Types of Blockchain Governance

Published by Mario Oettler on

There are two main types of blockchain governance models, off-chain governance and on-chain governance.

Off-chain Governance

Off-chain governance is the most familiar way to manage open source projects. It resembles a typical political process. Different interest groups try to influence the outcome of a decision-making process. This doesn’t only include the discussion itself but also the mechanism, how decisions are made.

This “game” is very open and there are only a very few rules. The communication can be private or via publicly accessible channels (reddit, forums like bitcointalk, etc.). In the end, the core developers get a sense of what feature should be implemented, or which rule change should be applied.

There are different types of agreement. In many open source projects, the community applies a consensus type called “rough consensus”. Instead of voting with a fixed majority, decision-makers should get an idea of what the majority of the community wants. Majority doesn’t necessarily mean only 51 %. The threshold is not clearly defined.

Both Bitcoin and Ethereum apply an off-chain governance model. Although there are particular rules exist on how contributors should submit proposals, who reviews them, and who implements them in the end, everybody could announce another governance process and invite contributors to follow this routine instead of the established one.

In a decentralized environment, the rough consensus has an advantage over a vote because it doesn’t require voter identification to avoid Sybil attacks.

On-chain Governance

With on-chain governance, the blockchain and the underlying protocol itself enforce the rules for how decisions are made are. Developers propose rule changes through code updates. And each node can vote on whether to accept or reject this update.

The weight or influence each node has can depend on two factors:

  1. mining power or
  2. amount of funds.

The more mining power or funds a node controls, the more votes it has.

But even though that looks like a clean solution with a traceable decision-making process at first glance, it gets as tricky as off-chain governance when digging deeper. The first question is, who implements the code changes? Coding and discussing code changes is done off-chain. This means although voters submit their votes on-chain the work to convince users to vote for or against an alternative is done off-chain. And subsequently, there will form discussion channels where stakeholders exchange their points of view.