Why cryptocurrency investors should care

What is Blockchain Governance?

Blockchain governance is a system of checks and balances within a blockchain or community that allows participants to decide what is best for the blockchain and cryptocurrency. Many companies use community management systems, so it’s important to know how these systems impact investors.

Why cryptocurrency management matters

Stock markets have clearly defined stakeholder structures that investors can take advantage of. These structures have resulted in governance systems that protect investors’ interests and prevent dishonest managers from running amok within companies. Cryptocurrencies are there regulated in many jurisdictionsbut most are managed only by a small group of developers and an interested community.

In most cases, token holders’ lack of involvement in governance is not due to developer blocking. This is because most management issues are technical and use industry jargon, and many holders do not realize they have a voice.

Many blockchain projects offer governance rights to token holders. These rights are not monetary or financial in nature, but give holders the ability to help decide what happens to the blockchain on which the cryptocurrency is built. This may not seem attractive to some, but for those investing in cryptocurrency it should be.

Governance rights allow interested parties to vote or participate in the development of the cryptocurrency. When a cryptocurrency’s programming changes, it should be of great interest to investors, as significant changes – such as switching from proof-of-work to proof-of-stake or redirecting the project’s purpose – can impact market prices.

An example of the importance of management

In 2017 Bitcoin investors witnessed a drama that culminated in the forking of the blockchain. Developers and participants could not agree on the proposed change and split of the blockchain, with some supporting the original chain and others supporting the new blockchain and Bitcoin Cash cryptocurrency.

This fork could have gone much worse for those investing in Bitcoin at the time. If the Bitcoin Cash community managed to attract more followers and interest from other investors, it could replace Bitcoin as the top cryptocurrency. At that time, the only people who really had an influence on the direction of the Bitcoin blockchain were developers and miners, because they were the ones who made the changes and pushed them to their nodes. Fortunately for investors, this fork didn’t cause prices to drop permanently as many predicted, but it could have.

Blockchain creators forked the Bitcoin blockchain and made the changes they wanted. Miners either loaded the latest version or didn’t, and investors were left out of the decision-making process while they invested money in tokens. Ultimately, they were rewarded as Bitcoin token holders received an identical number of Bitcoin Cash (BCH) tokens for free from the fork – worth over $345 per token on November 2, 2024. However, developer misunderstandings and such actions are not always beneficial to investors.

Types of management systems

Broadly speaking, there are two types of blockchain and cryptocurrency management systems: on a chain and off-chain.

Chain systems

Some blockchains allow all token holders to vote through automated voting processes. For example, Decred allows all token holders to cast votes by locking certain tokens to “buy” voting tickets. These users then cast their votes via voting service provider Decred or Decrediton, the blockchain’s user interface.

Off-chain systems

Bitcoin and Ether use off-chain systems using social proposals and discussions to obtain feedback from users and participants. Developers then make necessary adjustments to the network and protocols and rely on participants to update their clients.

Hybrids

Other blockchains may use a combination of on-chain (automated voting) and off-chain (discussions and reviews) mechanisms for governance purposes.

Popular cryptocurrency management systems

Bitcoin and Ethereum have systems that enable the implementation of decentralized representation. The core of these systems are improvement proposals suggested by developers or users to increase the functionality and performance of their respective blockchains. However, changes must be accepted by centralized developer communities and some network participants.

Ethereum improvement proposals must be subject to peer review, feedback, and community discussion before being approved or rejected. Investors can participate, but it requires a level of technical knowledge that many do not have – and this also applies to Bitcoin.

Solana uses a crowd voting process that weights votes based on the number of bid network validators. If changes are proposed, validators can vote for the actions they support. This can be beneficial for investors who stake their tokens, as it gives them influence on active development. However, if an investor only holds his SOL and does not stake any, he does not receive voting rights.

Conclusion

Cryptocurrency investors should be concerned about blockchain development happening behind the scenes. The more popular cryptocurrencies are under active development, which means that changes in coding, programming, and the blockchains they belong to will change over time.

Changes in the design and functions of the blockchain can impact the market’s perception of the cryptocurrency and cause price fluctuations. Management systems allow users, participants and investors to influence the evolution of the cryptocurrency in which they invest. In this way, investors who do not follow and participate in events lose the opportunity to participate in their investments.