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Crypto Terms:  Letter G

What is Governance?

Meaning:
Governance - the decision-making process within an organization or a project.
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2 minutes

Let's find out Governance meaning, definition in crypto, what is Governance, and all other detailed facts.

Governance is an essential part of every cryptocurrency project and, regarding decentralized blockchains, the governance structure is usually very liberal. Governance can be approached in various ways but there are two main decision-making structureson-chain and off-chain.

The primary voting structure in blockchains would probably be on-chain governance which allows embedding the voting participation and decision-making rules in the chain itself. This means that all proposed changes must be approved and adopted by all nodes in the blockchain network. 

For example, when a developer is working on a project, he has to send out change propositions to the blockchain and all nodes have to either accept or reject these changes. On-chain governance is considered to be in sync with the concept of decentralization of cryptocurrency. Though this structure puts a lot of power in the hands of miners, which might raise some concerns.

Off-chain is another voting structure in blockchains and it is adopted by major cryptocurrency projects such as Bitcoin and Ethereum. Off-chain governance works in a way that miners, users, developers, and business supporters participate in the decision-making process.

It is a bit different in the way that there is a development team (consisting of miners, users, developers, and business supporters) that decides whether to accept or reject proposed changes to the project. Though there is no need for validation by all miners and nodes because the changes are not written out in the blockchain’s code. Off-chain limits the level of decentralization in the projects, thus being closer to traditional business governance.

To have a more decentralized voting process, many blockchain projects use governance tokens. Stakeholders purchase and use governance tokens in order to gain voting rights and participate in the project's decision-making process on all levels. Governance tokens are widely used in decentralized autonomous organizations (DAOs) that depend on a pool of stakeholders with voting rights rather than having centralized management systems.

Both governance decision-making models have advantages and disadvantages but on-chain governance is definitely the one that is more desired by miners.