Understanding PoS networks from an ESG perspective: Governance

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This article is part of the “PoS networks from an ESG perspective” series. Click on the following links to learn more about Environment and Social. 

Bitcoin and the underlying technology were born amongst a widespread mistrust of central authorities and financial systems. Along with Bitcoin’s scheme of dismantling and restructuring traditional governance, this scenario has marked crypto success and adoption in the following years. 

But what is exactly the designed intent of Bitcoin and blockchain technology? Satoshi Nakamoto, the presumed Bitcoin inventor/s, found in P2P payment networks run on a cryptographic protocol the solution to modern power distribution and corruption. 

Based on a distributed governance structure, the technology supports the possibility of solving, or at least mitigating, governance and social challenges. It enables a new form of organization where all token holders or board of directors have decision-making power over protocols’ governance and cash flow distribution.

Instead, in the traditional financial system, equity investors have practically no say over the company’s strategic direction; board members are paid by the organization they oversee, generating a fundamental conflict of interest. 

The structure raises questions and concerns. For example, how does it ensure management’s interests are aligned with stakeholders? Does the ability to influence decisions hinge on the investment size? How much influence do stakeholders have over corporations?

Proof of Stake networks, on the other hand, limit excessive centralization of power using decentralization as the core of their governance structure. Decentralization is extraordinarily powerful, not only because it removes central authority and middlemen but also because it gives power to a diversity of actors. Furthermore, it is used as a security mechanism based on a mix of cryptography, DLT, and incentive systems.

Participation and Autonomy 

The fundamental principle of Proof of Stake governance is to incentivize collective participation amongst all stakeholders giving the community the autonomy they need to progress and advance the ecosystem jointly. In Proof of Stake, holding a token means having the right to vote. Core developers, validators, application developers, and token holders alike can participate, propose, and discuss structural, technical, and design changes that will benefit the ecosystem. 

Community engagement ultimately defines a truly decentralized governance system where members have the right to vote and they can take part in governance proposals, thereby suggesting network improvements. These improvements can be divided in two, each one with different community involvement. 

The first one, mostly technical, includes bug fixes and tokenomics parameters changes and don’t necessarily need community voting to implement changes. The second one is focused on governance and design changes like treasuries spending and users’ experiences enhancements, encompasses balanced and collective decision-making throughout each step of the governance.

Is, therefore, an open ecosystem enough to spur community engagement? How do we cope with technical and non-technical barriers that limit the involvement in protocol governance? How do we ensure equal opportunities exist for everyone interested in taking a part?

Truly inclusive on chain governance practices should provide members with the resources and guidance needed to spur open discussions that will maintain the network relevant and sustainable in the long terms, and aligned with the initial objectives and core principles. This obviously entails a great level of coordination, seamless proposal submission and voting mechanism as well as maintaining transparency and trust across the implementation of changes. 

DAOs (Decentralized Autonomous Organization) 

DAOs (Decentralized Autonomous Organizations) provide context for how the most common governance models work in the Web3 space. DAOs, organizations without hierarchy, represent a completely new form of management facilitating more efficient yet trustless governance practices. DAOs typically operate on open-source blockchain protocols governed by smart contracts. 

Any member of the DAO can make proposals, as token holders have governance rights over the entity. Still, the voting power is often a function of the number of tokens held; in some forms, DAOs resemble traditional corporations where larger shareholders have also the power to make proposals and influence business decisions.

Web3 with its underlying technology, protocol governance, and DAO structures shows how fundamentally different distributed governance is from traditional corporations. In the words of Gavin Wood, Web3 can be considered as “an executable Magna Carta - the foundation of the freedom of the individual against the arbitrary authority of the despot.”

Web3 is about rebuilding services so that everyone can participate in them on their own terms. Distributed ledger technologies (DLTs) and blockchain might require additional adaptations and strategic thinking to grow and fit multiple use cases. From an ESG perspective, PoS-based networks outshine traditional investments by a huge margin promising a more inclusive, decentralized, and sustainable future. Institutional investors and financial services can use verifiable ESG data set to overcome current data gaps. 

In its efforts to build a better and more decentralized internet, Figment actively participates in on-chain governance. We believe that through good governance practices and collective participations, Proof of Stake ecosystem will continue growing and improving over time, leading to sustainable community development and economic growth. 

If you want to learn more about Figment’s approaches to governance and on chain voting system click here.


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