n 2024, the Compound Finance token network (COMP) faced a massive crisis of governance. A whale (large-scale investor) known as Humpy purchased enough tokens to leverage in a vote against the rest of the DAO community. This proposal allocated millions in COMP tokens into a protocol run by Humpy’s investment group, the Golden Boys.

The backlash from the rest of the community was so severe that Humpy reversed the decision. But the question remained: what if he didn’t? What would it mean for the community and the 99% of members who voted against the measure?

This example illustrates the importance of good blockchain governance, highlighting both the strengths, weaknesses, and misunderstandings of decision-making on the chain.

Let’s dig into what it means to govern decentralized systems, and how to make the right decisions for your build and community.

What Is Blockchain Governance?

At its heart, the goal of a blockchain system is to be decentralized. However, as blockchain networks expand into larger communities with competing visions and goals, governance becomes unavoidable. There must be some mechanism that allows projects to evolve without involving a centralized managing organization. Without a clear hierarchy or institutional framework, blockchains must effectively coordinate stakeholders and their diverse voices.

Blockchain governance, then, is supported through several different mechanisms:

Proposal Mechanisms

These enable members to propose changes to technology or organizational dynamics. This could be as simple as a community forum or as complex as managed governance discussion threads.

Voting Systems

Voting in many Proof-of-Stake chains revolves around token ownership, with tokens having specific weights related to their voting power. Typically, users who own more tokens have more votes.

Within this voting framework, several types of voting are supported:

• Delegation, or the allocation of one’s votes to another as a pool of votes.

• Quadratic voting, where the weight of votes is a function of the total tokens held.

• Time-based weighting, where long-term token holders have stronger votes than short-term holders.

• Conviction voting or votes that can be staked or removed from proposals over time. Longer stake times reflect strong conviction, and proposals can gain traction as time passes.

• Holographic consensus, where votes are treated like an asset market that people can invest in as an incentive.

Implementation Processes

Once changes are agreed upon, implementation processes come into play. These may include methods for propagating code changes across nodes or contracts. Such changes will be integrated into the core of the blockchain, and local copies of the chain (held by nodes) will also update.

Resource Management

If a proposal involves allocating funds, there should be a process for moving those funds to or from different stakeholders.

These governance methods are often organized through a Decentralized Autonomous Organization (DAO), a sort of technocratic entity that controls specific aspects of implementation and allocation through smart contracts. A DAO will typically include the contracts and stakeholders participating in governance.

Good Blockchain Governance at Work

Good blockchain governance looks like what you’d expect from any well-governed organization. Proposals are made, reasonable and transparent debate occurs, consensus is reached, and the changes are implemented into the enterprise or system.

One such example is Ethereum’s Improvement Proposal (EIP) process. When Ethereum began the move to Proof of Stake from its original Proof of Work structure (with EIP-1559), it required sign-off from the community through decentralized decision-making. Every tech decision and competing opinion was documented publicly in forums and chat spaces, providing a level of accountability not often part of traditional corporate organizations.

This example highlights some of the features of good governance: transparency and fairness accomplished through mechanisms built into the platform.

No Permission Required

Blockchain governance is (mostly) democratic. Anyone who can acquire tokens can vote and have their voices heard through the proposal process. Think about it as radical democratization—no representatives, no complex government offices, just individuals and their vote. This suggests a fair and often radically diverse constituency, all with equal footing in decision-making. However, a fair system requires methods to keep bad actors from overpowering the rest of the community.

Automation and Enforcement

Smart contracts are automatic, and as such, once they are updated, they immediately reflect changes made through the governance process. There’s no foot-dragging or error; it’s simply a matter of suggesting the changes, implementing them, and knowing they are now in effect.

This fact means that there aren’t many delays to the execution of a decision. More importantly, it guarantees that these decisions are applied consistently, unencumbered by the whims of a less-than-enthusiastic managerial class.

When Blockchain Governance Goes Bad

We’ve mentioned the COMP governance fiasco at the top of this article, and it really stands out as the gold star for the foibles of decentralized governance. The Golden Boys organization had attempted to push several proposals through the DAO for the express purpose of diverting funds to wallets owned by their members. It was only after the third try succeeded that people began to accuse them of abusing the system and conducting ownership attacks against the chain.

We’re not pie-in-the-sky about blockchain. To discuss governance means getting real about the messier parts of compromise and negotiation, understanding that things aren’t always as easy as putting proposals up to a vote.

The Unbearable Weight of Whales

One of the primary challenges of blockchain governance is the whale; an individual or group of token holders who claim a wildly disproportionate amount of influence via their holdings on the chain. In severe cases, a single individual with the most tokens can completely override the will of the entirety of the community.

In these cases, we see how power imbalance flourishes in the name of decentralization, and savvy or wealthy investors can quickly corner the network and run it into the ground (usually for their own benefit).

Apathy and the DAO

While you might think that a DAO would lean towards a more engaged population, this isn’t the case at all. Investors and developers might plug into a token or blockchain project strictly for that reason and avoid engagement with the community more broadly. It’s in these cases that you often find plutocratic whales controlling the decisions of the community.

This is unfortunately one of the critical challenges of governance on the chain. Without clear incentives to participate, many stakeholders simply don’t care what happens unless it affects them directly (and, in many cases, they would rather just bail on the project than spend hours in debates). In fact, Chainalysis looked at 10 large DAOs and found that 1% of the token holders across all these projects held 90% of the voting power.

Attack on the Blockchain

Finally, token systems that invite participation also invite attacks—namely:

• 51% attacks, where the attacker gains over half of the voting stake to manipulate governance systems.

• Stake Grinding, where users leverage validation techniques to gain control of nodes and funnel influence to those nodes.

• Sybil Attacks, where attackers create fake nodes to disrupt consensus.

And these are just the technical forms of manipulation. Members of the DAO advocating for certain actions may buy votes or buy influence to change the outcome of decisions.

The Misunderstood World of Blockchain Governance

Jumping between the good and the bad of governance suggests a binary approach to the problem. But many successful DAOs and governance approaches use hybrid models that can mitigate the bad and promote the good.

We’ve mentioned on-chain governance here. As the name suggests, on-chain governance includes mechanisms that are strictly on the chain, like vote recording, smart contracts, and audits of implemented changes. When people talk about governance, they often mean this.

Conversely, off-chain governance is the “old school” approach to collaboration. Debates, forums, discussions, data-driven reports, and negotiations are all part of this uniquely human process.

Leaning too hard into one or the other can leave a blockchain vulnerable. The promise of the blockchain was that it would operationalize critical aspects of a decentralized community into code. And it does… but not completely. And that’s a good thing. Blockchain governance should be an invitation to understand how putting community collaboration into a protocol can streamline and strengthen some aspects, so that we can still engage with each other as “neighbors” and stakeholders.

The Evolution of Blockchain Governance

As blockchains evolve, so too does governance, and the current push for “Governance 2.0” models reflects stakeholders grappling with the good, bad, and misunderstood aspects that we’ve covered here.

Governance 2.0 is a new way to think about participation and flexibility:

• Participation: These new models emphasize participation through staking rewards for voting, built-in reputation systems, and tokenomics that reflect these values.

• Flexibility: Flexibility will reside in modular governance approaches, like smaller, focused DOAs covering specific categories of decision-making.

• Security: Tools like time-locked contracts, multi-signature requirements, and audits can help avoid attacks and the centralization of consensus.

As the backbone of a powerful ecosystem of L1 chains, Avalanche is leading the way in these modern governance measures. Our chains allow users to customize governance models for their chains as needed to support their communities. Additionally, you can implement more advanced voting mechanisms like conviction voting or holographic consensus.

Learn how you can support your own governance requirements with a flexible Avalanche L1.