Within a blockchain or community, blockchain governance acts as a system of checks and balances that gives participants the opportunity to determine the best path for the blockchain and cryptocurrency. It’s essential to comprehend how these community governance systems impact investors, as many such systems are in use.
Protocol shifts in blockchains have the potential to directly impact cryptocurrency investors. Most investors, however, do not engage in the decision-making processes surrounding blockchain and cryptocurrency development. Systems like Improvement Proposals in Bitcoin and Ethereum facilitate decentralized representation. Hybrid models that combine off-chain and on-chain systems exist, alongside purely on-chain or off-chain governance frameworks.
Key Considerations
Blockchain and cryptocurrency governance structures generally fall into two categories: on-chain and off-chain. Investors become more influential in governance when they express support or rejection for changes, thus preserving the decentralized and democratic roots of cryptocurrencies rather than yielding control to a centralized group.
Token holders often fail to participate in governance not because developers bar them, but due to the technical nature and industry-specific language of most governance issues, leading to unawareness among many that they can voice opinions.
On-Chain Systems
Voting processes in some blockchains allow all token holders to participate. For instance, Decred permits token holders to vote by locking tokens to acquire voting tickets, casting votes via Decred’s voting service provider or its user interface, Decrediton.
Off-Chain Systems
Off-chain systems are used by Bitcoin, utilizing proposals and community discussions for user and participant feedback. Developers then make necessary network and protocol adjustments, relying on participant client updates.
Hybrids
Blending on-chain automated voting with off-chain discussions and review, some blockchains adopt a mixed governance approach.
Decentralized Representation in Bitcoin and Ethereum
The backbone of decentralized representation in Bitcoin and Ethereum is Improvement Proposals, which developers or users propose to enhance blockchain performance and functionality. Community discussions and feedback play a critical role before proposals are accepted or rejected by a centralized group of developers and network participants.
Ethereum’s improvement proposals require peer review and community interaction. While investors can engage, a significant level of technical knowledge is essential, mirroring the situation with Bitcoin. Solana’s community voting process considers network validators’ stake amounts when voting on changes. While beneficial for staked investors, those holding SOL without staking lack voting rights.
Cryptocurrency Governance in Perspective
In cryptocurrency, “governance” denotes community involvement in the development of a blockchain and cryptocurrency, akin to shareholders voting on a company’s actions. Governance involves decisions by developers, the community, or both about a cryptocurrency’s blockchain, differing from regulation by bodies like the SEC or CFTC.
The governance structure of Bitcoin utilizes a community improvement proposal process, allowing anyone to propose a change post-discussion. Developers update accordingly, with miners and node operators deciding on acceptance and implementation.
Behind the scenes, blockchain development often goes unnoticed by cryptocurrency investors. Active development in popular cryptocurrencies means eventual changes in coding, programming, and associated blockchains. These alterations might shift market perceptions and influence prices. Governance systems empower users, participants, and investors to influence the evolution of their chosen cryptocurrency.
In 2017, a major incident involved investors as mere bystanders during a blockchain fork drama. Divergent opinions on a proposed change led to a split, leading to the creation of Bitcoin Cash. Had Bitcoin Cash gained more traction, it could have replaced Bitcoin as the leading cryptocurrency, showcasing developers and miners’ influence over the blockchain’s path given their role in implementing changes. Although the split didn’t cause a sustained price drop, the potential existed.
Bitcoin’s blockchain fork allowed developers to apply desired changes. Miners either updated their nodes or refrained, leaving investors out of decision-making despite financial stakes in the tokens. Investors ultimately benefited as Bitcoin token holders received equal Bitcoin Cash tokens, valued at over $345 per token on Nov. 2, 2024. However, such developer disagreements don’t always align with investors’ interests.
Blockchain governance grants interested parties the ability to vote or engage in a cryptocurrency’s development. Programming changes in cryptocurrencies, such as transitions from proof-of-work to proof-of-stake or redirections in project purpose, warrant investor attention due to their potential impact on market prices.
Offering governance rights to token holders enables them to influence blockchain decisions, though not financially binding. For some, these opportunities may not seem enticing, yet they are significant considerations for cryptocurrency investors.
Disengagement of token holders from governance isn’t typically due to developers blocking them; rather, it’s often a lack of understanding due to technical and jargon-heavy governance topics, leaving many unaware of their ability to participate.
As community involvement in governance increases, more voices add to the approval or dissent in changes, ensuring cryptocurrencies maintain their decentralized, democratic principles rather than following the direction of a small centralized group.