Why is Governance Important in Crypto?

KEY TAKEAWAYS

Governance systems are integral to the success and prosperity of blockchain projects in the crypto industry. They define the rules, decision-making processes, and community engagement that shape the development and operation of these networks. Do it right, and you are on the path for success. Do it wrong... and the project's future is at risk.

Blockchain technology has revolutionized businesses, industries, and commerce by eliminating the need for a central storage and control authority. It has found massive popularity in the world of digital assets, as it is the underlying technology that almost all major cryptocurrencies are built on. 

However, effective governance systems play a crucial role for crypto projects to thrive in the long run. These systems define the rules, decision-making processes, and community engagement that shape the development and operation of blockchain networks. 

Decentralized Decision Making

Governance in the crypto industry serves as the backbone for ensuring blockchain networks’ viability, adaptability, and integrity. Beyond technical advancements, governance mechanisms reflect community values and act as a social contract among participants. 

Governance systems also define how changes to a protocol, such as upgrades and feature additions, are decided and implemented. Effective governance systems facilitate the seamless adaption of evolving technologies and prevent disruptions that could harm the network and its users.

While cryptocurrencies like Bitcoin (BTC) prioritize stability and security, many Web3 blockchain projects built on platforms like Ethereum adopt more experimental and flexible governance approaches. These governance mechanisms boast advanced features such as liquid democracy, decentralized autonomous organizations (DAOs), and quadratic voting.

It is worth noting that Web3 governance extends beyond protocol upgrades, encompassing community initiatives and even venture funding through treasury management. 

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Why Is Governance Important in Crypto?

Governance plays a crucial role in the world of cryptocurrencies for several reasons. Here are some key reasons why governance is essential in the crypto space:

1. Decision-Making

Governance structures in cryptocurrencies allow for collective decision-making processes. These decisions can range from protocol upgrades, consensus mechanism changes, token economics adjustments, or resolving community disputes

2. Security and Risk Management

Governance mechanisms help maintain the security and integrity of blockchain networks. Through effective governance, potential vulnerabilities, bugs, or security breaches can be identified and addressed promptly. Proper risk management protocols can also be implemented to mitigate potential threats and protect the network and its participants.

3. Token Holder Representation 

Governance mechanisms enable token holders to have a voice and influence in shaping the future of the cryptocurrency ecosystem. Token holders can participate in voting, signaling, or other governance processes to express their preferences and contribute to the development and growth of the project. 

4. Transparency and Accountability

Governance promotes transparency by ensuring that decision-making processes and key information are accessible to the community. This transparency fosters trust among participants and helps hold project teams and token issuers accountable for their actions.

5. Community Engagement and Participation

Effective governance encourages active community engagement and participation. It allows individuals to contribute their ideas, expertise, and perspectives to the project’s development. This inclusive approach strengthens the community, fosters innovation, and builds a sense of shared ownership and commitment to the project’s success.

Examples of Good Governance

The crypto market is loaded with examples of good governance where Web3 projects used collective decision-making to come to a conclusion regarding an important matter. 

For example, back in August, Aave token holders started voting for two governance proposals in response to the systemic liquidation risk posed by Curve founder Michael Egorov’s large borrowing position on the lending protocol. The proposal aimed to avert the liquidation threat posed by Egorov’s lending positions on Aave.

Likewise, just recently, the Uniswap DAO recently voted to delegate some UNI tokens held by the Uniswap Foundation to underrepresented delegates that maintain an 80% participation rate. After prolonged conversations, seven delegates were chosen to receive 10M UNI of voting rights. 

The move came in response to dwindling activity across DAO governance structures amid a prolonged bear market.

Examples of Bad Governance

One example of governance gone wrong in the crypto industry is the case of the Bitcoin Cash (BCH) hard fork. Bitcoin Cash was created in 2017 as a result of a disagreement within the Bitcoin community regarding the scalability and block size of the Bitcoin blockchain. 

This led to a hard fork, creating a new cryptocurrency, Bitcoin Cash. The governance issue arose because a small group of developers and miners decided to fork the Bitcoin blockchain and create Bitcoin Cash without broader community consensus. 

This decision was contentious and resulted in a split within the community, with some supporting the original Bitcoin (BTC) and others supporting Bitcoin Cash (BCH).

Another example is the governance challenges faced by Tezos. Tezos was designed to address governance issues through on-chain voting systems, aiming to allow token holders to participate in decision-making.

However, Tezos faced a lawsuit filed by an investor alleging securities violations and mismanagement by the project’s founders. The lawsuit significantly delayed the project’s development and locked up investor funds until the legal issues were resolved.

The Bottom Line

Governance systems are integral to the success and prosperity of blockchain projects in the crypto industry. They define the rules, decision-making processes, and community engagement that shape the development and operation of these networks. 

Effective governance ensures the smooth integration of technological advancements, fosters community trust, and safeguards the interests of investors. However, finding the right governance model is an ongoing challenge, as different projects have varying goals and values.

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Ruholamin Haqshanas

Ruholamin Haqshanas is a cryptocurrency and financial journalist with over three years of experience in the field. He holds a Bachelor's degree in Mechatronics and has a strong interest in FinTech. He started as a freelance technology writer, but moved into cryptocurrency as he delved deeper into the industry in 2019. Ruholamin has been featured in several financial and crypto news outlets, including Cryptonews, Investing.com, 24/7 Wall St, The Tokenist, Business2Community, ZyCrypto, EthereumPrice.org, Milk Road to name a few. Ruholamin has also worked on major crypto and DeFi projects as a content producer, including Midas Investments, BullPerks/GamesPad and Equalizer Finance.