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The Pros and Cons of Community Governance Systems

The Pros and Cons of Community Governance Systems

Community governance systems have seen considerable adoption over the last two years. Interestingly, these systems have been in use within the crypto space for years. Despite their early use, it wasn’t until the introduction of DeFi (decentralized finance) systems that community governance really took off.

DeFi

DeFi systems eliminate the bank from finance. They replace centralized systems with decentralized protocols known as smart contracts. These contracts are designed to operate in a transparent and secure manner. They can be triggered upon the completion of certain parameters and can be programmed to meet certain requirements prior to transfer.

One of the main things that DeFi did was drive home the need for new community governance systems. For a DeFi network to be truly decentralized, it needed to have a way for the average users to participate in the larger decision-making process. This desire has led to the introduction of a couple of different community governance systems.

DAOs

The first style of community governance was the DAO (decentralized autonomous organization). These systems accomplished all the goals of developers. Regular users gain the ability to stake their tokens and gain entry into the protocol. They could put forth proposals regarding any of the platform’s technical or financial aspects. Notably, DAOs are still very popular today.

Governance Tokens

Another popular community governance method is the use of governance tokens. DeFi governance tokens are specially created digital assets that enable users to access the voting and proposal aspects of the network. The cool thing about this approach is that it enabled developers to incentivize governance systems rather than just provide access

No Accident

The popularity of community governance systems is no accident. These networks continue to thrive for multiple reasons. For one, their user base stays cohesive. Additionally, community governance systems provide developers and the community with more ways to control the value of a token.

It’s common for community governance networks to order token burns or buy backs to drive value. These strategies and more are just some of the ways community governance systems help. Here are some other benefits these protocols introduce to the market.

Pros of Community Governance

Transparency is the main benefit of community governance systems. When you provide the user base with the final say, there is always a feeling of community. Additionally, these systems make it easier for developers to measure their user’s sentiments towards certain upgrades and changes. If the community votes in favor of a concept, the project can automatically release funds from the community chest.

Average Users Heard

There are a lot of reasons why developers would want to listen to their users more. Users are the best way for a project to measure their options and features against competitors. If there is a constant drum of people asking for a certain feature, like staking, it can be time to put forth a proposal to the vote.

Community governance systems also make cryptocurrencies a better option than stocks. When a user trades stocks, it’s seldom that they have any of their input heard by the firm. The reality is they sign on for whatever the company decides to do until they sell their shares. Community governance in DeFi addresses this issue and makes participation profitable.

Incentivizes Participation

Community governance systems are popular for another reason, they incentivize users. Users can often stake or farm their governance tokens to earn profits. These profits are on top of any improvements to the value of the project’s utility token and ecosystem.

Many DeFi networks enable users to stake their governance tokens and secure profits. Incentivizing community governance drives more users to join. The higher participation level means that developers get a better consensus during votes. It also improves the innovative nature of the market as more users can mean more proposals and concepts come forth.

Network Safer

Community governed networks are generally safer for users than centralized networks. The main reason for the added safety is the fact that the developers have less control over the project. In many instances, the developers don’t have access to the community funds unless authorized by a vote.

Cons of Community Governance

Not everything is improved by the introduction of community governance to a network. There are still many issues and concerns that you should be aware of when joining one of these networks. Here are some of the most common pitfalls these networks face.

Centralization

The main drawback to these systems is that they can become centralized very quickly. Unless you are participating in a fourth-generation network like META1 that eliminates whale manipulation via a human-only requirement, there is always the risk that someone may just buy up the majority of tokens and take control over the network.

Developers

There is also a risk that developers maintained the majority of their tokens from the launch. When developers keep control over their tokens they retain control over the project. If the system is one that provides more weight to those who hold more tokens, this can lead to an illusion of community governance. However, if the developers always have the final say, it’s just a farce that usually ends badly for traders.

Security Concerns

Another major issue that has plagued community governance systems since day one is security concerns. The very first Ethereum DAO was hacked for $50 million which led to the creation of Ethereum classic and today’s ETH. DAOs require significant coding. As such, it’s recommended you stick to only open source community governed projects. Additionally, you need to ensure the project has undergone security audits.

Community Governance is the Way of the Future

Despite its drawbacks, it appears that community governance systems are here to stay. These unique systems provide a new level of transparency and enable projects to finally become truly community-led. For these reasons, you can expect to see more platforms introduce community governance into their networks moving forward.

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