An introduction to decentralized governance on Cardano

An introduction to decentralized governance on Cardano

(Written by @ElliotHill of the Cardano Foundation)

Governance is central to everything we do in human society. Countries, charities, companies, and every organization in between relies on governing bodies—centralized or decentralized—to enable internal changes and decision making.

While it is almost universally accepted that some type of governance is needed, what is not accepted so unanimously is the form that governance takes. Our diverse global community, and its changeable forms of governance at a national and even regional level, are evidence that there is no perfect model.

Blockchains, and by extension the Cardano ecosystem, have a similar need for governance. But just as blockchain seeks to disrupt financial inclusion and transform value, it also has grand designs on the theoretical and practical aspects of governance—ones inspired by principles of decentralization, transparency, and pushing power to the edges.

Experimenting and implementing new governance models is part of Voltaire on Cardano. Just as we are simultaneously moving through Goguen and Shelley, Voltaire will be a phase of constant improvement and exploration of what’s possible on Cardano.

In this introduction to governance on Cardano we are going to explore the difference between on-chain and off-chain governance, and discover what our initial experiments into governance look like on Cardano. We will also be asking the Cardano Foundation’s CEO, Frederik Gregaard, some of his thoughts along the way.

Decentralized blockchain governance: The journey so far

Blockchains aren’t sovereign nations, nor are they multinational organizations with shareholders in the traditional sense. Instead, blockchains are large ecosystems of equally-empowered actors working towards a common good.

These actors may fill different roles, such as developers, stake pool operators, enterprises, or general users. But ultimately, they all have a stake in what happens within the blockchain ecosystem. Each participant also has unique perspectives to offer.

However, blockchain governance has typically encountered problems in incentivizing community participation while also working for the benefit of the wider ecosystem.

Historically, it has also been difficult to ensure that those governing a community, and those who push protocol changes, do not become non-representative of the community’s broader sentiments. These issues have been central to the founding ideas of blockchain governance across many different protocols.

Within the Cardano ecosystem, Dor Garbash, Catalyst Product Manager at IOHK, highlighted the importance of providing equal incentives for participants to help develop the ideas of others for the overall good of Cardano, rather than promoting self-interest.

To solve this, researchers have tried two main types of blockchain governance, both on-chain or off-chain. Let’s examine their differences:

  • Off-chain Governance — Off-chain governance is not carried out using blockchain-based voting mechanisms. Therefore, token holders do not exercise voting rights in order to decide on proposals. However, there can still be a large degree of community-consensus on proposals before they are presented to a final board, or editors, who will oversee their implementation.

  • On-chain Governance — On-chain governance, as the name suggests, makes use of voting mechanisms on the blockchain, usually through tokens that represent stake and confer voting rights. Designed to be truly decentralized in theory, on-chain governance allows a broad range of ecosystem participants to vote and have their voices heard on key blockchain proposals and treasury decisions.

Discussing the difference between on-chain and off-chain governance, Frederik Gregaard, CEO of the Cardano Foundation, says:

“It’s likely that for a fully functioning blockchain ecosystem, both on- and off-chain governance will be required. Off-chain governance, through initiatives like the Cardano Improvement Proposals, can keep the Cardano blockchain nimble and open to change through expert community-led propositions. On the other hand, on-chain governance, such as the Catalyst fund, can empower users of interest and other stakeholders to take an active role in the future direction of Cardano’s development.”

Below, we are going to discover what both off-chain and on-chain governance looks like on the Cardano blockchain.

The Cardano Improvement Proposals (CIPs)

CIPs are one of the first examples of off-chain governance led by the Cardano Foundation. A single Cardano Improvement Proposal, or ‘CIP’, is a formalized design document for the Cardano community. Each CIP provides information or describes a new feature for the Cardano blockchain in a concise and technically sufficient manner.

CIPs begin life as an idea about how to improve the Cardano blockchain or its surrounding processes, with one or more individuals who are willing to propose and discuss the idea with the Cardano community.

There are three types of CIPs. The first, a Standards Track CIP, relates to any changes to the Cardano network, such as block or transaction validity rules. Process CIPs describe processes surrounding Cardano which are separate from the protocol, for example, changes to procedures and guidelines. Finally, an Informational CIP could propose changes to a Cardano design issue and doesn’t necessarily propose a new protocol feature.

After initial discussions and feedback from the community, the CIP is then formalized into a properly formatted proposal and submitted as a pull request to the CIP repository, through GitHub.

Each CIP goes through the above process before it’s approved

As a form of off-chain governance, CIPs do not employ a community-led voting process like Catalyst, as we will discover below. However, they do require some degree of consensus among the community before being proposed.

Once a CIP is formalized, CIP Editors will decide on its status—as shown in the process flow above. CIP Editors are key participants in the Cardano ecosystem who support and progress CIPs, and they may approve or reject a CIP. Therefore, CIPs are a highly democratic process requiring consensus from multiple stakeholders, ensuring that Cardano protocol changes occur only after careful consideration by key community members.

You can contribute to the Cardano Improvement Proposals here. A great resource to get started with CIPs can be found in CIP-0001 here, which defines the process of submitting a Cardano Improvement Proposal.

Project Catalyst and Fund3

Project Catalyst is an experiment in on-chain governance and treasury for the Cardano blockchain. Led by IOHK, for the first time, network participants can use their ada stake and associated voting rights to help fund the projects that matter most to them.

IOHK publicly allocated US$250,000 in ada during the Fund2 phase of Project Catalyst in September 2020, following two previous test phases. This generated a huge amount of creativity from the Cardano community, quickly attracting over 3,000 registered users and 126 proposals on the platform. Fund2 recipients, the first projects to publicly receive funding through Catalyst, were announced on the 12 January.

Fund3 has now launched, making US$500,000 in ₳ ada available to proposers, voters, and community advisers. Project Catalyst is unique in that it rewards not just projects seeking funding, but also voters and those who propose ideas.

One of the most impressive aspects of Project Catalyst is a six to eight-week funding round, which makes new funds available for projects building on Cardano. With a new round of community voting each time, there are multiple chances for new and innovative projects to be funded according to community votes.

Project Catalyst is a good example of on-chain community-led governance, Cardano’s first-foray into a voting-based treasury and governance system. You can participate in Project Catalyst on IdeaScale here.

A one-size-fits-all approach?

Good governance drives sustainable ecosystem growth, ensuring that a blockchain continues to survive and thrive by responsibly allocating resources to maintain, adapt, and grow its ecosystem.

This is unlikely to emerge from a one-size-fits-all approach to decentralized governance. Instead, just like the Cardano blockchain itself, governance will evolve and change according to the needs of its stakeholders—which is all of our community members, as well as Cardano’s core entities.

In our next article on governance, we will deep-dive into some of the more theoretical aspects of governance, including an exploration of the founding elements of governance, how we ensure decision finality and consensus, and discover why governance on Cardano leverages both on-chain and off-chain processes.

Do you have ideas on how decentralized governance can be shaped and implemented? We want to hear your suggestions. Leave us a comment below and join in the discussion.

Did you enjoy this article? The Cardano Foundation wants to share our perspectives with the world. Reach out to us using our contact form for expert input and article features.