The concept of blockchain governance is a currently a hotly debated topic, and to understand why this is the case, you need to know what precisely it is and the part it plays in the blockchain ecosystem.
The entire concept of blockchain governance relates to decisions made about two things, those being the economics or incentives on which the network is based on and the rules of the protocol or code. As with any new technology, while blockchain has made great strides in a short time, there is still room for improvement in areas such as scalability and privacy. Notably, the ecosystem has to be ready to adapt to new developments and adjust when one segment takes a different direction to reach certain levels of functionality.
For example, there has been debate in the mining community over whether to utilize ASIC resistance and therefore avoid centralizing mining.
While most in the blockchain community agree that it’s critical that there be a system of governance which handles implementation and other important decisions, they have not yet reached a consensus on what form that should take. There are several projects (Tezos, Dfinity, Decred, and others) which have developed models of on-chain governance where it is just another component of the protocol.
But, before the entire community decides on a solution for every project, it’s important to examine the current system of governance and determine the benefits in comparison to other models.
In order to grasp blockchain governance, you need to look at the various classes of participants in a network, their inventions and how they work together to align incentives and bring everything to a single point.
Miners — These people are essential to the network and help sustain it. They have several incentives, including transaction fees and block rewards. This means they favor those changes that could increase or maintain the block rewards and transaction fees and grow the value of their holdings.
Developers are also critical both because they create the protocol and maintain the blockchain. Additionally, they push out further implementations and so have an effect on the entire community. They are incentivized by growth of their work’s popularity, the community and so their existing holdings. But overall, there needs to be a better system of incentives for long-term development of protocols.
While there are some shared incentives, there are differences, which can result in issues. For example, one segment of the community may want upgrades that benefit them but are harmful to transaction fees, which would be unpopular with miners. And on the other hand, miners may be interested in updates which would yield larger block rewards that could damage the network’s longevity. Therefore it’s critical that all these differences have to be reviewed thoroughly and a middle ground used as a baseline for all further developments.
From this point one needs to look at how on-chain and off-chain governance works and the advantages of each.
On-chain transactions are considered valid when the blockchain is modified to reflect the transaction on the public ledger. This entails the validation and authentication of a transaction by a set number of participants. The various details of the transaction are then recorded on a block and dispersed to the entire blockchain network, which makes it irreversible. However, they may take longer than off-chain transactions because of all the different steps that have to occur for a transaction to be successfully completed. Added to that is the potentially high cost of a transaction, which can prove off-putting for some members of the community.
Off-chain transactions, on the other hand deal with values that are outside the blockchain and can be carried out using a number of methods. Firstly, two parties can have a transfer agreement, Next there can be a third party who guarantees that the transaction is correct. An additional means of conducting off-chain transactions is using a coupon-based payment mechanism. This happens when those individuals involved in a transaction buy coupons in exchange for cryptocurrency and send the code to another party who then redeems them.
Off-chain, one or more nodes may determine they they would rather not implement various changes, and this has an effect on the rest of the community. Any transaction which is conducted off-chain is instantaneous, don’t usually have transaction fees, and can offer a different degree of security. But, these transactions are not irreversible as they do not happen on the blockchain.
When evaluating on-chain and off-chain transactions, the question is not which is better, but how can each be used to improve the other. There are advancements in blockchain technology happening all the time, and the concerns of all members of the community can be met if everyone arrives at a common ground that considers factors like security and transaction speed as equally important.
