Cryptocurrency isn’t a Blockchain, here is the point
04.08.2022
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If people are not mentioning bitcoin then they would be speaking about cryptocurrency or blockchain.…
On-Chain Governance Demystified
On-chain governance refers to a system that manages and implements changes to the blockchains of cryptocurrencies. This governance is different from the other types of governance. This is because rules that institute the changes are encoded in the blockchain protocol. In addition, developers do propose changes through code updates, and every node votes if they should reject or accept the proposed changes.
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On-chain governance is a way of upgrading the blockchain protocols through on-chain voting. It is different from off-chain governance because that one needs the agreement of all the stakeholders in upgrading their software. The stakeholders include users, miners, node operators, as well as core developers.
On-chain governance is different as anyone may propose a code change in the protocol. After that, the token holders vote during an encoded voting period whether the code should be integrated or not. In addition, the system provides a voice call to all the token holders and offers a more efficient way to settle disputes.
Understanding On-Chain Governance
Even though most people that in crypto, there is an informal system, that is not the case as Blockchain forks prove it wrong. An example is 2016 when there was an improvement in the crypto world where Ethereum was divided into Ethereum Classic and Ethereum. Earlier on, the developers proposed another improvement, which was faster and easier to implement. Unfortunately, its implementation was unsuccessful as it would have resulted in losses.
Mechanisms of On-Chain Governance
The first mechanism is an incentive. In leveling the playing field for all the stakeholders or rather players, there is a shift in control. The control comes from the miners to the developers and then to the users. For instance, in some cases, the developers and users may advocate for modifications to reduce transaction fees. Such modifications may make the miners disadvantaged and this can make the network economically unsustainable. In the same way, the miners may advocate for upgrades increasing block rewards. In the long run, this may harm the network.
Information is the second mechanism. In this case, on-chain requires information transparency like in off-chain governance. The decision-making approach is decentralized and effective as one person does not influence it. Instead, it is achieved by a community. In addition, there is more transparency as every individual may look at the code and see the way decisions are made. Through it, you may also see the way see the process of establishing consensus.
The last mechanism is consensus. In the on-chain governance, voting is directly done through the protocol. Thus, the technique of consensus is the same as the direct democratic voting style. This is because the decisions are directly made in distributed ledger protocol.
The Advantages of On-chain Governance
On-chain governance is good as it develops binding agreements. Therefore, they are able to eliminate uncertainties that surround changes. They also ensure that any successful code change voted is implemented.
Accountability
On-chain governance enhances accountability. This is because all the updates about a decision can be found and even tracked. Moreover, there are some forms of transparency. Being transparent reinforces consistent ideas and fairness and also offers the users the chance of knowing if a blockchain community may join them before committing anything. In the on-chain governance, all the decisions are made transparent and the stakeholders should know before any voting process takes place.
Decentralized Decision-Making Process
On-chain governance enhances the decentralized decision-making process. It does this by giving any entity that holds blockchain tokens to vote on any protocol changes. In informal systems, the node operators and users may only signal through other ways. They may include mailing lists, social media sites, and community forums. This means that as compared to the on-chain governance, they cannot directly influence changes.
Quicker Consensus
Through the on-chain governance, there is quicker consensus. The code changes may be implemented quickly as there are encoded voting period. Stakeholders know that there is usually a fixed period of time where there is a fixed time that they signal their disapproval or support for a code update. It is different from the informal system where people can indefinitely debate about the code updates.
Few Malicious Hard Forks
In the on-chain governance, there are fewer malicious hard forks. This kind of governance highly helps in deterring the hard forks. Do you know when hard forks take place? They do occur when some of the stakeholders cannot agree to a resolution regarding protocol changes. These forks may be damaging as the network competes for the same users and brand. Therefore, the on-chain governance averts the hard fork as stakeholders feel enfranchised in case, they have a fair say regarding the way protocol should adapt.
The Disadvantages of On-chain Governance
The first limitation of this type of governance is that the system just allows low voter turnout. Also, it tends to have voter manipulation by the token holders who are powerful. The other disadvantage is that the system just benefits the powerful token holders. This gives them the chance of influencing future decisions which will mainly focus on profits. They are not concerned with achieving public blockchains’ goals.
