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18 Apr 2021

Do Cryptocurrencies Need Governance?

As their name implies, cryptocurrencies are currencies that can be traded in exchange for tangible objects or services. Unlike fiat currency, which has a physical form, cryptocurrencies are digital and live across a large network of computers (nodes). There is no central authority that monitors their use, circulation, and value; instead relying on governance protocols embedded in its software to prevent corruption. Cryptocurrencies are heavily dependent on cryptographic algorithms to ensure that the currency remains safe from malpractice.

What is Governance?

To understand governance, we need to understand how a blockchain works. Every node or computer on a cryptocurrency blockchain has certain jobs to perform with a certain set of rules. Their job is to maintain a large record of financial transactions, like a ledger or a database, and verify the work of other nodes on the network. Transactions are compiled into blocks with their associated transactional and consensus information with the intention of making it a permanent part of the pre-existing blockchain. The new block is then sent to the network to be verified by other nodes.

In order for a transaction block to become part of the blockchain, nodes rely on a pre-determined set of rules that form a part of the cryptocurrency's nature. Some of these rules include what constitutes a transaction, what information is required in each transaction of a block to be valid, whether there are any double-spending transactions, and what constitutes proof of work or proof of stake. These rules are important because they protect the integrity of the blockchain, making it immutable so that all transactions remain valid throughout the life of the currency. Someone who is looking to earn through bitcoins can visit https://bitcoin-up.live/

Since there is no central authority in cryptocurrencies, who controls the changes in how the currency operates and what rules and protocols remain valid? This is where governance comes into play, and different cryptocurrencies handle it in different ways. It allows for users, developers, and nodes on the currency network to have a say in how the network operates.

Why is Governance Important?

Governance is an important aspect of any asset. Without it, the decentralized nature of any cryptocurrency becomes vulnerable, allowing rogue investors to control what happens to the currency and consolidate power.

Representation

When considering fiat currency, only the issuing authority has a say in how it comes to the market and how it is regulated. In some cases, this can be particularly detrimental to the economy of a country. For example, in Zimbabwe, the government decided to increase the printing of currency notes in response to a number of economic factors, not realizing that it would result in hyperinflation.

Voting is a big part of governance for many cryptocurrencies. It allows all stakeholders to participate based on their interests in a cryptocurrency. It truly makes the cryptocurrency decentralized, preventing cases like hyperinflation and keeping investors interested.

Helps Currency Evolve

Governance encourages a forum for discussion where stakeholders can pitch in why a certain change in the cryptocurrency's framework should or should not be implemented. These changes can include ways to make the currency more stable, the reward system, what rules should be in place to deter attacks, and if there any vulnerabilities in the system that need to be addressed.

Protects Investor Rights

Investors are largely bystanders when it comes to governance. If there is no form of governance within any asset, investors can get conned off of their hard-earned money, making them lose interest, giving the asset a bad reputation, which, in turn, prevents other investors from trusting the currency. Having a set of rules helps assure investors that their money is safe and won't fall into the wrong hands; however, it is their responsibility to take the necessary measures to safeguard their asset once it is off the crypto network and in their wallets.

 

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