The Basics of Blockchain Governance

Recent attention to blockchain governance has encouraged people to think about governance systems in more detail. This article will explain the basics of blockchain governance and propose a framework to compare the governance systems of different blockchain projects.

Here are two basic steps to start with:

1. Off-chain & on-chain

The main difference between these two forms is whether governance processes are visible on the protocol level or not.

  • Off-chain governance is about sharing and discussing ideas, and getting support (funding) to implement ideas (turn them into code). It happens everywhere: on social media, GitHub, during conferences, or over dinner. We can discern four levels of participation: getting in touch, interacting with the community, contributing work, and exercising power.
  • On-chain governance is about ratifying code and modifying consensus rules. It happens on the protocol level. On-chain governance comes in many different versions, but we can discern three general approaches: fork-based, stake-based, and entity-based governance.

It is important to understand that — by this definition — all blockchain projects have both forms (off-chain and on-chain) in their governance system.

2. Formal & informal

  • Formal governance consists of clearly defined procedures, is verifiable, and there are equal access barriers to participate.
  • Informal governance consists of roughly defined procedures that may be opaque, and access barriers may be inconsistent.

The extent to which governance is formalized may vary greatly, but there are clear signs to recognize formal governance.

Formal governance in the real world

Signs of formal off-chain governance

Signs of formal on-chain governance

The other two approaches to on-chain governance attempt to formalize the ratification process with an on-chain vote. Access to the voting system is equal for all participants (either based on the amount of stake you have or whether you have an authorized identity) and votes can be verified on the blockchain. These approaches will therefore be classified as formal.

It should be noted that there are significant differences between on-chain voting systems: some are only used as signaling mechanisms while others allow code changes (new consensus rules) to activate automatically. Only those voting systems that empower participants to change the rules directly should be considered as formal on-chain governance.

The blockchain governance quadrant

This article proposes the blockchain governance quadrant displayed above as a simple framework to compare different governance systems. When you can distinguish between off-chain and on-chain governance, and when you can recognize whether governance is formal or not, you will be able to analyze different blockchain projects and collect relevant information.

Using the blockchain governance quadrant

  1. Bitcoin
  2. Ethereum
  3. Decred
  4. Tezos

This resulted in the following blockchain governance quadrant:

The blockchain governance quadrant for Bitcoin, Ethereum, Decred and Tezos.

Even though the analysis used to create this quadrant had a limited scope, it provided enough information to place the four projects into the blockchain governance quadrant.

This means that this framework can be used to quickly and easily compare the governance systems of vastly different blockchain projects.

Summary & conclusion

This article argues that each blockchain project has both forms of governance (off-chain and on-chain) in their governance system. The attribute that sets a governance system apart is the extent to which it is formalized.

  • Informal off-chain governance: Twitter, Reddit, Github, private chats
  • Formal off-chain governance: cleverly designed governance platforms
  • Informal on-chain governance: versions of the fork-based approach
  • Formal on-chain governance: entity-based or stake-based voting

The blockchain governance quadrant was introduced as a simple framework to compile information about the governance system of a project.

The blockchain governance quadrant can also be used to quickly compare the governance systems of vastly different blockchain projects.

Reflection

I ask questions and search for solutions.