Virtually all cryptocurrencies are based on a blockchain network. A blockchain network is just like a shared database with a distributed ledger. What this simply means is that the transaction records are kept on the blockchain to be viewed by all the involved parties. This process involves a lot of different steps and these become more apparent when a new transaction is initiated. When this happens, there is an addition of a new block to the existing blockchain. But before these new transactions can be validated, they must follow the specific set out procedures. The job of the nodes is to cross-check the details of the transaction, ensuring the accurate data is used, and once confirmed, they can be validated. When the first level of nodes is through with the verification, the transaction is passed on to the next level in the network. Here, it is further reviewed to satisfaction before finally being added to the network.
In cryptocurrency, there are different types of control/governance systems. Governance is the mode of decision-making on the network. The informal governance system for starters. This makes use of both offline and online parts to fully effect changes on a network. This is different from the on-chain type of control, which has its operations strictly online. Here, if one of the parties involved wants to make any changes to the network, he has to submit a proposal. This proposal will be reviewed by all the parties involved before a final decision is made. Generally, in the On-chain system, there are three major participants.
- The nodes
- The developers
- The participants.
The nodes are the miners. They are the ones responsible for validating transactions and adding new blocks to the existing blockchain.
The developers are the party responsible for the creation of the core algorithm which the network blockchain uses to operate.
The participants are the final users. This is the category where investors on the network fall under. This also covers online traders on platforms like bitcoin-code.
Each of the parties involved in the entire process is entitled to economic incentives. The nodes, for example, get a portion of the overall transaction fee. When a decision is to be made on the network, the parties are entitled to a vote either for or against the proposed action. However, not all parties have the same voting power. Parties; specifically nodes with large amounts of the coin have greater voting power than nodes with significantly fewer coins. If the votes sway in a particular direction due to having a greater number of votes, the action is implemented on the network.
There are different versions of on-chain control used by different cryptocurrency networks. The difference in the versions lies in the implementation process chosen to be used by the network. For instance, Tezos is a type of system where the ledger is self-correcting. Here, before a change is fitted into the network, they are rolled out in beta versions for testing. If the tests come back successful, the change is then implemented.
On-Chain Governance’s Advantages
On-chain governance provides several advantages over its informal counterpart, including the following:
- The decision-making process is decentralized
Protocol updates can be voted on by any entity that owns the blockchain’s underlying token. Users and node operators in informal systems can only express themselves through community forums, social media sites, and mailing lists. They have no way of influencing developments directly.
- Changes to the binding code
Any changes that are agreed upon through on-chain governance will be executed without question. This differs from informal systems in which all code updates are agreed upon ‘off-chain.’ There is a non-zero risk that whatever is decided will not be implemented. The Segwit 2x fiasco was a perfect example of this. Everyone in the Bitcoin community expected the hard fork, but it was canceled at the last minute. While there is no right or wrong in that case, it does demonstrate that centralised powers can make adjustments at will, which is utterly at odds with the decentralisation mindset.
Before any vote occurs, the mechanism by which on-chain decisions are made is highly transparent and open to all stakeholders. As a result, consensus norms are always stable, and stakeholders don’t feel that centralized powers continuously change the system. Stakeholders are more inclined to support a system with pre-determined and agreed-upon features such as quorum thresholds and voting intervals.
- Consensus in a Shorter Time
Because there are encoded voting periods, code modifications can be executed considerably more quickly. Stakeholders are aware that they have a set amount of time to express their approval or disapproval of a code update. In contrast to formal systems, where code modifications might conceivably be argued endlessly, this is a sharp contrast.
- Hard Forks with Fewer Malicious Forks
The most significant advantage of on-chain governance is that it helps to prevent hard forks. When a group of stakeholders cannot agree on protocol changes, a hard fork occurs. They can be especially harmful because various networks are now competing for the same brand and subscribers, which many people regard as a zero-sum game. Hard forks are avoided through on-chain governance because stakeholders feel more empowered if they say how the protocol evolves.
While on-chain governance is an intriguing concept, there are several well-articulated criticisms of the system.
Presently, Bitcoin and Ethereum are the leading names in the world of cryptocurrency. Their networks, however, do not use the on-chain control system. They both make use of informal variants. Their creation ethos were designed to be decentralized. This is the same basis that most of the criticisms of the on-chain approach face. The belief is that the system allows for a level of centralization in which the nodes and the developers control most of the decisions being implemented. In the original design of the on-chain governance type, it was used as an alternative for the informal system which claims to solve most of its shortcomings. Presently, its implementation is not far reaching enough. However, time will tell just how much it has solved the problems of its predecessor.
On-Chain Governance’s Future
On-chain governance has emerged as a viable alternative to traditional governance structures. It claims to solve bitcoin’s centralization problems by involving all nodes in a blockchain network in the decision-making process.
Blockchain technology takes a more inclusive approach to technology, allowing all players to gain equally. Updates to the technology are likely to continue as the blockchain community. Its networks strive to increase their scalability, allowing them to process more transactions and compete with existing electronic payment systems like Visa.
These adjustments will continue to be made to advance blockchain technology and the community’s shared benefits. As these adjustments and enhancements are implemented, on-chain governance will most likely focus on increasing openness and trust in the distributed ledger process.