In 2008, Satoshi Nakamoto created an electronic payment system that uses cryptographic proof as opposed to trust, implying that it allows two parties to transact directly without requiring a central party like a bank. As new blockchains emerge, concerns about the governance or rules for instituting changes on their networks have emerged. For example, a Bitcoin development team blocked the decision to increase the block size from the current 2MBs, a move that has compromised the ability to improve the speed, efficiency, and security of the Bitcoin blockchain. On-chain governance is one of the most preferred methods of implementing changes, and this post digs deeper to explore its benefits.
On-Chain Governance: How Does it Work?
On-chain blockchain governance is a method of implementing changes where the rules are ingrained in the respective blockchain protocol. In this mode of governance, developers working on the network propose the changes they want to be made, but the proposals have to be checked and voted by nodes. This means that it can be accepted or rejected.
To demonstrate how on-chain governance operates, think of a blockchain as a type of shared database where all participants have to work together to verify transactions. So, who are these participants so critical in blockchain governance?
- Miners: These are the people who run different nodes in a blockchain system, and they help to validate transactions.
- Developers: These are the people behind the blockchain mechanics, especially the algorithm. They are also responsible for proposing areas of development and improvement.
- Users: These are investors or users in various cryptocurrencies.
The stakeholders get some incentives to participate in governance. For example, every node (miner) in PoW blockchain or staker in PoS blockchain gets rewarded from the transaction fees. It is important to note that not all participants have equal rights. For example, nodes with more coins in PoS-based blockchains have more voting power. If the change that participants are voting for is accepted, it is baselined on the blockchain.
Benefits of On-Chain Governance
On-chain governance comes with a number of benefits, and the following three are the most notable:
The Governance is Decentralized
The changes on a blockchain that uses on-chain governance are not brought through the core development community. Instead, the core development community reviews the merits and demerits while the nodes take a vote on the expected changes. Therefore, all decisions are collective.
Allows for Faster Turnaround Time for Blockchain Changes
If a blockchain relies on an informal governance model, the efforts to get a consensus can take a lot of time, resulting in unnecessary delays even on high-potential proposals. However, on-chain governance makes it easy for key decisions to be made because after proposals are made, all that participants need to do is voting to accept or reject them.
Reduces the Risk of a Hard Fork with a Great Margin
Most people investing in cryptos would want to see them grow and yield high returns on investment. Because forks are mainly aimed at breaking a blockchain, nodes are likely to reject them because they are likely to weaken the networks.
Although on-chain governance comes with impressive benefits, it is crucial to be extra careful about every step you make. This means that the wallet, payment method, and investment platforms you use should be carefully vetted and only used once proved to be secure. Visit us on this website to learn more about blockchain governance and decentralized finance.
HedgeThink.com is the fund industry’s leading news, research and analysis source for individual and institutional accredited investors and professionals