Decentralization Over Governance
One of the essential elements of a cryptocurrency is decentralization. Decentralization is distributed decision-making and control across the network’s participants. It is crucial for a network’s security because if a single party controls most of the network, they can manipulate the data on the blockchain. With a decentralized network, the challenge becomes: how does a system govern itself? Governance is deciding what to do and how to pay for it; crucial to a cryptocurrency’s sustainability and longevity.
A famous governance failure in the crypto space is the hard fork that created Bitcoin Cash. In 2017 there was a deep community disagreement on a proposed protocol update, Segregated Witness (SegWit). SegWit addressed Bitcoin’s scalability concerns by reducing the size of each transaction, thus, allowing more transactions to fit inside a block.
Bitcoin Cash rejected the protocol update and ultimately split the project and its backers. A divide like that in the network can create turmoil in the ecosystem, harming its sustainability. And hard forks are not necessarily a cure to existing problems. A year later, Bitcoin Cash experienced another hard fork and split into Bitcoin Cash and Bitcoin SV.
What Can Cause Governance to Fail
Governance fails because of unsustainable systems to decide who pays and for what. One thing that jeopardizes sustainability is exclusive voting to decide on protocol changes. An example is, in Bitcoin, only the miners can vote on protocol changes. Miners vote by using their CPU power to accept or refuse blocks with the protocol changes. Unfortunately, most people do not have the resources to become miners, so there is a risk to network decentralization from exclusive voting because you only have a small group of people deciding on significant changes.
Another example that can cause governance to fail is not having decentralized funding. For example, consider a treasury that accumulates a portion of the transaction fees to fund network updates. First, it’s beneficial because it doesn’t rely on outside funding from investors or donors who may influence decision-making. Secondly, the funding can be easily predicted and last as long as people make transactions on the network.
Bitcoin lacks a treasury, so all the network upgrades as made by the core developers rely on organizations, commercial entities, and donations to fund developers. A decentralized network that depends on companies can threaten sustainability because they can decide to stop funding if it is no longer beneficial or go out of business. For example, from 2012- 2014, The Bitcoin Foundation was the only significant funding source and development and is no longer actively funding developers. Other companies that no longer appear to be actively funding developers: Bitmain, Blockchain.info, and BitPay. Click to view more of the current and former Bitcoin funding sources.
In summary: 3 common Governance Problems in Blockchain
- Disagreements in the direction of the network (which, at best, can result in a hard fork;
- Voting on network changes is exclusive and not available to the majority of the community members;
- No decentralized funding system.
How Cardano Solves These Three Governance Problems
Cardano’s governance system is called Voltaire. Voltaire will address these problems with two main components: Project Catalyst and a decentralized treasury system. These components enable community-driven decision-making, voting, and decentralized funding to create a sustainable and lasting network.
Project Catalyst is the world’s largest decentralized incubator with over 30,000 participants. In Catalyst, anyone can create a project proposal, get feedback from community members and advisors, and receive funding from the treasury. The proposals range from building decentralized applications (Dapps), creating educational materials, and even improving Project Catalyst itself, making it a self-sustaining incubator. Also, it will be used to vote for changes in network parameters, such as the saturation limit (K) or the minimum transaction fee that will ultimately feed into Voltaire.
Project Catalyst has a very inclusive voting system. For example, to vote in the current funding round, Fund4 voters are only required to hold a minimum of 500 ADA (roughly US$750). Moreover, voting rounds occur every 6-8 weeks, and there are incentives for ADA holders to vote. According to IOHK, the voter incentive is ~10$ a year per 10,000 ADA held in your wallet. So not only is there a low financial barrier to vote, but you get paid a modest amount of ADA. According to IOHK, with these perceived voter benefits, the long-term goal is to achieve 50% voter participation on the Cardano blockchain.
The second piece to Cardano’s governance system is an on-chain decentralized treasury. No single party or foundation controls the treasury; the community controls it through Project Catalyst. The treasury functions as the funding source for the proposals that the community decides. Currently, the treasury has 477,865,652 ADA (+US$716 million) and is growing. It collects funding from decentralized and sustainable sources: minting new coins and taxation from block rewards. As the number of transactions increases, more funds are added to the treasury to fund network upgrades and proposals, making it a self-sustaining funding source.
If you are interested to learn more about how the treasury works, how it is decentralized, and the sources of funding, read more here.
Cardano’s Voltaire, when fully deployed, will have an inclusive and sustainable governance model. Cardano’s governance is more inclusive because it allows anyone to make proposals, give feedback on other proposals, and receive funding. It is also more inclusive of voting on funding proposals. The latest voting round (Fund4) only required ADA holders to have a minimum of 500 ADA in their Yoroi or Daedalus wallets to participate. The treasury model for funding sustains growth because it doesn’t rely on outside financing, and the treasury grows as the network grows. When both a voting and treasury system are in place, Cardano will be truly decentralized, and the future will be in the hands of the community.
Fund4 - Voting Ongoing.
If you registered before June 11th, you have until June 25th to vote.
Over 22,000 wallets registered to vote.
One million ADA available to fund proposals.
Link on how to register to vote.
Fund5 registration occurs on July 6th.