Learning | Blockchain Governance Design Framework: Prysm Wheel

Blockchain platforms are economies written in code. The goal of any blockchain-based platform is to connect participants (such as buyers, sellers, miners, voters, etc.) to each other to conduct transactions and create value. Participants participating in the blockchain-based market are mainly focused on the purchase and sale of mutually beneficial goods or services. For example, miners in unlicensed blockchains try to make a profit by trading their computing power and bandwidth resources to obtain large rewards and transaction fees.

As we discussed earlier, the economy needs to be designed in multiple dimensions to function effectively. The most important (and perhaps the most misunderstood) aspect is governance. In this article, we discuss governance in depth, analyze how it differs from operational rules, and outline the framework we use to custom design effective governance for blockchain platforms.

Operating Structure and Governance

To understand why governance is the basic purpose in a blockchain platform, it is important to understand the difference between governance and operating structures.

The operating structure is a set of rules and processes jointly developed by both parties to help manage the daily functions of the platform or ecosystem. For example, algorithms can help determine the next block in the chain and the size of block rewards awarded to miners. These key operating structures are the foundation of the platform and are vital to the proper operation of the platform. They ensure that contracts, markets, and token economic behavior are effective, allowing individuals to reach mutually valuable agreements.

In contrast, governance is a set of mechanisms through which communities can choose to change or update their operating rules. In the event of an event not covered by the operational rules, the community will also decide to take action plans to correct these use cases. If the rules of operation consist of all written procedures and agreements in black and white, governance is a set of processes that helps us resolve the gray areas in between.

Governance allows the platform to deal with unforeseen, unpredictable and unpredictable.

All systems need flexibility to adapt to inevitable market changes over time. In traditional organizations, the leadership team makes these decisions continuously. In a decentralized blockchain platform, this central agency needs to be replaced with something else. What form a decision-making body should take is an ongoing, controversial debate in the blockchain community.

As with any economic or technological component of a blockchain project, governance must be custom designed for the specific task at hand if it is to be effective. The low-cost practice of pasting a governance structure is a simple but limited process, often with poor long-term benefits. Investing time up front to design governance for a particular platform will pay off in the future.

Before designing governance, we recommend that the platform first define its operating rules. These include contract design, market design, information system and token design. Pre-determining these elements ensures that governance addresses all aspects that need to be changed. Once the platform is ready for governance, we recommend that you consider the following elements in turn.

Blockchain governance design framework: Prysm Group Wheel

These seven elements of economic design for governance need not be completed in a specific order. However, as platform designs evolve, they should often be re-examined.

Decision range

When designing governance, it is important to understand what types of decisions need to be made during the governance process.

The many decisions facing the ecosystem may benefit from different governance processes.

For example, some decisions will require proprietary information and require the involvement of experts to benefit, while others will need to incorporate the preferences of community members in order for the decision to be adequately supported.

An overview of the types of operational processes that will need to be upgraded over time and all potential decisions that need to be made will help ensure the cohesion of the entire process and a robust governance system.

Stakeholder / participant

Every participant in the blockchain ecosystem is interested in the overall success of the ecosystem because it is a mutually beneficial operation. The goal of the governance system and the motivation behind the "decentralized" governance mechanism is to ensure that decisions about the ecosystem are in line with the wishes of all participants.

Defining stakeholders and their various goals at the start of a project is critical to the success of the governance system. This way, you can resolve how to handle any conflicting goals to best achieve the overall goals of the platform. The ideal balance may not be achieved, but keeping this in mind will set the direction for the design of the governance system.

The ideal balance may not be reached, but developing a conflict resolution plan will provide a positive approach to the design of the governance system.

As you develop your governance process, you can determine how to represent these different groups and when you will be directly involved in decision-making, if any.

Policy research and development

In order to ultimately implement the decision, specific recommendations must be made. This is especially true for blockchain projects, as these decisions often must be translated into code.

The timing of proposal development depends on the governance process. Consider the example of a government referendum, which is the ultimate form of direct democracy. In places where referendums are frequently used, such as California, a sufficiently clear law to be enacted has been submitted to citizens for voting. This means that before citizens don't even have a chance to express their views, a small group of people have fully formulated the law. In other places, such as the United Kingdom, the process is basically the reverse: first, a referendum decides whether certain policies are required, such as withdrawing from the European Union, and then after a vote occurs, a few politicians decide the exact details.

In either case, the policy research and development process that studies all the various policy-making options and results must be completed at some point.

This important task requires consensus on who will engage in these activities and which resources will be used as support mechanisms.

Proposal process

Before a potential policy can be proposed for approval or rejection, it must be brought to the attention of the entire community by one or more policy drafting members.

This involves identifying changes that need to be made, general ideas on how to resolve the issue, and a way to communicate it to the decision-making body.

For example, before a bill can be voted in a state or federal government, it must be written and sponsored by one or more legislators.

Any well-designed governance system must have a clear process for making recommendations. As mentioned above, the timing of the proposal and the policy development process may vary by design. Some governance systems allow for a very general policy to be developed and completed after its adoption. In other governance systems, a complete specific policy change is required before the proposal process can begin.

Information Distribution System / Education

When all kinds of stakeholders are involved in making decisions, no matter how trivial it may seem, clearly communicating the information needed is crucial to making informed decisions.

Many of the decisions that the blockchain ecosystem must make are very complex. In some cases, technical or economic expertise may be required to truly understand the impact of potential changes on complex platforms. The results of the policy research and development process may be crucial for participants' understanding as they understand when determining which option is best for them and the community.

Without designated communication channels for sharing reliable information with the community about potential decisions, the governance system will not function properly. For example, due to the lack of shared information in the chaotic process, which ultimately led to a hard fork of Bitcoin Cash, the community informally organized different factions online and face-to-face. The fragmentation of information leads to uncertainty as to which proposals actually need to be considered and how much support each one has. Even if an agreement is reached on the surface, there is still confusion about whether to implement it. In the end, not all miners imposed it, resulting in a fork.

Therefore, the design of any governance system must include official mechanisms for passing information to participants, even if the information provided using these mechanisms comes from crowdsourcing rather than "official" sources. Such a system enables the community to coordinate and determine the outcome of its own decision-making process, which is best for all participants.

Decision-making process

The ultimate goal of the governance system is to promote decisions that stakeholders consider to represent their interests and preferences.

There are many mechanisms to help you make the final decision. This can only be achieved if a fully specified proposal is created and the required information is provided to the governance participants.

In some cases, the mechanism may be community-wide voting, in which there are specific rules on the number of participants (quorum) and how many votes must be put on a proposal to approve it. At the other end of the spectrum, some decisions may be delegated to a specific role in the community (similar to CEO), and the person chosen for that role will be the final decision. Of course, there are many options between these extremes.

The appropriate choice of mechanism depends on the overall elements of the design round, including the information distribution system and implementation rules.

Implementation and property rights

An important and often overlooked issue around governance design is the property rights of ecosystem stakeholders. For blockchain-based platforms, participants successfully voluntarily contributed many resources that are critical to the success of the network, and participants retain ownership of these resources after allocation. A typical example is a computer processor contributed by a Bitcoin miner.

Ownership of resources can give certain actors immense power during the implementation phase of the governance process. For example, if the purpose of implementing stakeholder voting is to determine which protocol upgrade will be used, the results of a particular vote will only make sense for the platform and its devices if the nodes of the system choose to implement the upgrade on their computer instead of leaving.

As such, property rights may limit the types of decision-making processes that communities can effectively implement.

If one participant controls 80% of the resources required for the system to operate, thereby controlling most of the informal powers in the community, then the "one person, one vote" rule is almost meaningless.

When designing and improving the rules of a governance process, it is important to understand the unwritten power dynamics of property rights.

It may take several cycles for a complete governance process design to come together in a cohesive manner. This is due to the crucial step of understanding how the various elements work together to effectively enable participants to design a contextual governance process. It is best to plan several design iterations before getting the most favorable results.

In order for the system to achieve the best balance, it must have a well-structured operating structure and well-thought-out governance design to manage and implement decisions to ensure that it represents the preferences of relevant stakeholders. This balance can be achieved by following the framework suggested above to ensure that each of its seven elements is thoroughly addressed.