What is on-chain governance?
In this article we’d like to shed some light on the topic of blockchain governance and its role for decentralized finance.
First and foremost, let’s talk about what governance, or to be more specific, a governance framework is:
“Governance frameworks are the structure of a government and reflect the interrelated relationships, factors, and other influences upon the institution […] Governance frameworks structure and delineate power and the governing or management roles in an organization. They also set rules, procedures, and other informational guidelines. In addition, governance frameworks define, guide, and provide for enforcement of these processes. These frameworks are shaped by the goals, strategic mandates, financial incentives, and established power structures and processes of the organization.”
In simple terms, the governance or a governance framework defines the structure of any given entity, be it country, community or organisation and provides guidelines for its management and enforcement of stated rules.
This concept really becomes applicable to online data thanks to the blockchain technology, which enables not only architecting governance structures but also allows for decentralized decision making thanks to stake based voting.
Which possibilities does this open up?
The option to have one or multiple governing bodies and a way for anonymous decision making processes on a blockchain enables a stake-holder democracy in a truly decentralized manner.
This includes enacting rules, governing the blockchain through additional bodies like the elected Council and a technical committee who are appointed to best represent the stakeholders interests.
These bodies can also make use of a decentralized funding pot and bear great responsibility regarding governing the whole project.
They function as a safeguard for the stakeholders, being able to reverse ill-intended changes to the runtime as well as fast-track emergency proposals
What implications does this have for Decentralized Finance (DeFi)?
Having on-chain governance might be one of the greatest features and challenges for the Decentralized Finance sector, attempting to bring order to the chaos that crypto can be at times.
Being able to tap into a decentralized funding pot with the stakeholders having the task to manage those and vote on profound matters regarding the blockchain itself (i.e. through making use of the set_code command which can change the entire runtime) brings not only great flexibility to the projects that decide to implement governance bodies but also comes with great responsibility regarding the power that is being transferred to the individual.
That being said, the positives greatly outweigh the negatives since it shifts the value of a coin from a mere store of value or a simple currency to a powerful tool that lets stakeholders actively influence the direction of the project they are invested in, making sure their best interest is represented.
Examples for decentralized governance decision making
Examples for on-chain governance range from a simple tip for outstanding work from a community member to changes to the runtime via a proposal.
In case of a tip, the user who wishes to send a tip for what he considers a great contribution from another community member, can create a proposal through the Referendum Chamber, set the desired height of the tip (i.e. 1000 SDX) and put it up to vote for the community.
If other stakeholders share his opinion, they can second the proposal to reward the contribution, pushing it to the referendum stage where it will be put to a binary voting scheme (“Aye” or “Naye”) and if approved, the reward will be sent directly to the designated wallet.
Another example would be a selection process for the most anticipated projects on or development progress for the blockchain that can be backed (and even funded) by the stakeholders to ensure the decisive power over the key features of the project stays with them.
The power of the on-chain governance even goes so far as to be able to change the whole runtime, with the Council and the Technical Committee having to responsibly manage these pivotal propositions.
Note: The Council is elected for a fixed term and will have to reapply for each term if they wish to keep representing the stakeholders.
“With great power comes great responsibility”
One of the key takeaways is that education is key if the blockchain projects that make use of on-chain governance want to succeed.
Giving away a huge portion of the power and putting it into the hands of their stakeholders means that blockchains are more decentralized than ever before but at the same time require a lot more responsibility from the individuals involved.
While the potential benefits far outweigh the disadvantages it is clear that without proper knowledge of the project and the governance structure there is the possibility for a lot of chaos along the way. Making use of these powerful tools in a sensible way is the responsibility of the stakeholders who want their interests to be best represented by these government bodies.
Educating the crypto community and filtering out those that seek a short monetary gain is a process that isn’t accomplished overnight but a transition that will inevitably take place.