On-Chain Governance

November 21, 2023 - Around 3 mins mins to read

Understanding On-Chain Governance

On-Chain Governance refers to the ability of users to directly vote for changes in the underlying protocol of a blockchain governance. Unlike traditional centralized systems, the responsibility of controlling protocol updates, upgrades, and bug fixes is delegated to the community.

Blockchain governance consists of two main components: the rules that govern the protocol (the code) and the network’s incentive system (the economics).

Implementing blockchain governance can be challenging due to its decentralized nature. On-Chain Governance is particularly beneficial in distributed cloud-based architectures, where agility is crucial for efficient resource allocation. For example, DFINITY networks utilize an on-chain governance approach combined with a proprietary AI system to effectively allocate computing power to different companies and applications connected to their cloud architecture.

Platforms like Tezos and Decred allow users to directly vote on the platform’s future direction and make specific adjustments to meet the needs of developers and users.

In contrast, cryptocurrencies like Bitcoin employ a more moderate off-chain method, which has been successful so far but lacks the flexibility desired by businesses.

On-Chain Governance has also played a significant role in the rise of Decentralized Autonomous Organizations (DAOs). DAOs are community-run platforms where users agree upon and enforce the rules. With on-chain governance, DAOs can become essential applications for organizations, enabling customers to quickly interact with and customize products without additional expenses from the launching entity.

On-Chain Governance operates through three key mechanisms:

Consensus

In on-chain governance, voting occurs directly through the protocol. This consensus mechanism resembles a direct democratic voting system, where decisions are made directly on the distributed ledger protocol, and blockchain improvements are implemented accordingly.

Incentive

To ensure fairness among all participants, control shifts from miners to developers and ultimately to users. Users and developers can advocate for modifications that reduce transaction costs, potentially disadvantaging miners and making the network economically unsustainable. Conversely, miners can advocate for upgrades that significantly increase block rewards, potentially harming the network in the long run.

Information

Similar to off-chain governance, on-chain governance emphasizes transparency of information. The advantages of on-chain governance include:

Effective and decentralized decision-making achieved through community involvement.
Increased transparency, as anyone can review the code and understand how consensus is established and decisions are made.
Prevention of hard forks, which occur when stakeholders feel excluded from the decision-making process and fail to reach an agreement with other network organizations regarding its future path.

Additionally, on-chain governance involves voting through tokens, and incentives are provided to encourage user participation in the voting process.

Glossary