HOW BLOCKCHAIN GOVERNANCE & GOVERNANCE TOKENS KEEP BLOCKCHAIN DECENTRALIZED?

We all know that blockchain has decentralized nature. It means that

there is no governing authority. No single entity or group of people are

controlling the blockchain. This attribute of blockchain gives you

ownership of data, true privacy and transparency in the system.

But have you ever thought about who runs the blockchain?

Centralized systems have a set of rules defined by top authorities.

These systems function as per the set rules.

But who defines the rules in the case of blockchain-based systems?

How do dApps functions? And who ensures that blockchain-based

platforms, apps or networks are functioning as it's intended to?

Blockchain platforms and dApps run on blockchain governance. There

are two types of blockchain governance - on-chain & off-chain

governance.

Now, you must be imagining what is blockchain governance. And if there

is governance then how can blockchain call itself decentralized?

Let'blocks find out all your answers in this blog on blockchain governance.

What is Governance?

Governance is a set of rules and guidelines defined by the authorities or

a group of people to run an organisation, company or any platform.

In simple words, governance is a structure or protocol which the

participant agrees to follow when he enters the system.

The rules of the system are formulated as per the needs, preferences

and goals of the participants.

Take any organisation, corporation or institution, every infrastructure has

governance. Even schools, residential societies, offices and colleges

have pre-defined protocols that they follow.

Governance is of two types:

 Direct

 Representative

Direct governance is like a democracy where every participant is

involved in the decision-making process.

Representative governance is a model where participant indirectly cast

their vote in response to the proposals through a representative.

Now coming to blockchain governance, is a system where users decide

how the blockchain ecosystem will function. The users move proposals

and the rest of the participants of the network vote on them. the entire

governance process is automated through smart contracts.

Once everyone has cast their votes, the developers then view the

results. If the vote is in favour of the change or improvement in the

network then developers move forward with it.

Why Does Blockchain Need Governance?

Blockchain needs governance because they need base rules to function.

The developers write the rules of the blockchain network in codes.

These codes determine how the network or app will function. They also

code the functions and features of the blockchain network or any app

based on blockchain.

In the absence of these codes, the network or app will not function. So,

the codes or protocols or rules, you can call it anything, but it’s important

for the blockchain network and dApp to function properly.

Now if blockchain was centralized the story of blockchain governance

would have ended here. The developers have written the codes and the

network will function accordingly. That would have been all.

However, blockchain has a unique attribute, which is decentralization. To

sustain the decentralized nature of the blockchain, users must also have

a part to play in blockchain governance.

That is why, the whole proposal and voting system is there. It is to

ensure that users decide which direction the blockchain network or dApp

would go.

What is Blockchain Governance?

As discussed above, blockchain governance allows users to vote on

proposals to improve the network functioning, add new features and

decide how the network will function in future.

However, blockchain governance is not just about voting on proposals to

improve the network. It is much more than that.

Users of a blockchain network can cause the network to fork. The

blockchain fork happens when a group of users vote to bring a major

change in the network's functioning.

For example, the Ethereum hard fork pushed Ethereum developers to

start the development of Ethereum 2.0 to improve the scalability and

security features of the network.

Therefore, blockchain governance allows users to create competition by

developing a similar project with enhanced capabilities.

Another part of blockchain governance is where the users participate in

verifying the transactions using consensus protocols. Some blockchain

uses Proof-of-Work consensus while others use Proof-of-Stake

consensus.

Lastly, there is blockchain governance in the blockchain-based platforms

and apps. In such platforms or dApps, you need to stake the platform's

native token to participate in the governance proposals. These tokens

are also called governance tokens. Whereas this type of blockchain

governance is called DAO which is a Decentralized Autonomous

Organisation.

For example, you can stake SAND tokens to earn staking rewards as

well as vote on the governance proposals of the platform, Sandbox.

What is Off-Chain Blockchain Governance?

Off-chain blockchain governance refers to a governance mechanism that

is implemented outside of the blockchain network itself but still pertains

to the management and decision-making processes of the network.

How are decisions made outside of blockchain?

In a traditional blockchain governance model, all decision-making

processes are carried out through the blockchain network, and all

participants must come to a consensus before any changes can be

made to the network. This can be a slow and cumbersome process, as

all participants must reach a consensus before any action can be taken.

Off-chain governance allows for more flexibility in the decision-making

process by enabling participants to make decisions outside of the

blockchain network. This can be achieved through various means such

as voting, discussion forums, or other communication channels.

Off-chain governance can also be used to address some of the

limitations of on-chain governance, such as the difficulty of achieving

consensus in large decentralized networks or the potential for forks and

other disruptive events. By utilizing off-chain governance mechanisms,

stakeholders can reach decisions more quickly and efficiently, allowing

for more agile and responsive network management.

What Is On-Chain Blockchain Governance?

You will see On-chain blockchain governance in blockchain networks

where the Proof-of-Stake consensus mechanism is followed.

In On-chain blockchain governance, users directly vote on the

governance proposals on-chain. However, it's not that anyone can vote.

You must hold the network's native token to participate in voting.

Moreover, the weightage of your vote depends on the quantity of the

tokens you hold.

For instance, If you have MakerDAO's MKR tokens, you can vote on

proposals through its decentralized autonomous organization (DAO).

You can vote on crucial platform planning such as adding new types of

collateral to the debt system. Each proposal is coded into a smart

contract and executed immediately once it receives the required number

of votes.

EOS is another blockchain with on-chain governance, where coin

holders can vote for transaction validators in elections. Each coin equals

one vote, and users can delegate their voting power to other users if

they wish.

On-chain governance widens participation in blockchain governance,

reduces the risk of chain splits and forks, and allows individual users to

express their views. However, some on-chain governance systems still

retain off-chain characteristics, such as discussions in forums, blog

posts, and social media before voting on proposals encoded in smart

contracts.

What are Governance Tokens?

As we saw above governance tokens play a crucial role in blockchain

governance. It allows users to participate in the decision-making

process. Further, by involving the users in the decisions, these tokens

ensure the decentralized nature of blockchain governance.

In simple words, blockchain governance is a type of cryptocurrency or

digital token. Every blockchain platform, dApp or network has its own

native token. It is this token that allows its holders to vote on the

proposals.

You can not only vote using the governance tokens but also stake them

to earn rewards.

Where can you get these governance tokens?

Governance tokens are often issued through Initial Coin Offerings (ICOs)

or Initial DEX Offerings (IDOs). You can even buy governance tokens on

decentralized exchanges.

Some examples of popular governance tokens include UNI from

Uniswap, COMP from Compound, MKR from MakerDAO, and YFI from

Yearn. finance.

The value of governance tokens is closely tied to the success and

adoption of the underlying network or platform, as the ability to

participate in government decision-making processes can be a key

factor in attracting users and investors.

However, it is important to note that holding governance tokens does not

necessarily give the holder ownership or control of the network, as

decisions are often made through a decentralized and consensus-based

process.

How Do Governance Tokens Work?

Governance tokens serve as the basis for establishing decentralized

governance in decentralized autonomous organizations (DAOs),

decentralized finance (DeFi) projects, and decentralized applications

(DApps).

Governance tokens are typically awarded to users who have made

significant contributions to the community or have demonstrated loyalty.

Token holders can then use these tokens to vote on key issues to

ensure the effective progress of projects. Generally, voting is done

through smart contracts, which tabulate and enact the results

automatically.

Each project has its own set of governance token rules, and they are

distributed to stakeholders, including the founding team, investors, and

users, using various calculation methods.

Some governance tokens only vote on specific governance issues, while

others vote on a wide range of topics, including development updates

and smart contract revisions. Additionally, some governance tokens offer

financial returns, while others do not.

Let us understand with some examples.

MakerDAO is a decentralized lending platform that allows users to

create and borrow Dai, a stablecoin pegged to the value of the US dollar.

MakerDAO's governance token is called MKR. Holders of MKR can vote

on proposals to change various parameters of the MakerDAO system,

such as the stability fee (interest rate), the collateralization ratio, and the

size of the Dai savings rate. MKR holders also participate in the risk

management of the system, as they must pay for any losses in case the

value of the collateral falls below the required amount.

Another example is Compound, a decentralized lending and borrowing

protocol that allows users to earn interest on their cryptocurrency

holdings. Compound's governance token is called COMP. Holders of

COMP can vote on proposals to change the interest rates of different

assets, collateral factors, and other parameters of the system. COMP

holders also receive a share of the protocol's revenue through the

distribution of COMP tokens.

You see in both examples, governance tokens allow the community to

have a say in the development and operation of the protocol. The more

tokens one holds, the more influence they have in the decision-making

process.

Governance tokens provide a mechanism for decentralized decision-

making, promoting transparency and community involvement in the

development and growth of a protocol.

Conclusion

Blockchain governance and governance tokens keep up the

decentralized nature of blockchain networks, platforms, Defi and dApps.

It is the only way to give users the freedom and flexibility to decide how

the project they have invested in should function.

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