Large corporations like Amazon, Google, Netflix and Facebook make their own rules, which is obvious because, just like countries, they have a centralized authority. In a centralized infrastructure, rules and regulations can be implemented by a management team or other authorized staff. Individual countries have a constitution that citizens need to abide by. Changes and new legislation can be approved by the government when it gets a majority vote through the parliament.

Governance is the act of governing or ruling. It is the execution of the rules set by the government or authority in the constitution (political governance). Corporate governance are the processes used by organizations to make decisions. Overall you can say that governance entails the decision-making process in organizations and countries. In this article, I want to address the importance of yet another governance system, namely blockchain governance.

Governance in a decentralized infrastructure

A decentralized blockchain operating system (OS) is based on peer-to-peer interaction between two parties. The centralized, third-party decision maker can be substituted by an autonomous governance system in a decentralized OS.

Now let’s apply governance to a decentralized system. In a decentralized ecosystem the missing link is the third-party government. So how will we know the rules and how can we make sure everyone follows them? It makes sense to compare it to the traditional government system of a specific country. The constitution is an agreement of official rules and regulations everyone needs to abide by. In a blockchain OS the constitution can be replaced by integrating the set of rules in a protocol. Each blockchain can imprint its own specific set of rules.

Components of governance systems

A blockchain governance operating model will be comprised of two main components:

- An incentive program, in which network participants will be rewarded accordingly for their contributions.

- Mechanics for coordination, where each group of network participants has the ability to sent in a specific adjustment proposal.

Blockchain governance also involves 4 key communities:

Core Developers Node Operators Token Holders Project Team/Organization

A blockchain governance system can be implemented on-chain or off-chain. On-chain governance allows for token holders to cast their votes by using the networks intrinsic tokens. Off-chain governance means that important decisions will be voted on directly amongst network stakeholders. Developers can, for instance, submit changes through an improvement proposal that will be voted on by the network community. Most blockchain governance systems opt for off-chain governance.

To give some examples of governance systems that are currently implemented into blockchain projects, I want to highlight four different blockchains and their corresponding governance structure.

Governance in Bitcoin

Most of Bitcoin’s governance system originated by Satoshi Nakamoto’s whitepaper. Over the course of the past 10 years, some rules were added or amended to address bugs and denial-of-service vulnerabilities. When a researcher or developer finds a solution to a problem, for instance, scalability or security, a Bitcoin Improvement Proposal (BIP) can be filed. When consensus is reached by the network’s stakeholders, the proposal is integrated into the protocol and a fork occurs because of the change in protocol. A fork can come in two different forms, a soft fork and a hard fork. Opposite to a hard fork, implementing a soft fork is often times hassle-free for Bitcoin network users. A soft fork does not require everyone to switch to a new protocol at the same time, or at all. A hard fork splits the network in two and both protocols go their own separate way without having the ability to reconnect in the future.

Governance in Ethereum

The governance in Ethereum is pretty straightforward. In the image below, you will find the basic structure of the Ethereum governance system. The thicker the arrow the more influence. Bi-weekly all developers arrange for a meeting where they discuss development updates and governance proposals to keep the system in sync.

One of the biggest benefits of Ethereum’s governance system is the ability to make a major shift from Proof of Work to Proof of Stake. Ethereum’s Constantinople hard fork, that will occur at block height 7,080,000, initiates the protocol’s change from proof of work to proof of stake. The power of the miners will shift to anyone who holds a sufficient amount of ETH to run a virtual miner.

A big challenge to the Ethereum governance system was the DAO hack and subsequent Ethereum hard fork. The Ethereum hard fork in 2016 split the chain into two separate blockchains, Ethereum and Ethereum Classic.

When blockchain project Polkadot lost the majority of its ICO funds ($ 91,000,000) through a Parity bug in November 2017, various Ethereum stakeholders asked for a similar hard fork like the one in which the DAO funds were recovered. This time majority shareholders voted to decline a hard fork to recover the funds.

Governance in EOS

One of EOS’s four main pillars is governance. EOS elected 21 block producers that all agreed on the network’s constitution. The constitution acts as a p2p end-user license agreement. A constitutional change requires a majority of the block producers to agree on the proposal. EOS has established a governing body that rules on disputes. This is the EOSIO Core Arbitration Forum (ECAF). Block producers are obligated to execute all ECAF’s rulings.

Recently, a leaked document, supposedly from an EOS block producer, surfaced, fueling rumors that the leading digital asset service provider aims to manipulate EOS’s block producers governance system. So far, it hasn’t been proven that they, in fact, manipulated other block producers, but if that’s even a possibility, the governance system isn’t showing real decentralization.

Governance in Aelf

Decentralized cloud computing platform Aelf, proposes a DPoS consensus governance system. DPoS selects highly capable representatives to make the important protocol decisions in a fast and efficient way. Aelf recommends any side chain created through the Aelf operating system to merge mining through the main chain and deploy their own consensus protocol. This way each side chain can have its own governance system, customized for their own specific needs. Aelf will use a voting system to vote nodes in and out of the system on a regular basis, based on their contribution to the network.

Concluding remarks

A properly functioning governance system is essential for blockchain projects to continue to move forward. A customizable governance system should fit most needs as blockchain systems need to be able to adapt to their environments. If you would like to learn more about Blockchain Governance read Blockchain Governance 101