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 first step to understand blockchain governance, is to distinguish between two forms of governance: off-chain and 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

The attribute that sets one governance system apart from the other is the extent to which it is formalized. Therefore, the second step to understand blockchain governance is to recognize whether it is formal or 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.

Signs of formal off-chain governance

In off-chain governance we can discern four levels of participation: getting in touch, interacting with the community, contributing work, and exercising power (submitting, reviewing and voting on proposals). The first three levels are informal and can happen on centralized platforms such as Twitter, Reddit, or GitHub. The fourth level, exercising power, is where formal governance can take place. Ideal level four platforms satisfy special requirements to mitigate as many attack vectors as possible and create equal access barriers.

Signs of formal on-chain governance

In on-chain governance we can discern three general approaches: fork-based, stake-based, and entity-based. Most pure PoW networks have implemented versions of fork-based governance. During a contentious code upgrade, the network may split in two or more forks that will compete (fight) for financial and social support of miners, developers, investors and exchanges to decide which fork is “the real” project. These are undefined procedures which may happen behind closed doors. This approach to on-chain governance will thus be classified as informal.

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

To demonstrate how the quadrant can be used to compare vastly different governance systems, this article analyzed four main blockchain projects.

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

This resulted in the following blockchain governance quadrant:

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

A closer look at governance reveals that all blockchain projects are governed, whether their governance systems are visible or veiled.

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

Blockchain governance is an emerging research field. This article has provided a high-level overview of several important blockchain governance aspects, but it should not be regarded as a definitive guide. More research is needed!

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