The Internet Computer Blockchain Governance Model and Decision-Making Process

Published in

Blockchain Gazette

6 min readSep 6, 2023

If you check the tokenomics design of most blockchain projects today, you are going to find that some tokens are often allocated to governance. Why is that so? How does governance on the Internet Computer blockchain work?

In this article, we are going to explore the answers to this and many more questions about governance on the blockchain. Let's get started!

What is on-chain governance?

The term on-chain governance refers to a decentralized decision-making process within blockchain networks. This decision-making system allows token holders to directly participate in proposing and voting on protocol upgrades and changes through smart contracts. The goal of this system is to promote transparency, inclusivity, and community-driven development, which is not too common in traditional off-chain governance models, where decisions are made by a select few. Because of its key attribute, on-chain governance has become a very interesting topic in the blockchain space today.

Some Reasons For Governance Token Allocations

As we said earlier, most projects often allocate a portion of their tokenomics to be used for governance-related activities. These tokens serve several pivotal roles in shaping the project’s ecosystem and community.

Let’s consider five common reasons for governance token allocation:

1. Incentive Alignment

By distributing governance tokens to network participants, projects align the interests of users, developers, and investors. Token holders are incentivized to act in ways that benefit the ecosystem’s growth, stability, and security.

2. Decentralized Decision-Making

Governance tokens empower holders to actively participate in protocol upgrades, parameter adjustments, and strategic decisions. They promote decentralized governance by ensuring that stakeholders, not a select few, determine the network’s future.

3. Community Engagement

Governance tokens foster a sense of ownership and engagement among users. Holding tokens often translates to having a voice in network governance, encouraging active participation, discussions, and contributions.

4. Economic Model

Governance tokens can be integrated into the project’s economic model. They may be used for transaction fees, as rewards for validators or miners, or as a means of distributing value within the ecosystem.

5. Regulatory Considerations

The allocation and distribution of governance tokens can be designed to navigate regulatory challenges. For example, projects can structure token sales or distributions to comply with legal requirements.

Having considered some of the common reasons for governance token allocations. Let’s now take a deeper look into the Internet Computer’s governance architecture.

The Internet Computer (IC) uses a decentralized governance model (or decentralized autonomous organization DAO) called the “Network Nervous System” (NNS).

This core system (or DAO) of the IC allows token holders to:

Stake their ICP tokens in “neurons”,
Vote on proposals and then
Earn voting rewards for participating in on-chain governance activities.
Decide and distribute token rewards to node providers

How does the Internet Computer NNS governance model work for developers?

For developers participating in the NNS governance model, an inflationary and deflationary mechanism (aka, a sort of give-and-take economic scenario) is used here.

How does the process work exactly?

Developers pay (or give out value) for storage and computation (cost in cycles) by issuing out ICP tokens held in their deployed canisters.
Developers have the opportunity to receive value from the network if they act as node providers on the network. The node provider rewards are paid monthly to these developers as Special Drawing Rights (SDR).

You can learn more about the NNS reward model here.

The NNS governance model we have discussed so far is quite interesting, but that’s not all about governance on the Internet Computer. Let’s now talk a bit about the Service Nervous System (SNS), a sub-component of the NNS.

The Service Nervous System — a New Approach To Decentralized Governance.

The Service Nervous System (SNS) is a DAO (decentralized autonomous organization) that acts as the third level of decentralization of dApps running on the ICP (Internet Computer Protocol).

How does SNS work?

The SNS is a tool developers can use to decentralize an application already built on the IC. To decentralize here means much more. It means initiating a process that would see every aspect of the already-built application move to the control of the newly formed tokenholders.

We can compare the SNS as enabling a privately owned company to have an IPO (Initial Public Offering) today but doing so on a decentralized network of computers.

During the SNS launch process, community members are offered the opportunity to buy the dApps tokens in exchange for co-owning a share of the entire dApp. After this process is done, in theory, the developers will have relinquished full control of the dApp to participating community members. To the best of our knowledge, it is only on the Internet Computer today, that we can find this unique SNS governance model.

“We can compare the SNS as enabling a privately owned company to have an IPO (Initial Public Offering) today, but doing so on a decentralized network of computers.”

Important Observations: While the Internet Computer’s on-chain governance model is designed to be inclusive and democratic, it’s not without challenges. For example, some token holders may have more influence due to their substantial holdings (aka whale with substantial holdings), potentially leading to the same old problem of centralization of power. Striking a balance here to avoid concentration of power still remains an ongoing challenge not just on the Internet Computer alone but in on-chain governance in general.

Conclusion

Our discussion about the Internet Computer’s governance model has highlighted its unique approach towards decentralization not available in many other blockchains. The Internet Computer’s governance model is a testament to the blockchain community’s commitment to achieving a decentralized environment where decisions are made collectively, ensuring that the network evolves in a way that benefits all.

The article series continues. In our next article in the series, we will be looking at NFTs on the Internet Computer blockchain, what’s unique about them? Find the answer in our next article. Until then, we say thank you for reading. Please feel free to leave your comments in the comments section.

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Disclaimer: The information presented in this piece is merely for educational purposes only, it contains the viewpoint of the author and does not constitute investment advice. Readers are kindly advised to do their research on the subject and are free to disagree with the viewpoints shared by the author here. Thank you.