Ethereum governance happens off-chain, where the final implementation of the code comes down to the miners’ decisions on the network. When Ethereum transitions to Proof of Stake (PoS), this responsibility will transition to validators. When validators implement decisions of governance proposals introduced by Ethereum Core Developers, token holders are ultimately the ones who are exposed to the risks and rewards of those decisions.
Ethereum governance is off-chain, meaning that Ethereum Core Developers decide and implement protocol changes, rather than the token holders. The governance process starts on the Fellowship of Ethereum Magician’s forum, where stakeholders discuss a proposal’s merits and engage with some of the core developers building and maintaining the Ethereum protocol. Ethereum also has a research forum, a forum for broad topics of blockchain research, Ethereum protocol research, and Ethereum governance. Anyone can introduce a new proposal, making the forum a place where less technically skilled community members can reach out to developers actively building Ethereum to consult and coordinate.
In the forum, general ideas for proposals or current proposals develop into robust Ethereum Improvement Proposals (EIPs), which are added to Ethereum’s Github repository.
An EIP is a document that serves two roles. It is a document that provides information to the Ethereum community or describes new features and presents new standards for Ethereum, including “core protocol specifications, client APIs, and contract standards.”
After lengthy discussions, the Ethereum Core Developers decide whether to introduce the proposal into Ethereum’s protocol via a network upgrade, sometimes called a hard fork. It is then the responsibility of the node operators to decide whether or not to execute that upgrade. Ethereum does not have a formal voting mechanism like Cosmos or Polkadot have.
Ethereum avoids controlling its governance with a system where “one token = one vote” by staying away from formal on-chain voting. Ethereum governance favors a more meritocratic approach, where the core developers decide which code to implement in certain upgrades, and the community of node operators chooses to execute it.
Core Developers are in a position where they must have an excellent measure of the ecosystem throughout this process before bringing these proposals to the code of Ethereum. If Core Developers don’t have a sense for this, the protocol risks a hard fork – where some node operators agree with the change and upgrade to the newest binary release, but some miners choose not to, splitting the chain’s code into two variations. This has happened before: an ideological split in the Ethereum community after The DAO exploit is what led to Ethereum and Ethereum Classic.
There has also been a history of developers making unilateral decisions – in 2018, the developers modified the consensus algorithm to disable newer mining hardware.
Core Developers’ method of governance allows for more nuance in discussions and leaves more room for human coordination. Ethereum’s governance model puts a significant amount of emphasis on human behavior: only through coordination and persuasion do EIPs reach the Ethereum chain.
In Ethereum, the core developers must have a good sense of the miners’ direction before introducing something on-chain for an upgrade. Miners make the final decision as to whether or not to upgrade to the binary and install it on the chain.
Most recently, EIP 1559was a governance proposal originally introduced by Ethereum’s core developers that faced intense discussion and analysis from the community. In short, EIP 1559 is a mechanism that includes a network fee that is fixed per block. This mechanism burns that fee and changes block sizes to ensure that Ethereum can handle high levels of congestion.
There were posts on both the Magician’s forum and the Ethereum Research forum. This was a fairly contentious proposal, as it targeted ETH during transaction fees that would normally go to miners. For a more in-depth conversation about the technical research, check out this podcast episode from Bankless.
Ultimately what causes a hard fork are ideological differences. While miners are the ones who upgrade, the token holders are the individuals that use the chain. In the case of a hard fork, users can select the chain that they believe has the best features for their use. Where the hard fork goes, the token value goes: miners are incentivized to shut down operations on the chain with less value in favor of the other side of the fork.
Miners are accountable to the token holders and everyday users in the same way that Core Developers are accountable to miners. Where Core Developers must keep in mind the desires and interests of miners before introducing the code from an EIP, miners must have that same relationship with token holders. Miners must have an understanding of what token holders value and the improvements they would like to see.
After implementing new code into the Ethereum binary, miners can split the chain when some upgrade and others do not. While all stakeholders are interested in avoiding a hard fork where possible, they do happen. When a fork happens, miners have the ability to migrate across chains. Miners are not tied to token holders. They are solitary figures, competing against each other to earn the block rewards. They are incentivized to make blocks through block rewards and gas fees, but otherwise are not public-facing entities that face immediate or direct consequences of creating a hard fork.
As Ethereum transitions to PoS, validators take on the responsibility of participating in governance and being the last stop-gap before a hard fork.
In Proof of Stake networks, validators are crucial to governance operations. In Proof of Work, miners are incentivized to compete for block rewards, regardless of how many tokens are in circulation or transaction volume. Validators do not compete for securing the chain; consensus algorithms elect validators based on the number of tokens staked with the validator.
In networks with on-chain governance where one token equals one vote, validators are vital for ensuring that proposals on the network get passed. On Delegated PoS networks, validators accrue tokens via commission rates, ensuring a supply of tokens with which to vote. Validators can also (on some networks) vote with all the stake that is delegated to them. It is the validators’ responsibility to investigate proposals and vote in a way that ensures the continued economic and technological viability of the network. When individuals delegate to validators, there is an assumed social contract that delegators entrust validators to have their best interests in mind when considering and participating in governance.
However, off-chain governance requires validators to assume a different role. Once Ethereum transitions to Proof of Stake, the role of miners as those who implement changes in code shifts to validators. When validators are responsible for token holders’ stake, they cannot quickly switch to a different fork. The validators’ responsibility is to ensure security on the network, and we answer to our delegators. Delegators will entrust their validators to maintain their best interests on the network, leading to a sustainable, flexible, innovative chain developed with these interests in mind.
Specifically, on Ethereum, validators have to communicate with their token holders to understand the challenges they face, know the proposed changes, and understand the implications for the technology. Validators will also have to communicate with other validators, researchers, and core developers to gain insight into motivations and use their political capital where necessary, all in the name of ensuring the long-term vitality of the chain.
These are examples of the nuance Ethereum’s off-chain governance allows. Without on-chain voting to certify and confirm opinions of all stakeholders, Ethereum’s governance model requires validators to be at the forefront of Ethereum’s research and governance, in addition to having a strong sense of the coordination that these components require.
Off-chain governance and lack of community-centered software to manage individuals in a decentralized space also means that Ethereum opens a governance model for creative politics from validators that we have not seen in online governance research. Social scientists usually document and hypothesis test after witnessing events happen. This allows us to actively participate, document, and adapt in real-time.
As a result, validators and token holders on the Ethereum 2.0 ecosystem have the incredible power to actively create new politics and establish new ideas outside of current scholars’ research paradigms. Ethereum’s governance is only one way of organizing communities. As decentralized networks continue to evolve, the space will continue to iterate and improve upon shared models in order to come up with more creative solutions. We’re looking forward to it.