Governance is an important part of any Blockchain, but particularly so with Cardano. Cardano puts great stock in democracy and wants to take decentralization to a whole new level. The Cardano Governance model is key to achieving this goal. In this article we’ll discuss governance, why it matters and how governance works in Cardano.
What is governance?
Governance controls how a system makes decisions. Blockchain governance manages change and complexity.
Blockchain governance is decentralized by nature, as no single entity has control over a decentralized system. Governance can either be implicit or explicit. An example of implicit governance is Bitcoin. Bitcoin, the world’s first cryptocurrency, introduced a simple system of sending, receiving and storing value in a decentralized way. As a network which serves a very simple set of functions, it is largely self-governing, or can be governed with very mild human interference. Bitcoin’s governance is the monetary policy that each person who uses the Bitcoin network automatically subscribes to. These are the rules of the network which have remained unchanged since its inception. The value in such a system cannot be underestimated, as Bitcoin’s stability has fostered trust and reliability over the years.
Abandoning simplicity and embracing complexity means changing often without a decay in trust. The drawback to Bitcoin’s governance is that as the network scales to millions of users, the blockchain remains static and fixed. Cardano, as a third generation cryptocurrency, aims to explicitly set the rules for its governance. Cardano’s governance gives users a stake in shaping the future of the network. By explicitly outlining a blueprint for good governance, it is hoped that Cardano’s flexibility and adaptability will set a gold standard for the cryptocurrency industry. In this post, we’ll look at how staking works in Cardano and why it matters.
Why is governance important in Cardano?
Cardano is aimed at being a world financial operating system. The scope of such a system incorporates a constellation of services, including smart contracts, staking, policy making and more. Governance seeks to manage this complexity by giving people a voice in how the network should develop over time. The right for someone to have their say in the Cardano blockchain is proportional to the amount of tokens of the native ADA cryptocurrency that they hold. This is known as a users’ stake in the system. As a Proof of Stake (PoS) blockchain, Cardano’s philosophy is that those with skin in the game will serve the best interests of themselves and the network by participating in the blockchain’s development. Validators, for example, are voted on by token holders. These are the people who have the right to mint blocks on the blockchain. Going beyond simply granting operators the right to produce blocks, ADA owners can also participate to have some say in how the network should grow. By empowering users to have their voices heard, Cardano enables a truly decentralized, digital democracy.
How Cardano governance works
Cardano uses on-chain governance with a treasury to vote on and fund the blockchain’s developments. These fall under the umbrella of the Voltaire era of Cardano’s roadmap. Voltaire allows community members to make meaningful decisions around software updates, technical improvements and what projects should be funded. Participants in the community can submit Cardano Improvement Proposals (CIPs) and Funding Proposals (FPs) to be voted on. CIPs are formally structured proposals touching the Cardano Ecosystem. They are publicly available for review and discussion. A CIP might outline a Cardano specific process, provide information or propose protocol level alterations. FPs are formal requests or proposals to build something that is not yet covered by the Cardano protocol. Examples of FPs include developing new capabilities or integrations, paying for marketing or building an app to support the Cardano ecosystem. Token holders are entitled and incentivized to vote on these proposals.
What happens next?
Successful FPs are those which are voted on by ADA holders. No technical knowledge is required to participate in votes, only a temporary deposit of ADA. Winning proposals receive money from the Cardano treasury in line with the amount requested. Community oversight ensures that the funds are spent in line with the proposal, with clear KPIs and results.
Protocol level updates are implemented through Cardano’s groundbreaking hard fork combinator. Unlike traditional hard forks, in which a blockchain splits from another and operates with different rules, Cardano’s hard fork combinator enables upgrades to the network by incorporating all previous chain rules into a new version of the blockchain which contains the updates. An example of a protocol level upgrade using the hard fork combinator was the shift from Byron to Shelley, where Cardano transitioned from a static and federated model seen in Byron, to a dynamic and decentralized system as with Shelley. This represented an entirely new set of ledger rules, which was achieved using the hard fork combinator, all while preserving the original Byron history of the chain. This is significant for Cardano’s governance, as all future protocol level upgrades can take place while preserving original versions of the blockchain.
If Cardano as a blockchain can be thought of as infrastructure, governance is the vehicle for upgrading that infrastructure. For simple systems such as Bitcoin, stability is seen as a core advantage. However, Cardano sees upgradability as a need-to-have, rather than a nice-to-have. That is because Cardano’s infrastructure is inherently complex, requiring a process and funding needed to keep the blockchain updated over time. A successful blockchain without a suitable governance structure also suffers from splits in a community, where different groups with visions of how the blockchain should run result in, at times, contentious hard forks. Such events could often be avoided with a strong governance system in place.
Cardano, as a Proof of Stake blockchain, enshrines the rights of the ADA holders at a protocol level. This means decentralization of control starts with the technology, and is defined by every participant. This is the purpose of Cardano’s Volatire era and how governance works.