Decentralized On Chain Governance in Blockchain

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Written By: Polkadot

Decentralized On Chain Governance in Blockchain

Blockchain technology has come a long way since Bitcoin first appeared on the scene in 2008. Today there are thousands of different chains, with more and more continually appearing on the scene. What they all have in common is the need to be able to evolve, adapt and improve as newer technology becomes available. This requires efficient governance mechanisms that can ensure that blockchains can update to stay relevant and avoid becoming obsolete.

In very simple terms, governance can be defined as the way in which something is managed, as well as referring to the systems and mechanisms that are in place to do so. In blockchain, good governance is needed to determine which changes to the network are allowed, defining how exactly the protocol is implemented. Governance should provide blockchain communities with the means to maintain cohesion as they move forward with potential changes, preventing schisms that divide the community.

With legacy blockchains, this has presented problems in the past. How do you coordinate governance in a decentralized system? Who decides which changes are needed and when they should be carried out? With no formal decision making process in place, changes to legacy blockchains such as Bitcoin have been initiated by ad hoc groups of developers and stakeholders, sometimes in collectives or at conferences.

Yet the failure of a majority to reach consensus on how these updates should be coordinated sometimes leads to disagreements and contentious hard forks, which can split a community in two. For example, controversial hard forks of Bitcoin spurred the creation of Bitcoin Cash and Bitcoin Gold — new chains with their own tokens and communities. Rather than making the chain stronger, it led to divided communities.
To be sustainable, a blockchain needs effective, transparent, enforceable governance, with clear processes that allow stakeholders to make decisions on how the chain is updated and run, and that hold them accountable for their decisions. Crucially, in order for stakeholders to buy into a governance system, they need to be sure that their expectations will be met in terms of how the system will function according to a set of transparent rules.

On-Chain Governance

One way to address this is with on-chain governance. Governance mechanisms can be written into the code of a blockchain in order to lock in specific processes and rules for reaching consensus about prospective changes. In this way, governance can be managed on-chain, often with voting rights conferred upon native token holders. Typically, this would be a mixture of miners (in systems that use mining), developers and crypto-enthusiasts. Economic incentives are usually built into the process to encourage participation.
While this adds to the transparency of the governance process as everything is on-chain, in the past it has been found that on-chain systems can also present certain problems. Low voter turnout can create the potential, as in informal governance, for entities that hold large amounts of the native token (known as “whales”) to control the vote, thereby having an undue influence on how a chain is run. To mitigate this, token based voting systems need a way to protect the interests of those holding only a small amount of the native tokens (aka “minnows”).

Case Study: Polkadot’s Design For Effective Governance
Polkadot is a layer 0 protocol that unites multiple specialized blockchains into a unified, scalable network. Central to its design is the idea that good governance is necessary for a system’s participants to have agency and for the system as whole to stay relevant. Polkadot integrates mechanisms into its nominated-proof-of-stake (NPoS) system that facilitate effective governance in multiple ways.

Public Referenda

All holders of Polkadot’s native DOT token can participate in Polkadot governance via referenda and have a say in the direction of the network. Voting in Polkadot referenda is stake-weighted, based on the idea that the majority of stake should always be able to control the network. Blockchains are technological systems and economic systems that are difficult to align with one-person-one-vote systems.

However, several features are also included to prevent malicious proposals and make sure minority voices and those with less stake still have a meaningful say in network upgrades. These include conviction voting, enactment periods, adaptive quorum biasing, and an elected council that represents passive stakeholders.