In a world where all things in existence are created with decentralisation as the core foundation pillar, “Governance” is the mechanism used to make decisions on various decentralised projects. Given that the decentralised ecosystems lack any form of centralised authority to make up rules and key decisions that are accepted as the common norm, a method is needed to make the masses agree on any key decisions and rules that are to be put into place. These mechanisms at the most basic level are classified into two frameworks namely- On-Chain and Off-Chain.
While governance is a concept that is widely applicable across any framework that uses decentralisation and blockchain as core foundational concepts, the area where it prominently shines and has a lot of active public participation in today’s world is from DeFi and NFT areas. Some of the common situations during which governance decisions are required and implemented include — policy objectives, public values, institutional framework/administration, legal/legislation and public expectations.
Another important factor to note when it comes to governance mechanisms is that the type of governance model used could often reflect on how well a project/platform has achieved decentralization. This can be calculated using factors such as
- Degree of Accessibility (How much access each of the participants involved in the project has)
- Equitability (Has the project/platform been designed to treat all parties equally or does it favour certain parties involved more than others)
- Accountability (How much responsibility do people with key access hold over the project)
Let us take a look at the functionalities of these two governance frameworks
Off-Chain Governance — This type of governance framework is used in blockchain ecosystems that have a relatively closed group of people/entities who control the blockchain network’s operations. This framework is primarily used by blockchains that employ proof of work consensus mechanisms. The entities that are often involved in the governance process are end users, node operators, developers, and miners who work to keep the interests of all parties well aligned.
In this framework, the governance discussions happen via public discussions and proposals which are then voted upon during conferences, online forums dedicated to the network for governance purposes, mailing lists and so on. Essentially, regardless of how the vote takes place for governance, it happens completely outside of the blockchain network with just entities involved. The proposals that initiate a governance vote are implemented only when all entities involved come to an agreement.
In cases where all the parties involved failed to come to an agreement but there is considerable support among various entities for some proposals, it results in a Fork. This is a situation in which the entities that still support the new proposal choose to run a different version of the same blockchain network that has adjustments made to the software to accommodate the new proposal. The most famous example of such a fork occurring in the DeFi industry is Bitcoin Cash resulting from disagreements over increasing block size in bitcoin to scale Bitcoin’s transaction processing capabilities.
On-Chain Governance — This is a framework that allows any and all governance proposal votes to take place in the blockchain network itself. This framework is practised in blockchain networks that use a proof-of-staking consensus mechanism and allows anyone to participate in the voting process as long as they have the required number of source tokens. The weight of your vote in On-Chain governance is determined by the number of tokens in your possession.
In order to ensure fairness, blockchain networks often create DAO (Decentralised Autonomous Organization) that usually handles all governance-related procedures from scratch. DAO is an entity with no singular leadership and is completely community driven. All decisions are taken from majority consensus from the voting process in the community that acts based on rules defined by the DAO. There are times when DAOs cooperate with blockchain networks to release governance tokens that are specially used for voting purposes and have higher weightage when staked for transaction validation purposes.
This framework allows for a larger scope of participation in the voting process and helps avoid network forks. Aside from this, there are also occasions when the governance body chooses to have community-based discussions similar to the off-chain process and has the result of discussed proposal implemented in form of upgraded smart contracts.
While both governance frameworks were well received in the early phase, with an increase in the number of active blockchain networks and ever-growing public awareness surrounding the governing process, a lot of flaws have been perceived in both frameworks. This is especially the case for on-chain governance as entities/participants who hold a higher number of tokens can dominate the voting process creating a pseudo-centralised governance process.
But as the industry develops and grows, the market and participants’ awareness and approach to governance frameworks have continued to evolve alongside as well. The governance framework these days changes for varied purpose and are analysed on multiple levels. They are further classified based on how the involved entities approach the voting process namely -
- Centralised
- Hybrid
- Decentralised
Centralised — Proposals are voted upon by a group of people/entities involved and may occur on-chain or off-chain.
Hybrid — Proposals are voted upon either by the core team (developers/miners/blockchain owners) or by both the core team and end users of the blockchain network. Eg — only the core team for administrative/legal purposes and all parties involved for product upgrade/introduction of a new feature or making changes to existing features depending on public demand.
Decentralised — All Proposals are voted on by all entities active in the blockchain network regardless of the proposal’s purpose.
The end goal of all types of governance mechanisms comes down to helping developers bring about swift decision-making and efficient implementation of changes/upgrades to the blockchain.
