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Blockchain Governance And Decentralization: Are Workable Models Mutually-Exclusive?

If thousands of years of human history is any guide, this could take a while.

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Blockchain governance is, essentially, the means by which changes are proposed and implemented on a blockchain platform. This comes with a challenge: a wide variety of participants must be given a say in those changes, and powerful parties must not be given too much control – at least, that’s the blueprint for decentralization, though it doesn’t always work that way.

There are three broadly-delineated governance models that are competing to solve the problems around necessary governance and the philosophy of decentralization, and this is an overview of how they work.

On-Chain Governance

On-chain governance is a newer model that underlies blockchains like EOS, Cosmos, and Tezos. It is controversial because it is nearly synonymous with coin-based voting, which gives the wealthiest coinholders the most power.

Vlad Zamfir, best known for his work on Ethereum, recently criticized Cosmos on these grounds: he argues that this style of voting isn’t democratic, but a “one-dollar-one-vote plutocracy.”

Zamfir’s comments concern Cosmos, but many similar blockchains have concentrated wealth and voting power as well. EOS, for example, is facing ongoing vote-buying issues due to the fact that its block producers and exchanges hold a large amount of EOS.

Additionally, many blockchains in this category have low voter turnouts, which is not the fault of wealthy investors, but which does increase power concentration.

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Furthermore, blockchains with on-chain governance may become even more centralized in the future as crypto companies begin to offer staking services for institutional investors. Coinbase Custody, for example, is planning to introduce support for Tezos, Cosmos, and MakerDAO staking and governance later this year. This could allow financial institutions to gain a significant say over blockchains with on-chain governance.

“Binding Votes” and On-Chain Governance

Viewed through a technical lens, the “one-dollar-one-vote” model isn’t actually essential to on-chain governance. What really matters is the fact that the outcomes of any vote are binding and built into a blockchain’s code. As Phil Lucsok of Polkadot explains, binding votes make it nearly impossible for blockchain participants to go back on a decision, which is a good thing if agreements are frequently broken.

Binding votes have a downside, though: they reduce the power of participants. On one extreme, the nodes that supposedly govern the blockchain can become redundant and disenfranchised if they are forced to follow changes (as Zamfir explains here).

This problem can be partially solved by introducing other incentives: for example, EOS node operators, or block producers, provide resources to the network; but they also earn revenue.

At the other extreme, binding votes can take power away from small investors. If nodes are bound to enact the results of voting, those nodes are incentivized to accumulate wealth and voting power—and then vote for their own interests. Lucsok believes that this can be solved by ending “one coin, one vote” policies and using alternate voting schemes; however, few (if any) blockchains have proven that this is viable.

Informal Governance

Most older blockchains, such as Bitcoin and Ethereum, rely on informal governance systems that emerge naturally from the roles of their participants. On these blockchains, developers and other participants propose changes, and miners and nodes choose whether to follow those changes during scheduled upgrades. Usually, these changes are agreed upon, and the entire network makes changes in unison.

Otherwise, if miners disagree, a fork occurs. In November 2018, for example, the Bitcoin Cash community disagreed over block sizes, and part of the mining community decided to use alternative node software, thereby forming the ever-controversial Bitcoin SV blockchain.

A similar event occurred in 2016, when Ethereum was forked into Ethereum Classic due to disagreement around a major hack. (Note: purists will say that Ethereum Classic forked into Ethereum, precisely because ETC is the original unaltered chain. This is the kind of debate that forking can lead to.)

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These forked chains are usually associated with proof-of-work (or mining-based) blockchains that are similar to Bitcoin. However, this is largely incidental. The important thing is that proposed changes are not binding on Bitcoin-like blockchains. Minority opinions cannot be overriden by popular opinions, and any number of miners can fork a new blockchain, taking real value and hash power with them.

Informal governance doesn’t prevent all of the problems of on-chain governance. A few wealthy participants can still accumulate hash power or staked coins. However, participants who hoard those resources will only gain indirect power, not voting rights. On the other hand, those who accumulate enough resources can perform a 51% attack, something that has occurred on a number of blockchains.

Off-Chain Governance

Very few blockchains rely exclusively on off-chain governance, but Vlad Zamfir and CasperLabs are pursuing this goal. CasperLabs’ upcoming blockchain will rely on voting in a way that is entirely unlike on-chain governance. CasperLabs’ current governance proposal depends on constituencies. This means that core devs, open source contributors, DApp developers, and software licensees will all get one representative and one vote.

This “one vote per constituency” model solves one problem of on-chain governance: investors who hold a large amount of CasperLabs’ native token will not have a lot of voting power. This will also solve the problems of informal governance: as CasperLabs’ documentation notes, the network will not be “at the behest of network participants with the most hash power or cash staked.”

One problem with CasperLabs’ model is the fact that it shifts governance issues onto smaller groups. Each of CasperLabs’ constituencies will be left to elect a board member as they see fit, and those constituencies could be internally corrupt. That said, the risk of internal corruption may be minimized somewhat by the fact that CasperLabs plans to introduce more constituencies over time.

Apart from its voting system, the most defining feature of CasperLabs’ off-chain governance will be its non-binding voting procedure. CasperLabs will allow nodes to veto successful votes. As CasperLabs’ documentation explains, validators will be able to overrule breaking changes that could cause serious issues. However, the exact mechanism for dealing with these changes is still a work in progress.

Blockchain Governance In Summary

There is some amount of overlap between each governance model. This is partially because governance emerges naturally from other activity, and partly because each category of governance is not strictly defined.

There are, in any case, two concerns that are common in almost every model: who has the right to participate in decisions, and how should that right be distributed?

While most blockchain projects are created with widespread participation in mind, efforts to distribute power can have unintended consequences. Possibly, any governance model that distributes rights also provides a channel that is ripe for exploitation. The degree to which each governance model is problematic will become clear as time goes on and as each system matures.

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