With increasing adoption, the potential of blockchain to change life in every way – from management to division of labor to operating systems and methods of collaboration – is getting closer and closer to realization every day. If blockchain is the foundation of a truly digital model, governance is key to connecting the on- and off-chain worlds. Governance itself encompasses and dictates the functionality of the blockchain, from the organizational structure to the execution of workflows to coordination and incentives.
Conceptually, governance can be understood as on and off the chain. The former is divided into protocol and contract levels. As the blockchain space diversifies rapidly, governance also rapidly evolves to drive new and novel forms of collaboration, interaction, profit sharing, and risk structure based on each chain’s unique earnings value.
Today’s governance paradigms for on- and off-chain
I believe that in the future there will be several premises that need to be taken into account when building governance frameworks.
First, the digital world cannot be separated from reality. Like the off-chain world, on-chain governance also includes a two-tier structure in which administrative units serve as capital for users to participate in various democratic processes. In addition, external on-chain governance components such as server clusters, nodes, and other infrastructures determine how capital rights and interests are handled. On-chain governance dictates the use of external funds, energy and human resources. It also constructs new identities, modes of participation and power relations. In short, on-chain governance is both a reflection of today’s paradigm and a glimpse into the future.
Second, the on- and off-chain worlds are merging as the lines between social and corporate governance become increasingly blurred. While blockchain began to focus more on economic governance, that focus has shifted in recent years as institutions and companies experimented with blockchain to achieve more efficient social governance. As the line between corporate and economic governance narrows, the future of any chain will slowly but surely depend on the interests and will of its user base, greatly fueling the urgent need for next-generation governance at the protocol level.
Third, the market is currently dominated by coordinated polls that focus on greater centralization, dynamic customization, and third-party proxy agents. Given the fundamentally decentralized nature of the blockchain, on-chain governance depends heavily on the consensus mechanism of a network, which can be understood as a negotiation method that safeguards the interests and rights of community developers, miners and token holders. As part of the proof-of-work or PoW consensus, the focus is on workload. It would take a great deal of central authority and responsibility to validate the work of the parties rather than relying on the code to validate the work of the miners autonomously. In this way, PoW is essentially the same as traditional decision-making.
As part of the proof-of-stake voting, however, the following scenarios will enable more democracy and decentralization:
- One person, one voice based on identity.
- Second vote on the basis of identity.
- Hashing power voting.
- Reconciliation for transaction fees at the account level.
- Coordination of transaction fees at contract level.
- Electoral committee.
- Relative majority voting method.
- Other pledge related indicators including long term node maintenance, long term bond validators, long term coin holders, oracles, and customers.
- Any combination of the above modes.
Fourth, there are still various design issues related to on-chain governance. In today’s governance systems, power tends to be concentrated in a few. In addition, low voting rates also have a negative impact on the effectiveness of governance and network security. Future innovations in governance must therefore also address the above design-level concerns by providing greater incentives for stakeholders to vote while introducing loosely coupled voting to ensure more representative governance.
Overall, the current paradigm shows that on-chain governance represents the transformation of the economic and social organization of the digital world. With the advent of the digital age, people’s identities have increasingly been divided between different governance units rather than resting in the hands of a single one. By introducing new organizational structures and concepts, we can develop a completely new incentive mechanism for optimizing on- and off-chain governance that goes beyond what simple corporate structuring can achieve.
Based on these premises, sustainable and effective governance must meet the following requirements:
- A two-way mechanism for interacting with the real world.
- Comprehensive social governance.
- Movement to realize the vision of the community.
- Effective incentives and punishments through comprehensive mechanisms.
- Clearly defined responsibilities and authorities for governance in the chain.
Structuring of on-chain governance to promote sustainability and acceptance
If we understand governance as a key factor for the introduction of blockchain, networks must approach decisions such as consensus mechanisms, the roles of different participants – and more – with great care and thought. To bring the on- and off-chain worlds together, on-chain governance needs to evolve to enable:
- The assignment of real legal entities or jurisdictions to the chain.
- A comprehensive identity system that connects the identity of the network participants with their social identity.
- Participation in governance through greater rights with the proviso that such rights can be revoked.
By leveraging code, on-chain governance enables the elimination of uncertainty to reach binding agreements and ensure approved network changes are implemented. In addition, due to the inherently transparent nature of the blockchain, on-chain governance also encourages greater responsibility and thus secures a decision-making path. This transparency not only strengthens the community’s trust and fairness, it also enables users to make informed decisions about which platforms to join.
However, as mentioned earlier, today’s systems of governance still face design issues – namely, low turnout rates and voter manipulation by powerful token holders. Regarding the latter, there is still concern that governance systems favor powerful token holders. This leads to a greater emphasis on profit generation rather than realizing the vision of a public blockchain.
Therefore, I propose the key components for effective governance, namely:
Coordination Mechanisms: To ensure sustainability, transaction costs and user usage must be coordinated to minimize conflicts between users and stakeholders. Since transaction fees greatly affect a user’s ability to participate in a network, maintaining low and stable costs is an incentive to participate, which is critical to representative governance and network security. In short, the above mechanism would allow users – the real owners of the network – to participate.
Coordination between currency holders and governance participants: In order to have effective governance and ensure that the interests of the chain are represented, there must be significant overlap. Measures such as economic incentives and elections or the decoupling of governance rights from tokens are necessary in order to create more overlaps between these groups.
Coordination of candidates and selected candidates: To ensure network efficiency, screening mechanisms must also be implemented during elections to determine the correct number of candidates to meet the platform requirements. In addition, platforms must strike a balance between economic incentives, powers and responsibilities for long-term and stable governance.
Incentive measures: In order to reward participation, the following incentives should be created:
- User: Ability to use DApp; inexpensive network service.
- Token holder: GAS or token issuance by vote.
- Nodes: Receive transaction fees for packaged transactions or network fees for winning elections.
- Token Holders: Opportunity Cost.
- Knot: fines for wrongdoing.
Overall, effective governance must meet the following conditions: First, decision-making based on complete and symmetrical information. Second, there is a cost associated with making and changing decisions. Ultimately, governance must be flexible enough to advance the organisation’s interest while taking individual choices into account.
Drive flexible, dynamic and sustainable governance to win the future
Based on the above, I believe that “elastic manageability,” defined as “the ability to adapt to different social jurisdictions,” is the governance solution now and in the future. Elastic manageability enables us to coordinate the interests of different parties, reconcile decentralization and centralization, and establish an effective system of incentives and consequences. With an on-chain identity system and node verification, we can connect the on-chain and off-chain worlds for true integration.
Under this system, I believe the two key mechanisms are as follows:
- Coordination mechanisms.
- Two-lane voting mechanisms.
Token holders can vote on the direction of a community-based organization tasked with acting in the best interests of the platform. In order to incentivize participation and ensure a change of representation, direct incentives such as tokens should be issued based on the degree of participation of the token holders. In my view, the ability for users to vote for representative institutions and consensus nodes enables a platform that dynamically adapts to the changing requirements of the community and the industry.
In addition, an on-chain identity system is vital. As mentioned earlier, the on-chain world cannot be separated from the off-chain world. Rather, the sovereign states and legal systems of the real world must be mapped onto the chain. Governance mechanisms should reflect this through an on-chain social identity system that reflects users’ on-chain address and transaction records, decentralized identification documents and the registration jurisdiction. Based on these aspects, users’ off-chain regulations provide soft guidance on on-chain activities by jurisdiction.
The types of services provided in the public chain can be influenced by local regulations. This real-world identity mapping along with dynamic choices means that token holders have the ability to make decisions and adjust accordingly for future transactions. When processing transactions, different nodes react differently to different types of transactions, which has different effects on the types of services that are processed on the public blockchain.
For example, for a certain type of a certain transaction, consensus nodes that exceed the fault tolerance rate may not exist that type of transaction due to the influence of the local justice system. At this point in time, the judicial influence on this type of specific transaction is reflected in the public chain. As part of dynamic elections, the token holders then decide whether they will continue to vote for the affected nodes in the next term of office. Node candidates can also make adjustments according to the voter’s strategy.
Added value through dynamic elections
With this flexible and dynamic management system, I believe we can fully understand the decentralized on-chain management, node operations management and on-chain voting governance. Local regulations affect the strategic decisions of voters and, indirectly, the behavior of network participants.
Through repeated cycles of governance, blockchains eventually evolve to develop a balance that engages the interests of all – including real world concerns. This opens the way for sustainable and responsible growth in both the on- and off-chain world.
The views, thoughts, and opinions expressed here are the sole rights of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Da Hongfei is best known for founding the blockchain-based “Smart Economy” network Neo with Erick Zhang in 2014. Da received his education from the South China University of Technology with degrees in technology and English. He worked in a consulting firm until 2013. He then learned to code before starting Neo. Together with Zhang, Da also founded OnChain – a commercial blockchain company that provides services to private companies.