Understanding On-Chain Governance
On-chain governance refers to a system in blockchain networks where users have the ability to directly vote and participate in making decisions to change the underlying protocol.
This decentralized approach to governance allows the community to control protocol updates, upgrades, bug fixes, and other important decisions rather than relying on a centralized authority.
Merging Protocol Rules
On-chain governance empowers users to influence both aspects through direct voting and decision-making.
On-chain governance has also contributed to the emergence of decentralized autonomous organizations (DAOs).
DAOs are community-run platforms where users agree upon rules and decisions.
With on-chain governance, DAOs can serve as crucial applications for organizations, enabling users to interact with products and customize them without overhead expenses from the entity launching the application.
On-chain governance operates through three main mechanisms:
- Consensus: Voting is conducted directly through the protocol in on-chain governance. This consensus mechanism resembles a direct democratic voting process, where decisions are made directly on the distributed ledger protocol, and blockchain improvements are implemented.
- Incentive: On-chain governance shifts control from miners to developers and ultimately to users to ensure a level playing field. Users and developers can advocate for changes that may reduce transaction costs, potentially impacting miners’ profitability. Miners, in turn, can advocate for upgrades that may increase block rewards, potentially affecting the network’s long-term sustainability.
- Information: Information transparency is a key aspect of on-chain governance, similar to off-chain governance. On-chain governance provides transparency as anyone can examine the code and understand how consensus is established and decisions are made. Additionally, on-chain governance offers the advantage of avoiding hard forks, which can occur when stakeholders feel excluded from the decision-making process and disagree with other network participants regarding the network’s future direction.
On-chain governance typically involves voting through tokens, and incentives are often provided to encourage user participation in the voting process.