Blockchain, Decentralization, Tech, Finance, DeFI, Decentralized Exchanges, DEX.
Disruptive technologies are changing the way of life, especially in finance. Blockchain technology takes the lead and through decentralization, is the underlying technology for many decentralized projects and platforms such as DeFi (Decentralized Finance) and DEXs (Decentralized Exchanges). These projects depend on governance protocols to ensure that the projects are optimized, improved, and coordinated.
Innovative governance protocols are crucial to decentralized networks and platforms to represent the interests of all stakeholders in their ecosystem equally, improve the network, and maintain an inclusive decision-making process.
Blockchain and governance protocols:
Blockchain technology is a shared digital database that stores information in a block system that can not be altered or manipulated. Due to unique properties like security, decentralization, and scalability, it is an ideal technology for building powerful solutions in any industry. It requires validation of blocks of data linked to each other making it impossible to remove a block from the sequence. To validate these blocks, a level of consensus must be achieved by the nodes or participating computers within the network. Consensus also extends to governance in decentralized networks.
Without a central entity, governance protocols are relied on greatly. Blockchain governance refers to protocols and laws introduced within a blockchain network to control, and ensure equality and inclusiveness in the network while allowing for important changes such as software releases and updates. In such networks where there is no central authority, the interest of every stakeholder including users is important in the community, and efficient governance mechanisms reduce friction and conflicts that are certain to arise due to clash of interests.
Reasons for Governance in Decentralized Platforms
One of the features that decentralized protocols enjoy is transparency and accountability. The entire ecosystem is accountable o itself and others. Anyone can see the degree to which participants can be held accountable for their actions. An instance is the role of validators in an Ethereum network. Validators are responsible for validating blocks in a proof of stake consensus blockchains and their actions can have huge impacts on the network. They are also accountable for the integrity of the blockchain.
Decentralized blockchains are self-governing which means they rely on their internal capabilities to decide on important issues since there is no central authority. Development roles, Initial Coin Offerings, and update launches are some crucial aspects that the members of the ecosystem would have to decide on collectively. This would be a difficult feat to achieve without proper rules of organization and operation.
It motivates members and users to participate and contribute to the network. By acknowledging contributors and clearly stating rules for membership or rewards, participants are inspired to take action and contribute innovatively to the community or network.
4. Conflict Resolution:
Proper effective governance protocols reduce disputes where multiple members have divided interests. It helps the community reach an agreement on what is best for the entire network. Smart contracts which are self-executing terms encoding into the network help to reduce the friction level and also through decision mechanisms such as staking and voting.
5. Formation and operation:
Governance is the heart of decentralized communities and projects because it explains the vision and motivation behind the network. The members can see the architecture of the network and learn its functionalities to contribute and participate properly. It defines the rules that the network would run by to ensure its longevity and efficiency, and how it intends to handle issues in the future and achieve its goals.
Governance is important in making significant decisions such as making token monetary rules, creating a foundation, or even creating forks. It is divided into two models:
1. Off-chain mechanism
2. Onchain mechanism
Most proof-of-work blockchain systems adopt the Off-chain governance mechanism. This model leverage on the participation of its core stakeholders to checkmate each other. Stakeholders include miners, users, developers, and node operators. Bitcoin and Ethereum use this process. When proposals are made for updates or changes within the network, all stakeholders are expected to agree and accept collectively the proposed improvement. If a consensus is not reached, it would lead to a split in the chain's software, each new chain running a similar but different version, and whichever chain has the highest hash power becomes the main chain. Thus the longest chain after a split, known also as a fork, has occurred and is regarded as the original chain.
The off-chain governance mechanism is much more traditional because proposals are considered over calls and at conferences. The members get notified through emails and online platforms through which they can participate. The setback this medium suffers is this: it is hard to make a significant contribution as an individual user. The process can also be time-consuming.
An example is the hard fork that the Bitcoin main chain experienced as a result of a debate over the block size of the network. In a proposal to scale the network and enhance Bitcoin's transaction processing rate, the community debated whether Bitcoin's block size should be increased to accommodate more transactions. The debate lasted over years through offline platforms, and direct communication until it finally led to a hard fork. Bitcoin cash was birthed and became a digital asset with a different but identical blockchain code to Bitcoin.
The on-chain mechanism is quite different and held to be more transparent. Unlike the off-chain mechanism where decisions are made by a few persons who attend meetings or conferences to decide the fate of the chain, on-chain models have rules for making such changes or proposals encoded into the blockchain. The developers' team would offer updates and changes while each node on the network would vote for or against the proposed changes.
While this system supports inclusiveness and fairness to each node to participate, it is also transparent and encourages the creation of DAOs. Decentralized Autonomous Organizations are systems formed to allocate decision-making, management, and entity ownership and have protocols encoded in them. DASH, Augur, and MakerDAO are examples of DAOs.
On-chain governance is exercised on proof of stake blockchains. To participate, the participant must hold the native token of the blockchain. For example, to vote on a proposal on the BitDAO network, you must hold a BitDAO BIT token. Also, the weight of your vote would be determined by the number of tokens you have. This voting right is also delegable, meaning it can be transferred to another participant to vote on your behalf. While nodes can vote for another node to become a validator, they can also transfer their voting rights to validators to vote in their place.
Both governance systems have faced criticisms. While off-chain is described as slow and hierarchical because of its informal process of reaching a consensus through conferences and offline platforms, on-chain processes have been faulted for basing the weight of a node's vote on the number of tokens in its holding. This means that influential nodes and participants known as whales that hold many native tokens can inadvertently influence the decision-making system by voting validators that would validate blocks in their favor.
It is an encouraging feat that regardless of which governance system a blockchain adopts, the technology continues to make progress. With DAOs, decentralized platforms can bring their visions and prospects closer to their community and users. However, it is important to be clear when setting rules for blockchain consensus. Though a project can leverage the two systems, it is best to clarify the terms on which it considers these areas: membership, decision-making, operation, and formation.
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