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Governance

Governance is how a crypto project makes decisions. It involves rules, roles, and processes for things like voting and making changes.

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What is governance?

Governance determines who can make a proposal, who can vote, and when a decision passes. This can involve a change to a protocol, the technical rules of a crypto project. It can also involve how a shared budget is spent.

With on-chain governance, proposals or votes take place on a blockchain, a shared digital record of transactions. Off-chain governance takes place outside the blockchain, for example, through a forum or discussion. Some projects use both approaches.

A token can provide voting rights, but this varies by project. Such a token does not automatically give you ownership, profits, or dividends.

An example of governance

Suppose a crypto project wants to add a new feature to its platform. The developers make a proposal, and then participants with voting rights can vote on the change.

If enough participants vote in favor and the proposal passes, the new feature can be developed and added. In some cases, a smart contract can automatically carry out the approved change. This lets users help decide the future of a crypto project.

Why is governance important in crypto?

Governance determines who can influence the development of a crypto project. That’s why the term comes up in news about protocol updates, votes in a DAO, and how project budgets are distributed. A DAO is a group that tries to make decisions according to shared rules.

Voting with tokens is not the same as one person, one vote. Someone with a lot of tokens, or many delegated votes, can have a lot of influence. A small, active group can also make important decisions if few people vote.

Also, an approved proposal is not automatically safe or wise. Errors in a proposal or in the smart contract that carries it out can cause harm. Formal voting rights don’t always tell the whole story either: developers and administrators can have influence outside of a vote.

Disclaimer: This content is for informational purposes only and does not constitute financial, investment, legal, or tax advice. The information provided may be incomplete, inaccurate, or outdated and should not be relied upon as such. Nothing on this website should be considered a recommendation to buy, sell, or hold any cryptocurrency. Investing in crypto-assets involves risk of loss.