The Chang hard fork marked the beginning of a self-sustaining and community-driven era for Cardano. With the Genesis keys now obsolete, the team is contemplating their publication to underscore their irrelevance. While on-chain governance is crucial for true decentralization, it is frequently misunderstood or ignored. True independence from any leader or team ensures the community that they have full control over the future of the system they are dedicated to. On September 1, 2024, the Cardano nation was born.
The Chang Hard Fork
The hard fork combinator activated the Chang upgrade at the start of epoch 507. While Chang is widely celebrated on social media for introducing the first phase (Chang #1) of on-chain governance, other significant upgrades should not be overlooked. Developers are particularly excited about Plutus V3, which will introduce advanced ZK cryptography.
As with every hard fork, coordinating the efforts of pool operators, exchanges, wallet developers, and DeFi application developers was essential. Despite one delay, the hard fork was successfully triggered, marking the last use of the Genesis keys.
The Chang upgrade, implementing CIP-1694, marks a significant shift towards a more decentralized and community-driven governance model, ushering Cardano into the Voltaire phase. This CIP outlines the process for transitioning Cardano’s governance from the founding entities—Input Output, the Cardano Foundation, and Emurgo—to the Cardano community. Since early 2023, the community has been actively discussing and voting on CIP-1694, making it the most debated and commented-on CIP in Cardano’s history.
Relinquishing control over a project can be challenging for founding entities. In Cardano’s case, these entities have handed over control of a treasury holding more than 1.5 billion ADA to the community.
Cardano, like many other blockchains, has faced criticism for having a visible leader. Although Charles Hoskinson is only the CEO of IOG and block production has been fully controlled by the community, he has often been criticized for being seen as the leader of Cardano.
Charles Hoskinson never had a ‘STOP’ button to halt Cardano. When IOG released a new node version, pool operators and the community could choose to accept or ignore it. In this respect, Cardano’s upgrade process has always been similar to Bitcoin’s.
The main difference was that instead of hard-coding the block number for a hard fork in the source code, Cardano required the hard fork to be triggered through Genesis keys. These keys could also transfer ADA from the treasury, as seen with Catalyst funds, and modify some protocol parameters.
Decentralized project management remains a misunderstood topic. With the Genesis keys now irrelevant, it’s important to consider the influence that Charles Hoskinson and the founding entities still have on the project.
One thing is now absolutely certain: if you believe the SEC can’t issue a court order to shut down the network to anyone who has control over Bitcoin, the same now applies to Cardano. Charles Hoskinson is alive, and IOG, the Cardano Foundation, and Emurgo still exist. However, their roles are now similar to those of all ADA holders. Through governance bodies, the community will decide on triggering hard forks, modifying protocol parameters, or withdrawing ADA from the treasury.
The influence of blockchain leaders is often overstated and clouded by false narratives.
The Cult Of The Leader
Decentralization is a key feature of any blockchain project. Blockchain is a technology that requires someone to build it, set the initial rules, and then launch it together with other volunteers. In 2009, the anonymous creator Satoshi Nakamoto launched Bitcoin.
On August 15, 2010, Bitcoin faced a major threat when an unknown hacker created 184.467 billion BTC out of thin air, an event known as the Value Overflow Incident. Satoshi, together with another developer Gavin Andresen, quickly implemented a hard fork to remove the excess BTC, saving Bitcoin from an early demise.
Later in 2010, Satoshi left the Bitcoin community, handing over control of the Bitcoin source code repository and network alert key to Gavin Andresen. This transition made Andresen the lead developer, responsible for managing the project’s development and coordinating contributions from other developers.
Satoshi’s departure led to a misconception that blockchain projects must not have a leader, or that the leader must remain anonymous to avoid government intervention. Some even believe that no one should hold the keys to GitHub or coordinate development.
Despite Satoshi’s exit, Gavin Andresen fully assumed his role, including addressing critical issues like the Overflow Incident. This transfer of responsibility is continuous and never-ending.
A leader can be a well-known figure who frequently discusses a project or the entire industry, or someone who remains behind the scenes. Instead of a single leader, a small group of core developers might hold significant influence. While a project doesn’t need to be transparent about who holds the primary decision-making power, non-transparency should not be confused with decentralization. Anonymity can sometimes conceal dictatorship and absolute control over the project. Publicly disclosing leadership details may not always be seen as beneficial.
Every blockchain requires some form of governance, whether by a leader, a team, or a larger community, to ensure its proper functioning and development.
If a blockchain protocol had no team or allowed everyone to act independently, it would likely drive people away from the project. In the event of a critical issue, timely fixes might not be delivered, or multiple incompatible solutions could emerge. Long-term, challenging problems might go unaddressed, or lack sufficient support.
Therefore, the question isn’t whether to have a leader or a team, but how to ensure that control over the project is genuinely decentralized. This means placing it in the hands of many independent entities capable of reaching a consensus, even if not everyone agrees.
The answer is on-chain governance.
On-Chain Governance
Chang #1 introduces governance capabilities to the Cardano blockchain as outlined in the Cardano improvement proposal CIP-1694.
Immediately following the hard fork, individuals interested in governance started registering as DReps. ADA holders began delegating their decision-making power to these DReps. We are currently in the bootstrapping phase of governance.
The election of the constitutional committee members took place some time ago, and they are now preparing for governance with the support of Intersect.
Charles Hoskinson remains the CEO of IOG. The next time IOG delivers a new incompatible version of a node requiring the work of the hard fork combinator, its acceptance will depend not only on SPOs and other critical infrastructure nodes but also on the votes of DReps, CC members, and SPOs.
It is no longer sufficient to just install a new version of a node and depend on the founding entities to sign the transaction that triggers the hard fork. Now, DReps must also agree to the hard fork, and CC members ensure that the change aligns with the constitution.
No changes, including protocol parameter modifications or ADA withdrawals from the treasury, can occur without the approval of governance bodies.
This marks a shift from the pre-Chang era when founding entities needed to use Genesis keys. The 7 Genesis keys have been replaced by numerous keys held by CC members, DReps, and SPOs.
The next step in governance is the approval of the Cardano constitution, a necessary move towards full on-chain governance. This should be done within 90 days.
On-Chain vs. Off-chain Governance
People do not understand the differences between on-chain and off-chain governance. Let’s describe the basic differences:
On-chain governance refers to a system where decisions about a blockchain network are made directly on the blockchain itself. This typically involves a voting mechanism where token holders can propose and vote on changes to the network’s rules or parameters.
Off-chain governance is a more centralized approach where decisions are made outside of the blockchain, often by a small group of developers or stakeholders. While this can be more efficient, it can also lead to a concentration of power and reduce the network’s decentralization.
Cardano’s on-chain governance model is a significant departure from the more centralized approaches used by other blockchains like Bitcoin and Ethereum. This decentralized approach empowers the community to shape the future of the network and promotes a more equitable distribution of power.
While Bitcoin doesn’t have a formal on-chain voting mechanism like Cardano, miners can be seen as indirectly voting on the network’s direction through their actions. This is often referred to as ‘hash rate voting’. While miners’ actions can influence the direction of the network, it’s not a direct on-chain voting process. There’s no formal mechanism for proposing and voting on specific changes.
Hash rate voting is more of an indirect form of governance where the majority mining power determines the network’s direction. It’s not as explicit or formal as the on-chain governance mechanisms.
Someone could argue that the Bitcoin Improvement Proposal (BIP) process is a formal mechanism for proposing and discussing changes to the Bitcoin protocol. However, while it’s a crucial part of the network’s evolution, it’s still considered off-chain governance.
Even though BIPs are proposed and discussed publicly, the final decision on whether to implement a BIP is largely determined by Core Devs and miners. Core Devs must implement the change, or accept it if someone other than them implements it. Miners have the power to accept or reject new rules by including or excluding them in the blocks they mine.
The BIP process does not involve a formal on-chain voting mechanism where token holders can directly express their preferences. Instead, it’s a collaborative process where developers, miners, and other stakeholders discuss and debate proposed changes.
Therefore, while the BIP process is a significant part of Bitcoin’s governance, it’s still considered off-chain governance because the final decision-making power rests with miners and the market.
Bitcoin’s governance model is a hybrid of off-chain mechanisms like the BIP process and on-chain factors like hash rate voting. While this approach has served Bitcoin well, it also limits the degree of decentralization and community involvement compared to Cardano’s on-chain governance model introduced by the Chang hard fork.
Satoshi envisioned a form of on-chain governance where each user would have decision-making power. In the Bitcoin white paper, he wrote:
‘The proof-of-work also solves the problem of determining representation in majority decision making. If the majority were based on one-IP-address-one-vote, it could be subverted by anyone able to allocate many IPs. Proof-of-work is essentially one-CPU-one-vote.’
Satoshi assumed that every BTC holder would also be a miner, thus having a CPU vote. However, the BIP process was introduced only after Satoshi’s departure, highlighting a flaw in his assumption.
It can be said that Cardano will achieve something Satoshi envisioned for Bitcoin. The rise of expensive and noisy ASIC miners has prevented a significant portion of BTC holders from having substantial decision-making power.
Conclusion
No governance model is inherently good or bad. If the community understands and agrees with a given governance model, recognizing its strengths and weaknesses, it can function effectively. However, a model may be deemed dysfunctional if a significant portion of the community demands changes or the resolution of long-standing issues.
On-chain governance ventures into uncharted territory, and many foresee potential challenges for the Cardano community. One concern is the influence of ADA whales, who could dominate governance decisions with their substantial voting power. Whether this will pose a problem remains to be seen. However, this issue is akin to the significant influence of large miners in the Bitcoin ecosystem. The best solution is to have a diverse group of whales with differing opinions. Disagreements among whales would enhance the voting power of smaller DReps.
One of the key advantages of on-chain governance is the ability to gradually implement changes based on the community’s wishes. If ADA holders felt powerless to enforce desired changes, they might leave the ecosystem. This scenario is undesirable for whales as well, as it would diminish their wealth. Consequently, whales are compelled to consider the community’s wishes to some extent.
The primary goal of on-chain governance is to enable continuous evolution. Cardano must advance technologically to stay competitive and effectively serve its community. The community must maintain control over the decentralized infrastructure they choose to utilize.