Intro to Governance Part 1

Recently, Ethereum Tegucigalpa made the decision to actively participate in the governance processes taking place across the Ethereum universe. This is because it is key that we participate as key players in a conversation that, in one way or another, involves all of us. The decisions made within DAOs affect us, the users of these protocols. In this sense, it is crucial that we stay informed and raise our hands to voice our opinions.

This process requires time, not only to participate in the spaces that are created to address these topics but also to research and ensure we are well-informed, so we can make an informed opinion.

Based on that research and what has so far been an interesting participation process in the governance of Scroll, we have decided to share with our readers a general idea of governance, its importance, and the role it plays in DAOs.

First of all, we need to define what the word governance means and how it applies to the Ethereum universe.

The general consensus for defining the word governance seems to revolve around all those processes, mechanisms, rules, structures, and standards that facilitate decision-making to achieve the objectives set by organizations, governments, and entities of any nature.

Now, how is the concept of governance applied in Ethereum?

To answer this, we need to remember the fundamental principles under which Ethereum operates:

• Decentralization

• Transparency

• Immutability

In order to fully comply with the first two concepts behind this technology, governance processes become crucial because, without them, the result would be the opposite of what the theory suggests Ethereum technology is trying to solve.

Let’s give an example: imagine a scenario where a company that has recently launched a new product into the market asks the community to participate as investors to help expand access to this product in regions of the world where it has not yet arrived. This product has the potential to help these communities improve their socio-economic conditions, while greater use of the product benefits the company.

Now, to attract new investors, the company promises all candidates ongoing and transparent participation in decision-making on all matters relevant to the company and its future.

In essence, this company is promising all potential investors active participation in the company’s governance process, meaning they are invited not only to have a stake but also to voice an opinion on everything related to managing the company.

There are several reasons why companies or institutions might be willing to give the community control over their policies, and even when defining some of these reasons, we could simply be speculating since the real motivations are likely only known to the key players in these institutions.

However, there are some considerations that are likely part of these reasons. These revolve around providing an image of decentralization and transparency. This enables companies to meet two of the fundamental principles on which everything built on Ethereum should be based, and this compliance, in turn, legitimizes operations and attracts more users. Since the use of mathematics is a pillar of building this technology, we can use a simple operation to illustrate how this works.

More users = More income

When a company or institution based on Ethereum does not promote an active and participatory governance process, it risks creating a conflict with its target market, especially as it becomes more common for industry-leading protocols to do so.

What is the Purpose of Governance Processes?

We’ve already mentioned the effect governance has on legitimizing an organization’s operations. But to give a more precise idea, we need to establish the differences between a traditional organization and one based on Ethereum’s fundamental principles.

Traditional organizations, whether they are corporations, NGOs, or foundations (for-profit or non-profit), typically share a common decision-making structure. This similarity is that they usually have hierarchical, pyramid-like structures, where there is typically a board of directors to whom a president answers, and from that position, other roles branch out depending on the nature of the organization’s business.

The decision-making mechanism allows the board to set the organization’s goals, and the president is the main person responsible for achieving these goals.

In contrast to a hierarchical, pyramid-like structure, organizations based on Ethereum, known as DAOs (Decentralized Autonomous Organizations), must have a flat structure if they wish to meet the decentralization criterion.

The only way to achieve this is through an inclusive and transparent governance process (the second fundamental principle of Ethereum).

But what benefits does a DAO have from maintaining a governance process beyond merely complying with a “social” norm?

Some of the benefits include that the image of compliance allows them to maintain good relationships with other DAOs that also comply with this norm, which opens the door to collaboration between organizations and, of course, new business opportunities.

Another benefit is that by complying with this criterion, they create a perception of security and stability, which allows their native coin (the token usually used in the governance process to determine voting power) to have a market value close to what the DAO expects.

Finally, we can add that governance processes give organizations the opportunity to receive firsthand opinions from their users on topics they consider relevant, as well as proposals on how the organization should be managed and the areas it should focus on to continue growing.

In general, these are some of the benefits and, therefore, the reasons why DAOs incorporate governance processes into their structures. It is important to mention that the results obtained from these processes are not always the expected ones, both for organizations and users. This is because there is no “One Size Fits All” when it comes to governance, meaning that not all implementation models are the same, and in this line, not all adapt in the same way to different organizations.

In the second part of this article, we will explore different governance models and also examine some of the common problems DAOs face when putting them into practice.

Sources

Cryptopedia Staff. An Overview of BlockChain Governance (2023)

Ruben B. El Apasionante Mundo de la Gobernanza Descentralizada

Jon Ganor. Understanding Ethereum's Governance (2024)