With accelerating adoption, the blockchain’s potential to transform life in all directions – from business to division of labor, operating systems and collaboration methods – is nearing realization. If blockchain is the basis of a truly digital model, then governance is the key to connecting the worlds on and off-chain. The administration itself includes and determines the functionality of the blockchain, from its organizational structure to the implementation of the workflow, voting and incentives.
Conceptually, management can be understood as on-off and off-chain; the first is divided into protocol and contract levels. Thanks to the rapidly diversifying blockchain space, management is also rapidly evolving, managing new and new forms of collaboration, interaction, profit distribution and risk structure, based on the unique profit value of each chain.
Today’s management paradigms inside and outside the company
In the future, I believe that several assumptions need to be taken into account when building governance frameworks.
First, the digital world cannot be separated from reality. As in the off-chain world, on-chain governance involves a two-tier structure, according to which control units serve as capital to involve users in various democratic processes. In addition, external chain management components, such as server clusters, nodes, and other infrastructures, determine how capital rights and interests are addressed. Remote control determines the use of external funds, energy and human resources. It also builds new identities, ways of participating and power relations. In short, on-chain management is a reflection of today’s paradigm and a look to the future.
Second, the on-off-off-chain world is linked as the boundaries between social and corporate governance become increasingly blurred. While the blockchain began to be more focused on economic governance, this focus has shifted in recent years as institutions and businesses experiment with the blockchain to achieve more effective social governance. Once the line between enterprise and economic governance is narrowed, the future of any chain will slowly but surely depend on the interests and will of their user base, which will significantly strengthen the urgent need for next-generation protocol-level governance.
Third, the market is currently dominated by stock weight voting, leading to greater centralization, dynamic adjustments and third-party representatives. Due to the fundamentally decentralized nature of the blockchain, on-chain management depends to a large extent on a consensual network selection mechanism – which can be seen as a negotiation method that interests the interests and rights of community developers, miners and token holders. In context proof of workor PoW, compliance, the emphasis is on workload. This would require a high level of centralized authority and responsibility to validate the parties ‘work, rather than relying on a code for autonomous verification of miners’ work. In this way, PoW is essentially the same as traditional decision making.
However, according to the evidence-based vote, the following scenarios will allow for greater democracy and decentralization:
- One person, one vote based on identity.
- Secondary voting by identity.
- Voting with hash force.
- Voting for account-level transaction fees.
- Voting of transaction fees in the contract layer.
- Election Commission.
- Relative majority voting method.
- Other indicators related to collateral, including long-term maintenance of nodes, long-term binding validators, long-term coin holders, fortune tellers and clients.
- Any combination of the above modes.
Fourth, there are still various design issues related to chain management. In today’s governance systems, power is concentrated in the hands of a few. In addition, low voting ratios negatively affect network management efficiency and security. Future governance innovations must therefore address the above-mentioned concerns from the design level by offering voting stronger incentives for stakeholders, while introducing open-ended voting to ensure more representative governance.
Overall, the current paradigm illustrates that on-chain governance represents the transformation of the economic and social organization of the digital world. With the advent of the digital age, people’s identities have become increasingly divided between different government entities, rather than in the hands of a single one. By introducing new organizational structures and concepts, we can be a pioneer of a completely new incentive mechanism for optimizing management outside and in the chain, beyond what can be achieved by a simple corporate structure.
Based on these assumptions, sustainable and efficient management must meet the following requirements:
- A two-way mechanism for interacting with the real world.
- Comprehensive social administration.
- Moving towards achieving a community vision.
- Effective incentives and penalties through comprehensive mechanisms.
- Clearly defined responsibilities and powers for chain management.
Structuring governance within the chain to promote sustainability and adoption
If we see governance as a key factor in adopting a blockchain, networks must approach decisions such as consensus mechanisms, the roles of the various actors – and more – with great care and discretion. In order to connect the on-off and off-chain worlds, on-chain governance must evolve to enable the following:
- Mapping real legal units or jurisdictions to a chain.
- A comprehensive system of identities that combines the identity of network participants with their social identity.
- Participation in proceedings through greater rights, indicating that these rights may be revoked.
By using the code, on-chain governance enables the elimination of uncertainties and the creation of binding agreements, which will ensure the implementation of all approved changes in the network. In addition, on-chain management also stimulates greater accountability due to the inherently transparent nature of the blockchain, thus ensuring a decision-making path. In addition to strengthening community trust and justice, this transparency also allows users to make informed decisions about which platforms they connect to.
However, as mentioned earlier, today’s governance systems still face design challenges – namely low turnout and voter manipulation by executive token holders. As for the second option, there is still a concern that management systems favor strong token holders. This results in a greater emphasis on making a profit than on achieving the vision of a public blockchain.
I therefore propose the key components of effective governance, namely:
Coordination mechanisms: To ensure sustainability, transaction costs and user use must be coordinated to minimize conflicts between users and stakeholders. Because transaction fees strongly affect a user’s ability to participate in the network, keeping costs low and stable stimulates their participation, which is key to representative network management and security. In short, the above mechanism would allow users – the real network holders – to participate.
Coordination between currency holders and administrators: There must be significant overlaps in order to manage effectively and represent the interests of the chain. Measures such as economic incentives and elections or the separation of management rights from tokens are necessary to increase the overlap of these groups.
Coordination of candidates and selected candidates: To ensure the effectiveness of the network, elections must also implement screening mechanisms that ensure the right number of candidates to suit the needs of the platform. In addition, platforms must ensure the right balance of economic incentives, powers and responsibilities for long-term and stable governance.
Incentive measures: The following incentives should be provided for rewarding participation:
- User: Ability to use DApp; low cost network service.
- Token holders: Issuing GAS or tokens by voting.
- Nodes: Earn transaction fees for packaged transactions or network fees for winning elections.
- Token holders: Opportunity costs.
- Nodes: Fines for inappropriate behavior.
Overall, effective governance must meet the following conditions – first, decision-making based on complete and symmetrical information. Second, there are costs associated with selecting and changing options. Finally, the administration must be flexible enough to support the interests of the organization while taking into account individual choice.
Promoting flexible, dynamic and sustainable governance with a view to the future
On the basis of the above points, I consider that “elastic handling”, defined “The ability to adapt to different social jurisdictions” is a solution to governance for the present and the future. Through flexible governance, we can coordinate the interests of different parties, balance decentralization and centralization, and put in place an effective system of incentives and consequences. Through an on-chain system of identity and node authentication, we can connect the world on-chain and off-chain for true integration.
Within this system, I believe that the two key mechanisms are the following:
- Coordination mechanisms.
- Two-track electoral mechanisms.
Token holders can vote on a direction for a community organization that is charged with acting in the best interests of the platform. To stimulate participation and ensure representative change, direct incentives, such as tokens, should be issued based on the level of participation of token holders. From my point of view, it allows users to vote for representative institutions and consensus nodes a platform that dynamically adapts to the changing needs of the community and industry.
In addition, an identity system on the chain is also essential. As mentioned earlier, the world of a chain cannot be disconnected from the world outside the chain. Sovereign states and real-world legal jurisdictions need to be mapped into the chain. Governance mechanisms should reflect this through an on-chain social identity system that reflects on-chain addresses and user transaction records, decentralized identification documents and registration jurisdiction. Based on these aspects, off-chain regulations provide users with a soft guide to on-chain activities by jurisdiction.
The types of services provided in the public chain may be affected by local regulations. This real-world identity mapping, along with dynamic choices, means that token holders have the authority to make decisions and adapt accordingly to future transactions. When processing transactions, different nodes will respond differently to different types of transactions, which will affect the types of services processed on the public blockchain to different degrees.
For example, for a particular type of particular transaction, consensus nodes that exceed the error tolerance rate cannot go through that type of transaction due to the influence of the local court system. At present, the legal influence on this type of specific transaction is reflected in the public chain. In dynamic elections, token holders then decide whether to continue voting for affected nodes in the next election period. Node candidates can also make adjustments according to the voter’s strategy.
Added value through dynamic options
I believe that through this flexible and dynamic management system, we can fully understand decentralized chain store management, node traffic management and chain voting management. Local regulations influence the strategic choices of voters and indirectly influence the behavior of network participants.
Through repeated management cycles, blockchains eventually shifted to developing a balance that includes everyone’s interests – including real-world concerns. This opens the way to sustainable and responsible growth in the online and off-chain world.
The views, ideas and opinions expressed herein are by the author only and do not necessarily reflect the views and opinions of Cointelegraph.
Da Hongfei is best known for co-founding the “Smart Economy” Neo blockchain network with Erick Zhang in 2014. Da graduated from the University of Technology in South China with degrees in technology and English. He worked in a consulting company until 2013, when he learned how to code before founding Neo. Along with Zhang Da, he also founded OnChain, a commercial blockchain company that provides services to private companies.