Tezos (XTZ) is a blockchain network known for its on-chain governance mechanism, which enables protocol upgrades in a decentralized manner. Unlike many blockchain networks that rely on external development teams or miners for upgrades, Tezos adopts a governance model that empowers its community through a formal and transparent process. Governance in the Tezos ecosystem is aimed at fostering long-term development while minimizing hard forks—something many other blockchain systems occasionally encounter due to disagreements among stakeholders.
On-Chain Governance Model
At the core of the Tezos ecosystem is its on-chain governance model, whereby token holders (XTZ holders) are able to participate in the decision-making process. This model has made Tezos stand out when compared to other blockchain systems that require external changes, often leading to network instability. In the Tezos network, developers can propose protocol improvements, and these proposals are then voted on by the community. This governance ensures that upgrades are implemented based on collective agreement from stakeholders rather than a subset of influential members or miners.
The voting process typically involves multiple stages. Initially, a proposal is submitted, followed by a voting period where XTZ holders cast their vote using their tokens. If a proposal gains enough traction, it moves into a testing phase where the proposed changes are tested on a temporary network (testnet) to ensure that they function as intended. After successful testing, the proposal is fully implemented into the mainnet if the majority of voters approve.
Roles within Tezos Governance
Tezos governance primarily revolves around its token holders and "bakers." Bakers are similar to validators found in other Proof-of-Stake (PoS) networks. They stake XTZ tokens and, in return, participate in securing the network, validating transactions, and crucially, voting on governance proposals. Unlike traditional PoS systems where validators’ roles are limited to securing the chain, Tezos bakers have a hand in steering the project's future development through voting rights.
XTZ holders who do not wish to run their node can delegate their tokens to a baker of their choice. Delegation does not transfer ownership of the tokens, but it allows participants who lack tech expertise or resources to still contribute to governance through a chosen baker. Delegators thus have an indirect but significant influence on the decision-making process within the network.
Governance Challenges
Despite its innovative governance model, Tezos is not without challenges. Questions have been raised about voter apathy; not all XTZ holders or delegators actively participate in governance proposals. Although the protocol allows token holders to have a say, low engagement levels can sometimes affect the legitimacy or pace of decision-making. Similarly, as with any decentralized system, there is always the risk of dominance by whales or large bakers—entities that hold significant proportions of the staking pool—potentially influencing votes in the direction favorable to them.
