What is blockchain governance?

Blockchain governance is a system of checks and balances within a blockchain or community that allows participants to decide what is best for the blockchain and cryptocurrency. Many use community governance systems, so it is important to know how these systems affect investors.

Why Cryptocurrency Governance Matters

Stock markets have clearly defined stakeholder structures for investor recourse. These structures have resulted in governance systems that protect investors’ interests and prevent rogue executives from running amok with companies. Cryptocurrencies are regulated in many jurisdictionsbut most are only governed by a small group of developers and an interested community.

In most cases, the lack of token holder involvement in governance is not due to developer blockage. Instead, it’s because most governance issues are technical and use industry jargon, and many holders are unaware that they have a voice.

Many blockchain projects offer governance rights to token holders. These rights are not monetary or financial, but give holders the ability to help decide what happens with the blockchain the cryptocurrency is built on. This may not sound appealing to some, but for those investing in cryptocurrencies, it should be.

Governance rights allow interested parties to vote or participate in the development of a cryptocurrency. When the programming of a cryptocurrency changes, it should be of great interest to investors, because significant changes, such as moving from proof of work to proof of stake or reorientation of the project’s goal, can influence market prices.

Example of the importance of governance

In 2017, Bitcoin investors were spectators in a drama that resulted in a fork to its blockchain. Developers and participants could not agree on a proposed change and the blockchain split, with some supporting the original chain and others supporting the new blockchain and cryptocurrency Bitcoin Cash.

This range could have been much worse for those who invested in Bitcoin at the time. If Bitcoin Cash had managed to attract more followers and interest from other investors, it could have replaced Bitcoin as the leading cryptocurrency. At the time, the only people who really had a say in the direction the Bitcoin blockchain went were the developers and miners, because they were the ones making the changes and uploading them to their nodes. Fortunately for investors, this range did not cause a permanent price decline as many had predicted, but it could have.

Blockchain developers forged the Bitcoin blockchain and made the changes they wanted. Miners loaded the latest version or not, and investors were excluded from decision-making even though they had invested money in the tokens. They were ultimately rewarded as Bitcoin token holders received an identical amount of Bitcoin Cash (BCH) tokens from the fork for free, worth over $345 per token on November 2, 2024. However, developer disagreements and actions of this type do not always benefit investors.

Types of governance systems

Generally, there are two types of blockchain and cryptocurrency governance systems: in chain and off-chain.

Chain systems

Some blockchains allow all token holders to vote through automated voting processes. For example, Decred allows all token holders to vote by locking certain tokens to “purchase” voting tickets. These users then vote through a voting service provider Decred or Decrediton, the blockchain user interface.

Off-chain systems

Bitcoin and Ethereum use off-chain systems, using proposals and community discussions to get feedback from users and participants. Developers then make necessary adjustments to the network and protocols and rely on participants to update their clients.

Hybrids

Other blockchains could use a combination of on-chain (automated voting) and off-chain (discussions and reviews) governance.

Popular Cryptocurrency Governance Systems

Bitcoin and Ethereum have systems to implement decentralized representation. The heart of these systems consists of improvement proposals, suggested by developers or users to improve the functionality and performance of their respective blockchains. However, changes must be accepted by centralized developer communities and certain network participants.

Ethereum improvement proposals must undergo peer review, feedback, and community discussion before being approved or rejected. Investors can participate, but this requires a level of technical understanding that many do not have – this is also true for Bitcoin.

Solana uses a community voting process, weighting votes based on the amount of participation from network validators. When changes are proposed, validators can vote in favor of the supported actions. This can be beneficial for investors who have staked their tokens, as it gives them a say in active development. However, if an investor only holds his SOL and does not stake any, he does not have voting rights.

The essentials

Cryptocurrency investors should be concerned about the blockchain development happening behind the scenes. The most popular cryptocurrencies are actively developed, which means that changes to coding, programming, and the blockchains they belong to will change over time.

Changes in blockchain design and functions can affect how a cryptocurrency is perceived by the market and cause price fluctuations. Governance systems allow users, participants and investors to have a say in the evolution of the cryptocurrency in which they invest. Thus, investors who do not follow and participate in developments are missing out on an opportunity to participate in their investments.