Introduction to Blockchain Governance

A Lesson on Governance With Practical Examples

At a high level, blockchain governance refers to the mechanisms by which decentralized networks adapt and change over time. While blockchain networks should be intelligently designed, it’s only natural that new considerations are uncovered once a protocol has been tested by the public.

Problems can specifically arise in the face of competition. If users begin to crowd around a different set of features that they find superior, should a network adapt to match those demands? Network features like inflation rates, privacy, and consensus rules are continuously debated and can only be iterated after real-world usage. Fred Ehrsam made an excellent case for why a blockchain network’s ability to evolve and upgrade amidst ongoing development will be the key differentiator for whether or not it can survive the competing interests vying for its control.

Blockchain governance is rooted in the fact that the interests of a network’s stakeholders change as they interact with and generate value from the network. Stakeholders are naturally self-servant and their main goal is for the network to operate in their favor. As such, these systems need processes to relinquish these differences if they are to survive.

These processes are interesting because they’re attempting to digitize how communities make decisions, a potential step function improvement from the status quo. In the digital world, stakeholders can coordinate at much lower costs and the malleable nature of software systems opens the door to faster experimentation. Models can be tested in parallel and inefficiencies can be easily fixed.

On-Chain vs Off-Chain Governance

Blockchain governance is generally broken up into two camps: on-chain governance and off-chain governance.

On-chain governance refers to a process in which protocol upgrades happen automatically in response to coin voting. In these systems, token holders vote on measures directly with the network’s intrinsic token. The votes are calculated directly by the protocol and subsequent outcomes occur autonomously. This relationship between coin voting and code changes is commonly referred to as being ‘tightly coupled.’

To see On-chain governance in action, let’s use Bitcoin’s scaling debate as an example. In this debate, there are two sides. One side wants to increase the block size to have greater throughput on the base layer chain, and the other side wants to limit throughput on the main chain and focus efforts on moving transaction bloat to layer 2 solutions like the Lightning Network. If Bitcoin was upgraded through on-chain governance, token holders would cast their vote for either option, and whichever option garnered more votes would automatically be integrated into the protocol.

Off-chain governance, on the other hand, refers to a process in which network stakeholders coordinate amongst themselves informally to decide how network upgrades are handled. Most networks today employ off-chain systems. The most common process looks something like this: developers submit changes through formal improvement proposals, network stakeholders coordinate through community channels (subreddits, email forums, and social media), protocol developers integrate new features, node operators signal their support or dissent for the changes, and miners decide which chain to secure.

The community has not come to a consensus as to which system is optimal, and frankly, it likely shouldn’t because different use cases require different governing processes. When evaluating both on-chain and off-chain governance, it is important to understand the tradeoffs of both. For a more in-depth justification for on-chain governance, read Luke Duncan’s piece on governance and network effects. For a well-thought-out critique of on-chain governance, check out Vlad Zamfir’s post advocating for informal processes.

Approaches to Blockchain Governance

Blockchain governance to date has been largely conducted off-chain, following the process described above. Both Bitcoin and Ethereum allow anyone to submit pull requests on the core protocol repository, but any upgrades are subject to the level of support they receive from the community, core developers, node operators, and miners.

While these systems are robust in terms of factoring in various stakeholder interests, they make it extremely difficult to push changes through. This is the direct result of misaligned incentives. Miners only care about collecting transaction fees, so they will vehemently oppose any measures that prevent them from doing so. Core developers want the value of the coin to go up, making them impervious to any radical changes. New developers are disenfranchised by the inability to make changes so power concentrates among a small group of core developers, who are often at odds with the miners. These systems naturally tend towards gridlock, opening up the door for competitors who can more effectively coordinate their stakeholders.

Newer networks have taken it upon themselves to evolve more efficiently over time. Several notable projects are implementing new governance processes that will give their stakeholders a direct say in how protocol upgrades are executed.

Decred

Decred is a self-sovereign monetary asset that aims to optimize for best in class governance. It employs a hybrid proof-of-work/proof-of-stake consensus that enables on-chain governance. Blocks are mined similar to Bitcoin, but the miners’ work has to be approved by a randomly selected group of ‘stakers.’ In addition to verifying the miners’ work, proof-of-stake participants are also able to vote on changes to Decred’s consensus protocol.

Decred’s system of governance is in stark contrast to both Bitcoin and Ethereum. In the latter two blockchains, consensus rule changes can only be accomplished through hard forks, which naturally tends to be a malicious process. In Decred, however, hard forks are avoided because the protocol stipulates that consensus rules can be updated autonomously based on how stakeholders vote. This process makes upgrading the protocol’s features seamless.

One of the most interesting aspects about Decred’s governance is that its specifically tailored to fix misaligned developer incentives. Decred identifies itself as a ‘self-funding cryptocurrency’ because a portion of each block reward goes to a project subsidy fund. These funds are then used to support development of the project. What’s particularly novel about this fund is that Decred’s stakeholders have complete autonomy over how the funds are allocated.

0x Project

0x protocol is a set of smart contracts and tools that enable the decentralized exchange of any asset on the Ethereum blockchain. From its inception, 0x’s core team has planned to relinquish control over the protocol to the community as the ecosystem grows more robust. The motivation behind this is that the 0x team views the protocol as a piece of public infrastructure. If 0x protocol is integrated across the Ethereum ecosystem and helps transfer trillions in value, it shouldn’t be susceptible to downtime or censorship.

0x protocol plans to employ an on-chain token voting scheme to decentralize the process by which the core smart contracts are upgraded. While there isn’t a finalized plan, the team has outlined a rough roadmap for how they plan to enable on-chain voting. They will start by creating a community managed TCR which stores ERC20 token metadata. After the TCR is functioning, the team will enable token holders to veto the core developers on upgrade proposals. Lastly, 0x plans to move towards a liquid democracy in which token holders can stake tokens behind delegates responsible for voting on protocol upgrades.

0x is one of the few systems that is methodically attempting to distribute its token into the stakeholders who would benefit most from having a say in the governance process. ZRX is simultaneously used as a fee token within the protocol so stakeholders have a mechanism to accumulate it over time. This is interesting because it creates an incentive for those who are most affected by protocol changes to acquire the token.

Governance Within district0x

At district0x, we’re big believers in blockchain governance. We think it has the potential to redefine how stakeholders coordinate and derive the most value out of public, decentralized infrastructure. Governance within district0x is broken up into two components: the District Registry and District specific governance.

The District Registry is a token curated registry that contains the credentials of Districts that have been approved as being non-malicious and value-additive to the ecosystem. Districts listed on the registry get access to ancillary modules and a token staking interface necessary for network governance. In order to apply to the District Registry, individuals must submit a deposit of the network’s intrinsic token, DNT, along with their proposal. Similar to other TCR designs, a vote only occurs if an application is challenged. During the challenge period, token holders can vote on whether or not they want to accept a district by bonding their tokens to ‘yes’ or ‘no’ votes. After the voting period is over, the smart contracts tally the votes and enforce the majority decision.

Upon the creation of a district, a corresponding Aragon entity is created through which token holders stake their tokens to receive voting rights within the district. Token holders can vote on many aspects of their district including functionality, code of conduct, and technical integrations.

For a more zoomed-in look — click here

Live Governance Today: Meme Factory

While most blockchain governance systems haven’t yet been developed or released, users can experiment with live, functioning governance on Meme Factory. Meme Factory is the third district built in the district0x Network. It is a network of meme creators, curators, and collectors who coordinate through an incentive-based voting game.

The focal point within Meme Factory is the DANK Registry, a token curated registry that stores the credentials of approved memes. Memes voted into the registry are made available for purchase within the Meme Marketplace.

Meme Factory works like this: Meme creators submit their original works to the DANK Registry by staking a fixed amount of DANK token alongside their proposal. Then, curators are tasked with overseeing the registry and ensuring that no duplicate or dull memes are included. Lastly, collectors browse the registry for high-value memes which can be traded on secondary marketplaces. Collectors have faith that they’re purchasing provably rare memes because each one is tokenized as a unique asset on the ethereum blockchain.

Governance within Meme Factory allows a set of stakeholders to coordinate on the value of rare digital goods without a central party. By removing gatekeepers, Meme Factory allows both creators and curators to retain the fair value of the work they provide to end-consumers.

DNT holders were able to vote on a number of Meme Factory features like meme format, website theme, homepage layout, and back-of-meme design. You can check out results from the Meme Factory Survey here. For more information on the Meme Factory and its internal governance, we recommend you check out our education portal!