Blockchain Governance
An overview of how some of today’s leading blockchains govern their decentralized networks
In a typical organization or government, a consensus is required to change its rules and regulations, and even deciding on a future direction. This occurs through a board of directors and shareholders, or a group of elected officials who would have the final-say in making such decisions. The same applies to blockchain networks — a consensus must be reached to enact changes. But how do decentralized networks, which are not owned and controlled by a single authority, govern themselves?
Blockchain networks can be described as polycentric, in that blockchain networks are influenced by competitive forces stemming from individuals and groups that are part of and surround the network. These competitive forces characterize the changes that a blockchain network may undergo over time, and are defined through the network’s governance. Blockchain governance refers to the mechanism set by the network to enact changes to the blockchain and its protocols, including its roadmap, equitably and inclusively.
Governance mechanisms are fundamental to blockchains as well as the protocols that are built on top of them, and they are relied upon to make critical decisions such as adjusting chain-parameters, token policy, and even making irreversible chain forks. We will look at how some of today’s leading blockchains handle governance, but it is important to know the two primary types of blockchain governance: off-chain governance and on-chain governance. These terms describe how decision-making processes take place, either off the blockchain through informal discussions, conferences, core development team meetings, or on the blockchain through staking and voting on proposals.
Ethereum
Ethereum governance occurs off-chain, and various stakeholders in the Ethereum community are involved in the governance process. Stakeholders include core developers, validators, EIP authors, node operators, application developers and users, and people who hold ether. The fundamental process in Ethereum governance is the proposal of Ethereum Improvement Proposals (EIPs). EIPs describe standards for implementing changes to the Ethereum network; and are what the community describes as their “source of truth”. EIPs can range from small to major topics, including technical specifications, new features, even making changes to the mechanisms that drive the network. Guidelines for proposing EIPs are described in EIP-1, and anyone can write an EIP to propose changes to Ethereum so long as they adhere to the guidelines.
EIPs — Ethereum Improvement Proposals
EIPs are the basis of governance in Ethereum. Each EIP undergoes many rounds of amendments and is debated upon until a consensus is reached by stakeholders. When an EIP is approved, Ethereum’s core development team will write, test and implement the code required to manifest the approved EIP. The EIP (generally bundled together with other approved EIPs) will then be scheduled for a network upgrade, during which the entire network of Ethereum nodes must voluntarily choose to execute the upgrade to implement the EIP. In that sense, an EIP — and the changes it proposes, can only truly be part of Ethereum if all stakeholders support it. Stakeholders would generally be in full agreement with the proposed protocol changes; however if a group refused to implement the changes during a network upgrade, then the chain would split into two distinct blockchains as the protocols between the two groups would become incompatible.
Although anyone can propose EIPs, in reality these are mostly written by developers due to the technical expertise required to write them. In addition, EIPs are mostly vetted only by the core development team and community members who are technically inclined. Moreover, EIPs for major upgrades like a hard-fork (such as the Merge) can only be implemented by the core team. These are some elements of centralization surrounding Ethereum’s governance. While Ethereum governance remains off-chain, many use cases built on top of Ethereum, such as DAOs (Decentralized autonomous organizations) use on-chain governance. A great example of this is Arbitrum.
Arbitrum
Arbitrum is a layer 2 solution designed to scale Ethereum and it uses an Optimistic rollup to batch multiple transactions executed on a sidechain while synchronizing transaction state data with Ethereum. Arbitrum was once governed by a board, and it sought to make its governance decentralized through the formation of a DAO and launch of its governance token: ARB. Since the airdrop of ARB tokens to the community, Arbitrum has officially transitioned into a DAO.
Arbitrum DAO
Arbitrum’s governance is on-chain and is centered around their One and Nova networks, through the Arbitrum DAO. The DAO represents the global community of ARB holders and delegates that members elect. Unlike in Ethereum, ARB holders will be able to vote on key decisions governing Arbitrum’s networks, and influence how Arbitrum is upgraded and even how revenue can be used to support the ecosystem. ARB holders govern the DAO through Arbitrum governance contracts, which in turn govern the smart contracts and parameters of various Arbitrum networks, and the DAO Treasury which is used to fund ongoing developments and the maintenance of Arbitrum and its technologies. Arbitrum DAO also has a security feature called the Security Council, which is a group of elected entities responsible for protecting the integrity, confidentiality, and availability of the DAO and its chains. The council is empowered by Arbitrum’s constitution to bypass the general voting process and execute any software upgrade or action in light of security threats. Members of the council are elected by the DAO through elections occurring twice a year.
AIPs — Arbitrum Improvement Proposals
Arbitrum governance is carried out through Arbitrum Improvement Proposals (AIPs) which are submitted to the Arbitrum DAO on-chain, unlike Ethereum’s EIPs. Anyone can submit an AIP, and every new AIP begins as a conversation on the Arbitrum governance forum. A preliminary vote is carried out by the proposer to measure community interest; and after a week, the outcome of the vote is decided by a simple majority with no quorum. AIPs that pass the vote become formal AIPs and will be moved for on-chain voting. For an AIP to be approved on-chain, it must receive more “in favor” votes than “against” votes, and meet a quorum depending on its type: constitutional or non-constitutional. Once an AIP has been approved, the actions defined in the AIP will be executed on-chain and changes will be implemented. The mechanism of AIP implementations will not be discussed.
ARB — Governance Token
Arbitrum members use their ARB tokens to represent their vote. Smart contracts in the Arbitrum DAO designed for votes to be weighted by the amount of tokens they are backed by. Thus the more ARB tokens a user has, the higher the weight of their vote. ARB holders can also delegate their voting power to a delegate who can vote on their behalf if they are unable to participate in governance. The use of ARB tokens for on-chain governance allows holders to vote directly on proposals that ultimately shape the Arbitrum DAO and all the technologies and protocols it governs, in a democratic and decentralized manner.
F(x)Core
F(x)Core is a blockchain built using the Cosmos SDK and Tendermint Core, and it is the backbone of the entire Function X ecosystem, which includes other chains such as f(x)EVM, Pundi X Chain, and Margin X. Like Arbitrum and many PoS-based blockchains, f(x)Core governance also occurs on-chain.
F(x)Core Governance
F(x)Core has a governance module to support on-chain governance, allowing changes to the blockchain to be coordinated through governance proposals. Before governance proposals are formally created on-chain, community members (core development team, stakeholders, general users) typically participate in off-chain discussions held on the Function X forum to debate the pros and cons, and seek clarity over proposed changes to the network. Once the proposed changes are widely accepted by the community, the proposer will then create a proposal on-chain and members who hold f(x)Core’s native token: FX, can cast their vote on the proposal.
FX — Governance and Native Token
F(x)Core community members who participate in governance are delegators and/or validators. Delegators are users who have FX tokens staked with at least one validator, and validators are users who run a full-node and participate in the network’s consensus. A delegator’s voting power is proportional to the total FX that they have bonded to their validator(s); and a validator’s voting power is proportional to the total FX bonded to them as collateral. Delegators who are unable to participate in governance can delegate their tokens to a validator of their choice; and they will simply inherit the vote of their validator(s).
Governance Proposals
Governance proposals on f(x)Core range from configuring chain parameters to requesting funds from Function X’s Ecosystem Genesis Fund (EGF). To submit an on-chain proposal, an initial deposit is required from the proposer, and this moves the proposal to the deposit period. During which, the proposer and members of the community can continue to add funds to the proposal so that it crosses the deposit threshold required to initiate governance voting on-chain. When the deposit threshold is met, the proposal enters the voting period, and delegators and validators have a week to cast their vote on the proposal. Users who are neither delegator nor validator are not qualified to vote on governance proposals, however, they can still submit and deposit on proposals. For a proposal to be approved on-chain, it must receive more “Yes” votes than “No” votes, and meet a set quorum — based on the proposal type, of the total bonded FX tokens on f(x)Core to be considered valid. If a proposal fails to meet the quorum, it will be rejected regardless of the result of the vote. After getting approved on-chain, the proposal will be implemented, and a network upgrade will be executed.
For a more detailed explanation of how governance works on f(x)Core, please visit our official docs.
Closing Thoughts
Both off-chain and on-chain governance have their own merits and demerits. Proponents of on-chain governance believe that governance on-chain is the most democratic and transparent way to maintain community consensus, while proponents of off-chain governance believe that governance off-chain provides better security by preventing a majoritarian democracy from taking place. One can even point out that blockchains operating with on-chain governance are a little less secure than their off-chain governance counterparts, while blockchains operating with off-chain governance are a little less decentralized than their on-chain governance counterparts. Despite the differences between these governance mechanisms, blockchain networks and their communities are still able to work together in harmony, and they continue to build and shape their respective networks to move with the times.
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