While you’re trying to understand the technology behind any particular cryptocurrency, the project might be doomed on the organizational level. The governance process is more of a human issue and if it’s not formally defined, even though the network is decentralized from an architectural standpoint, it can remain centralized in its decision-making processes.
In this article, we’re going to explore governance models that are retaining the decentralized characteristics and examine who are acting in ways that are best for the community, like TeleCoin or Tezos.
There are enough bad examples out there, the worst of which could be EOS, which has only 21 trusted entities periodically elected to maintain the blockchain and receive rewards for doing so. EOS seems to be designed for block producers to support other block producers. It’s clear that the EOS protocol may have an incomplete approach to governance and the accusations against them are well-deserved until they will be willing to change their ways.
Leaving any selfish reasons behind, a blockchain’s governance should be as decentralized as possible in order to maximize the network’s resilience to all sorts of attacks. Sometimes, even at the expense of efficiency and innovation. With over $2 billion worth of digital assets having been stolen to date, you can’t accuse anyone of willing to be security-first!
How important is the governance model
The cryptocurrency world is still in development. Even if it’s different and we’re supporting the proposal of being defined as a completely new asset class, it has similarities with the equity markets where there are clearly defined stakeholder structures for investor recourse. Structures with the same goals as governance systems: protect investor interests and prevent rogue executives from running amok with the company.
“At an individual level, real monetary value is at stake, which in turn gives rise to investor and payment protection concerns,” says Philipp Hacker, a researcher on corporate governance systems.
Cryptocurrency investors have the same rights as company shareholders, because they are directly affected by protocol changes in a blockchain.
If the changes are determined only by a select group of stakeholders, a large majority could become the victim of their own interests. In the case of Bitcoin, when Bitcoin’s core team showed resistance in the face of changing the block size, investors were bystanders in the drama that culminated in a fork of the blockchain, thus Bitcoin Cash was created.
Bitcoin is based on a set of rules, most of them being inherited from Satoshi Nakamoto’s original vision. Over time, in order to address its vulnerabilities new rules had been added, while others were amended. Who made these decisions? According to its decentralized governance model, any individual can “vote” on “Improvement Proposals” suggested by developers or other users. However, in order to use the signal mechanism that is casting your vote throughout the network, you need to run a full node.
In theory according to Satoshi, in order to preserve Bitcoin’s decentralization, everyone should run his/her full node. In practice, only those who are actively mining Bitcoin are doing so. Ordinary people who own Bitcoin are relying on other third-party services, so the power remains in the hands of the miners and, more likely, to the ones in charge of the mining pools.
That’s Bitcoin, with both its good and bad parts. Now, what are some other promising governance models among cryptocurrencies? Which one of these is promoting decentralization the most?
Ethereum, such as Bitcoin, is built around the notion of no centralized forms of control. However, it has a more advanced governance model than Bitcoin. That’s arguable, of course, but here’s why we believe that’s true.
Ethereum governance is based on a decentralized model but it doesn’t conduct the process on the blockchain. There are designated developers in charge of the implementation of necessary improvements after the decision process.
In the case of the DAO hack, when $55 million worth of ether had been stolen, the proposed solutions could have been voted on by making a transaction with a minimal amount of ether; around 0.06–0.08, less than $1 at that time. The battle was between freezing the hacker’s stash and leaving those funds lost in order to preserve the blockchain’s immutability or hard fork the chain and refund investors. The investors won the vote and the “code is law” rule was broken that day.
Bad mouths might say that “the money guys won,” especially because the vote recorded low participation. But the investor’s rights were protected that day. A security vulnerability is beyond their control and they shouldn’t be the ones paying for it while there are ways to make it right for them.
TeleCoin is a community project building a privacy-focused cryptocurrency with Masternode capability. The advancements and updates of its code are decided through a consensus established by a decentralized blockchain voting system.
Speaking of decentralized governance models, what can be more decentralized than a voting system based on the blockchain where the community can enforce changes and improvements through direct participation. The code is managed by a team of core developers, of course, but in reality, they are indirectly owned by the network. They are continuously maintaining a bound of trust by acting in the community’s duty. To become an active participant you only need to secure a Masternode with a collateral of 10,000 TELE.
This is a rational approach for a privacy-focused coin. Bitcoin tried a similar approach but has fallen between scaling and debate. Masternode participation ensures enough stake for the owner to act in the network’s favor as well as a technical solution to guarantee fair participation without all the unnecessary requirements.
Tezos has a formalized governance model. If Ethereum’s team chose to wing it in the DAO case, Tezos doesn’t agree with their ad-hoc, unplanned model. According to its founders, Arthur and Kathleen Breitman, “Tezos is a blockchain that can evolve by upgrading itself. Stakeholders vote on amendments to the protocol, including amendments to the voting procedure itself, to reach a social consensus on proposals.”
The self-evolving governance model can evolve with its needs rather than get fragmented time and time again with hard forks. With this type of governance, rules for instituting changes are encoded into the blockchain protocol. If developers wish to propose code changes, each node has to vote on whether to accept or reject the proposed change.
The on-chain voting system, where blockchain technology becomes the referee, proved itself to be the best form of governance once again.
Monero’s governance process is not on an on-chain system. Being a privacy-focused cryptocurrency where public keys identifying a voter are not easily divulged, such a system may be difficult. Instead, Monero is aiming towards “sovereign-grade censorship resistance” with an open-source platform run by the community.
It’s a loose structure with absolutely no hierarchy, where everyone is encouraged to join. Anyways, there is the Monero Core Team, consisting of seven individuals who remain anonymous, who have clear responsibilities within the network, including being trusted arbiters of the “Forum Funding System” on behalf of the community. In other words, they are managing the codebase with its internal rules (fees, upgrades, changes, etc.), distributing the Monero funds, and setting a general direction for the project.
They might have been inspired by Bitcoin, who is doing so well as the creation of an anonymous individual/group. While you can’t put 100% trust in the Monero guys, at least, they don’t represent a centralized failure point.
Cryptocurrency governance is under-appreciated. Decentralization is what defines the cryptocurrency movement. Not paying attention to the structure behind the protocol’s decisions can lead to a bad investment. DAO investors were lucky enough to get their money back. You can’t know if that can happen again. Protecting investor rights and organizing a fair decision process while moving with the fast pace imposed by the evolution of technology are key points that have the same importance as the correct functionality of the cryptocurrency protocol itself.