What Is Governance?
Governance is a major part of all cryptocurrency projects. Since a core tenet of crypto is decentralisation, governance plays a huge role for blockchains. It allows for a voting system, like in a decentralised autonomous organisation (DAO), so projects remain decentralised.
While governance can refer to any structure, such as centralised or decentralised, it is most commonly seen in the crypto space as a liberal structure.
Types of Governance
On-chain governance: This type of governance means that voting is conducted on-chain. The rules for how the vote is conducted are also set on-chain, which means that when a governance proposal passes, all nodes in a particular blockchain must approve the proposed changes and adopt them to the blockchain. On-chain governance allows for participation from all of the nodes supporting the network.
Off-chain governance: Off-chain governance allows miners, developers, and users to participate in the decision-making process for a project. This type of governance increases participation from the community and not just the nodes for a blockchain.
With off-chain governance, miners and nodes don’t all have to agree, as it is a majority vote. Typically, the way in which users vote is by buying a governance token, where the amount of voting power depends on how much they have. Off-chain governance is quite common in the crypto space, and many see it as a positive, as it is one of the ways a crypto project can achieve decentralisation.
Why Is Governance Important?
Governance is essential because it represents a core tenet of crypto — decentralisation. It allows for more individuals to directly impact the decision-making for a project.