Decentralized Governance Overview
  • 25 Jun 2021
  • 1 Minute to read
  • Contributors
  • Dark
    Light
  • PDF

Decentralized Governance Overview

  • Dark
    Light
  • PDF

What is decentralized governance?:

Decentralized governance refers to frameworks for managing collective action and common resources outside of the existing legal system.

Economic activity has traditionally been organized via companies - legal entities capable of entering into agreements and controlling property. These common agreements and assets are managed via a system of corporate governance; executive officers control day to day operations while answering to the board of directors, who in turn report to shareholders. Any disputes are escalated to the traditional court system.

The rules of decentralized organizations are primarily enforced by code, rather than the legal system. This gives decentralized systems greater predictability as changing laws or governments don't impact the organization. But it also requires greater care in designing governance mechanisms, as token holders can't rely on the courts to address minority shareholder protections or other needs.

Decentralized governance often involves more direct voting as compared to companies; token holders can vote on executive actions and parameter changes instead of delegating their power to a board of directors and executive officers. This empowers participants, but can also lead to voter apathy and less organizational agility due to the sheer volume of issues to review.

Benefits of Decentralized Governance:

One goal of decentralization is mitigating risk. Decentralized governance vests power directly with token holders, removing exeuctive teams that could become targets of censorship, manipulation, or bribery. Relying on code for executing agreements also reduces reliance on external legal systems.

As another benefit, decentralized governance can facilitate cooperation and overlap between different types of system stakeholders. Discussion venues are typically open to all, giving token holders, protocol users, and the broader community an opportunity to share their thoughts. And some protocols distribute governance rights to their users as an incentive, which can further align interests over time.


Was this article helpful?