To coincide with the launch of our testnet, the Theta team would like to bring the community up to speed on our current considerations and progress regarding: 1) overall governance, 2) governance and consensus roles in Theta, 3) Theta’s progression to a dual currency system.

Governance and the Blockchain

Generally, governance is a set of administrative processes or frameworks through which constituents of an entity are able to manage and further the interests of the entity/system as a whole. As it relates to blockchains, governance pertains to decisions on two primary components: incentive mechanisms (i.e. economics of the system) and the blockchain protocol (i.e. improving on technical developments, preventing/recovering from attacks).

Governance is widely considered one of the most important matters in designing, implementing, and innovating on the blockchain because it establishes the structure/process by which blockchain protocols can be managed and continually improved upon. Important features such as consensus, scalability, cryptoeconomic design are important, but in the long run, the right governance structure is what allows any of these other components to be appropriately enhanced.

Not only does the governance model directly impact all protocol stakeholders and manage how the blockchain currently operates, it is also the framework by which improvements, bug fixes, decision processes, decentralized management mechanics can be iterated upon in the future. As such, the Theta governance structure is a crucial part of our protocol to correctly implement. We are using the testnet to optimize our governance process and build a robust structure to account for future developments.

Theta’s Initial Governance Approach

Theta will start off with a limited set of validators to secure the network. Over time, we plan to extend this initial set to accommodate more validator nodes with the end goal of fully decentralizing the network. This will be done while simultaneously accounting for security and performance of the protocol. Validators run a full node and are responsible for proposing/approving new blocks and validating transactions. They earn Theta proportionally to the amount of tokens staked and their contribution to the security of the protocol. We are focused on building processes that allow everyone to contribute to network safety and earn Theta Tokens.

To reach a fully decentralized governance structure, we are taking a multi-step approach of gradually transitioning governance responsibilities to all stakeholders of the network. The composition of the validator set will transition over time to the community of relay nodes, video platforms, and other strategic partners.

We view our approach as rendering custodial care to the nascent blockchain. Left to his own devices, an inexperienced swimmer would simply struggle to stay afloat, and results would be disastrous. Similarly, launching a fully decentralized governance structure on day one might leave it exposed to malicious actors that can attack the unestablished governance structure. The result would be catastrophic for the Theta Network and all token holders alike. In light of the recent struggles of prominent blockchain project launches, we believe a safer approach would be a gradual transition to decentralization with the assistance of responsible and well-intentioned oversight. As creators of the Theta Network, we will initially provide the protocol with the necessary stewardship towards an increasingly decentralized future.

A Dual Currency System

In the interest of securing the network, installing proper governance, and managing the economics of the network, Theta will institute a dual currency system. The Theta Token that you know (and many already own) will be used to stake, secure, and govern the Theta Network, while individual operations (video segment transactions, smart contract operations, etc.) will be paid for with the operational token, Theta Fuel. (We’ll use the italicized form to indicate the token itself, be it Theta or Theta Fuel.)

There are two key reasons to introduce a second token:

First, this allows the utility and purpose of each token to be separated. Theta is used strictly for staking and securing the network, while Theta Fuel is used to power utility-based operations of the network. This is necessary because staking inherently decreases circulating supply, but video segment transactions and smart contracts will require a highly-liquid token that can facilitate millions of daily transactions. Second, two tokens are needed to solve governance issues that arise from using the same token for staking and operations. Because the token used for operations must be liquid, it would be easier for a malicious actor to accumulate a significant number of that frequently-traded token on the open market. If that same token is also used for staking, they could potentially threaten the security of the Theta Network. By separating the two functions (staking and operations) into different tokens, that risk is greatly decreased. The Tendermint/Cosmos Hub team wrote extensively on this subject in their introduction of their own dual currency model for the Cosmos Hub.

Theta is the staking token in the Theta protocol, which is used to stake, secure, and govern the Theta Network. validator nodes, which approve blocks in the blockchain, will need to hold Theta. All tokenholders can contribute to the security of the network by staking Theta, and will be incentivized to do so by the reward of additional Theta. Malicious actors that take actions to harm the network will have their staked Theta slashed, or forfeited.

Theta Fuel is the operational token of the protocol. Users earn Theta Fuel for every video stream they relay to other users on the network. Theta Fuel can in turn be used to complete transactions like paying another relay node to provide you with a video stream, or for deploying or interacting with smart contracts. You can think of Theta Fuel as the “gas” of the protocol. Just as holding Theta gives you a proportional right to govern the Theta Network, holding and generating Theta Fuel gives you a proportional means to watch video streams or take other actions on the Theta Network.

In a forthcoming blog post, we’ll be taking a closer look at the dual currency system and how it influences the economics of existing video platforms and dapps that build on the Theta protocol. In the mean time, you can also check out the Theta Fuel FAQs as well, which will be updated on an ongoing basis as the protocol develops.

Outlook on Theta Governance

We’ve shared the core concepts of governance and economics of the Theta protocol, but development and fine tuning will continue through our testnet period and until mainnet launch in Q4. This is the nature of building a protocol in a nascent, fast-evolving space like blockchain. In particular, the exact parameters for Theta staking, the Theta Fuel generation rate, and validator node selection will be focuses of development and testing in the coming months, and we’ll continue to share our progress with the community as that happens. We look forward to completing the remaining milestones of our roadmap, and as always we appreciate your support along the way!