3.4 Blockchain protocols and governance

Blockchain protocols are the rules that govern how a blockchain network operates. They define everything from consensus mechanisms to transaction formats, ensuring all participants follow the same standards. These protocols are crucial for maintaining the integrity and security of the blockchain.

Governance in blockchain networks determines how decisions are made and implemented. From Proof-of-Work to Proof-of-Stake, different models offer unique approaches to validating transactions and adding new blocks. Challenges like decentralization and scalability keep governance an evolving field in blockchain technology.

Blockchain Protocols

Blockchain protocol fundamentals

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• Set of rules, standards, and guidelines that govern the operation and functionality of a blockchain network
• Defines consensus mechanism used to validate transactions and add new blocks to the chain (Proof-of-Work, Proof-of-Stake)
• Specifies format and structure of transactions and blocks ensures compatibility across network participants
• Establishes cryptographic algorithms used for securing the network maintains integrity and prevents tampering
• Determines incentive structure for participants encourages participation and good behavior (block rewards, transaction fees)
• Ensures all participants in the network adhere to the same set of rules maintains integrity and security of the blockchain
• Examples of blockchain protocols include Bitcoin, Ethereum, and Hyperledger Fabric each with its own specific rules and standards

Governance models in blockchain

• Proof-of-Work (PoW) governance model
  • Miners compete to solve complex mathematical problems to validate transactions and add new blocks
  • Miner who solves the problem first is rewarded with cryptocurrency (Bitcoin) and transaction fees
  • Requires significant computational power and energy consumption leads to concerns about centralization and environmental impact
• Proof-of-Stake (PoS) governance model
  • Validators are chosen to create new blocks based on the amount of cryptocurrency they hold and "stake" as collateral
  • More stake a validator has, higher their chances of being selected to create a new block and earn rewards
  • More energy-efficient than PoW may lead to greater decentralization, as it does not require expensive mining equipment
• Delegated Proof-of-Stake (DPoS) governance model token holders vote for delegates to validate transactions
• Proof-of-Authority (PoA) governance model set of approved validators take turns creating new blocks

Blockchain Governance

Protocol changes through consensus

• Formal proposal process, such as Bitcoin Improvement Proposals (BIPs) or Ethereum Improvement Proposals (EIPs)
  • Developers or community members submit detailed proposal outlining suggested changes, rationale, and implementation plan
  • Proposal is reviewed, discussed, and debated by the community through forums, mailing lists, and other communication channels
• Achieving consensus on proposed changes requires majority of network participants to agree on implementation
  • Specific consensus threshold may vary depending on blockchain protocol and significance of proposed changes
  • Consensus reached through various methods, such as on-chain voting, off-chain signaling, or combination of both
• Approved changes implemented through network upgrade or hard fork
  • Hard fork is a backward-incompatible change to the protocol requires all participants to upgrade their software to the new version
  • Participants who do not upgrade will be left on a separate, incompatible chain

Challenges of blockchain governance

• Decentralization
  • Ensuring decision-making power is distributed among diverse set of stakeholders, rather than concentrated in the hands of a few
  • Balancing need for community input with efficiency of decision-making processes
• Scalability
  • Implementing changes that enable blockchain network to handle growing number of transactions and users without compromising performance or security
  • Balancing need for scalability with desire to maintain decentralization and accessibility for all participants
• Upgradability
  • Enabling blockchain protocol to adapt and evolve over time to address new challenges, incorporate new features, and fix vulnerabilities
  • Managing complexity of coordinating network upgrades across decentralized network of participants with varying interests and incentives
• Governance models must strike balance between these competing priorities while ensuring long-term sustainability and resilience of the blockchain network