Both the base layer and application layer governance are crucial for the proper functioning and evolution of a blockchain network.
Governance is a critical aspect of any decentralized network as it ensures that the network can adapt, evolve, and operate efficiently without a central authority. The governance of a blockchain network can be broadly categorized into two layers: the Base Layer Governance and the Application Layer Governance.
Base Layer Governance
The base layer refers to the blockchain consensus mechanism itself. This is the foundational layer of a blockchain network that includes the blockchain protocol, consensus algorithm, and the native cryptocurrency. The base layer governance involves decisions and changes related to the core protocol of the blockchain, such as changes in the consensus algorithm, block size, and transaction fees.
The consensus mechanism is a set of rules and processes that nodes in a blockchain network must follow to agree on the current state of the blockchain. Different blockchain networks use different consensus mechanisms, such as Proof of Work (PoW), Proof of Stake (PoS), or Delegated Proof of Stake (DPoS).
Protocol changes refer to any modifications made to the underlying code of the blockchain. These changes can include bug fixes, improvements, or new features. Protocol changes often require a majority of nodes to agree and implement the changes, which may result in a hard fork or a soft fork.
Application Layer Governance
The application layer consists of all of the various decentralized apps (dApps) built atop the underlying blockchain. Examples of application layer governance systems include Decentralized Finance (DeFi) protocols and general-purpose decentralized autonomous organizations (DAOs). The application layer governance involves decisions and changes related to the dApps and smart contracts built on the blockchain.
Decentralized Finance (DeFi) Protocols
DeFi protocols are financial services, such as lending, borrowing, or asset trading, that are built on blockchain technology. The governance of DeFi protocols often involves decisions related to the parameters of the protocol, such as interest rates, collateral requirements, and fee structures.
Decentralized Autonomous Organizations (DAOs)
DAOs are organizations represented by rules encoded as a computer program that is transparent, controlled by organization members and not influenced by a central government. DAOs aim to codify the rules and decision-making processes of an organization, eliminating the need for documents and people in formalized roles.