On-Chain Governance

On-Chain Governance

DEFINITION of chain governance

Chain governance is a system for managing and implementing changes to cryptocurrency block chains. In this type of governance, the rules for initiating changes are encoded in the blockchain protocol. Developers propose changes through code updates, and each node votes to accept or decline the proposed change.

DISTRIBUTING CHAIN ​​GOVERNANCE

The current governance systems in Bitcoin and Ethereum are informal. They were designed using a decentralized philosophy, first promulgated by Satoshi Nakamoto in his original article. Improvement proposals to make changes to the blockchain are submitted by the developers and a core group, made up mainly of developers, is responsible for coordinating and reaching consensus among stakeholders. The stakeholders in this case are miners (who exploit nodes), developers (who are responsible for blockchain algorithms) and users (who use and invest in various parts).

Critics of the system claim that this form of informal governance is, in fact, centralized among miners and developers.

They point to two prominent ranges in the cryptocurrency ecosystem as evidence. The first is a division of the original ethereum blockchain into ethereum classic and ethereum in 2020. This split occurred despite another flexible fork proposal which would have been easier to implement but would have resulted in a loss for investors affected by a hack in the blockchain of cryptocurrency. According to reports, a majority of the Ethereum community was in favor of a soft fork, but its core developer was influenced by investor opinion and implemented a hard fork. Some claim that this contravenes the widely held principle of “Code is Law” in which the parameters governing software are defined in the original code.

The second example provided as evidence that current governance systems are broken is the series of events that led to the emergence of Bitcoin Cash in 2020. During this range, a proposal to increase the average size of blocks in Bitcoin blockchain has been rejected by the main development of the cryptocurrency team. They rejected the change, despite the fact that the high transaction fees made the use of bitcoin as a support for daily transactions untenable. The only constituency that benefited from high transaction costs was minors. In the end, a renegade group of developers and miners walked away to create their own cryptocurrency with varying block sizes.

Chain governance has emerged as an alternative to informal systems of governance. It claims to solve the problems of centralizing bitcoin by incorporating all the nodes of a blockchain network into the decision-making process. Stakeholders in the process have economic incentives to participate in the process. For example, each node can earn a reduction in overall transaction costs for voting, while developers are rewarded with other funding mechanisms. Each node’s vote is proportional to the amount of cryptocurrency it holds. Thus, the higher the number of cryptocurrencies held by a node, the more votes it has.

How does chain governance work?

Unlike informal governance systems, which use a combination of offline coordination and online code changes to make changes, chain governance systems work only online. Changes to a blockchain are offered through code updates. Subsequently, nodes can vote to accept or reject the change. Not all nodes have the same voting rights. Knots with more coins have more votes than knots with relatively fewer funds.

If the change is accepted, it is included in the blockchain and referenced. In some cases of chain governance implementation, the updated code can be restored to its version before a reference, if the proposed modification fails.

The implementation of chain governance differs between different block chains. For example, Tezos, a cryptocurrency, uses a self-modifying ledger form. The proposed modifications are implemented in the blockchain of the part and deployed on a test version of the chain. If the planned changes are successful, they are finalized in a production version of the blockchain. Otherwise, they are canceled. DFinity, a startup that uses blockchain to build the world’s largest virtual machine, has unveiled a plan to adopt a hard-coded constitution on its network. The constitution triggers passive and active actions. An example of the former could be an increase in the size of the rewards for blocks while the latter could involve quarantining certain parts of the network for updates or cancellations.

Benefits of chain governance

According to its proponents, the advantages of chain governance are:

  • It is a form of decentralized governance

Changes to a blockchain are not routed through a main development community, which assesses its pros and cons. Instead, each node is allowed to vote on the proposed change and can read or discuss its pros and cons. It is decentralized because it relies on the community for collective decision-making.

  • Shorter turnaround times for changes

Consensus on the proposed changes is reached in a relatively short time among stakeholders. Informal governance systems require time and effort between stakeholders to reach consensus. For example, the Bitcoin Cash range and the classic Ethereum range took months to build and implement. In addition, off-chain maneuvers can lead to disorderly situations in which certain nodes can agree to disagree and not to carry out the proposed modifications. The algorithmic voting mechanisms are relatively faster because the results of the tests for their implementation can be seen via an update of the code. Performing the code change on a test network, as in the case of Tezos, also allows stakeholders to see the effects of this change in practice.

  • The possibility of a hard fork is greatly reduced

Since each proposed change requires a consensus of all nodes, this means that the possibility of a hard fork is greatly reduced. Through the use of rewards, chain governance provides economic incentives for the nodes to participate in the voting process. The informal governance process does not provide economic incentives to end users, who use or invest in cryptocurrencies for daily transactions for long periods of time. Economic incentives rather fall to miners and developers. Once the vote is over, all node operators are required to follow the decision.

Disadvantages of chain governance

Based on initial experiences with chain protocols, the disadvantages of this type of governance are:

  • Low participation rate

As in real elections, low voter turnout can become a problem for chain governance. The recent DAO Carbonvote, which recorded participation rates of 4.5%, is proof of this problem. The low participation rate is also undemocratic because it could result in a single node with significant operations manipulating the overall future direction of the protocol.

  • Users with higher stakes can manipulate the votes

Nodes with more pieces get more votes. Again, this means that users with more issues can take control of the voting process and steer future development in the desired direction. Most importantly, it diverts the dynamics of miners and developers to users and investors, who may simply be interested in maximizing future profits rather than developing the protocol toward innovative use cases.

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