In addition to hardware requirements both PoW and PoS, intentionally or not, have implemented certain governance structures in their protocols which affect the value of stakeholder’s investment (hardware and time). Whereas Governance is generally less clearly defined in PoW chains, many upcoming PoS chains articulate their Governance structure in a clearly defined way. As has been argued by many prominent figures in the blockchain space, governance in blockchain is the perspective from which to approach many of the problems blockchains are facing today.
Governance structures in PoW
To kick off discussion of the governance structure in the most prominent PoW blockchain Bitcoin, let us first look at the early days of Bitcoin. Bitcoin was born out of a general skepticism of formally established governance institutions. Instead of trusting in legally defined governance mechanisms, code is meant to regulate relations of power and claims.
However, as the history of Bitcoin has shown, the direction into which Bitcoin evolves is anything but clearly defined by code. Many of Bitcoin’s stakeholders hold fundamentally opposing convictions of where the protocol is meant to stand in terms of degree of centralization and transaction speed. As the protocol scales, many of these disagreements over Bitcoin only will intensify as the recent block size debate has shown.
In the Bitcoin protocol as it exists today there are many stakeholders, but the most influential in the development of the protocols are developers, miners, exchanges and users. This article focuses on all of them to clearly articulate what relative governance role is assigned to miners. What power do miners have to press their claims on the blockchain and how does their influence broadly compare with other stakeholders.
To begin with, developers derive their sphere of influence from the power they have to implement in code the rules set by the 2008 Bitcoin whitepaper. As such they maintain the code and write new functionalities when demanded by the community. However, their sphere of influence is not endless and limited for two important reasons. First, Bitcoin is an “open” protocol, meaning that there are no gatekeepers to participation in the community. Every change implemented by developers can be scrutinized by other developers. There is no way that a critical software update would go about unnoticed. Second, implementation of the developer’s update still depends crucially on acceptance by the wider community. If the update gets ignored by users, miners and exchanges, then the developer will have no real influence on protocol development.
Miners hold a significant influence over protocol development as they are the one’s that verify new transactions on the network and thus mine new tokens. If the miners decide to not accept an update proposed by the miners and refuse to download new software, then propositions by developers are effectively useless.
Centrally controlled exchanges like coinbase and bitfinex are still one of the main platforms through which new users are exposed to tokens. Consequently, if an exchange does not list for example a hard-forked alternative to a token like for example Bitcoin Cash, then many potential users will never be exposed to the token. Lastly, users can reject updates and forks of a blockchain by simply switching to a different protocol.
In total, miners have a relatively high influence to press their claims on the blockchain. If they decide to refrain from updating to a new software, then nothing will change.
Governance structures in PoS
To begin with, the stakeholder set of PoS chains includes all of the above stakeholders with the exception of miners. Instead we rely on so called forgers who forge a block as already outlined in part one of this series.
PoS does not rely on specific hardware which means that PoS can incorporate a more flexible set of governance rules. In turn there already are a myriad of different governance mechanisms proposed through different PoS projects. Many ideas creatively tackle some of the difficulties encountered in traditional blockchain governance. Now, what does this mean for forgers?
First, forgers by definition will hold native token to enter the privilege of adding new blocks. In this sense, they are affected by how the protocol evolves over time through governance. So how well other stakeholders do their job under governance will affect the holdings of the forgers.
As with any other blockchain, PoS relies on developer updates to constantly evolve. One of the main problems with existing blockchains is that there is little incentive to maintain a blockchain or work on core development features. While there is collective interest in the sustainable scaling of blockchains, developers’ time is typically spent in a more lucrative way by launching their own token or networks. The Ethereum foundation has already tried to counter this trend by handing out bounties for the completion of useful applications on the Ethereum chain. However, there is no systematic way to incentivize people to build on an already existing chain instead of forming their ows n chains. A governance mechanism on PoS chains which has repeatedly been suggested is to attach a bounty to an improvement proposal. If an improvement proposal gets added to the protocol, then the person who proposed it in the first place gets paid by the network. This way developers are incentivized to work on ideas which update and scale the protocol. This governance mechanism is to the benefit of forgers as it creates value for the protocol which translates into a higher token price.
More directly, governance may empower forgers to change protocol in very well defined ways.
With Proof of Stake we can also create systems where users have the ability to participate more actively in governance decisions. Simply by virtue of having a certain token, people are authorized to participate in certain governance decisions like the block size debate. If considered important then token holders (forgers) could also be asked to vote on updates to different consensus algorithms. The flexibility of PoS allows for a range of governance decisions to be taken by forgers.
One limiting factor to this development is, however, that most token holders in practice never make use of their voting rights. Informing oneself on the different options and making good decisions involves costs. To lower these costs some protocols have considered delegated voting for their protocols. People can chose who they want to delegate their voting rights to and let them take care of difficult choices on their behalf.
Pool of Stake offers a more holistic solution to this problem by taking care of important governance decisions while letting the user remain in control of the token. Users can simply pool their token in one place and have peace of mind when it comes to the future of their assets.