Original Link: What is Governance For?

Author: Cathy Barrera, PhD

Summary

Blockchain governance systems are crucial in establishing rules for decision-making processes and enabling organizations to adapt over time. However, defining these systems without identifying what they should accomplish can lead to ineffective design. Economics can help guide us in this context as it offers valuable insights on governance.

Governance systems exist to allow organizations to adapt as circumstances change and more information becomes available. This adaptation is crucial since it's impossible to define every potential decision in advance.

Historically, governance has been the privilege of the majority owner in private companies, while in larger organizations, stakeholders often elect a board of directors who then appoint a CEO to handle day-to-day decisions. The rationale behind a single decision-maker often lies in the efficiency of information gathering and application, as well as a more effective incentive alignment and accountability compared to group decision-making. However, this doesn't necessarily mean this is the only effective governance model, particularly when considering blockchain governance.

So, what does this mean for blockchain governance?

It's crucial to remember that the essence of governance is to establish mechanisms for future decision-making. Blockchain technology, while it presents new opportunities and challenges, doesn't change this fundamental point. The questions to guide governance design remain:

1. What type of decisions need to be made?

2. What information is needed for these decisions?

3. What expertise is required to make these decisions?

4. Whose preferences should be taken into account?

5. Who should be directly involved in the decision-making process?

6. How can these individuals be selected?

7. What potential mistakes could occur in the selection process, and how can they be minimized?

8. How can decision implementation be ensured?

9. How can rule violations be identified, and what should the consequences be?

In the context of blockchain governance, these questions can be explored in innovative ways. For instance, decisions might be decentralized and involve token holders, reducing the risk of centralized control and potentially increasing transparency and fairness. A well-structured blockchain governance system might also use smart contracts to automate decision implementation and enforce rules, reducing reliance on central authorities.

The unique nature of blockchain also allows for more fluid and dynamic governance structures, such as DAOs (Decentralized Autonomous Organizations), where decision-making power can be distributed among token holders, creating a more democratic, consensus-based system. This not only widens the scope for participation but also mitigates certain risks associated with traditional governance models.

Still, there's no one-size-fits-all solution. Different blockchain projects may require different governance structures, depending on factors such as the type of decisions to be made, the stakeholders involved, and the level of decentralization desired. The key is to design governance systems deliberately and purposefully, with a clear understanding of the goals and the context. In other words, blockchain governance should be designed with its eyes open, not blindfolded.