On-chain Governance 101
What is On-Chain Governance?
On-chain governance is the process of making and implementing decisions within a decentralised autonomous organisation (DAO) using blockchain technology. These decisions are recorded on the blockchain, making them transparent, secure, and tamper-proof.
How Does On-Chain Governance Work?
Here's a classical example of how on-chain governance typically works:
Proposal Submission: Any token holder (those who hold the DAO's native cryptocurrency) can submit a proposal for consideration. This typically involves outlining the proposed change and its potential impact on the protocol.
Temperature Check (Optional): A preliminary "temperature check" vote might be held to gauge community sentiment and determine if the proposal has enough support to warrant a full governance vote.
Consensus Check (Optional): A "consensus check" vote could follow, where a higher threshold of support is required. This helps ensure that only proposals with broad community backing move forward.
Governance Vote: If the proposal passes the previous stages, a formal governance vote is initiated. Token holders can vote for or against the proposal, with their voting power often proportional to their token holdings.
Quorum and Timelock: A minimum quorum (percentage of total voting power) must be reached for the vote to be valid. If the proposal passes with sufficient support, it enters a timelock period, during which it can be challenged or vetoed by a designated group.
Implementation: If the proposal survives the timelock period unchallenged, it is automatically executed by the DAO's smart contracts, enacting the proposed change on the protocol.
Why is On-Chain Governance Important?
Decentralisation: On-chain governance ensures that decision-making power is distributed among token holders, rather than being concentrated in the hands of a few individuals or entities.
Transparency: All proposals, discussions, and votes are recorded on the blockchain, making the governance process open and transparent for everyone to see.
Security: The use of blockchain technology makes on-chain governance resistant to manipulation and fraud.
Community-Driven: On-chain governance empowers the community to actively participate in shaping the future of the DAO. This fosters a sense of ownership and encourages active participation.
Challenges of On-Chain Governance
Voter Apathy: Not all token holders participate in governance, leading to low voter turnout and potentially skewed outcomes. This can be due to lack of awareness, lack of incentives, or the complexity of the process.
Whale Influence: Large token holders ("whales") can have disproportionate influence over voting outcomes due to their significant voting power. This can lead to decisions that benefit a few at the expense of the broader community.
Complexity: The technical nature of on-chain governance can be intimidating for some users, hindering broader participation. Additionally, the nuances of specific proposals may require in-depth knowledge of the protocol, making it difficult for less experienced users to make informed decisions.
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