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.

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.

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

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.

1. Permission to participate

Who has access to on-chain governance?

  • Stake-based governance: those who have sufficient funds.

2. Voting rights

Who has the right to vote?

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

3. Quality of decisions

Who has incentives to succeed?

  • Stake-based governance: all voters are invested.

4. Centralization risk

Who can attack the governance system?

  • 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.

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?

I ask questions and search for solutions.