In previous blog posts, we’ve covered the fundamentals of blockchain governance with further discussion about the differences between on-chain and off-chain governance. This article builds upon these topics with a more in-depth look at running blockchain governance through the use of smart contracts.
What is a Smart Contract?
A smart contract is a digital version of a real-life agreement, written in code on a blockchain. It executes automatically based on ‘if-then’ logic. Computer scientist and cryptographer Nick Szabo was the first to propose the idea of smart contracts in his 1996 paper on the topic, where he used the analogy of a vending machine. A vending machine will only dispense its product to a user once it receives a coin.
Smart contracts operate in a similar way. Similarly, upon the fulfillment of agreed conditions, a smart contract can automatically execute a transaction on the blockchain. Therefore, smart contracts can be used to manage the automatic transfer of digital assets like cryptocurrencies between parties, according to their real-life agreements.
Because blockchain is immutable, the parties to a smart contract agreement are safe in the knowledge that there can be no tampering with the underlying code and the contract will execute once the conditions are met. Smart contracts can be used in a range of applications including property law, financial trades and settlements, and crowdfunding agreements. However, they also have an application in the governance of blockchain itself.
Decentralized Autonomous Organizations — Governance Using Smart Contracts
As we established during previous articles, blockchain governance depends on the interactions of node holders, token holders, and core developers. Smart contracts can be used to manage the agreements made between these parties. In blockchain terms, this is known as a decentralized autonomous organization (DAO).
A DAO is a group of entities with no centralized management structure, like a traditional organization such as a public limited company. In such a centralized model, management decides the strategy and actions for taking the organization forward, by balancing the interests of various stakeholders.
In a decentralized organization, each party has voting rights over decisions that affect the organization as a whole. Smart contracts form the “autonomous” part of the DAO, by encoding the principles of agreements between the parties and then executing the agreements automatically when particular conditions are fulfilled.
When discussing DAOs, one of the best case studies is unfortunately also one of the worst. The DAO was a venture fund, constructed as a smart contract on the Ethereum blockchain. It raised the equivalent of $150 million during its initial token offering.
The idea was that anyone could pitch an idea to The DAO, and the token holders would vote to implement it or not. If the vote went in favor of the pitcher, the smart contract underpinning The DAO would automatically execute the transfer of funds. The incentive for token holders was that they would get a share of the profits from successful projects.
However, using a vulnerability in the smart contract code itself, a hacker managed to find a way to drain funds from The DAO, siphoning off the equivalent of $70 million in ETH tokens. The Ethereum community ultimately voted to save the day by reversing the transaction. However, after this incident and an unfavorable SEC ruling, The DAO folded.
Despite this particular story having a negative ending, it illustrates very well the principles of a DAO and the use of smart contracts in governance. The case for smart contracts and DAOs in a blockchain context remains compelling. After all, there have been various data breaches by private companies over recent years, for example, Equifax or more recently, Marriott Hotels.
However, these kinds of data breaches don’t destroy faith in using the internet for transactions. There are many examples of smart contracts working successfully in practice. Websites like State of the Dapps show lists of all the applications successfully running smart contracts on platforms including Ethereum, EOS, and Tron. One of the most well-used is MakerDAO, a project using smart contracts for governance in its stable coin system.
How Aelf Uses Smart Contracts in Governance
The incident with The DAO is one of the reasons that aelf has chosen to implement a robust governance structure from the very outset. The decision to roll back the Ethereum blockchain to compensate token holders split the Ethereum community, resulting in the Ethereum Classic hard fork. With aelf, token holders participate in a clear and transparent system of governance based on the DPoS governance protocol.
DPoS is the closest model in blockchain governance to that of a representative democracy. Rather than all token holders voting on all decisions, DPoS allows token holders to delegate nodes which will perform mining and other specialized tasks. The voting mechanism for electing node holders is conducted using smart contracts, automatically electing those nodes with the most votes.
Aelf foundation members are responsible for reviewing the code for new features and updates either from the team or third party. Delegated nodes then decide which core features they wish to incorporate based on their needs. If enough delegated nodes implement the new feature, a smart contract ensures that the entire system approves the same change. In this way, aelf won’t be subjected to the same divisive hard forks that have split the Bitcoin and Ethereum communities.
Using a combination of smart contracts and the DPoS governance method, aelf ensures that our token holders have the greatest say over future developments of the system. It aligns the interests of token holders with the long-term prospects of the aelf platform, particularly for those with long-term locked in tokens. This was our priority when constructing the aelf governance model, and we believe it will serve the interests of all our stakeholders well, long into the future.
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