On-Chain Governance: Decision-Making on the Blockchain
On-Chain Governance is a decentralized framework used to organize and integrate updates/improvements into the blockchain network.
What is On-Chain Governance?
On-chain governance provides users with the ability to directly vote on changes to the underlying protocol in blockchain governance. The onus is on the community, not the centralized party, to control protocol updates, upgrades and bug fixes.
The two types of decisions that make up blockchain governance are:
- the rules underlying the protocol, that is, the code;
- the incentive system of the network, which is the economy.
Managing a blockchain can be tricky because it is a decentralized system. Managing on the network is especially useful in distributed cloud architectures, where agility is required to properly allocate resources. For example, DFINITY networks provide a blockchain-based management approach that is combined with a proprietary artificial intelligence system to efficiently allocate computing power across different companies and applications connected to their cloud architecture.
Tezos and Decred, for example, are platforms that allow users to directly vote on the future direction of the platform and adjust certain parts to meet the needs of both developers and users.
Whereas cryptocurrencies such as bitcoin use a more moderate and off-chain method, which has proven to date to be reasonable, but lacks the flexibility needed by businesses.
On-chain management has fostered the growth of decentralized autonomous organizations (DAOs). A DAO is a community-managed platform in which the rules put in place are agreed upon by users. DAOs can become critical applications for on-chain managed organizations, allowing customers to interact with their product and quickly customize it to their needs without overhead on the part of the organization running the application.
In the case of on-chain management, voting is done directly through a protocol. The consensus technique equates to a direct democratic voting mechanism – decisions are made directly on the minutes of the distributed ledger and blockchain enhancements are implemented.
To level the playing field for all participants, there is a shift in control from miners to developers and later to users.
Users and developers, for example, can argue for modifications that will markedly reduce transaction costs, putting miners at a disadvantage and making the network economically unsustainable. Likewise, miners might advocate modifications that would significantly increase the reward per block, which could harm the network in the long run.
On-chain management requires transparency of information just as much as off-chain management does. Listed below are the key benefits of in-network management:
- The decision-making approach is efficient and decentralized because it is not influenced by a single person, but is reached through the community.
- There is more transparency because everyone can look at the code and see how consensus is reached and decisions are made.
- Hardforces can be avoided. When some stakeholders feel disconnected from the decision-making process and cannot agree with other organizations on the future path of the network, hardforces can occur.
- In addition, the network is governed by token voting, and incentives are offered to encourage user participation in the voting process.