Why It CANNOT Be Ignored!!
Crypto Governance – By the end of this year, the cryptocurrency industry will achieve its goal of replacing the current financial system. A lot of resistance has resulted from the power structures concerned about losing their monopoly on money.
Money, though, plays only a minor role in power. Money alone cannot move the heavens and the earth; it is what individuals and institutions do with it that makes a difference.
The real power is in the hands of governments, it lies in the decisions regarding the allocation of resources. As a result of cryptocurrencies, dozens of novel community governance models have emerged.
There are decentralized, autonomous organizations with billions of dollars in cryptocurrency in their treasuries, ready to be distributed according to their communities’ interests.
With cryptocurrencies not only does the current financial system have the potential to be replaced, but also governments involved in financing and supporting corruption in the financial system.
Here I’ll explain everything you need to know about cryptocurrency governance, and why cryptocurrencies are the last frontier of financial freedom.
DISCLAIMER: I am not making any financial recommendations. You are invited to enjoy and learn from anything in this post.
Power Of Community Governance
The next thing I want to discuss is something you may not have heard about. Around 100 years ago, more than a quarter of Americans, British, and Australians took out health insurance through fraternal societies.
We see similar structures in today’s decentralized autonomous organizations and fraternal societies. Fraternal societies would pay into a government treasury on a monthly basis, and those funds would be used to pay for its members’ medical expenses.
All members of fraternal societies knew one another. In this way, they will not be forced to pay a higher monthly fee if they use an unnecessary amount of Treasury funds.
Members of the fraternal society were provided with basic medical services on an as-needed basis using a portion of these Treasury funds.
During those days, there were a lot of doctors around, and this resulted in intense competition for these fraternal society contracts.
Costs of healthcare have been kept low due to this competition. The right to basic medical care was covered by a single day’s wage in fraternal societies, thus explaining their popularity among the working class.
This setup did not appeal to all doctors, who urged the government to change it. They did as they were told.
Medical leaders began denying licenses and doctors’ income to fraternal societies that had signed contracts. It would also enhance the quality of medical care if the bar were raised to become a doctor.
Consequently, physicians are in short supply, which is causing the cost of health care to rise. A combination of these factors led to fraternal societies falling out of favor, to be replaced by public and private, centralized, health insurance and health care providers.
Medical costs continue to rise, under the control of many of these centralized parties.
In conclusion, community governments have the potential to revolutionize some aspects of our lives, and cryptocurrencies equip us with the means of making community governments more mainstream.
The blockchain-based governance structure and the ‘off-chain’ governance structure are the two main types of governance in cryptocurrency.
Bitcoin, Litecoin, Manero, and Ethereum for now, are examples of proof of work cryptocurrencies with off-chain governance.
You may be familiar with the crypto community members’ improvement proposals posted on GitHub, but for someone unfamiliar with them, let us examine Ethereum Improvement Proposal 1559, or EIP 1559 for short, which implemented partial transaction fee burns in the Ethereum blockchain beginning in early August.
One of the few EIPs that has been implemented since Ethereum’s creation in July 2015 is EIP 1559, originally posted to GitHub in April 2019. In part, this is the result of the non-structured nature of off-chain cryptocurrencies’ governance processes, but primarily it is due to the fact that proof of work cryptocurrencies are created by different stakeholders.
During the last BTC meeting, you might recall the economic majority concept. An economic majority must be in favor of a chain if you want to make major changes to a proof-of-work cryptocurrency like Bitcoin.
BTC holders, miners, developers, and Bitcoin developers are included here. Since we are often told that Bitcoin miners and developers are ultimately in charge of Bitcoin’s Blockchain, this might come as a surprise, but it is not true at all.
As an example of why Bitcoin shouldn’t be considered an inflationary cryptocurrency, imagine that most Bitcoin miners and developers want to transform Bitcoin into such a currency.
The majority of BTC holders will dump their BTC if they disagree with this decision. Hard fork with supply change will go live when the hard fork is live.
The original 21 million limitations are assumed to be followed by a few miners and developers. The BTC holders who are dissatisfied would invest their money back into the version of BTC they support.
Consequently, you would have two distinct blockchains with their own histories and different rules.
The majority of proof-of-work cryptocurrencies, including Bitcoin and Ethereum, have undergone these hard forks several times.
As a result of the security risks associated with hard forks for both the original and the new blockchain, major changes are not even tried to be implemented unless the economic majority is supportive.
51% 95% of this community favors off-chain governance, a delay-inducing process with a very high threshold. Since then, EIP 1559 took over two years to pass, and white bitcoins are going through their first upgrade this November.
In exchange for this, off-chain governance makes proof of work cryptocurrencies, more secure than proof of stake cryptocurrencies. You can learn more about that, on the home page.
A key difference between off-chain governance and on-chain governance is on-chain governance. I guess on-chain is the way to go. A common feature of proof-of-stake cryptocurrencies is their on-chain governance, as seen in Polkadot, Terra, Solana, and arguably Ethereum once 2.0 comes around.
After all that, on-chain governance is not just a phenomenon of cryptocurrencies. Many decentralized applications, such as Defi protocols, take advantage of on-chain governance.
Now that on-chain governance structures exist, dedicated forums often exist for discussion of changes made to the cryptocurrency or application. These is the smart contracts, which define the requirements for proposing improvements, and for rejecting them.
The governance structures on blockchains often have a community treasury, which can be funded with staking rewards and or transaction fees.
A proposal will pass if 51% of participating tokens or points vote to endorse the proposal, the most basic form of on-chain governance.
Following the successful passage of the proposal, a portion of Treasury funds are allocated to whatever improvement or initiative it sought to bring about – sometimes with issues, but most of the time successfully.
In this basic setup, something like this isn’t ideal, since someone with a lot of money can come in and buy all their favorite coins and tokens, or even vote to give themselves the crypto to the community.
Many projects have devised clever ways to prevent this from happening via their on-chain governance structures. In this article, I will keep it simple to illustrate the Polkadot government structure.
Hence, to table a proposal on Polkadot, you need bonds or state-specific coins. If there are enough documents participating, the proposal will be considered as passed based on the level of consensus.
The weight of a vote is based on how many months the dot has been locked up. Maximum lockup of 32 months makes a 6x, multiply the pocket voting period of one month and if fewer dogs are participating, the weight is based on how many dogs are participating. Whether the proposal passes the Polkadot Council or not, if it is found to be a threat to the blockchain by Polkadots community elected Technical Committee it is vetoed, and the dots staking the proposer is destroyed.
In case of an emergency proposal, the technical committee can expedite it if all goes well. The proposal takes another month to be implemented.
In a blog post written by Ethereum founder Vitalik Buterin on on-chain governance and its dangers, vitalik Buterin explains how on-chain governance appears to be the best of both worlds.
The referenced economic majority and off-chain governance structures make this understandable. As a result of On-chain governance, crypto coin and token holders are now also considered, and the presence of a community Treasury means that they can afford to hire new devs if they want to alienate non-compliant developers.
Defi protocols are a rich man’s world as a consequence, and we’ve seen it play out already in VC-backed On-chain governance.
In short, on-chain governance is by its very nature less secure. On the other hand, On-chain structures offer an alternative to overreaching governance, and here’s how they work.
How DAOs Can Replace Governments
Vitalik believes a properly funded public goods scheme is the key aspect of cryptocurrency governance structures that have been missing. A public good is something that the government is supposed to provide. There are many public goods including roads, bridges, police, firefighters, military, elections, regulations, and various administrative practices. Of course, you could theoretically deliver many of these public goods by a private company.
However, money as a point system is not effective. Some public goods are considered public goods. Here’s how it works.
In an earlier post, I spoke about fraternal societies and their crazy affordable health care plans. It’s simple – for a day’s wage, each fraternity member would get more than their money’s worth in healthcare. This is why fraternal societies are so popular.
As opposed to this, universal health insurance, that is, government-provided health insurance doesn’t always equalize outcomes among individuals.
Given the fact that you can go your entire life paying taxes for a universal health care system that you haven’t used to your dying days if at all, many people would rather keep their tax money instead and bite the bullet by paying upfront for health care here when things go bad.
It would increase the tax burden for universal health care on anyone still paying into it, causing them to leave the system, and then the entire health system would collapse.
Whatever your views are on universal health care, it is clear that it’s a public good, however, it would not be funded if money were the only measurement due to the incentives I mentioned earlier.
There are no opt-outs to paying taxes, and if you fail to pay your taxes, men with guns will show up. This is how governments solve this issue today. According to Vitalik, the solution lies in a funding method called quadratic.
The idea behind quadratic funding is that if a large number of people contribute to something, the result will be more valuable than just the amount of money that is poured in.
Alternatively, the value of a service rests more on its popularity than its revenue, which strikes me as logical.
Rather than making all public services equal, this method puts them on a spectrum. The most popular services would be eligible for a much higher funding level than the most costly services.
Now I will point out that the funding of the most costly government services is the key factor causing government corruption. I won’t even bother trying to explain the special quadratic formula here, which determines how much funding can be provided to service. To show you how to use the quadratic funding calculator, I’ll show you how.
Consequently, for the hypothetical service with 10 paying $1 each, the theoretical service to users would only receive $285 out of $1000.
This funding comes from the community treasury if you’re wondering where it comes from. Providing funding for the most used public goods will ensure they continue to operate.
DAOs And Decentralized Identity
Finally, we need a way to verify each participant in a blockchain governance structure is a real person and not a hybrid identity.
In this current system, all of our personal information is handed over to a centralized party that can manipulate or destroy it. Similarly, whatever platform or process we’re operating on can also be removed by the centralized party.
Rather than trust a centralized party to verify our actions if we happen to act or vote a certain way. Rather than centralized identity management, decentralized identity management is possible.
Although there are many crypto projects currently working on this, they all work in a similar manner, which is that someone else needs to verify the identity of the user of the app or DAP.
Decentralized identity solutions can range from simple online video chats to meeting in person, and many don’t even require physical identification. Hey, it’s me. That’s all it is.
With a decentralized digital identity set up, strong on-chain organizational structures can be built without heavily relying on coin holders. There is only one remaining task – keeping voting data private. A person may be coerced into changing themselves if they are not protected.
It was Vitalik who suggested that we mask the vote when it was cast, by using zero-knowledge proofs. According to my post on the MENA protocol, zero-knowledge proofs allow for the proof of something without disclosing any information.
By preventing someone from proving how they voted, Vitalik wants to take this idea even further.
This is something that only the voting party would know, and there would be no records of the votes however they are registered in the Blockchain as being in favor of a particular proposition.
In combination with all of this technology, it becomes obvious how decentralized autonomous organizations could eliminate centralized governance structures.
My most recent scoop about zoom 2.0 will be discussed along with many of these technologies.
With all the price pumping and dumping happening in cryptocurrency, it is easy to forget that it is about more than finance. My favorite cryptocurrency technology is Decentralized Governance.
In fact, decentralized governments are nowhere near achieving the full extent of the benefits they can offer as compared to what fraternal societies could do 100 years ago with healthcare.
To put it simply, I reckon it’s not farfetched to say that for every dollar that’s lost to middlemen in the financial system, two dollars are lost due to inefficiency, incompetence, and corruption in government, as with everything in life.
In the end, it boils down to aligning incentives in such a way that people are able to pick and choose the things they want and need. I think there is a possibility of a fence that uses cryptocurrencies.
However, we are still a long way from fully functioning decentralized autonomous organizations doing anything other than Defi.
It’s been said that the system exists to protect itself, and we’ve just begun to see the results when cryptocurrency fails to safeguard the interests of feared fat cats.
Just picture how aggressively the government will crack down once cryptocurrency threatens its monopoly on violence. Even though the technology is within their reach, not a single government has implemented a transparent voting system.
Simple mechanisms like that inspire a great deal of trust from an increasingly distrustful citizenry and perhaps can resolve a number of today’s social and political conflicts.
Whatever the cause of the problem may be, the answer is a decentralized trustless system, with centralized power structures that have succumbed to the internet over the past 1000 years. Maybe one of the different Decentralized Governance structures will prove able to successfully lead humanity into the future.
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