Cryptocurrency was created to replace the current financial system, and with each passing day the crypto industry is coming closer to achieving this goal. This has resulted in a lot of pushback from the powers that be, who don’t want to see their centralized money monopolies replaced by cryptocurrency. However, people often forget that money is just a small part of the power equation. This is because money alone has no power; it’s what individuals and institutions decide to do with that money which moves the heavens and the earth.

In other words, the real power lies in governance—it lies in deciding how resources are allocated. Cryptocurrencies have given rise to dozens of novel community governance structures over the years. Some of these decentralized autonomous organizations, or DAOs, now have billions of dollars of crypto sitting in their treasuries, ready to be allocated in accordance with the interests of their communities.

This means cryptocurrencies have the potential to not just replace the current financial system but also to offer an alternative to the governments that sanction and support its corruption through their monopoly on force. Here’s everything you need to know about cryptocurrency governance and why it may be the final frontier for financial freedom.

Start with a short history lesson about something you’ve possibly never heard of. Around a hundred years ago, more than a quarter of all people living in the United States, Great Britain, and Australia used fraternal societies for health insurance and healthcare. These fraternal societies, also called friendly societies, were not all that different from the decentralized autonomous organizations we see in cryptocurrency today. Members would pay a monthly fee into a treasury, and those funds would be used to cover the medical costs of the members. Because fraternal society members all knew each other, this would prevent any one of them from using an unnecessary amount of treasury funds lest they be forced to pay a higher monthly fee. Part of these treasury funds were used to pay for a yearly contract with a doctor who would provide basic medical care for the members on an as-needed basis.

At the time, there were a lot of doctors around, and this created intense competition between them to land the best yearly contracts with fraternal societies. This competition kept the cost of healthcare low across the board—in the case of fraternal societies, a single day’s wage would cover a year’s worth of basic medical care, which is why fraternal societies were especially popular among the working class. Not all doctors were happy about this setup, however, and they called on the government to fix it. Healthcare regulators began denying doctors medical licensing for signing contracts with fraternal societies, and they also raised the bar to become a doctor on the grounds that it would improve the quality of care. This significantly reduced the number of doctors in circulation, and healthcare costs started to rise. These combined factors caused fraternal societies to fall out of favor, and they were replaced by public and private centralized healthcare and health insurance providers. Many of the centralized parties have since become corrupted monopolies, and medical costs have only continued to rise under their reign. The takeaway is that community governance has the potential to completely revolutionize certain aspects of our lives, and cryptocurrency has given us the tools to take community governance mainstream.

Broadly speaking, there are two types of governance structures in cryptocurrency: off-chain governance and on-chain governance. Off-chain governance is common among proof-of-work cryptocurrencies such as Bitcoin, Litecoin, and Monero. One off-chain governance process some may be familiar with is improvement proposals posted by community members on GitHub for everyone to see and discuss. A simple example is Ethereum Improvement Proposal 1559, which introduced partial ether transaction fee burns to the Ethereum blockchain with the London hard fork. EIP-1559 was initially posted to GitHub in April 2019 and is one of the few EIPs that has actually been implemented. This is partially because off-chain governance processes are not very structured, but primarily because there are many different stakeholders involved in proof-of-work cryptocurrencies.

To make a big change to a proof-of-work cryptocurrency like Bitcoin, the economic majority must be in favor of the change—this includes miners, developers, and holders. This might come as a surprise, since we’re often told that miners and developers are ultimately in control of a blockchain, but that isn’t the case. Imagine most miners and developers decide they want to turn a coin into an inflationary asset with no maximum supply. If the majority of holders disagree, they’ll sell as soon as the change goes live, while those who kept the original rules continue on their own chain. This is how hard forks happen, and they’ve occurred many times for both Bitcoin and Ethereum. Because forks carry real security risk, major changes are rarely attempted unless the economic majority—generally something like 95 percent—is on board. This high threshold makes off-chain governance a slow process, but the trade-off is that it makes proof-of-work cryptocurrencies more resistant to capture than many proof-of-stake alternatives.

On-chain governance, by contrast, takes place directly on the blockchain and is common among proof-of-stake cryptocurrencies such as Polkadot and Solana, as well as many DeFi protocols. While on-chain governance structures often have their own forums for discussing proposed changes, it’s the smart contracts that define and enforce the rules for tabling, passing, and rejecting them. These structures often feature a community treasury funded by staking rewards or transaction fees. The most basic version gives users one vote per coin or token, and a proposal passes if a simple majority of participating tokens vote in favor. Once passed, treasury funds are allocated to whatever the proposal called for.

This basic setup isn’t ideal, because it makes it easy for someone with a lot of money to buy the votes they need to get their way, or even to vote themselves the funds in the treasury. Most on-chain governance structures try to prevent this. Polkadot is one of the better examples: to table a proposal, participants must bond DOT coins, and the threshold for passage depends on how many DOT are participating, with a higher consensus requirement when turnout is lower. The weight of a vote also depends on how long the DOT is locked up, with a multi-year lockup offering a multiplier on voting power. Proposals can still be vetoed by an elected council, and if a proposal is judged a threat to the network by a technical committee, it’s vetoed and the proposer’s staked DOT is burned.

On-chain governance isn’t without real dangers. In on-chain systems, the coin or token holder is effectively also “the miner,” and a community treasury means incumbents can afford to sideline non-compliant developers since they can simply hire new ones with treasury funds. This tends to make on-chain governance friendlier to whoever holds the most capital, and the consequences have played out in DeFi protocols with heavy venture funding.

Even so, on-chain governance structures point toward a possible decentralized alternative to overreaching central authority. What’s often missing is a mechanism for properly funding public goods—the roads, bridges, courts, and administrative functions that governments are traditionally supposed to provide. Money as a simple point system doesn’t always capture the value of a public good well. Fraternal societies, again, are a useful comparison: a day’s wage bought a year of basic healthcare because the value each member received was worth more than the cost. Universal, government-run healthcare doesn’t always deliver each person that same value, and the mismatch between what people pay in and what they get out is part of why public systems strain under their own weight over time.

One proposed fix is quadratic funding, an idea popularized by Ethereum co-founder Vitalik Buterin. The concept is that when many people each contribute a small amount to something, that thing is worth more to the community than the same total contributed by a few large donors—value scales with the number of participants, not just the size of the pot. A matching pool, drawn from a community treasury, then tops up the most broadly supported projects according to a quadratic formula. This tends to reward services that serve the most people rather than services that serve whoever has the most money to spend, which is part of what drives government dysfunction in the first place.

The remaining piece of the governance puzzle is verifying that each participant is a real, unique person rather than someone using multiple identities—without handing all of that personal information to a centralized authority that could misuse or lose it, or use it to remove someone from a platform for holding the wrong opinion. Decentralized identity solutions aim to solve this by having other participants vouch for a person’s identity directly, sometimes as simply as a video call, without requiring any government-issued ID. Layer on zero-knowledge proofs to keep the vote itself private—so that not even the voter can prove after the fact how they voted—and it becomes possible to build governance structures that don’t depend as heavily on raw coin or token holdings, and that resist coercion.

Cryptocurrency’s potential goes well beyond finance, and that’s easy to forget between the price swings. Decentralized governance is arguably the most powerful piece of the whole picture: it opens the door to doing what fraternal societies did with healthcare a century ago, at a scale that hasn’t been possible before. For every dollar lost to middlemen in the traditional financial system, it isn’t hard to argue that far more is lost to inefficiency, incompetence, and outright corruption in centralized government. As with most things, it comes down to building systems that align incentives so that what people actually want and need is made available to them—not a fantasy, but a genuinely achievable outcome.

We’re still a long way from fully functional decentralized organizations that do much besides DeFi, and entrenched interests rarely give up power willingly—crackdowns tend to intensify once decentralized systems start threatening a government’s core monopolies. It remains striking that no government has yet implemented a transparent, blockchain-based voting system, even though the technology already exists. Something that simple would go a long way toward restoring trust in institutions that have squandered a great deal of it. Centralized power structures have been tried for thousands of years, and every one of them has eventually collapsed under its own weight. Somewhere among the many competing decentralized governance experiments now underway, one of them may prove robust enough to help usher in something better.