Decentralized Governance in Ethereum
Ethereum’s success rests heavily on its decentralized governance model. Like any large system with many players and high stakes outcomes, this may present some unique challenges; but Ethereum has managed to get much of it right and stands as an impressive demonstration of how effectively decentralized systems can function.
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Success for blockchain networks requires that no single actor holds sway over key decisions for the network, including changes to both its protocol and decentralized applications that run atop it. Decentralized apps are one of the reasons behind blockchain’s popularity; typically they’re created by communities of developers or, in case of cryptos like Ethereum or Bitcoin, an elite group of founders. New blockchains often rely heavily on venture funding or founder-run entities and thus may initially be very centralized; over time though they often transition towards more community-run programs over time.
Vitalik Buterin, co-founder of Ethereum, shared some thoughts in 2020 in an essay released by his company on the importance of effective governance when high stakes outcomes are at play, such as when managing billions worth of assets on networks like Ethereum. Buterin states that his ultimate aim for governance in Ethereum should be “credible neutrality”, meaning the process must remain transparent with no single actor having ultimate control.
Ethereum uses both on-chain and off-chain governance mechanisms to meet its goal. Stakeholders vote off-chain for proposals which then are implemented into the network by miners; whereas, on-chain voting involves voting by the entire network on on-chain proposals.
Both models can be effective. The former offers an easier process for proposing and discussing updates; while the latter may lead to long forks if there is disagreement among stakeholders. Either off-chain or on-chain governance processes must be designed with this in mind in mind to manage any potential disagreements that may arise between people using blockchains.
As part of crypto, it’s also essential to recognize that each community of stakeholders creates its own culture over time. Bitcoin has led to maxims like “not your keys, not your bitcoin” and “don’t trust, verify.” Depending on its specific use case, these values may or may not play an essential role in its governance model.
Crypto projects must find a way to delegate some level of control to their stakeholders, yet digital roles and power relationships are neither hierarchical nor horizontal, making regulation through traditional governance mechanisms such as Mode 1 or 2 difficult. In this article, we explore some stepping stones towards conceptualizing what we might refer to as Mode 3 governance that encompasses these new relationships in an efficient and secure manner – an exciting prospect!
