On-Chain Governance

What is 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:

What is 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.

Consensus in on-chain governance ensures that all participants have a say in the decision-making process. This is achieved through voting, where users can express their preferences on proposed changes to the protocol. The voting process typically involves token holders, who can cast their votes based on the number of tokens they own. The more tokens one holds, the more voting power they have.

For example, in the Tezos blockchain, users can vote on proposed protocol amendments through a process called “baking.” Bakers, who hold a certain amount of tokens, can participate in the consensus process by staking their tokens and validating transactions. This decentralized governance model enables stakeholders to actively participate in shaping the future of the blockchain.

Why is there an 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.

Incentives play a crucial role in on-chain governance. Participants are motivated to actively participate in the decision-making process because their actions directly affect their economic interests. For example, if users believe that a proposed change will enhance the network’s value, they have an incentive to vote in favor of it. Similarly, developers have an incentive to propose improvements that align with the interests of users and token holders.

On-chain governance incentivizes active participation and aligns the interests of all stakeholders. By involving users in the decision-making process, it promotes decentralization and prevents a small group of individuals from having too much control over the protocol.

What is 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.

On-chain governance provides transparency by making all governance-related information publicly available. This allows participants to assess the proposed changes, evaluate their potential impact, and make informed decisions.

Additionally, on-chain governance involves voting through tokens, and incentives are provided to encourage user participation in the voting process. Token holders are typically rewarded for actively participating in the governance process, which further incentivizes engagement and ensures a more decentralized decision-making process.

In summary, on-chain governance enables users to directly participate in the decision-making process of a blockchain protocol. It ensures decentralization, transparency, and fairness among all stakeholders. By involving the community in governance, blockchain networks can adapt to changing needs, improve their protocols, and ultimately enhance their value and utility.