What is CGS?
Good governance is a key point when we talk about decentralized networks in general, or blockchain in particular. Decentralized networks break with the traditional hierarchical models (vertical) and facilitates a model in which hierarchy does not exist (horizontal). In this sense, different groups of participants have different and common interests. Having a strong governance system to rule them is crucial. It is essential to maintain the incentives of those participants aligned. Therefore, the system needs mechanisms to coordinate those participants around their common incentives, and avoid imbalances in their powers.
Governance could be exercised on-chain or off-chain. On one hand, on-chain governance mechanisms could both ensure that a process is properly followed and allows fast decision making. However, it will not be easy to change an on-chain governance mechanism once it is established. Furthermore, if it is not well designed, it is exposed to exploits and hacks. On the other hand, off-chain governance mechanisms (i.e. Bitcoin Improvements Proposals -BIPs – and mailing lists in the case of Bitcoin) could be modified easily but it makes the coordination of its participants more difficult.
An Initial Coin Offering (ICO), a process by which a company issues a series of tokens in exchange for cryptocurrencies (in general) through smart contracts, has both decentralized and centralized components.
On one side, the process by which the participants of an ICO send cryptocurrencies to a smart contract in exchange for tokens is managed autonomously by the referred smart contract in a decentralized way. On the other, the process of holding and spending the raised capital is fully controlled and centralized by the company itself.
This makes it harder to align the incentives of the ICO launcher with those of the token buyers and to enforce a mechanism of coordination between them, given that there is animbalance of power. In this sense, once the ICO is complet ed, ICO token holders have no control over the management of the funds, and if they are unsatisfied they can only sell their tokens in a secondary market. This brings ICOs to the classic problem of agency costs which economists have tried to solve for years.
To solve this issue, we have devised the “Coin Governance System”, which is an on-chain coordination mechanism that could strengthen and align the common interests of ICO launchers and token buyers, preventing that their individual interests create an imbalance of power between them.