Blockchain technology is the new rave, but quite a lot of people think that there are so many moving parts, and it’s difficult to understand. In this article, we explain the working principle behind decision-making in blockchain technology.
Read Time: 3-5 Minutes
I know you are eager to get into the nitty-gritty of blockchain governance, but what exactly is blockchain in the first place? Blockchain is a digital ledger (a book or collection of accounts where transactions are being recorded) of transactions that is duplicated and distributed across a network of computers systems. Because these systems form a connected chain, they are referred to as a blockchain. Each computer system represents a block of transactions.
Blockchain governance on the other hand refers to the way decisions that affect every computer and user on the blockchain are made. This process can be a little tricky, hence I will walk you slowly into it. Let’s start with a story about Brian Armstrong.
Coinbase, the start-up that Brian started to buy and sell bitcoin was on the verge. Brian had staked a bet, that bitcoin will be the future of money and people would soon be using it as a legal tender. It was this bet that Armstrong was able to raise funding for his startup, and it became one of the biggest financial companies in the US in early 2010.
Unfortunately, the early roots of Bitcoin that was mired in drugs and illegalities tanked the value of the Bitcoin and kept it as a speculative asset and not the replacement to money that Brian had hoped. Not only that, but the bitcoin blockchain was too slow to process transactions compared to traditional payment systems like Visa and MasterCard platforms that performed thousands of transactions in seconds. For a technology platform that was supposed to be the future of Money and finance, that was not good enough, and Brian was losing the trust of board members.
He was under immense pressure to drop his stance and diversify Coinbase into a blockchain-backed company that could do other things apart from buying and selling bitcoins.
For Brian, however, the problem could be fixed, and he made it his next big move. If he could convince those who held the power to drive a kind of change that made the bitcoin blockchain process transaction faster, they might be able to still achieve the aim of making Bitcoin the future of Money. This means that Brian had to travel to China to see the people that held the most power to be able to fundamentally change the way that bitcoin blockchain processed transactions. This is where it gets interesting.
Blockchain governance is an informal system of control and regulation, where no single person holds all the keys to effect a change in the way transactions are made. Only those who are invested in the system are allowed to decide what happens as regards a specific blockchain. This is referred to as an informal system of government. Your level of investment determines the level of control you can wield when it comes to making a decision. These investment levels were divided into 3 groups. The Developers, the miners and the users.
To solve this problem, Brian Armstrong went on a quest that took him to China. So why did a trading platform Founder and CEO in the US have to go to China? Brian felt that the payment processing ability of the Bitcoin network could be faster, and this could be done by changing the code behind the bitcoin network. To accomplish the journey, he had to make a trip to China, the place that had the largest groups of bitcoin miners in the world under one roof. Why couldn’t Brian just ask the person who wrote the bitcoin code to change it and pay him off? Not exactly, because not only one person wrote the bitcoin blockchain code, and that is why the blockchain governance structure.
The governance structure. for blockchain refers to how decisions are made on the future of the blockchain. When someone feels like there should be an update to the blockchain, he writes the idea, or ask a programmer to write the idea. When that is done, the stakeholders of the blockchain have to vote to agree to the change. This vote allows them to arrive at a consensus (or Consensus Protocol, a set of codes that signify an agreement has been reached by the necessary stakeholders), which effectively seals the decision. The blockchain is edited, and a new version is created.
At this point, you would be right to ask who these stakeholders are. Well, to explain that, let’s talk about decentralization. Do you know one of the biggest drawbacks of the current financial system? It was that a select group of people could decide what happened to people’s money that had been kept with them. In a country, an authority like the central bank held too much power and wasn’t supposed to be so.
Financial power is centralized, and the financial destiny of millions of people is reliant on the decision of a few, creating a sort of financial cabal or a gatekeeper’s system. To counteract that, blockchain now operates on a principle that everyone who has a vested interest in blockchain could vote to influence the decision. This in turn created this informal governance structure that we have been trying to explain. There is no centralization of power, hence it is called a decentralized system.
Two more questions at this point. Why Did Brian then have to go to China if there was no centralized system? The second question would be how do you become part of the decision-makers in a typical blockchain setting?
To become part of the decision-makers on the blockchain, you had to be one of three people. A miner, a developer or a user. These are the people that made up the stakeholders in a blockchain setting, like bitcoin.
What Miners Do: Blockchain is a series of transactions coded and a block. When a new transaction is created across the blockchain, a new set of codes is written and shared with everyone on the blockchain. Miners verify these transactions, ensure their validity before it is added to the blockchain. These miners are also called nodes. Once they verify the transaction, they are paid in coins or a term referred to as a Proof of Work, (PoW). The more transactions they can verify, the more tokens they get and the more tokens they get, the more power they have to affect a decision that has to happen on the blockchain. These are some places where the transaction fees on the blockchain go to.
What Do Developers Do: Developers write the codes that govern the functioning of the blockchain, just like in other systems. However, the codes that they write has to be verified and vetted by the other stakeholders. That takes us to the last set of stakeholders.
The Users: These are also called participants who use and invest in various cryptocurrencies on the blockchain, and they get a cut of the transaction fees.
Back to Brian Armstrong. We still have not established why he had to go to China just to effect a change in the system. Not all nodes or miners have the same voting power. The more coins you have, the more voting power you get. Miners have to use complicated software and systems to solve mathematical equations and for bitcoins, these does two things.
The first is to enter a new set of bitcoins into circulation where they get a share and the next is to confirm a set of transactions and enter a new block into the blockchain ledger. But this is done on a first to solve basis, hence the more powerful your system and software is, the better chance you have. This gave birth to server farms with huge computing power that miners used to mine Bitcoins.
At the time, China had one of the largest server farms for mining Bitcoin and had the most Bitcoins available, hence giving them the power to effectively change the structure and code of the Bitcoin blockchain, if only he could convince them to do so. They had formed a sort of conglomerate that allowed them to wield huge power at the time. The implication of these server and miner farms cannot be covered in this article as we would have to delve deeper into energy, electricity and conservation.
Unfortunately, Brian Armstrong couldn’t convince them to push for the change at the time. He would go back to the US and find an alternative solution to his problem. Coinbase still exists today as one of the biggest cryptocurrency trading platforms in the world. Safe to say, he succeeded in his quest in some other way. Since then, the bitcoin blockchain has been updated twice, through hard forks and created both Bitcoin Cash and Bitcoin Gold. That’s a topic for another blog post.