DeFi Innovation: Exploring Decentralized Governance Models for Blockchain-based Investment Platforms
Satoshi Nakamoto presented a white paper in November 2008, outlining Bitcoin as the first electronic payment system. It was based on a decentralized peer-to-peer network, removing the need for any third-party intermediary. The concept of blockchain technology was also introduced to support such a system. After years of research in this field, it was widely acknowledged as a major advancement in fault-tolerant distributed computing.
In simple words, blockchain is a kind of database that stores all transactions ever occurred in a network. It contains a distributed, tamper-free, and permanent digital ledger maintained by all nodes of the system. This technology introduced significant innovations as the network is open to all participants, enabling interactions without any prior knowledge. Network nodes automatically verify and record electronic transactions using cryptographic algorithms.
Blockchain is similar to Digital Ledger technology but focuses on cryptocurrency and related ecosystems. It uses encryption and decryption techniques to control access to a system, allowing only the addition of new data, with existing data remaining immutable.
One can explore various opportunities to invest in companies engaged in blockchain R&D. Well-known entities like IBM and Nvidia are continuously exploring various applications of blockchain technology. One of the markets investors can choose from is Decentralized Finance (DeFi).
Decentralized Finance (DeFi):
The concept of DeFi revolves around removing the participation of financial institutions as third parties in transactions. The aim is to allow individuals to manage their finances with digital wallets, peer-to-peer lending, and other services.
The advantages of DeFi include:
- Using decentralized applications to transfer capital globally.
- Enabling investors to generate income.
- Maintaining a high level of security.
Moreover, the aim of DeFi is to eliminate reliance on third parties and centralized institutions involved in all financial transactions.
Blockchain-Based Governance (Decentralized Governance):
Blockchain is being hailed as a technological solution for many governance challenges. In 2015, some suggested that the state may no longer be necessary. However, using blockchains for governance is still an emerging concept that represents third-generation thinking. It is critical to distinguish between the governance of the blockchain and governance by the blockchain.
Governance by the blockchain refers to the execution of blockchain technology in real-world systems. The voting system is the best example of it. This concept is gripping due to its ability for transparency and tamper-proofing.
In the governance system, blockchain can be used for three essential functions:
- Tracking resources and data
- Decision-making and evaluations
- Voting system
In 2013, Decentralized Autonomous Organizations were originally called Decentralized Autonomous Companies. Theoretically, DAOs do not constitute a singular application but rather a decentralized firm that lacks a typical physical structure. The concept is that it runs fully autonomously, with humans possessing voting powers at certain procedures.
Innovations in Decentralized Governance Models:
1. Token Voting:
Token voting is one of the most common methods of decentralized governance. Each token holder has voting power proportionate to the number of tokens they hold. When a proposal is made, token holders vote on whether to implement it or not.
2. Delegated Voting:
Delegated voting allows token holders to delegate their voting power to a trusted representative or a proxy. These representatives vote on their behalf, streamlining the decision-making process.
3. Liquid Democracy:
Liquid democracy combines elements of direct voting and delegation. Token holders can either vote directly on proposals or delegate their voting power. Additionally, they can revoke delegation at any time, providing flexibility in decision-making.
There are various governance models provided by DAOs, some of which are as follows:
It functions as a decentralized autonomous organization that allows individuals to pool their funds and involve in share ownership of assets using cryptocurrencies like Bitcoin and Ether.
It is a platform without an official audit that enables projects to raise funds from the public using Ethereum's public smart contract. Through that platform, individuals can decide on the allocation of funds and award tokens to community members.
Blockchain technology allows individuals to reshape their interactions in politics, business, and society. This transformative process could impact the main principles that support existing political systems and governance models, questioning the traditional system of the state. Moreover, the rise of DeFi has unlocked immense potential in the world of finance, and decentralized governance models have been at the forefront of this innovation. By granting users greater control and decision-making power, DeFi investment platforms are transforming how financial services are accessed and managed.
Blockchain Developer at GlobalVox