Blockchain technology has come a long way since Bitcoin first appeared on the scene in 2008. Today there are thousands of different chains, with more and more continually appearing on the scene. What they all have in common is the need to be able to evolve, adapt and improve as newer technology becomes available. This requires efficient governance mechanisms that can ensure that blockchains can update to stay relevant and avoid becoming obsolete.
In very simple terms, governance can be defined as the way in which something is managed, as well as referring to the systems and mechanisms that are in place to do so. In blockchain, good governance is needed to determine which changes to the network are allowed, defining how exactly the protocol is implemented. Governance should provide blockchain communities with the means to maintain cohesion as they move forward with potential changes, preventing schisms that divide the community.
With legacy blockchains, this has presented problems in the past. How do you coordinate governance in a decentralized system? Who decides which changes are needed and when they should be carried out? With no formal decision making process in place, changes to legacy blockchains such as Bitcoin have been initiated by ad hoc groups of developers and stakeholders, sometimes in collectives or at conferences.
Yet the failure of a majority to reach consensus on how these updates should be coordinated sometimes leads to disagreements and contentious hard forks, which can split a community in two. For example, controversial hard forks of Bitcoin spurred the creation of Bitcoin Cash and Bitcoin Gold — new chains with their own tokens and communities. Rather than making the chain stronger, it led to divided communities.
To be sustainable, a blockchain needs effective, transparent, enforceable governance, with clear processes that allow stakeholders to make decisions on how the chain is updated and run, and that hold them accountable for their decisions. Crucially, in order for stakeholders to buy into a governance system, they need to be sure that their expectations will be met in terms of how the system will function according to a set of transparent rules.
One way to address this is with on-chain governance. Governance mechanisms can be written into the code of a blockchain in order to lock in specific processes and rules for reaching consensus about prospective changes. In this way, governance can be managed on-chain, often with voting rights conferred upon native token holders. Typically, this would be a mixture of miners (in systems that use mining), developers and crypto-enthusiasts. Economic incentives are usually built into the process to encourage participation.
While this adds to the transparency of the governance process as everything is on-chain, in the past it has been found that on-chain systems can also present certain problems. Low voter turnout can create the potential, as in informal governance, for entities that hold large amounts of the native token (known as “whales”) to control the vote, thereby having an undue influence on how a chain is run. To mitigate this, token based voting systems need a way to protect the interests of those holding only a small amount of the native tokens (aka “minnows”).
Case Study: Polkadot’s Design For Effective Governance
Polkadot is a layer 0 protocol that unites multiple specialized blockchains into a unified, scalable network. Central to its design is the idea that good governance is necessary for a system’s participants to have agency and for the system as whole to stay relevant. Polkadot integrates mechanisms into its nominated-proof-of-stake (NPoS) system that facilitate effective governance in multiple ways.
All holders of Polkadot’s native DOT token can participate in Polkadot governance via referenda and have a say in the direction of the network. Voting in Polkadot referenda is stake-weighted, based on the idea that the majority of stake should always be able to control the network. Blockchains are technological systems and economic systems that are difficult to align with one-person-one-vote systems.
However, several features are also included to prevent malicious proposals and make sure minority voices and those with less stake still have a meaningful say in network upgrades. These include conviction voting, enactment periods, adaptive quorum biasing, and an elected council that represents passive stakeholders.
Unlike other coin-based voting systems, votes on Polkadot are not counted merely by the number of tokens in an account. Rather, votes are weighted according to a conviction voting system, according to which DOT holders can increase their voting power in a referendum they feel strongly about by committing to their decision for a longer period of time, thereby increasing their exposure to the outcome. They do this by locking up some tokens until the proposal is enacted. Each doubling of the lock time increases the power of the user’s vote, up to a maximum of six times the account’s value, allowing users to express their conviction in referenda even if they don’t have a huge amount of tokens to stake.
This mechanism also has the effect of preventing a stakeholder from initiating a malicious proposal, voting for it and simply leaving the network, as they will have committed their tokens to the lock until well after the proposal has been enacted.
Adaptive Quorum Biasing
To address issues associated with low voter turnout, Polkadot uses adaptive quorum biasing. As the referendum turnout increases, the threshold of aye votes required to pass it is reduced. This means that a supermajority is required to pass a proposal when turnout is low, whereas a simple majority suffices when voter participation is higher. This allows Polkadot to facilitate change in a more secure and less arbitrary way. Such positive biasing ensures that only relatively consensual proposals pass, preserving the core idea that the majority of stake should control the network’s evolution.
Good governance requires a system that ensures accountability and enforceability, so that the decisions reached are also enacted efficiently. In Polkadot, this is carried out autonomously, without any human involvement. At the end of the voting period for a proposal, the votes are tallied and the result calculated. If the proposal passes, Polkadot’s code automatically schedules the proposal for enactment. This normally occurs 30 days after the vote, allowing time for those who are unhappy with the outcome some time to unbond any tokens they have staked (a 28 days unbonding period) and leave the network if they wish.
Supporting the System
To ensure that DOT holders don’t have to decide between voting or earning rewards from staking, users can lock the same tokens for multiple purposes. This means the same account can have its tokens bonded to participate in staking and still use these tokens to vote in referenda
Representing Passive Stakeholders
Any DOT holder can register to be considered for an elected council, whose role is simply to represent passive stakeholders, to submit important proposals and, in exceptional circumstances, to cancel uncontroversially dangerous or malicious proposals. The council currently consists of 13 members (this number may increase or decrease with an upgrade), with a fixed term of seven days. To ensure fairness, council proposals need to be supported by a strict majority of council members, with no veto. Dangerous or malicious proposals may only be cancelled by a unanimous vote.
Blockchains have to be able to be updated quickly if emergency upgrades or technical fixes are needed. To enable this, Polkadot also has a technical committee that consists of teams with expertise in Polkadot and its technology. In these exceptional cases, the technical committee has permission to fast-track a proposal, allowing it to be enacted without the usual waiting time.
If funding is not available to pay for infrastructure development, a blockchain is dependent on developers freely donating their time and work and the network can stagnate as a result. In Polkadot, treasury funds are raised from some of the validator rewards (from minting) and from a fraction of the transaction fees and slashings (the fines paid by any validators who act maliciously or incompetently).
Polkadot’s governance system enables DOT token holders to use these on-chain treasury funds to keep the entire system running smoothly. Crucially, the treasury can be used to support any activities that benefit the network in general, not just infrastructure development. This gives the Polkadot community a high degree of collective agency.
Governance on Polkadot Parachains and Parathreads
Polkadot’s architecture is composed of a central Relay Chain and several specialized, sovereign blockchains, which are known as parachains and parathreads (similar to parachains but using a “pay as you go” method for connectivity to the network). It is also composed of external chains that are connected by bridges.
Notably, while Polkadot’s on-chain governance is used to govern the system as a whole, the individual blockchains running as parachains or parathreads can customize their own blockchain’s governance mechanisms to suit their needs. Polkadot provides these sovereign chains with the means to develop and customize their own governance system in the way that’s best for their own communities. Parachain teams can even make use of pre-built governance components when they develop their parachain with the Substrate blockchain framework.
Decentralized On-Chain Governance
To sum up, decentralized on-chain governance needs to address several issues to ensure that it works effectively and enables blockchains to adapt and evolve. Mechanisms like those used by Polkadot are effective at preventing individuals or groups from wielding too much power, and at allowing communities a say in how their chain is run. The enactment of decisions autonomously according to the system’s code leads to more transparent and binding results. These methods contribute to the increasing decentralization of blockchain technologies and their development, and to the longer-term goal of a better, more equitable internet — Web 3.0.