Governance: Blockchain Tech's Greatest Problem

On paper, blockchain technology seems to be ironclad. An online distributed ledger that is entirely self-governed, immutable, anonymous and secure, there are near-limitless potential applications for the new technology. However, a crucial step in the development of any blockchain is the creation of governance mechanisms.

This aspect of blockchain, whose responsibility lies with the founders and developers of any particular project or network, is perhaps the greatest predictor of a particular chain's success or failure. While many developers have a good idea of what blockchain governance is and how they would like it to operate, achieving these goals is sometimes significantly more challenging.

Consensus Between Users

Blockchain governance requires not just consensus achieved by validating nodes, but also consensus between users on the network as well. One of the first projects to bring the idea of blockchain governance to light was Dash. In the case of Dash, a network of masternodes helped to achieve these goals. Operators of masternodes are able to vote on budget proposals, providing members of the community with the greatest stake in the project with a system for making decisions and reaching agreement on new developments.

Dash's model has proved useful for many other cryptocurrency projects, although each is somewhat different. Sometimes, a developer will add voting rights into the token as well, providing holders with the opportunity to be a part of the governance process and helping to ramp up incentives for use as well. While this is a straightforward and, some might argue, slapdash effort at harnessing the power of blockchain, other projects seek to be more innovative in their governance structures.

In the Interest of the Community

Particularly in the case of highly successful cryptocurrency projects, it can be tough to find mechanisms for governance that will encourage voters to act in the common interests instead of self-interest. Storecoin may be one of the more interesting projects in this regard. Chris McCoy, the project's creator, says that there are four separate branches that check and balance each other on protocol-level, key people, and monetary policy decisions for the cryptocurrency imitating the U.S. Constitution. McCoy explains that blockchains need an enterprise-grade governance [model] that is trusted, enforceable and reaches finality in a democratic process. Storecoin has yet to break into the mainstream of the digital currency world, but its governance strategy is distinctive

EOS is another project that aimed to channel the U.S. Constitution in its governance procedures. However, following pushback from the broader digital currency community, founder Dan Larimer was forced to return to the drawing board in search of a new model. In 2021, he resigned from due to concerns about censorship in the industry. MakerDAO is another project that aims to harness a "governance risk framework" in order to diversify trust in trustless ecosystems.

Cryptocurrency project Tezos also illustrates a potential pitfall of governance models as well: human users. When Tezos launched in 2018, it claimed to innovate in the area of governance, promising "a formal process through which stakeholders can efficiently govern the protocol and implement future innovations." However, bitter fights between Tezos foundation members crippled the project early on, forcing developers to re-examine their structures and goals.

Interestingly, the largest digital currency in the world does not have a governance model like the ones above. Bitcoin​​​​​​​ was designed without any type of governance in this sense, and the project has continued to see success in a truly decentralized fashion. While some may argue that this is evidence against the need for governance, others are likely to suggest that, with a healthy governance system, the bitcoin project could be even more successful than it has been. Undoubtedly, the debates over whether and how to enact governance mechanisms for cryptocurrency projects will continue so long as the space itself remains active.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. "Why Governance Is the Greatest Problem for Blockchains to Solve."

  2. STORE. "About."

  3. Coindesk. "Dan Larimer Announces Departure From EOS Building"

  4. MakerDAO. "Governance Risk Framework (Part 1)."

  5. YouTube. "Tezos."

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.