Blockchain Governance: What Is It, What Types Are There and How Does It Work in Practice? – Watsonlaw

Centralized vs. Decentralized Governance

Blockchain Governance: What Is It, What Types Are There and How Does It Work in Practice? - Watsonlaw

Blockchain’s main value proposition is decentralization — eliminating gatekeepers or middle-men in transactions to reduce costs and enabling parties to directly transact with each other, e.g. via smart contracts. On a large scale, this effectively means the removal of centers of authority such as governments and their institutions, central banks, etc.

Decentralized governance is therefore a natural response to the current ‘State above all’ world order that has been the go-to approach for centuries. In the age of information and personal empowerment, decentralization acts as a driver towards a future designed to vest authority in the hands of the people. For this reason it could even considered to be the digital extension of a representative democracy.

Decentralized networks are usually consensus driven and enable participants to take active part in decision making processes within a network. Just like in Bitcoin — whenever a transaction is queued, it requires the collective approval of inter-connected nodes to go through rather than that of a central operator or groups of such.

Similarly, DASH uses a consensus-based voting system to introduce changes to its protocol. Governance proposals within its network are submitted to stakeholders, who are in turn given a deadline to ‘announce’ their decision.

The DASH model is arguably more effective in delivering decisions due to its urgency detail, which incentivizes network participants to vote before a deadline rather than turning a blind eye and letting others do it instead.

Why decentralize?

Besides the case for direct transacting and bypassing middlemen or gatekeepers, a decentralized governance model has the obvious benefit of providing checks and balances on those with authority, hence increased transparency and accountability.

Transaction approval has to go through a number of stakeholders and vote calls are usually made available for the whole network to see. A central authority is unable to ‘cook the books’ or introduce self-interest changes behind closed doors as the books are distributed among the participants. This also eliminates the risk of ‘Single Point of Failure’ of centralized systems.

Moreover, decentralization can help improve efficiency and the rate at which decisions are taken on the macro level. In line with the DASH example, specific decisions can be directly submitted and thereby bypass traditional hierarchical structures native to centralized governance models.

The case against decentralization

Nevertheless, decentralized governance has its own issues. First, it calls into question the collective’s ability to carry out important decisions. If authority is distributed, one will naturally look at the distributed parties and argue against their credibility of adequately representing the collective.

Without a working, deadline-induced voting system, decentralized governance is bound to fail. Decision implementation on the Bitcoin mainnet may take months, even years, to complete in cases where the collective is simply unable to reach a consensus.

The benefit of a centralized governance model, assuming a responsible and knowledgeable authority is in charge, relates to the latter’s monopoly over decision making. Typically, a central authority will possess all relevant information to make informed decisions which serve the community’s best interests.

Furthermore, a single authority is usually more likely to possess the necessary expertise to ensure smooth operations and informed decisions. This is at least in an ideal scenario where the authority in question remains responsible towards its managing obligations. In such a complex environment like blockchain, centralized decision making will often be advocated for due to information asymmetries between central bodies and a network’s constituents. Given the fact that the central controller is probably the one who designed the network, it makes sense to vest authority in the creator.

Additionally, centralization could also have the benefit of faster decisions. As participation from others is reduced, a central body can execute faster without the need of subjecting every single decision to a combined vote. Having a pre-determined decision making process system will of course be an additional prerequisite to proper operations. The infamous DAO attack from 2016 with 3.6 million stolen Ethereum is a clear example of how slow decision making can have vast negative consequences on a network’s entire operability and functionality.


On-chain vs off-chain governance

Related Articles

Back to top button

Adblock Detected

Please consider supporting us by disabling your ad blocker