from Ruben Jackson
The cryptocurrency markets are often referred to as the “wild west” of finance and fintech: a dog-eat-dog world, a bit hazy from a legal perspective, too complex to even attempt any kind of order or control. Indeed, in the heady days of the 2017 ICO boom, that description was perhaps justified, considering the many stories of seedy operators selling fast-getting rich systems to wide-eyed new investors.
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By and large, those days are now behind us. In fact, the biggest players in crypto are starting to take action to govern policies that are a more extreme departure from standard practice in mainstream markets.
End of July, Sam Bankman-Fried, CEO of one of the larger crypto exchanges, FTX, announced that the company will reduce the available leverage from 100x to 20x to encourage “responsible trading”. Soon after, Changpeng Zhao, CEO of the competitive exchange Binance, followed.
Regulators are circling more and more the crypto markets – an inevitable development as cryptocurrencies are a multi-trillion dollar asset class. And the discussion gets more complicated when we turn to the question of decentralized platforms and applications, as opposed to FTX and Binance.
Let’s talk about decentralized governance
Blockchain governance is a somewhat obscure topic, but anyone who asked, “Who controls a blockchain?” Will have touched on some aspects of it.
Aside from the question of how transactions are confirmed, there are, among other things, more general questions about the functionality that the blockchain can support, how it is updated and developed, and how incentives are distributed.
On many platforms, such as Ethereum or even the Bitcoin blockchain, these matters are handled off-chain between a group of core developers and the miners. However, if we take Ethereum as an example, Ethereum governance rarely extends to what’s happening in the chain. Over the years, Ethereum has been misused to issue fraudulent tokens, set up unstable smart contracts, and drain millions of dollars in value more than 100 chops. Once only Ethereum governance intervened. It divided the Ethereum blockchain and the community forever.
From this perspective, it is easy to understand why a decentralized financial ecosystem based on such a platform is unsettling for regulators. And it’s also easy to see how far-reaching, draconian regulation could easily decimate such an ecosystem that has no comprehensive way of making itself compliant.
On-chain vs. off-chain
The Ethereum governance methodology isn’t the only one in use, and a small number of projects are taking a different approach known as on-chain governance.
On-chain governance transfers decision-making responsibility to those who own the network’s token, with their voting rights programmed into their tokens, and as such, their voting weight is linked to their financial investment. Tezos is a platform that has placed the concept of on-chain governance at the center of its operation.
By doing Tezos Environment, the network is operated by “bakers” or block validators chosen by XTZ token holders. Bakers can make on-chain suggestions for any changes they want to see on the network and the other bakers vote on the change. Token holders simply move their tokens to the bakers who vote according to their preferences.
Tezos isn’t the only example of a project doing on-chain governance, but it’s one that takes a comprehensive on-chain approach to governance. Another example is Speckle, which takes an even more sophisticated approach.
Speckle enables its DOT token holders to vote on-chain for the participants of the Polkadot Council, who are responsible for proposing matters that the community can vote on.
However, Polkadot goes one step further by giving DOT owners a say in which projects can operate in the Polkadot ecosystem. In order to secure one of the coveted Parachain slots from Polkadot, projects must participate in an auction process. You can take part in crowd loans to raise enough funds for a successful offer so that DOT holders can use their tokens for the applications they want to see in the chain.
Building consumer brands
So why are centralized units and decentralized projects taking steps to regulate themselves now? Part of that is likely because they know regulators will catch up with them at some point.
The other, perhaps more significant, reason is that crypto companies are maturing to the realization that they are operating in an increasingly competitive environment where they need to make sure they are engaging with consumers.
The reputation of the Wild West may appeal to a small group of risk-taking investors, but the vast majority of consumers would be put off by the idea of entrusting their online cash to a company similar to an online casino operator.
With mass adoption in mind, blockchain operators are increasingly realizing that they need to convey a cleaner, more professional image.
In doing so, they are taking the same path that companies like Google, Facebook and Amazon Made around the turn of the century. Similar to how the World Wide Web has developed into a stable, almost universal technology, the cryptocurrency universe will also become part of the fabric of our society tomorrow.
Contrary to the old perceptions that still prevail, the cryptoversum learns to apply self-management. The fact that some of the leading figures and projects are already establishing a new status quo shows that change is in full swing.
Ultimately, these early pioneers write the next chapter in the development of the financial industry. Despite the worried voices from Capitol Hill, they are ready to show that they take their responsibilities seriously.
Ruben Jackson is a blockchain security consultant who supports organizations with data structures. Outside of his nonexistent office hours, Jackson reports and writes opinions on the blockchain / crypto space. He previously wrote for Crunchbase News on CBDCs and NFTS.
Illustration: Dom Guzman
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