Why Crypto Investors Should Care About Governance
The Decentralized Autonomous Organization was a success after what was billed as the largest crowdfunding project in history raising $100 million worth of ethers in less than two days.
To be clear, DAO is a stateless, decentralized organization with a flat organizational structure beyond geographical restrictions. The token holders get to vote on projects for investment and the relationship is governed by smart contracts on ethereum’s blockchain.
But it was affected by a hack exploiting the security vulnerabilities in the code, resulting in a theft of $55 million worth of ether. The Ethereum community was plagued by the question of what to do with the remaining funds. This resulted in large investors demanding a hard fork by creating a withdraw function in the code. Developers, on the other hand, argued that a soft fork that freezes funds and prevents hackers from cashing in on stolen ether would be better suited. The rule that 'code is law' about original blockchain remains immutable regardless of hacks. Thus was born Ethereum from the money the guys won and a hard fork while the original blockchain continued as Ethereum Classic. Whereas Ethereum is the second most valuable cryptocurrency, Ethereum classic is ranked 17th.
The DAO fiasco brought into attention the governance issues within cryptocurrencies.
Does Governance Truly Matter For Cryptocurrencies?
With clearly defined stakeholder structures, equity markets have investor recourse. They have resulted in governance systems protecting investor interests preventing rogue executives from destroying the company. Cryptocurrencies, on the other hand, are shielded from oversight. DAO hack was one example of governance going wrong while similar situations abound.
In this case, Bitcoin investors were merely bystanders as the drama unfolded culminating in a fork to the blockchain resulting in a new cryptocurrency. When it comes to solving governance issues through on-chain voting systems, Tezos, the premier crypto has been embroiled in a governance problem with an investor filing a lawsuit against the founders. With the absence of governance systems come technical issues also. The absence of replay protection leads to duplication of transactions across old and new blockchain equally.
Cryptocurrency investors are liable to the rights similar to those for company shareholders as they are directly affected by protocol changes in a blockchain. A hard fork may have a multiplying effect, in the number of coins in the portfolio. A lawsuit similar to that for Tezos, could stop the development work on protocol and thereby locking up investor funds until resolution. On the other hand, smaller cryptocurrencies are not systematically important enough to warrant governance systems.
Governance systems help streamline internal change management besides providing investor protection. Speaking about it, they can be used to implement decentralized ethos leading to the development of Bitcoin. The major changes in cryptocurrency protocol are hijacked by a group of stakeholders. As an example, the investors won when the ethereum’s protocol was bifurcated. When the Bitcoin core team resisted changes enabling longer block size, the result was Bitcoin cash. Governance systems can help if voting systems are established and the number of stakeholders involved is multiplied.
The Governance Systems Already Implemented By Cryptocurrencies
The major cryptos like Bitcoin and Ethereum have systems to enable decentralized representation. Within these systems are improvement proposals as suggested by developers and users while enhancing the functionality and performance of respective blockchains.
In the governance game, Ethereum outwits Bitcoin, with testing several cryptocurrency-related innovations on its blockchain. Regarding the DAO issue, voting occurred through the implementation of a Carbon voting mechanism where a transaction involved spends a minimal amount of ether ranging from 0.06 ether to 0.08 ether. It turned out that recorded lower voter participation added to the publishing of transcripts of developer calls on its website.
Implementing governance systems has been the focus of many cryptocurrencies. Hybrids of off-chain governance and on-chain systems, as well as purely on-chain systems, are the focus of the cryptos. In the case of Dash, the decision making about future development is done through voting on proposals presented by the core development team by Masternodes. Here dash core consists of senior members from Dash network being answerable to Masternodes in turn answerable to them as well as removed by them. Another crypto going by the name of Decred, implements s similar structure, while the entire process, voting, and proposals are implemented on the blockchain. The votes per stakeholder or user are proportional to the stake of coins.
With privacy-focused cryptocurrency, an on-chain system may face problems like those affecting Monero, where public keys identify voters not easily divulged. The current flow of cryptocurrencies towards establishing governance systems sends a positive momentum for the cryptos. It establishes the need for such a system.