What is On-Chain Governance?
One of the key features of blockchain tech is that it is decentralized and not controlled by any central body. However, there is some form of governance in order to decide the direction of a project. Which block gets validated? What should the next upgrade be? In essence, in other, for blockchain solutions to work, there still has to be some form of governance.
On-chain governance is the mechanisms and structures put in place to manage and implement changes to cryptocurrency blockchains. In the case of on-chain governance, rules for effecting changes are encoded into the blockchain’s protocol. Developers can propose a change through modifying or updating a code, and each node within the network is allowed to vote whether or not to accept the proposed change.
On-chain governance came as an alternative to solving the rather informal system of governance currently plaguing blockchains. Critics pointed to the fact that although blockchain governance is informal, it is still centralized among miners, developers, and stakeholders. And to an extent, I agree with them. ZenCash (a privacy coin) for example, recently had a 51% attack and over $500k was stolen. On-chain governance claims to solve this problem of centralization by involving all the nodes within a blockchain network in the decision-making process. Nodes are incentivized to participate in the voting process.
How Does It Work?
Informal systems of governance typically make use of both online and offline options to effect changes. On-chain governance, on the other hand, works solely online. Changes are effected through code updates, and each node has the right to vote to accept a decline a proposed change. The voting power allocated to each node is not the same. Nodes that hold more coins have more power than nodes with lesser coins. In order to keep the network from being hijacked, factors like how long a node has held its coins are considered too.
It is important to note that on-chain governance varies across blockchains. Tezos, for example, uses a self-amending ledger. In its case, proposed changes are introduced into the coin’s blockchain and rolled out in a test version. If the planned change is successful, they are implemented in the production version of the blockchain. If not, they are discarded.
Advantages of On-Chain Governance
It is Decentralized: Changes to a blockchain are not left to the core development team. Instead, each node within the network has a say.
Quicker Time to Implement Changes: Informal governance model, as in the case of Bitcoin Cash and Ethereum Classic forks typically take months to implement. They demand the time and effort of stakeholders in order to reach consensus. On-chain governance is online and by making use of algorithmic voting mechanisms, it is faster.
Manipulation of Votes: Since individuals who hold the most coins are given higher voting power, it is easier for nodes with more stake to control the voting process and steer the development of a project in their direction.
Low-voter Turnout: Blockchains that adopt on-chain governance model may have to deal with low voter turnout, as evident in real-world elections. Taking DAO Carbonvote for example, only 4.5% of the nodes participated in the voting process.