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Governance Meaning

Dec 6, 2023 | Updated Dec 6, 2023
Governance refers to the mechanisms and structures through which decisions are made within a blockchain network or cryptocurrency project.

What is Governance in Crypto?

Governance is the process of overseeing a community, organization, or system. It involves promoting responsibility, rules, stability, widespread participation, and inclusion, among others. 

Governance is a crucial aspect of cryptocurrency networks. It aids in determining how the network develops or evolves, resolves disputes, and implements changes, and defines the individuals responsible for the decision-making within a cryptocurrency project. Most blockchain projects establish tokens that enable users to influence the decisions that help the ecosystem’s growth, which are known as governance tokens.

Individuals can buy and stake governance tokens for the right to vote on decisions or proposals concerning the project, contributing to a decentralized voting process. These tokens are essential in decentralizing the voting process, where individuals can buy and stake these tokens for the right to vote on decisions or proposals concerning the project. A common application of these tokens is in decentralized autonomous organizations (DAOs), which rely on their respective members to collectively make decisions.

What are the Governance Models in Cryptocurrency Networks?

Governance in cryptocurrency networks happens either on-chain or off-chain.

On-Chain

On-chain governance is a framework for implementing upgrades and changes to a protocol based on rules embedded in the blockchain’s programming. The encoded rules also decide who participates in the decision-making and voting processes. It typically involves miners, developers, and participants with voting rights.

For instance, developers can propose changes to the network, and all the nodes have the right to accept or decline the request. Technically, the decision on whether to implement the changes or not involves everyone’s participation. In cryptocurrency networks like Tezos, people who hold governance tokens can delegate their voting rights to other nodes, which then accept or decline the implementation of changes.

Off-Chain

In off-chain governance, decision-making is done outside the protocol. Cryptocurrencies like Bitcoin and Ethereum don’t have rules for instituting changes embedded into the chain. Instead, discussions on whether to accept or decline proposals happen on social media, conferences, and online forums, among other events. In off-chain processes, developers, miners, businesses, institutions, and end-users can participate in the decision-making.

Layer 2 Blockchain

A layer 2 blockchain is a secondary network built on top of an existing blockchain network. It is a solution to extend the capabilities and performance of the base network.

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Rare Sats

Rare sats is the smallest denomination of Bitcoin considered unique and more scarce than its peers.

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Maximal Extractable Value (MEV)

Maximal extractable value (MEV) is the maximum value block producers (miners or validators) can obtain by including, reordering, or excluding transactions when producing a new block.

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