When talking about cryptocurrencies, the most notable characteristic is that they are decentralized. So, how exactly are they governed? As an investor, this information is crucial because the system of governance, whether targeting stocks or bonds, plays a crucial role in decision making. So, here is all that you need to know about crypto governance.
What is Cryptocurrency Governance?
This term is used in relation to decision-making in an organization. In this case, it is the way the decisions are made in a blockchain network. The system of governance can be vested on a few delegates or distributed among all nodes (participants). A good governance system is what makes a blockchain network admirable.
As we are going to see shortly, there are three main types of governance; centralized, decentralized, and on-chain governance models. No matter the model of governance, most issues revolve around a reward system, access to the network, block sizes, funding allocation, and decision making.
Decentralized Blockchain Governance
The primary value proposition in blockchain and cryptocurrencies use is decentralization. This means that you eliminate centralized management, such as banks and credit card firms, to help keep the cost of transactions low. When looked at from a large-scale application, it means removing central authorities, such as central banks and governments.
Centralized Blockchain Governance
While decentralized governance may look flawless, it comes with some shortcomings. One, the collective ability of the users to make important decisions can be wanting. Also, it can be inefficient without a working deadline. To address these challenges, some blockchains developed after Bitcoin deviated and opted for centralized governance.
Instead of simply asking all the users on a network to vote on important decisions, the centralized governance model reduces the number of those involved to a small and more knowledgeable team. This is a team with the best interest of the network’s community. For example, the network creators always have the interest of growing their blockchains and should be in the governance team. The additional members can be voted by the nodes to join the governance team. Some of the unique advantages of centralized governance include:
- Decisions are made relatively faster compared to a decentralized governance model.
- Makes it possible to have knowledgeable people in the management of the selected blockchain.
This is a type of decentralized governance model, but it features additional rewards to incentivize the nodes to participate. It comes with the benefits of fast decision-making and use of experienced persons in governance. The main challenge of on-chain governance is the risk of low voter turn-out, especially where the reward is low. It also comes with a risk of the pay-to-play decision-making process.
When selecting crypto coins, take your time to understand the model of governance because it is likely to define the future development of the blockchain. You can easily establish if a crypto has good governance by checking its performance. For example, Ethereum (ETH) and Cardano (ADA) are two cryptocurrencies to consider because of their future potential. It will also be a good idea to work with professionals in cryptocurrencies to help you make the best decisions. A good example is Mantra Dao, one of the best DeFi platforms on the globe. They will not only help you to pick the best crypto coins, but also with the right methods of using them.
Author Bio – Mashum Mollah is a Fintech entrepreneur, and passionate blogger. He is on a mission to help small businesses grow online. He shares his journey, insights and experiences at Finance Team. If you are an entrepreneur, marketing professional, or simply an info-holic, then this blog is for you.