The best on-chain governance system

Recent attention to blockchain governance has encouraged people to think about governance systems in more detail. This article will explore different approaches to on-chain governance.

On-chain versus Off-chain

The first step to analyze blockchain governance, is to distinguish two forms of governance: on-chain and off-chain.

The main difference between these two forms is whether governance processes are made explicit in the consensus rules or not.

- Off-chain governance: how ideas are shared, discussed, get funding, and turn into code. Off-chain governance can happen anywhere: on social media, on GitHub, during conferences, or over dinner. Twitter, Reddit and GitHub are all part of the off-chain governance system of a project.

- On-chain governance: how code is ratified. On-chain governance comes in many different versions, but we can discern three general approaches.

If you are interested in off-chain governance:

Approaches to on-chain governance

In the context of blockchains, participants have incentives to consolidate power and guide the network in directions that benefit them. This could be problematic, especially if on-chain governance enables “elites” to establish their dominance without being accountable.

This section will explore three general approaches to on-chain governance:

  • Fork-based governance
  • Stake-based governance
  • Entity-based governance
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Governance without accountability

Most blockchain projects are pure PoW networks and have implemented versions of fork-based governance. During a contentious code upgrade, the network splits in two or more forks that will compete (fight) for financial and social support of miners, developers, investors and exchanges. The market ultimately decides which network is “the real” project.

The process to determine “the real” project happens largely off-chain and may happen behind closed doors. This can benefit existing power structures such as miners or investors, creating a “veil of decentralization”. Other approaches to on-chain governance have attempted to formalize this process and make it more transparent with an on-chain vote.

Some projects have implemented versions of stake-based governance. We are not talking about PoS projects, which still may rely on forking to upgrade the consensus code, but about projects that allow coin holders with a certain stake in the project to ratify consensus code through an on-chain vote. Two notable examples are Decred and Tezos.

Alternatively, there are projects that advocate the benefits of entity-based governance. While it remains an idea (no working code), it is an interesting approach that requires further examination.

Stake-based versus Entity-based governance

Since there are multiple implementations of stake-based systems, and since there are no entity-based systems in production, it is impossible to compare the two on-chain governance approaches in detail. Rather, this section will make a conceptual comparison.

Here are four fundamental differences:

1. Permission to participate

Who has access to on-chain governance?

  • Entity-based governance: those who go through KYC.
  • Stake-based governance: those who have sufficient funds.

2. Voting rights

Who has the right to vote?

  • Entity-based governance: those with verified identity.
  • Stake-based governance: those with skin in the game.

3. Quality of decisions

Who has incentives to succeed?

  • Entity-based governance: only invested entities.
  • Stake-based governance: all voters are invested.

4. Centralization risk

Who can attack the governance system?

  • Entity-based governance: attackers can buy or bribe entities.
  • Stake-based governance: attackers can obtain more funds.

Which on-chain governance approach is better?

Conclusion and reflection

All blockchain projects are governed, although some governance systems are more visible than others. This article has explored three approaches to on-chain governance: entity-based, stake-based, and fork-based.

Fork-based governance relies on an informal, often opaque process to decide which fork is “the real” blockchain. Stake-based and entity-based governance aim to formalize this process with an on-chain vote.

On a conceptual level there are at least four fundamental differences between these two formal approaches. However, until we see how entity-based systems behave in production, it remains difficult to compare the two.

Most projects that experiment with explicit governance systems are young and constantly developing, therefore it may take some time before we can conclude which on-chain governance approach is better.

It is even possible to combine multiple approaches, such as the hybrid system in Decred or Quadratic Voting.

Here are some questions to consider:

Questions to advance entity-based governance

  • How do we store KYC data securely (no identity leakage)?
  • How can we verify identities in a decentralized way?

Questions to advance stake-based governance

  • How do we ensure that voters have skin in the game?
  • How can we cultivate diversity within the system?

Questions to advance fork-based governance

  • How do we prevent brand confusion between forks?
  • How can we prevent loss of development capacity?

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I ask questions and search for solutions.

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