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On-chain vs Off-chain Governance

Updated: Mar 10, 2023

#17 Governance Series

What is on-chain vs off-chain Governance?

As self-revealing as the names are, on-chain and off-chain governance differ in whether blockchain components are incorporated into the governance process to ensure decentralization. With on-chain governance, the voting result can directly change the protocol’s codebase, token economics, parameters etc. With off-chain governance, an entity, like a core developer group, has to play a role in executing the will of the stakeholders. Let’s look at some examples.

Bitcoin’s Off-chain Governance

Unlike many “stake” related tokens, Bitcoin, with its PoW mechanism, does not interlock governance rights with its coin. The Bitcoin community has a mailing list including Satoshi, a forum to talk about Bitcoin improvement proposals (BIPs) as well as everything Bitcoin, and regular core dev meetings open to anyone. Yet there is no explicit governance process built on-chain. Miners are one of the major stakeholders in the Bitcoin community, yet the only explicit right endowed to miners is to verify or reject a block, which can lead to forking of the chain in the case of disputes, as witnessed in the birth of Bitcoin Cash.

Bitcoin Magazine explains a brief history of Bitcoin off-chain governance. Back in the day, there was a “​Flag Day Activation ‘’ where a block height/timestamp is notified, and those in favour of the upgrade simply start following the new rules from then on. Yet the absence of public signals with the method could easily lead to a chain split. So the community moved on to have miners include a signal inside the block they produced. The height of the threshold to determine consensus within minders varies with BIP9(95%), BIP91(80%), and BIP8 (90%). Later proposals included ways to orphan the blocks that did not include such signals to prevent a small percentage of miners from boycotting the signalling process.

What happened with the SegWit Civil War?
By separating signatures and transactions within a block, SegWit (Segregated Witness) increased the amount of information that a Bitcoin block can contain without increasing the actual block size limit of 1MB. This would mean cheaper and faster transactions of Bitcoin. Nonetheless, it took two years for SegWit to be fully activated. Bitcoin Core already had SegWit’s code lying dormant while the miners would not update the software. Coordination Failure!
Of course, the miners were against cheaper transactions. Big mining pools like Bitmain wanted a hard fork instead to increase the block size. So the larger community came up with UASF (User Activated Soft Fork). BIP148 promises that once a majority (51%) of the hash power triggers a signaling process, it will always be the longest chain. Grassroot wallets and nodes that implemented BIP148 will reject all the non-signaling blocks to be orphaned.
With a few other twists along the way, BIP148 was voted in and SegWit was locked into the Bitcoin network on August 9, 2019. (There was a soft fork against SegWit that decayed into irrelevance) The Bitcoin community has set precedent by taking initiative and making a difference, rather than playing into the hands of mining oligarchs.

On-chain Governance example in Tezos and Difinity

One can argue that the hard forks of Bitcoin Cash and Ethereum (Classic) were caused by the lack of a “formal” governance process. So what does built-in blockchain governance look like?

Tezos blockchain was designed to embody on-chain governance to make itself self-upgradable. The first step of the governance process is the proposal, where the first popular (coin) voting happens to determine which proposal to implement. Next is exploration, where the selected proposals are voted again to be tested on a separate blockchain in the next phase. If the test result has a support of over 81% of the current coin supply, it is moved onto the promotion stage and is uploaded as “hot-swap” onto the Tezos blockchain.

Tezos also has a unique coin inflation model to incentivize governance participation with the newly minted tokens. Here, the protocol gives out a proportional share of the new coins to existing stakers to reduce the impact of inflation.

Dfinity, the once-called sister chain of Ethereum with its EVM Dapp ecosystem, designed a decentralized decision-making system powered by AI: “Blockchain Nervous System (BNS)”. It is a neuron network of staked token holders that can be run on any personal device. Neurons can make proposals and cast votes with “autopilot” voting functionality that configures “follow relationships’’.

For example, a neuron can be configured to automatically follow the decision of another neuron, perhaps that of a core developer, protocol politician, etc. Moreover, after enough time has passed to measure the outcome of the executed proposals, we can create a feedback loop combined with the data points in the proposal to strengthen the autopilot.

Such an on-chain governance system has a clear upper hand in swiftly embracing the demands of the community.

The Practical Mix of On-chain and Off-chain Governance

In reality, the choice of on or off-chain governance is not black and white, with obvious benefits of being gray. Most DAOs gather signals and do “temperature checks” off-chain in Discord and/or Forum, where there is more daily activity. Then an active proposal can be moved to on-chain voting and reach the final consensus.

In MakerDAO, anyone can write a signal thread on the forum following this guide. If the thread reaches a majority for a poll, with the guidance of the Governance Facilitator the proposal is pushed on-chain to the governance portal.

A popular combination is SafeSnap, where the off-chain voting result of Snapshot can directly trigger an on-chain execution on Gnosis Safe. It is a chain-agonistic tool that any DAO on any chain can implement. Plus, the execution can be triggered by just about anything, including Discord polls! Safesnap is now called Reality, and is one of the Zodiac apps on Gnosis Safe.

As DAOs expand, operation outside the ‘headquarter chain’ grows and crosschain DAOs emerge.

Enter the new dimension of interchain governance. Zodiac, “the expansion pack for DAOs”, supports “a DAO on one chain to control assets and interact with systems like a Gnosis Safe on a different chain” through Bridge Module. A new integration was announced in November 2022 to allow more than asset management.

Closing thoughts

Today we discussed the difference between on-chain and off-chain governance with a few examples. While off-chain governance can minimize onboarding costs with easier-to-use everyday tools, on-chain governance can better guarantee decentralization and embrace the voice of the general community. Most DAOs choose both the on-chain and off-chain aspects to foster participation and decentralization with the help of tools like Zodiac. There is still a vast unexplored territory, such as cross-chain governance and L1 vs App level governance.

To understand what governance framework is most suitable for your DAO and its particular requirements, feel free to reach out.

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