Governance

Governance is of utmost importance in every cryptocurrency project. Cryptocurrencies, being decentralized blockchains, often adopt an open governance structure. There are different approaches to governance.

On-chain governance serves as a primary voting structure in blockchains. When a blockchain project implements on-chain governance, the rules for participating in voting and decision-making are embedded in the chain itself. This implies that all nodes in the blockchain network must approve proposed changes and incorporate them into the on-chain governance rules. Developers send out packages containing proposed changes, and nodes have the choice to accept or reject these changes. On-chain governance is considered more in line with the underlying decentralization of cryptocurrencies as all nodes have the right to accept or decline proposed improvements, ensuring decisions are made with the participation of everyone. However, concerns arise regarding the concentration of power in the hands of miners.

Off-chain governance is another decision-making structure employed by cryptocurrency projects. Bitcoin and Ethereum, for instance, are managed through off-chain governance. In this method, developers, miners, users, and business supporters can participate in decision-making. Bitcoin has a group of code developers who communicate through mailing lists and social media channels to accept or decline changes. The core development team reviews development proposals. However, these changes are not directly written into the blockchain’s code, and validation by all miners and nodes is not required. Off-chain governance resembles traditional business governance more closely 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 acquired and staked to acquire voting rights and participate in decision-making regarding all aspects of the project. Governance tokens find popular application in decentralized autonomous organizations (DAOs). These organizations lack a centralized management system and instead rely on a pool of stakeholders with voting rights.

Governance holds immense significance in all crypto projects as it determines who can participate in decision-making. Both governance models have their own advantages and disadvantages; however, there is a growing demand for on-chain voting rights distribution.