make decisions that affect the majority. Similarly, in a publicly-owned company, a board of directors appoints executives who decide how to run the firm.
Blockchain governance brings different challenges because blockchains are decentralized ecosystems with no central decision-making authority. While it’s easy to think of blockchain governance in terms of consensus protocols, there are more fundamental considerations.
At aelf, although we believe the technical features of a blockchain make up the backbone of the next generation blockchain, we also believe that the governance and economic model make up the soul of the ecosystem and without it, you will just have a lifeless machine. This series will introduce what governance is, the important concepts for consideration, common challenges and will finish with how aelf approaches this.
What Do We Mean by Blockchain Governance?
A blockchain is a distributed system with a network of computers that all run precisely the same blockchain software. Therefore, blockchain governance in this article refers to the protocol for deciding which software, or which software version, the network will use.
Who’s Responsible for Blockchain Governance?
In blockchains, there are usually four central communities involved in governance. They are:
• Core developers
• Node operators
• Token Holders
• The blockchain team or organization
Let’s break down the role of each of these groups in the governance process.
Core developers are the group responsible for maintaining the code that underpins the blockchain software itself. There is usually a central code repository, and the core development teams add or remove code that modifies the software.
While the core development team can make changes to the underlying code, they can’t put it into effect because they don’t control the network itself. Implementing the changes is the responsibility of the node operators who run the software.
For our purposes, a node operator is a person operating a computer that runs the full version of the blockchain software and maintains a full copy of the ledger.
Node operators generally don’t write the code — they are dependent on core developers for that. But node operators can decide whether to implement code changes on their nodes. Therefore, for blockchain governance to run smoothly, the core developers must implement code changes that node operators agree to run.
It’s comparable to the role of a legislative body and a judiciary body. The legislators can bring forward a new piece of legislation, but the judiciary officials decide whether or not to implement that legislation.
The Blockchain Organization
The blockchain organization can be a non-profit foundation or a company. For example, Bitcoin and Ethereum each have a foundation while Aelf, and others such as Ripple and Dash are each managed by a company. The organization usually fulfills various roles.
The central role of the organization is to steer the project, including its development and funding. It can help to influence the direction of the project, but it is not responsible for executing decisions.
For example, the organization will often decide how to compensate the developers. It will also play a role in marketing the project, and in representing the broader communities of investors and supporters.
The latter shouldn’t be underestimated. If developers and node operators make a decision which is unpopular with token holders, there may be a mass sell-off which could seriously affect the value of the project overall.
An exodus of token holders would reduce the available funds to compensate core developers, and if the value of the token falls, node operators will also earn a reduced return for their efforts. Therefore, it’s in the interests of core developers, node operators, and the blockchain organization to keep the majority of token holders happy.
When there is an update to the software, it’s referred to as a fork. If the software update renders previous software versions incompatible with the new updates, it’s known as a hard fork. Hard forks are usually significant changes, and as such may be contentious within the blockchain community.
Several cryptocurrencies came into existence as a result of hard forks in the Bitcoin community. For example, in 2017, there was a disagreement over a proposed increase in Bitcoin block size. The community couldn’t reach an agreement, and so one group went ahead with the increase while the others kept running the old version of the software. This change resulted in Bitcoin Cash, which has undergone a recent hard fork of its own.
The Scalability Challenge
Forks are an inevitable result of the challenge of managing decentralized governance at scale. The biggest blockchain projects have the largest communities, and the bigger a population becomes, the more difficult it becomes to reach a consensus between all members. This explains why there have been many Bitcoin hard forks so far.
For a smaller-scale example, consider how difficult it becomes to choose a restaurant when you invite fourteen friends out for dinner compared to asking just four.
The blockchain community has also been involved in some heated discussions about the value of on-chain governance. In principle, changes could be programmed into the blockchain themselves and voted through by members, then implemented automatically in the code itself.
However, there are significant challenges with this approach. First of all, all members have to be acting in the interests of the group as a whole, which isn’t guaranteed in a large, disparate community. Secondly, blockchains are immutable. Once voted in, changes cannot be undone.
Like any system of democratic governance, there is no right way to manage blockchain governance — there are only ways that are more or less democratic. So far, there is no one-size-fits-all approach — just a lot of healthy debate.
Given that blockchain technology is still relatively young, healthy debate is undoubtedly a good thing. For blockchain developers, node operators, the organization, and the project’s investors, each participant will naturally gravitate towards the projects that they believe are run according to their own personal values and preferences.
This piece has described the role of the various parties in a blockchain ecosystem and how they work together to govern the project. We’ve also touched on some of the challenges involved in governance. In part 2, we’ll outline the difference between on-chain and off-chain governance and how this is employed by aelf. In this piece, we have also gone into detail about the differences between PoW, PoS, and DPoS.
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