Bitcoin and cryptocurrencies are often considered simply as an alternative form of digital money, but what many people do not realize is that censorship-resistant blockchains are going to change the way we govern ourselves and vote on important issues in the future.
Before we arrive at that future, however, we must first tackle the problem of how to govern a blockchain itself.
A couple of remarkable events have highlighted the need for on-chain governance - the dramatic forks of Ethereum in 2016, and then Bitcoin in 2017. In both cases, a major decision concerning the project's future was made almost entirely by the core developers, leaving out a considerable number of stakeholders.
In this article I will cover the evolution of blockchain governance and focus on Telos as a leading example.
First Generation Governance
When Satoshi Nakamoto designed Bitcoin he certainly planned for a lot, but he understandably could not foresee all the issues that Bitcoin would face in the future.
The governance of Bitcoin comes down to the miners accepting the upgrades provided by the core developers, or rejecting them in favor of an alternative version. Other than threatening to dump their BTC on the market, investors have no say in what protocol upgrades are passed, or which projects get funded. With first generation blockchains, these decisions are made in a centralized fashion by the core developers and can result in violent splits between the community.
Bitcoin vs. Bitcoin Cash
As per the whitepaper written in 2008, Bitcoin was originally designed to be a peer-to-peer electronic cash system. As the years went by however, the number of Bitcoin payments increased and the blocks started to reach capacity. The fees and transactions times started to go up and Bitcoin was no longer functioning as digital cash, but rather as a digital store of value. There was a heated debate in the community over whether to expand the blocksize beyond 1MB in order to facilitate more transactions, or to leave it as is to maintain maximum decentralization.
Due to the fact that Bitcoin had no on-chain governance mechanism, there could be no all-inclusive democratic resolution to the debate. In the end, some miners decided to support the blocksize upgrade by upgrading to a different version of the software. This caused a controversial split between Bitcoin Cash and Bitcoin in the summer of 2017.
Ethereum vs. Ethereum Classic
Ethereum was designed to be a censorship-free platform for unstoppable decentralized applications. One of the first dapps created on Ethereum was called the "DAO" (Decentralized Automomous Organization) and was supposed to allow token holders to vote on which Ethereum projects received funding. Over 150 million dollars worth of Ether was invested into the DAO at the time. Shortly thereafter, a hacker exploited a vulnerability in the DAO's smart contract and drained a significant portion of funds from the account.
A debate raged in the community over whether or not the chain should be hard-forked to return the stolen funds to the investors, or uphold the "unstoppable applications" mantra and keep the platform free of intervention.
While Ethereum revolutionized blockchain with the addition of smart contracts, it still lacked any governance features. Had there been a voting system built into Ethereum, the ETH holders could have collectively voted on which path to take. In the end, the majority of Ethereum miners accepted the hard-fork upgrade to return the investor's funds and split away from Ethereum Classic in the summer of 2016.
Second Generation Governance
A blockchain needs more than just core developers to grow and attract users. Business operations, marketing, graphic design, a social media presence are also required. First generation blockchains have no native funding mechanism, and therefore these operations are usually handled by early investors, volunteers, or people who request donations.
Digital Cash (DASH)
DASH was the first cryptocurrency to introduce the concept of an on-chain community fund that automatically receives a percentage of all block rewards produced on the network. Any community member can pay a small fee to submit a proposal to the fund and outline their plan to add value to the DASH network. The DASH masternode owners then vote on whether or not to grant funding. If the proposal receives enough yes votes, then the funds are automatically sent to the proposer's account and they can proceed with their work.
This on-chain community fund allows the chain to grow organically, as community members do not rely on donations for their work, but actually receive rewards for their contributions in the form of the blockchain's native token.
Third Generation Governance
Third generation blockchains seek to make the technology even more democratic by allowing individual token holders to vote on block producers, funding proposals and protocol amendments. Among others, third generation blockchains include Tezos, EOS and Telos.
Tezos was the first blockchain to implement on-chain protocol amends, automating the entire process of upgrading the blockchain. Any community member could submit the code for a protocol upgrade to the chain and ask the bakers (token holder representatives) to vote on it. If an upgrade proposal reached a certain threshold of yes votes then all nodes in the network would automatically upgrade themselves with the proposed code.
In early 2018 Block One released the open-source EOSIO software and the community launched the first EOSIO-based blockchain, aptly and confusingly called "EOS".
Different from Bitcoin and Ethereum, where anyone can configure a node to start validating (or mining) transactions and producing blocks, most* EOSIO blockchains rely on the token holders to elect the block producers who validate transactions and maintain the blockchain.
* Some upcoming EOSIO chains, such as Ultra (UOS), are planning to elect the block producers themselves instead of relying on the community to do so.
Telos is another EOSIO-based blockchain that takes governance to a higher level. In addition to BP voting, Telos introduced two new key governance features.
- Worker Proposal System - A system that allows all token holders to vote on community funding proposals
- Telos Amend - A mechanism that allows community members to submit and vote on protocol upgrades.
Block Producer Voting
Telos token holders have the right and responsibility to vote for the Block Producers (BPs) that validate transactions on the network. It is in the community's best interest to elect BPs that are reliable, trustworthy, and actively work to add value to the ecosystem.
When it comes to deciding who to vote for, most BPs have a website and Twitter account where token holders can go to gather information. Investors who don't have the time to do research can delegate their votes to a trusted proxy and have them vote on their behalf.
Here's a screenshot of the BP voting section in the SQRL desktop wallet, where it is possible to vote for BPs individually or delegate votes to a proxy:
Worker Proposal System
Similar to DASH, Telos has a community fund to facilitate self-sufficient growth. However, what makes it different from DASH's community fund is that anybody who owns Telos tokens can vote on proposals. No masternode is required.
These community funds are granted to proposals that manage to convince the community that they can add value to the Telos ecosystem. Some ideas for proposals include sponsoring an influential YouTube channel, building a fun Telos-based game, or managing the organization's social media accounts.
If a proposal gets a simple majority of 5% of eligible voting tokens, then the submitter can claim the funding and get to work on their project.
You can view the active Telos worker proposals yourself at chainspector.io/governance. Here is a screenshot of two active proposals:
Protocol upgrades are software updates that all nodes must install in order to adjust important parameters such as the inflation rate or voting quorum percentages. The mechanism used to implement protocol upgrades on Telos is called "Telos Amend".
The Telos blockchain is governed based on the TBNOA (Telos Blockchain Network Operating Agreement), which exists as a set of documents on the IPFS network. Any user can submit a proposal to have the agreement amended. If it receives enough votes, the changes must be implemented by the core developers. Protocol upgrades are written in plain English so that even non-technical users can vote on them.
Protocol amendment proposals can be viewed at chainspector.io/governance/ratify-proposals:
In this article we covered first generation blockchains where the core developers and miners control protocol changes. Second generation blockchains introduced the concept of an on-chain community fund that allows large investors to have more say in what projects receive funding. Finally, we covered third generation blockchains that permit individual token holders to elect block producers, vote on funding protocols and make the final decision on protocol upgrades.
Governance is an often overlooked aspect of blockchain technology, but given the dramatic community splits that we have witnessed over the past decade, it has become clear that incorporating some form of governance at the chain level is of great importance. Once we have tackled the problem of on-chain governance we can move on to overhauling our outdated democratic voting systems to incorporate blockchain technology.