I. Introduction
The ambition, born with Bitcoin and driven by decentralized finance, building a borderless economy that emancipates itself from traditional financial and banking systems requires a shared willingness from every individual to participate in its development.
Distributing power into everyone's hands without the intervention of a trusted third party and in the absence of a higher authority requires the development of new, adapted, and participatory management mechanisms.
Depending on the type of a protocol and its role within the ecosystem, several options then open up regarding its governance. In this article, we will examine the different forms this can take in order to establish an overview of the current situation, and then we will consider ways to address the shortcomings of the system as it stands, or to improve it.
II. Blockchain governance
First of all, let us introduce the two main types of consensus that are involved in governance and smooth operation of a blockchain.
Recall that a blockchain is a distributed ledger technology on a network of computers that enables better data security and transparency. Indeed, it is not enough to corrupt a central entity to take control of the data since they are accessible on all the computers in the network, each corresponding to a knot.
It is important to nuance the difference between a public (decentralized) blockchain, which is a truly disruptive innovation, and a private (centralized) blockchain, which is an incremental innovation (improvement of an existing system through a minor enhancement).
A consensus is a common criterion respected by all blockchain stakeholders to ensure its security. Although it can take several forms, all of them literally involve proof of participation in the network's operation through the provision of resources.
a. Proof of Work
Introduced in the Bitcoin whitepaper, the Proof of Work consensus requires node validators to provide energy and computing power in order to mine each block of the chain.
Here is what controls Bitcoin: majority vote. Since all nodes in the network are equal, if the majority decides something, it will happen. And if you oppose the change, you are free to join other systems, which is why there are so many Bitcoin forks.
(Literally «forks.» Bitcoin Cash is thus the result of a «hard fork,» meaning the creation of a secondary chain that shares a common root with the main blockchain (the Bitcoin blockchain), bringing improvements over the original protocol.)
The most powerful network wins, and that is why most users, miners, and developers are incentivized to respect and protect this mutual agreement. It is in everyone's interest to keep the network active, secure, and healthy!
b. Proof of Stake.
Proof of Stake consensus appeared a bit later, born from the ecological problem posed by PoW consensus, whose operation requires too much energy expenditure. Here, the network nodes are controlled by validators having a financial stake in the protocol. This involves holding a defined number of the blockchain's native tokens and «staking» them in order to create an additional node on the network.
As with Bitcoin's PoW, the governance of this type of blockchain is ensured by majority vote.
III. DAOs
Definition: A Decentralized Autonomous Organization is a form of governance in which the only hierarchy is everyone's voting power, allocated according to the stake (often financial) at risk regarding the success of a project.
There are many projects in the ecosystem DeFi and others are created every day. Each of these initiatives, driven by a shared desire to break free from bank control as trusted third parties, seeks to ensure its governance in the most transparent and equitable way possible.
This is how many projects find the solution to this problem through the creation of a DAO, allowing everyone to make their voice heard when decisions are made regarding its evolution.
– A DAO cannot be stopped or shut down.
– No person or organization can control the entity (no one can manipulate the numbers, for example).
– Everything is transparent and auditable, within a supranational framework.
It is therefore a global organization that is open to all, that relies on no jurisdiction, operating with computer code, and where no one can commit fraud. The weight of each person's vote corresponds to the amount of the project's tokens they own.
IV. Conclusion
Thus, it is important to remember that governance in decentralized finance—although it takes different forms depending on the consensus used or the type of protocol within the ecosystem—is always based on the same fundamentals, which are:
– The key to the success of the project or the operation of the protocol
- Participation in network security
– The ease of access to governance
It aims to be as fair and transparent as possible, with the code being open source and inalienable.
