On-chain governance is a system of managing and implementing changes to cryptocurrency blockchains. In this type of governance, rules for instituting changes are encoded into the blockchain protocol. Developers propose changes through code updates, and each node votes on whether to accept or reject the proposed change.
Understanding On-Chain Governance
A blockchain network is a system that contains a distributed ledger similar to a shared database. Transactions are recorded on the blockchain and shared with all of the participants. Whenever a new transaction is conducted, a new block is added to the blockchain. However, there are consensus protocols, which must be followed for the transaction to be considered valid. Miners also called nodes, verify the data to ensure its accuracy and that the necessary parameters regarding the transaction have been satisfied.
Once miners have completed their verification process, the results are submitted to the network. After the review by other nodes or participants and reaching consensus, a new block is added to the network. Miners usually receive compensation for their efforts, which is called a Proof of Work system or process.
Participants in On-Chain Governance
Unlike informal governance systems that use a combination of offline coordination and online code modifications to effect changes, on-chain governance systems work only online. Changes to a blockchain are proposed through code updates, and developers must submit improvement proposals to make changes to the blockchain. A core group consisting mostly of developers is responsible for coordinating and achieving consensus between stakeholders. Typically, on-chain governance involves the following stakeholders:
• Miners — who operate the nodes that validate the transactions
• Developers — who are responsible for core blockchain algorithms
• Users or participants — who use and invest in various cryptocurrencies
Stakeholders in the process are offered economic incentives to participate. For example, each node can earn a cut of overall transaction fees for voting, while developers are rewarded through alternate funding mechanisms.
The participants or nodes can vote to accept or decline a proposed change. However, not all nodes have equal voting powers. For example, nodes with greater holdings of coins have more votes than nodes with a relatively lesser number of holdings. Accepted changes are included in the blockchain and baselined. In some instances of on-chain governance implementation, the updated code may be rolled back to its version before a baseline if the proposed change is unsuccessful.