In the world of cryptocurrencies, governance is defined as the people or organizations that have decision-making powers regarding the project.
Governance is an important aspect of all cryptocurrency projects. As decentralized blockchains, cryptocurrencies often have a very liberal governance structure. There are a number of different approaches to governance.
On-chain governance is one of the primary structures for voting in blockchains. When a blockchain project has on-chain governance, the rules on who can participate in votes and make decisions are embedded in the chain itself. This means that all nodes in the blockchain network have to approve proposed changes and adopt them in the on-chain governance rules. Developers working on the project send out packages with proposed changes, and nodes have the option to either accept or reject these changes. In many aspects, on-chain governance is considered more in tune with the underlying decentralization of cryptocurrencies. As all nodes get the right to accept or decline a proposed improvement, decisions are made with everyone’s participation. Of course, there are also some concerns with the fact that this structure puts a lot of power in the miners’ hands.
Off-chain governance is the other main decision-making structure adopted by cryptocurrency projects. Bitcoin and Ethereum are both managed through off-chain governance. In this governance method, developers, miners, users and business supporters can participate in decision-making. Bitcoin, for example, has a set of code developers who work on the project. They communicate through various mailing lists and social media channels and accept or decline changes. Development proposals are gathered and reviewed by the core development team. However, these changes are not written out in the blockchain’s code, and validation by all miners and nodes is not necessary. In this sense, off-chain governance is more similar to traditional business governance and limits the level of decentralization in the project.
Many blockchain-based projects have introduced governance tokens to facilitate a more decentralized voting process. Governance tokens are purchased and staked in order for the stakeholder to gain voting rights and participate in the decision-making process regarding all aspects of the project. One of the most popular applications of governance tokens is in decentralized autonomous organizations (DAOs). These organizations do not have a centralized management system, but rather depend on a pool of stakeholders who are given voting rights.
Governance is an important part of all crypto projects, as it determines who has the right to participate in decision-making. Both governance models have advantages and disadvantages; however, on-chain voting rights distribution is becoming increasingly sought-after.