Governance

One of the principal attractions behind cryptocurrencies is that the provide decentralized and transparent framework within which transactions (payments, contract) can be executed.

The network itself has to evolve over time, and as the number of participants grows, their preferences for the network evolution inevitably diverge. This leads to conflicts that have to be resolved, amicably, to avoid risk of network splits, which weaken all resulting subnetworks, at least in the short term.

There are two conceptually different approaches to governance: on-chain and off-chain. In the on-chain, the adoption of the changes proceeds within the blockchain itself (similar to direct democracy, tho not necessarily with one person-one vote). It is based on voting for any possible change, with coins. Off-chain relies on having a trusted real-life foundation, that surveys the opinions of the stakeholders, tries to build a consensus, but ultimately makes a decision (a type of representative democracy).

Bitcoin and Ethereum are governed off-chain. Among the principal stakeholders are developers, miners, and those holding significant investment. This is a fairly small subset of users, who end up making the decisions about protocol changes and forks. It appears that community is willing to delegate the decisions to them, under assumptions that the key players have the health of the network as their primary interest. However, the emergence of Ethereum Classic or Bitcoin Cash indicates that there can be divergence of interest between the key players, that ends up reducing the value of individual forks. In the end, a significant role is played by the leaders of the projects (e.g. Buterin), and public trust in their good intentions. At least superficially antithetical to the idea of full decentralization.

The on-chain governance (Tezos, Dfinity) attempt to make the governance automated, with the decisions to be processed on chain. In principle, every network participant could express their opition via vote on any issue. The reality is however, that the bulk of the network participants do not possess the skills set needed for make an informed decision, and hence their votes are bound to be influenced by (off-chain) lobbying by special interests. A likely outcome is the explicit or implicit delegation of the voting rights, creating pools (parties) of like-minded participants, and voting as a block. These natural tendencies make the idealistic direct democracy inherently unstable.

Despite the instability of the idealized democracy, the network as a whole has tremendous deciding power via adoption and rejection of individual forks. There is no guarantee, however, that the winning fork will be the embodiment of the decentralized libtertrarian network, and not a tightly controlled centralized structure, that uses blockchain tech.

Notes on Blockchain Governance Dec 17, 2017, Vitalik Buterin