The Battle for Blockchain Governance Between Tezos, Polkadot, and Ethereum

LongHash Blockchain Information (ID: Kyle Torpey)

, Author: Zhehao Chen, reprinted with authorization by Odaily.

Recently, the Kusama community conducted a referendum to change the currency unit of Polkadot’s native token DOT, that is, to change the counting unit of DOT at a ratio of 1:100 (and then increase the supply of DOT by 100 times), which has ignited the topic of the currency circle. The final referendum results were dramatic. Despite the majority of supporters voting, the Web3 Foundation has stated that they will not upgrade the DOT.

This conflict highlights a problem with Polkadot's on-chain governance model. However, other projects, including Tezos, have already demonstrated that on-chain governance can work very well.

The first core issue in blockchain governance is whether to adopt off-chain governance or on-chain governance. In order to avoid hard forks, a number of on-chain governance projects have been born. The most famous projects include Tezos, which first advocated on-chain governance and is relatively stable in operation, and Polkadot, which was mentioned at the beginning. Projects governed on the chain are mainly governed through a PoS-like consensus system in the form of one coin, one vote. After all proposals are passed, self-upgrade will be carried out, and no hard fork will occur.

In the case of Tezos, the advantages of the on-chain governance model are still very significant. Tezos went live on the mainnet on September 17, 2018. Up to now, a total of 4 upgrade proposals have been initiated, one of which was voted down in the end, and the other three were successfully upgraded. The specific voting information can be queried on Tzstats. It is worth noting that Tezos has successfully upgraded three times in just two years after the mainnet was launched, which is precisely because of its well-designed correction mechanism.

This mechanism helps Tezos avoid hard forks that would split the project community and damage its network effect. Tezos co-founder Arthur Breitman explained in one of his tweets that the goal of Tezos is to have a clear correction mechanism, but at the same time not be able to easily initiate harmful corrections. Tezos has a multi-stage voting process that takes about three months. “In contrast, other fork-based governance projects have extremely long-term roadmaps, with sometimes 1-1.5 years between upgrades,” Breitman wrote.

Additionally, Tezos’ governance mechanisms can change over time. Stakeholders will have an economic incentive to adopt the governance that is most efficient and preserves Tezos' network effects to the greatest extent possible.

Most of the early public chains adopt the mode of off-chain governance. The core members of the community will set up an organization by themselves to decide whether to carry out a series of operations on the project through off-chain resolutions, including how to fix BUG and add new functions to the project , and changing parameters, etc. In general, the entire governance model is relatively centralized, and most of the right to speak is held by the core developers, who are not necessarily the most interested in the entire ecosystem. Sometimes, roles with the highest level of interest, such as mining farms and giant whales, may not have the support of core developers for their appeals.

The problem with off-chain governance is that if the core developer’s decision cannot be supported by other users, the project will be hard forked with a high probability. BCH, BSV and ETC are typical cases of such results. The hard fork is actually a result that most users in the entire ecosystem do not want to see. In addition to the security issues of the network itself, they also hurt the network effect of the community. The loss of users and developers has dealt a fatal blow to many projects.

But on-chain governance also has its drawbacks. The most common problem in the on-chain governance model is that the democratization process pursued by the project party may eventually evolve into the "plutocratic rule" of giant whales. This is definitely a situation that all ecological participants do not want to see. The plutocratic rule will lead to the loss of users and the failure of projects, which means that these giant currency-holding whales will eventually find no buyers.

The Kusama incident mentioned above actually highlights the risks of chaebol rule. In this referendum, neither the Web3 Foundation nor the development company Parity voted. If they choose to vote, they may be accused of "imposing their will on the community" due to their outsized power. But if they don't vote, and don't implement the upgrade that the majority voted for, they could still be blamed for the same. In this matter, whether the Web3 Foundation and Parity vote or perform upgrades, disputes are inevitable.

Before diving into the issue of on-chain governance, let’s define the stakeholders of a blockchain project. In the article "The Collective Action Problem of On-Chain Governance" by Mallika Parlikar (graduated from the Department of Politics of New York University and currently a blockchain governance consultant at Casper Labs), the stakeholders are divided into four categories: developers, node operators, Currency holders and ordinary users. Token holders generally refer to those who hold a large amount of tokens and sell tokens to ordinary users. In PoS, they will carry out Staking. Ordinary users refer to those who will use a lot of dApps on the public chain, and will exchange various goods and services on the public chain (project parties who issue various ERC20s on Ethereum for ICO and holders of ICO tokens) Some also belong to this category of users).

In the article, Parlikar assumes that the distribution of the four major stakeholders is as shown in the pyramid in the figure below. Developers are the least, followed by node operators and currency holders, and ordinary users are the most. But the reality is that most blockchain projects do not fit into this type of model because they have quite a small number of common users. Ethereum may be the closest to the "pyramid" user distribution model on the left. As of May 21, 2020, the total market value of Ethereum has reached 23.3 billion US dollars, and there are a large number of ordinary users in its huge ecosystem. The picture on the right is a redrawn picture based on Parlikar’s article. We can see that even if ordinary users of Ethereum far exceed developers, their right to speak is almost the same.

According to Etherscan, as of May 21, 2020, ERC20-USDT has a market capitalization of $5.7 billion. In the so-called off-chain governance of Ethereum, whether the weight of ordinary users can have 1/4 is a question worth discussing. The off-chain governance of most projects is mainly dominated by core developers, and it is up to the developers whether to listen to the opinions of the community. In the case of off-chain governance, the interests of ordinary users are seriously weakened, at least not equal to the number. They have neither the energy nor the ability to initiate actions such as hard forks, and it is difficult for them to participate in decision-making.

In the process of on-chain governance, the user distribution model may be completely different from the above situation. For example, Tezos, which first advocated on-chain governance and is relatively stable in operation, has a high degree of overlap among its developers, node operators, and currency holders.

The figure below shows the Tezos rights distribution (if there are a lot of XTZ users in the future). Most token holders will entrust their tokens to node operators to earn interest. Some developers (such as Cryptium Labs) are also node operators, while others are not. As Parlikar described, currency holders and non-currency ordinary users should be two groups of people that do not overlap. As Tezos attracts more and more ordinary users, they gain more power throughout the ecosystem. However, overall, if the average holding of XTZ is too low, then they will not have much power. Moreover, ordinary users are less likely to participate in voting. However, such governance mechanisms also have an obvious benefit. Developers can both submit agreements and participate in the Tezos voting process. Ideally, Tezos users and developers will have similar power in the future, which is impossible in off-chain governance.

In the case of Tezos, the act of producing and validating blocks is called Baking. The role responsible for block production and verification is called Baker, which is equivalent to the node operator in Bitcoin and Ethereum. For a user to become a baker, the node must hold at least 8,000 XTZ worth $22,160 (as of writing). If the token holders do not have enough XTZ, they can entrust the tokens to other bakers to enjoy certain baking income. In this way, the roles of node operators and currency holders overlap to a certain extent.

In Tezos' self-amending process, proposals are submitted by bakers. As we mentioned above, Tezos has successfully initiated 4 proposals (3 of which were successfully passed), all of which were proposed by developers. Cryptium Labs, one of the core development teams of Tezos in the last two upgrades, participated in the proposal. According to tezblock data, Cryptium Labs ranks 13th among bakers, and it is also one of the largest players in the entire ecosystem (Coinbase is the largest independent baker/coin holder)).

From the data of tezblock, it can be seen that Cryptium Labs is a relatively large baker as a developer, but other developers, such as Nomadic Labs, DailLambda and some personal core code contributors, are not considered large. Therefore, users who hold coins will hand over their coins to developers like Cryptium Labs for baking.

The Swiss Bitcoin Association recently announced tzBTC anchored to BTC to help develop the Tezos DeFi ecosystem. On the positive side, because the project is in its early stages, Tezos bakers are more focused on user interests when making upgrade proposals. After all, if you cannot quickly attract new users to use Tezos, the project itself will not last long, and the currency price will be stagnant.

According to the TQ Tezos wiki, the self-amendment process consists of 4 phases: Proposal Phase, Voting Exploration Phase, Testing Phase, and Voting Promotion Phase. The explanation on the wiki is, "Each stage will last for 8 baking cycles (that is, 32768 blocks, that is, about 22 days and 18 hours), and the time span from proposal to activation is roughly three months. If in a certain If there is any problem in this stage, the whole process will be invalidated and returned to the proposal stage to start again.”

The recent Kusama referendum event has raised the complexity of on-chain governance issues to another level. Polkadot is the first to release valuable test tokens on its own test network that are inconsistent with the main network. Although Kusama is distributed in proportion to the number of positions held by investors in Polkadot, since Kusama is already online, many Investors chose to sell, and the entire bargaining chip structure has changed.

Both on-chain governance and off-chain governance have their own advantages, but at the same time there are many problems and risks. After any network reaches a certain scale, it may encounter the risk that the most influential developers, investors and node operators on the network have too much power compared with ordinary users.

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