November 18, 2024
Governance is the backbone of blockchain networks, ensuring that these decentralized systems operate smoothly and reflect the needs of their communities. Understanding how decisions are made is vital for anyone involved in this dynamic field. Blockchain governance typically divides into two models: on-chain and off-chain.
Knowing the devil in the details can sometimes be overwhelming, whether it's figuring out who gets a say in crucial changes or how to balance efficiency with fairness. The article will explore these governance models, providing insights into both systems' inner workings and real-world applications, helping you navigate the complexities of Web3 governance.
Introduction to On-Chain and Off-Chain Governance
Overview of Governance in Blockchain Networks and Its Necessity
In the realm of blockchain and Web3, governance is not just an add-on - it is a necessity. It's what keeps these decentralized networks functioning smoothly and evolving according to the needs and desires of their communities.
At its core, governance in blockchain is about making collective decisions that affect the network's underlying protocol. Given the decentralized nature of blockchains, these decisions cannot be made by a single entity. Instead, they require the participation of various stakeholders—including developers, miners, users, and others—to ensure all voices are heard and considered.
Distinction between On-Chain and Off-Chain Governance Models
There are two primary models of governance in blockchain: on-chain and off-chain. Each has its distinct approach and set of tools to manage decision-making processes.
On-chain governance, as the name suggests, occurs directly within the blockchain network. Blockchain-native mechanisms, such as proposals and voting systems encoded into smart contracts, make decisions. This model allows for transparent and automated decision-making processes, where votes can be directly counted and implemented through the network itself.
In contrast, off-chain governance involves decision-making processes that occur outside the blockchain. These often include discussions, forums, and meetings that result in human-conducted voting or consensus before anything is implemented on-chain. While off-chain governance processes can provide more flexibility and allow for nuanced discussion, they can sometimes lack transparency and take more time to finalize decisions due to the need for greater human intervention.
A recommended resource for the very basics is this insightful video: Differences Between On-Chain and Off-Chain Governance.
On-Chain Governance: A Deep Dive
On-chain governance represents a cornerstone in the evolution of decentralized systems, targeting the centralization concerns of traditional governance structures by embedding governance directly within blockchain technology. This system integrates voting elements within the blockchain, enabling stakeholders to exercise direct influence over proposed changes through token-based voting systems and smart contracts.
The purpose of on-chain governance is intrinsic to its design: fostering a community-driven decision-making environment while adhering to the foundational principles of blockchain—transparency, audibility, and decentralization.
Mechanisms and Processes Involved
Stakeholders, comprising token holders, developers, and validators, submit proposals which are subsequently voted upon by the community. The utilization of smart contracts automates this progression, ensuring that approved changes are implemented seamlessly without manual intervention.
Examples of On-Chain Governance
Tezos - an open-source platform, for instance, empowers its community to vote on protocol updates and enhancements through its self-amending blockchain architecture, which diminishes the need for hard forks. This participatory model aims to ensure that the platform's evolution reflects the collective vision of its users.
Similarly, Decred - a cryptocurrency, employs a hybrid consensus incorporating both Proof-of-Work and Proof-of-Stake mechanisms, enabling a decentralized approach to protocol amendments while maintaining security and stakeholder engagement in governance processes.
Role of Governance Tokens and Decision-Making Processes
The concept of governance tokens lies at the heart of on-chain governance systems. These tokens represent voting power within a blockchain ecosystem or a Decentralized Autonomous Organization (DAO), providing holders with the ability to propose and vote on strategic decisions that shape the network's future.
The weight of an individual's vote is typically proportional to their token holdings. To encourage participation and foster more inclusive decision-making, token holders may receive network incentives such as additional tokens or reduced transaction fees upon engagement in governance activities.
On-chain governance mechanisms, such as the Decentralized Autonomous Organization (DAO) of Decred - which requires a 60% supermajority vote with a 20% quorum to pass proposals - illustrate the sophisticated frameworks in place to ensure broad consensus among community members. By involving various stakeholders in a transparent and automated governance process, on-chain governance models strengthen community trust and foster sustained engagement.
Legal documents must be prepared to define governance rules and provide protection for DAO members. This includes clarifying the rights and responsibilities of token holders, thereby ensuring robust and compliant decentralized governance frameworks. Learn more here.
The transparency and inclusivity of on-chain governance gratify the ethos of blockchain technology by allowing all stakeholders to partake actively in the network's development, aligning network evolution with the shared interests of its community.
Off-Chain Governance
Off-chain governance refers to the processes and mechanisms used to make decisions about a blockchain project, outside the confines of the blockchain itself. This approach relies heavily on community engagement and stakeholder participation, often playing out on platforms like social media, online forums, and at conferences. As a result, off-chain governance becomes a critical space for both formal and informal discussions that shape blockchain initiatives.
We can understand how off-chain governance works using Sperax’s example:
Sperax Off-Chain Governance Using SnapshotPhase 0: Casual Ideation (Discord)
The governance journey begins on Discord in the #DAO-discussion channel. Here, community members can share ideas informally, discuss them with others, and gauge initial interest. Members can even create a poll to assess sentiment or reach out for a Community Call to explore ideas further.
Phase 1: Governance Proposal (On Forum)
If the idea gains traction, it moves to the formal Proposal (Active Discussion) channel using the SIP Template. The Sperax community and team provide feedback over a minimum 48-hour period, allowing constructive input. Tags identify the proposal’s focus—USDs parameters, new assets, liquidity mining, product features, partnerships, or other suggestions.
Phase 2: Snapshot Vote
Once a proposal has matured, it’s posted as a poll on Snapshot for formal voting. Polls last for three days, with votes weighted by the voters’ veSPA balance. The default options are "Yes" or "No," and an additional “Yes with modification” option can be added on request. For a proposal to pass, it needs a minimum quorum of 200 million veSPA votes and over 50% "Yes" votes.
Here’s the detailed video on how to vote on Sperax DAO proposals.
- If both criteria are met, the proposal moves to a Sperax Improvement Plan (SIP).
- If quorum isn’t met or fails to receive sufficient "Yes" votes, it is marked “Defeated” and undergoes a 7-day cooldown before resubmission. Proposals with "Yes with modification" votes can return for edits without the cooldown period.
Phase 3: Sperax Improvement Plan (SIP)
Successful proposals advance to the Sperax Improvement Plan (SIP) list for implementation. The Sperax engineering team prioritizes these based on available resources, while community developers can contribute code. All implementations undergo a final audit facilitated by the Sperax Foundation, ensuring high standards of security and functionality.
Role of Community Forums and Stakeholder Participation
Community forums and social media platforms remain at the heart of this model. They provide spaces where stakeholders, including core developers, miners, validators, and users, can discuss and deliberate proposals for improvements.
Examples of these platforms are evident in the governance models of major public blockchains like Bitcoin and Ethereum. In Bitcoin, regular online meetings allow stakeholders to voice their opinions on proposed changes, while Ethereum, under the guidance of influential figures like Vitalik Buterin, follows a similar inclusive approach. Discussions and proposal assessments often take place on open platforms like GitHub and Reddit, ensuring transparency and participation.
Challenges Faced in Off-Chain Decision-Making
One of the challenges faced in off-chain governance is that of coordination. It often involves a complex interplay of interests among various groups, such as node operators, core developers, and the end-user community. The informal nature of debates allows for flexibility, yet poses challenges due to subjective biases. Game theory becomes relevant in understanding the strategies stakeholders may employ as they navigate these cooperative and competitive dynamics.
Transparency versus Centralization Tendencies
Meetings held by Bitcoin's core developers, for example, are usually open to the public, and conversations about improvement proposals, such as Bitcoin's BIPs and Ethereum's EIPs, are accessible to anyone who's interested. These processes provide a platform for incorporating a diverse range of views that span technical feasibility, user experience, and network security.
A notable feature of off-chain governance is its centralized tendencies. Core teams and influential figures can affect or even sway decision outcomes in the absence of direct on-chain voting mechanisms.
Need and Importance
Off-chain governance facilitates a smoother transition from a centralized to a fully decentralized model without the rigidity of coding decisions directly into the blockchain. As such, off-chain governance offers valuable insights into stakeholder priorities and technical considerations, refining project hypotheses before committing to on-chain implementations. For more information on the informal processes involved in these governance systems, refer here.
Comparison: On-Chain vs. Off-Chain Governance
Advantages of On-Chain Governance
A significant plus is transparency. Every voting record and proposal history gets etched onto the blockchain, ensuring a tamper-proof, clear history of decisions. Outcomes here are automated and reliable due to smart contracts, making the system inherently transparent and immutable. The entire process is out in the open, providing a layer of trust that is hard to achieve otherwise.
Drawbacks and Criticisms of On-Chain Governance
However, this model is not without criticism. On-chain governance often suffers from voter apathy. With low participation rates, decisions can inadvertently be controlled by a vocal minority. Furthermore, there's a risk of power centralization. If influential entities gather a majority share of the voting power, it undermines the democratic design, leading to a concentration of power that may not reflect the community's broader interest.
Benefits of Off-Chain Governance
It promotes flexible and nuanced discussions, adapting well to the dynamic nature of social dialogue. Being less rigid than on-chain models, it allows for private conversations and the discretion required for sensitive deliberations. Discussions can originate off-chain before transitioning on-chain for formal voting, balancing between transparency and pragmatic dialogue.
Challenges and Limitations Associated with Off-Chain Governance
Off-chain governance also faces its hurdles. The lack of transparency can lead to centralized decision-making, monopolized by influential stakeholders. This model may also suffer from a paucity of accountability since decisions aren't always as visible or verifiable as their on-chain counterparts. While privately made decisions might empower confidants, they can sideline community-wide verification, thereby veering away from decentralization's core ethos.
Real-World Prominent On-Chain Governance Models
On-chain governance provides a structured framework where decisions are made within the blockchain system itself. It's a compelling idea because it promises decentralized and efficient protocol management. Let's delve into how different platforms implement this concept.
Tezos on-chain governance process and voting
Tezos is a prominent example when discussing on-chain governance. It enables updates without needing disruptive hard forks. The process starts when bakers—those responsible for validating transactions—propose upgrades.
A series of stages process these proposals, starting with a proposal period and moving into an exploration period, which requires both a quorum and a supermajority to advance. After a cooldown period, there is another voting round to ensure widespread support.
This rigorous process has seen the Tezos network undertake 14 significant protocol upgrades, such as 'Nairobi' and 'Oxford'. Read more about their process here.
EOS on-chain governance model
Conversely, the EOS governance model differs as it relies more on off-chain processes and the EOSIO Constitution. This constitution serves as a guiding framework for the elected Block Producers who manage both block production and governance decisions.
Unlike Tezos, EOS emphasizes the elective nature rather than a fully automated on-chain process, which can sometimes slow decision-making but maintains a level of community involvement through forums and discussions.
MakerDAO's integration of both on-chain and off-chain governance
MakerDAO represents a successful hybrid model that merges on-chain governance with off-chain elements. MKR token holders influence changes by voting on protocol adjustments directly affecting system parameters via Executive Votes. Additionally, off-chain discussions and proposal developments take place within the MakerDAO Governance Forum.
Risk Teams and Working Groups play a crucial role in vetting proposals before they're put up for an on-chain vote, which balances democratic decision-making with informed analysis.
This approach fosters community engagement, an essential aspect for long-term governance stability.
For more insights, check this.
Real-World Examples of Off-Chain Governance
When we talk about off-chain governance in the realm of cryptocurrencies, Bitcoin and Ethereum stand out as quintessential examples.
Bitcoin
Bitcoin has always embraced an off-chain governance model. Here, the community relies heavily on discussions among various stakeholders, including developers, miners, and users. These conversations primarily occur on platforms like GitHub and Bitcoin forums.
The submissions, known as Bitcoin Improvement Proposals (BIPs), act as the backbone of this system. Even though there isn't any formal voting mechanism, this process enables every stakeholder to voice their opinions, as seen during the block size debate.
This particular debate resulted in a hard fork, creating Bitcoin Cash, showcasing how off-chain governance can lead to significant, albeit sometimes contentious, changes. This decentralized model emphasizes transparency and inclusivity, ensuring that even without a central figure, the community stays actively involved.
Ethereum's Governance Forums and Core Development Influences
Ethereum also operates under an off-chain governance model, with some on-chain elements. Ethereum Improvement Proposals (EIPs) are the main conduit for proposing changes. Discussions around these proposals take place across various platforms, involving developers, users, and researchers.
Despite notable figures like Vitalik Buterin playing influential roles in these discussions, Ethereum's governance remains collaborative. It combines both formal and informal processes, fostering debate and building consensus through forums and community calls.
The DAO hack incident led to deep divisions that resulted in the formation of Ethereum Classic, demonstrating the community's willingness to use hard forks as a method to resolve conflicts. Ethereum's approach ensures adaptability while acknowledging the diverse interests of its stakeholders.
Addressing Challenges in Blockchain Governance Models
In the realm of blockchain governance, both on-chain and off-chain systems battle with their fair share of challenges, which makes finding effective governance solutions all the more critical.
A prevalent issue in on-chain governance is voter apathy where a significant portion of token holders abstain from participating in decision-making processes. This lack of participation risks skewing results and undermining the democratic principles these systems strive to uphold. The complexities inherent in voting mechanisms can further deter participation from those who are not technically inclined, leading to voter fatigue.
While some projects attempt to counteract apathy through incentivization, the risk of favoritism and undue influence remains a concern.
Plutocracy risks also loom large, where individuals with substantial token holdings wield disproportionate influence over decisions, challenging the equity of these systems.
These processes, typically conducted through developer meetings or community forums, often lack the audibility and accountability that on-chain decisions demand. This opacity can lead to centralization, contradicting the decentralized ethos of blockchain technology. With a lack of public records, stakeholders might feel disconnected from governance, leading to mistrust and disengagement.
The challenge is further compounded by legal and regulatory concerns, particularly for decentralized autonomous organizations (DAOs), where ensuring compliance with laws is a necessity to prevent legal ramifications.
Future Trends and the Impact of Blockchain Governance
As blockchain governance continues to adapt, the synergy between on-chain, off-chain, and hybrid models indicates a dynamic evolution aimed at bolstering robust, inclusive, and efficient networks.
Hybrid governance models present an intriguing blend of structured on-chain precision and versatile off-chain flexibility, offering a blueprint for more balanced ecosystems. Through a combination of on-chain transparency and off-chain adaptability, these models allow for refined decision-making processes.
On-chain Governance
On-chain governance is increasingly drawing interest due to its capacity to support transparent environments where a global base of stakeholders can engage, unbound by borders. These platforms support egalitarian ideals, channeling the collective voice through technological advancements. The burgeoning role of Decentralized Autonomous Organizations (DAOs) exemplifies this shift, offering a route for community-driven governance.
As we gaze into the future, it's clear that increasing the scalability, speed, and efficiency of governance models will be paramount. Tools like layer 2 solutions, quadratic voting, and liquid democracy offer promising enhancements that could revolutionize participation, accommodating even those with minimal technical expertise.
This setup not only ensures deliberate assessment but also champions interoperability among diverse blockchain networks, fostering an integrated ecosystem.
Regulatory Landscape Influence
The regulatory landscape will undoubtedly influence blockchain governance's trajectory. Policymakers will need to balance nurturing innovation and maintaining robust oversight to prevent centralization.
The evolution towards cross-chain governance will demand regulatory frameworks that support coordination across various networks, ensuring decentralized governance continues to mature and expand.
Moreover, advancements in artificial intelligence and machine learning could further refine governance processes, from automating evaluations to offering predictive insights. These innovations, combined with accessible user interfaces and secure digital identity solutions, promise a future where blockchain governance is more inclusive and resilient.