Governing Distributed Ledgers: Everything You Need to Know

Before diving into distributed ledger technology (DLT) governance, let’s first define governance.

Governance is a process designed to manage risk and ensure the right things get done. Technology governance, then, is how a system is aligned to the organisation’s overarching objective, how risks are managed, and ensuring investment is allocated appropriately.

For DLT networks, governance is important to guide the improvement of the underlying technology, and protect it against risks such as malicious security attacks.

Good governance for DLT networks ensures that the right mechanisms are in place to reach consensus, and that the right incentives are in place to maintain this consensus into the future.

When you boil it down, the question is: who has the authority to change the underlying code base and how are priorities associated with change set?

Throughout this piece, we will focus mainly on the governance around consensus protocols and their code bases, rather than the applications built on top, though there is certainly overlap.

There are two broad categories of governance in the DLT world: off-chain and on-chain governance.

The pros and cons of on-chain governance

On-chain governance is programmed into the decentralised ledger technology. (Note here, though, that not all DLTs use a blockchain. But for simplicity’s sake, assume on-chain to be coded into the consensus protocol.)

In this case, governance decisions are executed as code. For example, given an input, the code will produce an output, such as setting the cost for users to transact on a blockchain.

A more ‘out there’ example of on-chain governance is Tezos, whereby any developer can submit a proposal for a protocol update, which triggers an on-chain voting event where node owners decide whether the updates are to be accepted.

The benefit of on-chain governance is that decisions can be carried out very quickly. In addition, the decision-making process - typically determined by some sort of voting mechanism - is transparent and (usually) designed to be fair and open (though the opposite can also be true). It does this by removing centralised bodies, which is aligned to the ethos of DLT.

That being said, given the finality and the binary nature of on-chain governance (as soon as the voting process is complete, the winning decision is immediately executed by the protocol), there are issues associated with nefarious actors taking advantage and gaming the on-chain governance processes in their favour.

For instance, a typically discussed area of concern are sybil attacks, where a single actor controls multiple nodes of a peer-to-peer network, giving them a disproportionately large influence within the network.

Another issue includes difficulty in creating and following a roadmap, as it can be hard to get all parties to agree on anything if control is too decentralised.

The pros and cons of off-chain governance

Off-chain governance, as you can probably now guess, refers to the governance mechanisms, bodies and processes that are not coded into the consensus protocol, meaning they can be fluid in nature.

Across the crypto ecosystem, most, if not all, projects have some form of central body that dictates, to a varying extent, the direction of travel of their respective project.

This is quite similar to the open source community, such as the Linux Foundation. The level of control a governing body has, and its influence over the network, varies depending on the use case and properties of that network.

Obviously, one drawback of off-chain governance is the centralisation of what is meant to be a decentralised ecosystem (though this can be negated by design).

On the flipside, one positive is that strong, centralised leadership can play an integral role in driving the overall vision, and actually building a user-friendly and productisable network that thrives in what is, and will continue to be, a flooded market.

The hunt for good DLT governance

To say there is one optimal approach to governance would be complete nonsense, and it is very likely that the governance architectures used in tomorrow’s most successful networks are yet to be invented.

Furthermore, given the combination of online and offline governance mechanisms, the options really are endless, and exciting.

That being said, there will always be a debate around how much decentralisation is the right amount, and, because of this, it is best to think about decentralisation and centralisation sitting on either ends of the spectrum.

Where exactly on the spectrum is the right place to sit, as well how much goverance should be on-chain as opposed to off-chain, really depends on what your use case is. For instance, private blockchains are typically for-profit and thus the governance is more centralised, whereas public blockchains are typically less centralised given their desire to disintermediate.

DLTs are platforms, and all platforms need a governing body

That being said, DLTs are platforms, and building a platform requires the right incentives to be in place to generate critical mass so that network effects pull new users onto the platform.

To do this, there needs to be some sort of influential off-chain governing body that helps drive direction, especially in the early days. Many of these DLT platforms have this, though the degree of centralised power within these governing bodies can change significantly.

For instance, Ethereum is said to be run (and controlled) by its cofounder Vitalik Buterin, while bitcoin is much more decentralised, with the node operators voting on whether or not they accept the updates put forward by developers (although a handful of organisations now own the lion’s share of bitcoin nodes).

These differing structures create varying outcomes, with bitcoin undertaking a number of forks, leading to blockchain offshoots and variances of the bitcoin token (hard forks) in the market.

Ethereum, on the other hand, has only had one hard fork (although a potential new fork is lurking), as proposed changes are typically accepted by all because they are backed by Buterin. It should be noted that in the early days of bitcoin, creator Satoshi Nakamoto played a hands-on role in building and developing the bitcoin blockchain into the world’s biggest crypto network before promptly disappearing.

The all-important role of on-chain voting

It goes without saying that a critical part to all DLT is consensus, which is done on-chain, through voting or other mechanisms, like proof of work or proof of stake.

On-chain voting, as discussed earlier, can also play an important role in other areas associated with governance. For instance, in DFinity, users can vote to edit the ledger if something bad has occurred, like an attack.

Things get really interesting when users can vote on-chain on changing the protocol’s on-chain governance. This is known as meta on-chain governance voting. There’s actually a huge amount of possibilities and iterations of on-chain voting, which will no doubt create some extremely interesting governance architectures.

Why off-chain governance is also critical

But in order to succeed, off-chain governance will be critical. This is because the governing groups and processes need to play a more hands on-role earlier in the network’s life to build an interested and engaged community, as well as setting the precedents and norms within the community to help grow the network.

Further, off-chain governance offers more flexibility and adaptability as nothing is hard coded. The foundations laid early will be vital to ensure effective and fair governance is grandfathered out across the ecosystem over time, in turn driving longevity of the network.

One large issue associated with off-chain governance and governing bodies is that like many platform companies (think Microsoft, and now Google and Facebook), though they may start with the best intentions, things can change, and people can become greedy as they try to capture more value for themselves (it’s human nature).

Therefore, it’s important that these central bodies ensure these ecosystems remain fair, open and decentralised (though the level of decentralisation depends on what is being built - private versus public blockchains require different governance architectures). This will most likely require becoming more hands-off over time, while still ensuring the right governance and incentives are in place to drive growth and development.

Transitioning from off-chain to on-chain

Off-chain governance allows for the governing bodies to trial different governance approaches over time, and gradually, if they wish, transition the most effective processes from off-chain to on-chain.

This is typically done through the application of smart contracts or some loosely coupled governance layer that sits on top of the consensus protocol (by definition, these aren’t considered on-chain as they aren’t part of the protocol and the outcome isn’t necessarily final), or directly into the protocol itself.

One option is to create a governance pipeline of sorts, whereby new governance processes - which may only initially be enforced off-chain - are transformed into programmed governance via smart contracts or a computational layer on top of the consensus protocol, where programmable governance is easily tested and iterated (and, if need be, removed). If something becomes so heavily ingrained within the community, it may then move from this loosely coupled governance test bed to part of the core protocol itself.

This process gives the off-chain governing body the power to drive adoption and growth at the beginning of the protocol’s life, and, over time, hand the power back to the community.

The caveat being that moving things down the pipeline makes these processes harder to change, so it’s imperative that the repercussions are understood thoroughly. But overall, this model gives the network and its community a nice testbed of sorts to ensure the right governance is in place to achieve network prosperity.

Creating the right foundations for DLT networks to prosper

DLT governance is very much a nascent field, with the likes of Tezos and DFinity, and others like Cordano, using their liquid democracy architecture to create some really interesting models.

That being said, many more new ideas will no doubt surface as this space develops, so it’s imperative that these DLT networks have the right foundations and mechanisms to adapt and grow within the wider community, and to meet market demand.

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This article first appeared on Digital Asset Ventures.