Governance
Governance is the mechanism employed to determine protocol development for cryptoasset projects.
Introduction
The foundation of cryptoasset governance is the decision of whether to conduct it on-chain or off.
On-chain governance happens via a process implemented on the protocol itself. Stakeholders vote on whether to move forward with proposals made via a public forum designed for this purpose. Typically it is not enough to own a token to be considered a stakeholder. Tokens must be staked for their holders to become eligible to participate in the voting process.
Staking commonly entails locking the tokens for period of time, making them illiquid for the duration of the staked period. Demonstrating the stakers’ long term commitment to the project. From their willingness to give up their access to the tokens during the time period when voting takes place.
Successful proposals are funded directly from a projects treasuries. Examples of projects implementing on chain governance include Decred, Tezos, and Polkadot.
Off-chain governance occurs indirectly in both formal and informal settings.
Formal mechanisms include dedicated improvement proposal systems. Bitcoin, Ethereum, and Monero take this approach. Once a proposal is made to these systems a review takes place to determine whether the proposal is in the projects best interest.
Participation in these reviews requires some type of earned standing within the project community signaling the reviewer is worthy of guiding the project’s future direction. Funding of successful proposals is not secured directly from the project’s treasury. If a foundation exists to support the project its assets will often be used to support successful proposals surfaced through these mechanisms.
Informal governance takes place in the community around the project. Online, in places like Discord and social media, or off-line, at venues like conferences.
Further Reading
Revisiting the on-chain governance vs. off-chain governance discussion