Introduction to Governance and Coordination

CTA: In these threads we attempt to provide an overview of what this category is and some information about the current state of the domain space. These posts are living documents and it is our hope that the community will continue to contribute to this definition.

What is governance?

Using its most basic definition, governance refers to any process of imposing control over a system. In the context of cryptoeconomic systems, governance takes on a more specialized definition. Cryptoeconomic networks are heterogeneous systems of human actors, technical code, and financial entities. Once deployed, most smart contracts or other blockchain-based systems are primarily set in stone, with limited degrees of post-deployment mutability.

Though smart contracts are mostly unchanged after they are deployed, there is still a need for them to update and evolve over time and in response to external conditions without requiring the more drastic action of a fork or a complete overhaul of the contract code. ‘Governance’ is generally referred to as the manual and mutable parts of the process still required for blockchain and smart contract systems.

In other words, if a smart contract is a ship sailing on the ocean, then the precise structure and build of the ship is hard-coded into the contract, but the direction and speed that the ship travels is left up to governance post-launch. This process involves social coordination of system participants to make decisions and these decisions are in turn imposed upon the system. The procedures and tools used to 1) gather input from system participants, 2) achieve consensus for system-level decisions, and then 3) implement these decisions are what comprise a governance framework.

What does governance look like in crypto today?

One could consider blockchain based consensus to be an early example of a coordination problem in crypto and as such blockchains like Bitcoin and Ethereum to be systems that employ governance mechanisms both on-chain, and through off-chain improvement proposals. Subsequently, the Decentralized Autonomous Organization (DAO) emerged as a function of smart contract implementations and introduced another example of systems that employ governance mechanisms. One of the basic tenets of a DAO is that actors interact with the system in a decentralized way (i.e., not managed directly by another human but rather by interacting with a set of rules pre-programmed in a smart contract.

Given the need for community-driven technologies to evolve and maintain an updated set of rules that are responsive to fluctuating external conditions (market, technical, and regulatory) as well as to iterate and optimize in incremental ways while operating live on a day-to-day basis, many of them naturally incorporate explicit governance structures. This trend remains prevalent in smart contract applications. There are many recent examples of projects where community governance mechanisms play a prominent role including Aragon, Decred, MakerDAO, Cosmos, Tezos, and more. These projects employ various blends of on-chain versus off-chain social coordination and governance mechanisms. At present, many of these projects are evolving their definitions of good governance structures and their solutions to security and incentivization problems in an iterative or trial-and-error process.

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This is a small piece of graphical work i started to outline some of the approaches to consensus i have encountered. I haven’t started the pro/con side of the graphic yet or where most applicable. It is a work in progress.

Consensus Mechanisms.PDF (62.9 KB)

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That is an extremely useful visual breakdown! Thanks for that, and I look forward to seeing how you update it.