What is On-Chain Governance?
On-chain governance refers to a system of decision-making and rule-setting in blockchain networks that is integrated directly into the underlying blockchain infrastructure. In an on-chain governance system, network participants are able to propose and vote on changes to the network's protocols and rules, and the outcome of these votes is automatically executed on the blockchain.
The goal of on-chain governance is to create a more democratic and decentralized decision-making process for blockchain networks, where all participants have an equal say in the direction of the network. This allows for more transparent and equitable decision-making, and reduces the risk of centralization and control by a small group of individuals or organizations.
On-chain governance typically involves the use of token-based voting systems, where network participants hold tokens that give them voting rights proportional to their stake in the network. When a proposal is put forth, network participants can vote either in favor or against the proposal using their tokens. If a proposal receives a sufficient number of votes, it is automatically implemented on the blockchain.
One of the key benefits of on-chain governance is that it allows for rapid and efficient decision-making, as proposals can be put forth and voted on quickly and transparently. This enables blockchain networks to adapt and evolve in response to changes in the market or technical developments, allowing them to remain competitive and relevant over time.
However, on-chain governance also has its challenges. For example, the outcomes of token-based voting systems can be influenced by the concentration of token ownership, leading to potential centralization and unequal representation. Additionally, on-chain governance systems can be complex and difficult for non-technical users to understand, which can limit their participation in the decision-making process.
Simplified Example
On-chain governance is like having a big school meeting where everyone gets to vote on important decisions. Imagine you and your classmates are all part of a big school community and you all want to make the school a better place. To make decisions, you all come together for a big school meeting. During the meeting, you discuss different ideas and everyone gets to vote on what they think is the best solution. The idea with the most votes becomes the decision that everyone follows. This is like on-chain governance in a blockchain network, where all the members of the network can vote on important decisions that affect the network, such as changes to the rules or new features to add. Just like in the school meeting, the idea with the most votes becomes the decision that everyone in the network follows.
History of the Term "On-Chain Governance"
The term "on-chain governance" in crypto pertains to the process of making decisions about the development and direction of a blockchain project through the use of its native token. This approach stands in contrast to off-chain governance, which involves decision-making through more traditional methods, such as voting by a board of directors or a foundation. The concept of on-chain governance emerged in the early 2010s with the rise of decentralized autonomous organizations (DAOs). DAOs are organizations governed by rules encoded in smart contracts, self-executing contracts deployed on a blockchain. This means that decisions about the organization are collectively made by its token holders, removing the need for a central authority in the decision-making process.
Examples
Decentralized Autonomous Organization (DAO): A DAO is a decentralized organization run by a set of rules encoded as computer programs on a blockchain. Members of a DAO can propose changes to these rules and vote on them, with decisions being made based on the majority of votes cast by token holders. For example, MakerDAO is a DAO that provides stablecoins and decentralized loans on the Ethereum blockchain. The rules for these services, such as interest rates and collateral requirements, are governed by its token holders.
Token-Weighted Voting: This is a common method of on-chain governance in which token holders can vote on proposals directly proportional to the number of tokens they hold. For example, in the Compound protocol, token holders can vote on proposals to change interest rates and other parameters that affect the functioning of the protocol. This ensures that decisions are made in the interest of token holders with a larger stake in the protocol.
Staking-Weighted Voting: This is similar to token-weighted voting, but in this case, token holders cast votes proportional to the amount of tokens they have staked rather than just holding. This incentivizes token holders to actively participate in the governance process, as staking their tokens for an extended period of time gives them a greater say in decision-making. An example of this is Cosmos, a blockchain network that uses a delegated proof-of-stake consensus mechanism and allows token holders to vote on network upgrades and other governance proposals.