Why is Governance Important in Crypto?

Crypto revolutionized our perception of money and transactions. However, it would not be the same if there was no governance. The latter presents a set of rules that a particular blockchain project follows and brings out the best of this system. Why is governance important in crypto?

Key Takeaways:

• No centralized decision making
• Governance token holders make all the decisions
• Transparency increases trustworthiness
• Attracts investors as they can vote on changes they need or want
• Improved engagement drives technological advancement

Why Is Governance Important in Crypto?

Just like every country needs some type of government, every project built on a blockchain needs to govern itself. However, blockchain allowed to take the traditional governance to a completely new and much more predictable and trustworthy level. Governance is the process of overseeing and executing changes to blockchains through voting. There are several reasons governance is important in crypto.

• Decision-Making

Governance is necessary to figure out what is allowed and what is not allowed, when and which upgrades are made to the protocol, how the developers and users deal with unexpected events, and so on. The process is more formalized and streamlined by using smart contracts and transparent voting on the blockchain to make these decisions. Although smart contracts that automatically implement decisions are prevalent and preferred, an old-school manual approach still exists.

In typical situations, decision-making in organizations is bestowed on a single leader or a small group of board members. They have the power to make all the important choices. The greatest advantage of governance in crypto is that there is no centralized control. It is decentralized across engaged token holders. The community, basically, runs the show. 

• Security and Risk Management

Governance helps to promote the growth of blockchain and digital assets by helping those who are interested in crypto projects manage risks. With the advancement of smart contracts and open-source protocols, the crypto community feels more empowered to steer the projects in the directions they deem to be the best way to go. 

As a result, token holders feel more confident investing in a particular project. They know that they will be heard and can contribute to the actual improvement of the project. Moreover, appropriate protocols will take care of risk management. Potential weaknesses, errors, or security breaches may be quickly found and fixed with good governance.

• Token Holder Representation 

Developers of various protocols create so-called governance tokens to enable those who own them to make decisions in a decentralized manner. They allow the holders to play an active role in deciding the future of a protocol they believe in. It works this way:

1. Project developers (or users) submit an idea for change or advancement;
2. The community discusses the issues and users vote concerning this or that change via governance tokens;
3. Smart contracts automatically implement the change that got the most votes or implement any other idea that was raised based on the voiced opinions. 

The holder representation is very similar to the way shareholders can vote on key decisions in a company through shareholder meetings. Any individual who decides to obtain governance tokens for a protocol may participate in the conversation with other token holders, put forward proposals on new rules or future direction, and in turn vote for proposals put forth by others in the community. 

• Transparency and Accountability

Decentralized governance plays a huge role in supporting the growth and development of more distributed organizations that desire to promote a transparent way to control funds and various processes.  As decision-making and important information lie in the hands of the community, it promotes transparency. It makes the project developers and those who have at least some power to control its processes accountable for the results of their choices. 

A coded set of rules and smart contracts make all the processes in a particular project verifiable and trustworthy. They set the rules for how the project works and allow for implementation changes without one single entity affecting the final result.  A good project has a structure that allows it to meet and manage the expectations of a community in a transparent way.  Token holders gain confidence and trust from transparent governance, which strengthens the bond between the project and its supporters.

• Engagement and Participation

Project creators give the public a say in crypto projects they care about. To get actual voting rights and influence the project, one needs to become a community member by acquiring governance tokens. In most cases, the more tokens one holds the more their vote counts. Active users gain more voting power based on how many tokens they are holding. 

The governance tokens enable self-sustaining evolution through community proposals. Users are able to vote on changes that they actually need and want. There is an unprecedented ability to democratically steer the direction of the project that one cares about. 

Besides creating a project that looks attractive and one that the crypto community deems to be valuable, the developers often reward the token holders for participating in the project. After all, they want the project to grow in terms of value and adoption and advance in terms of technological innovation. 

Examples of Good Governance

DAI is a stablecoin that runs on the DeFi protocol, which can be altered based on decisions users make through the maker governance token. For example, the question of whether or not the debt ceiling should be raised can and is voted on. In the same way, users decide what should be changed to improve the protocol and maintain or strengthen the price stability of DAI.

Another good example is the Balancer project that uses BAL token to encourage liquidity providers to get involved in the decision-making process. The latter ensures a hassle-free path to voting and makes the liquidity providers care not only about the rewards they receive but also help the project progress and the BAL value to increase.

Examples of Bad Governance

Some of the best bad governance examples include projects that had forks. It is proof that the governance structure and rules had some shortcomings. It happened to the most famous and prominent blockchain – the Bitcoin. 

Tezos also experienced some governance issues. In fact, it was even sued for mismanaging the project and violation of taking appropriate security measures. These inappropriate founder actions put the project on hold and did not allow the world to fully explore everything the project had to offer. 

Conclusion 

Governance provides many advantages to the crypto world and can be applied beyond it. Strong and well-structured mechanisms allow the project to move forward in the right direction. They also allow to mitigate the risk of attempts by a single entity (or a group of scammers) to impact decisions in a negative way. The rules and decision-making processes also ensure that investors feel confident and motivated to participate in project decisions.