Understanding blockchain governance needs us to understand what governance is all about. As a society, we congregate in tribes, villages, towns, and empires. When people live close like that, norms come into play.
The underlying principles of how we live with each other includes:
This is something that we can apply even in the digital world. The three aspects above need to blend well with each other for groups to work. Goals and rules need to work together to form structure.
Governance in the Blockchain World
All development projects have roadmaps. Organizations and software development projects have to agree on what they are doing. Most organizations have a central authority or team of leaders.
Because we decentralize the blockchain world, authority figures and teams do not exist. That leaves this domain an anarchic state. Governance has to happen somehow. As of now, two ways exist in the governance of the blockchain that work effectively.
- Coordination methods
Before we get into the governance of blockchain, we will need to understand what the blockchain governance is. It does not work the same way as standard governance.
Every blockchain is a system that evolves. Evolution happens because there are new needs. As with everything else, needs demand our attention. If the blockchain does not fulfill needs and deliver on promises, it will die.
It, therefore, has to evolve and adapt.
Evolution, Consensus, and Incentives
The evolution happens when the blockchain makes changes and invents new ways to make final decisions on what the changes should be. Organizations will use a leadership team or a CEO who is the central and final authority.
We do not design the blockchain to have this kind of thing. That means that there has to be another way to govern.
That is why there need to be incentives and coordination of the members. Without the incentives, members will not take part in governance. Over time, the blockchain will become less useful and many people might not agree on changes.
The Blockchain Governance Strategies
Several strategies have been proposed and implemented in different blockchain systems. We will review some of them and sort them from where fewest members take part in where most members have direct involvement.
- Benevolent Dictator for Life
- Core Development Team
- Open Governance
- On-Chain Governance
To understand what they entail, let’s learn what each one involves:
Strategy 1: Benevolent Dictator for Life
The creator of the blockchain or the lead developer of a cryptocurrency will have the final say about what happens or what changes in the blockchain. An example of this style of leadership is available in the form of Mark Zuckerberg. He has the final say about what happens to Facebook. This is the simplest blockchain governance strategy.
Strategy 2: Core Development Team
The most active developers of the system are the authority. They decide what functionality will or will not be in the blockchain. The control is in their hands as the core development team. This strategy is the most common type you will find in open source programming projects.
Users can offer or request additional features. But the core development team has the final say about what may or may not be in the official release.
Strategy 3: Open Governance
A strategy like this one works like a democracy. The team that makes the governing decision has to be elected by the users of the blockchain. Some blockchains we have in operation today use this system. In a system like this, the team is ‘elected’ to decide about the blockchain.
Strategy 4: On-Chain Governance
In this strategy, we store the rules that govern the blockchain itself. Thus, they become immutable and unchangeable. We store them in-chain in smart contracts. These contracts have built-in capabilities and procedures for changing them.
The regulations become deployed as smart contracts and can undergo modification by the users based on their needs and the needs of the blockchain.
Who Governs the Blockchain & What Is the Hard Fork?
When it comes down to the reality of it all, the users govern the blockchain. Major changes require something we call a ‘hard fork’. This term means a change to the blockchain protocol that makes it incompatible with old clients.
For the hard fork to happen, users need to agree that they will follow it. Users can refuse to follow it and create a divergent blockchain.
For example, the DAO Hard Fork on Ethereum created Ethereum Classic.
The story about who governs the blockchain may change from time to time. However, at the end of it all, the users control the final decision. They say what will be in the blockchain and what they will leave out of the blockchain.
If a blockchain makes changes that they do not agree with, the users can just leave.
Any of the major changes require the Hard Fork.
A hard fork means that the blockchain has changes that are not compatible with moving back. So, if the users do not make the switch to the new version of the blockchain, we leave them in the old version.
For the hard fork to be successful so that everyone can move forward, users of the blockchain have to decide to update their clients to accommodate the new changes. If not all the users make the change, a divergent blockchain emerges.
This will fragment the blockchain network.
How Did Ethereum Classic Emerge?
This is an interesting story we think you should know. We call it the ‘DAO hack of Ethereum’ for a reason. The DAO was a smart contract on the Ethereum blockchain that completed a crowdfunding campaign that broke records with all the value stored within the contract.
There was a flaw in the smart contract’s code which a hacker(s) manipulated and used to create another version of the smart contract under their control. They siphoned off a portion of the DAO contract funds worth an estimated $72 million (at the time).
After vigorous debate, the Ethereum network decided that to implement a hard fork that allowed investors to get their portions of the Ether, would be a wise move.
This decision drew much contention because the historical ledger in blockchains is supposed to be immutable and final. They design smart contracts to be their final authority. Any action that could be performed with the contract, flaws notwithstanding, was fair game.
The decision to reverse the DAO hack was against the principles of how a blockchain’s immutable laws are supposed to work.
Some users of the Ethereum network refused to follow the DAO hard fork, and this created a divergent blockchain where the DAO hack was a success. In the wake of this, the Ethereum Classic cryptocurrency, which has the same history as Ethereum until the DAO hack, was born.
Even with the reverse, the users made the final decision about whether to follow the hard fork.
So, that is how governance works in a nutshell.