Cardano stands as a highly decentralized network when it comes to block production. As the transition from the Shelley era to the Voltaire era takes place, this decentralization will extend to project management as well. On-chain governance will be a key feature of Cardano.
The Shelley Era
Each active Cardano client forms the core of the Cardano network. In terms of governance, every client serves as a custodian of the protocol rules. Certain rules, such as protocol parameters like block size, client version (hard fork), or the option to withdraw ADA coins from the Treasury, are particularly pertinent to governance.
While staking pool operators (SPOs) were responsible for running the Cardano client on their nodes, the three founding entities - IOG, Cardano Foundation, and Emurgo - could execute certain governance actions using governance keys. To initiate an action, a quorum was needed.
In practical terms, this meant that agreement was required from 5 out of 7 key owners.
Since it is only a cryptographic key, in theory, one entity could hold multiple keys.
Thus, it can be stated that these entities owned the governance keys.
During the Shelley era, the three founding entities exclusively controlled certain aspects of the protocol, including the protocol parameters, the ability to initiate a hard-fork for protocol upgrades, and the withdrawal of ADA from the treasury and reserve. There was no mechanism in place to replace these entities.
Stake Pool Operators (SPOs) ran Cardano clients, but external changes to protocol parameters (like block size) or withdrawals of ADA from the treasury could occur without community consent. In essence, SPOs couldn’t ensure system consistency and stability.
Governance, which is the relationship between the team and the community, operates on a social contract, much like many other blockchains. The community and users had to trust the team to act in the project’s best interest.
The Shelley era’s governance design didn’t allow for active on-chain participation by ADA holders. This meant that the three entities could decide on governance actions arbitrarily, potentially without community approval.
The Voltaire Era
With the onset of the Voltaire era, control over these and other governance actions shifted to three distinct governance bodies. As a result, the previous governance keys will lose their power over governance actions.
These three distinct governance bodies will each have specific roles in the new governance framework:
- a constitutional committee (CC)
- a group of delegated representatives (DReps)
- stake pool operators (SPOs)
New governance actions will be defined, which can be submitted by each ADA holder via a transaction. Members of the governance bodies, who are authorized to vote on a specific governance action, will have the power to decide whether the action will be ratified (and subsequently enacted) or not.
The diagram illustrates the governance actions and the respective governance bodies that can vote on them. It’s important to note that initiating a hard fork is the sole action that requires a vote from all bodies.
Depending on the type of governance actions, it is defined which governance bodies must approve it. At least 2 governance bodies must approve each governance action.
For a governance action to be ratified, a majority of members in at least two governance bodies must vote YES.
Significantly, the distribution of voting power will be spread across multiple entities. Each governance body, whether it’s the Constitutional Committee (CC), Delegated Representatives (DReps), or Stake Pool Operators (SPOs), will comprise multiple members.
The quantity of governance keys will be flexible rather than fixed. This implies that the number of DRep members can fluctuate based on interest, mirroring the rise and fall in the number of active pools.
DReps and SPOs will cast their votes using the ‘1 Lovelace = 1 Vote’ system, while Commission members will vote using the ‘1 Person = 1 Vote’ system.
Decision-making will hinge on both ADA ownership and delegated voting power.
Delegation of ADA to DReps
The voting power will be determined by the total ADA that is delegated, expressed as a whole number of Lovelace. ADA holders will have the ability to use their existing stake credentials to delegate their stake not just to a chosen pool, but also to DReps. In essence, there will be two distinct delegations.
The ledger will be responsible for determining the stake distribution for each DRep. This distribution will dictate the amount of stake backing each vote from a DRep. In essence, a DRep’s voting power is composed of all ADA coins delegated to it, including its own.
The most recent version of the per-DRep stake distribution, as given on the epoch boundary, will be used for voting. Delegation to another DRep (or to oneself) will become effective from the new epoch.
ADA holders have the option to delegate their voting power (coins) to their chosen DRep.
Alternatively, they can choose one of two other options: Abstain or No confidence.
Choosing to delegate to ‘Abstain’ signifies that the stake is actively marked as non-participatory in governance. Such a stake will not be included in the Active Voting Stake. However, it will still be registered for the incentives provided to Ada holders who delegate their voting stake.
Opting to delegate to ‘No Confidence’ implies that the stake is counted as a ‘YES’ vote for every ‘No Confidence’ action and a ‘NO’ vote for all other actions. This delegated stake will be considered a part of the active voting stake.
ADA coins can exist in one of the states depicted in the chart. ADA coins can be delegated to DReps, which is expected to be the most common choice. Some ADA holders may choose the ‘Abstain’ or ‘No-Confidence’ options. These three states form part of the registered stake. Some ADA holders may choose not to do anything, resulting in their stake being unregistered. The unregistered stake is not utilized for voting and behaves similarly to an ‘Abstain’ vote.
Only ADA coins that have been delegated to DReps or automated No-Confidence DRep are counted in the active stake.
The figure illustrates the Active Voting Stake, which includes participants who can actively engage in voting and whose votes are taken into account. Delegation of ADA to ‘Abstain’ DRep and ‘No Confidence’ DRep follows a predefined automatic behavior.
