Decentralized Governance
Exploring the fundamental differences between off-chain and on-chain governance
Overview
- Introduction
- What is Off-Chain Governance?
- What is On-Chain Governance?
- Strengths and Weaknesses of Both Models
- Hybrid Approach
- Summary
Introduction
As DeFi continues to mature and DAOs grow ever more popular, the question of effective mechanisms becomes increasingly more popular, particularly around the topic of off-chain and on-chain governance. Each strategy, with its own set of benefits and challenges, plays a crucial role in steering the direction of decentralized protocols. In this exploration, we will unravel the specifics of these governance mechanisms, with the aim of shedding light on their applicability and suitability for different decentralized situations.
What is Off-Chain Governance?
Off-chain governance refers to the process of collecting votes on platforms such as Snapshot through what’s commonly known as “Improvement Proposals.” This helps protocols get a read on how the community feels about different issues and enables them to cast sentiment votes.
Typically, these proposals are launched on forums or Github repositories to give users a heads-up about what might be coming up in the pipeline. Then, platforms like Snapshot are used to actually enable voting. After a decision is made, the protocol’s team starts to implement the proposals. While this method isn’t typically considered fully decentralized (since the community’s votes aren’t binding on-chain and the team has the final say), it does let the community weigh in on the decision-making process.
What is On-Chain Governance?
On-chain governance shares similarities with off-chain governance such as making decisions public and open to voting. However, a key distinction lies in its execution. On-chain governance conducts the voting process directly on-chain (on the blockchain), making it binding and final. Platforms like Tally facilitate this process, offering a user-friendly frontend that enables users to create proposals, complete with executable code, in a straightforward manner.
Tally differs from platforms such as Snapshot because DAOs often utilize smart contracts to propose, vote on, and execute decisions. This method means an automated, trustless, and arguably more trustworthy environment, as the automated execution of proposals is managed directly by code, minimizing the need for manual intervention and reducing the potential for any bias or mismanagement.
Strengths and Weaknesses of Both Models
On-Chain Governance Strengths
- Transparency and Immutability: All proposals and voting outcomes are recorded on the blockchain, ensuring transparency and longevity.
- Automated Execution: Successful proposals can be automatically executed via smart contracts, ensuring the community’s voice is heard without the need for manual intervention.
- Trustless Environment: The decentralized and coded nature of on-chain governance reduces reliance on any one particular individual or team.
On-Chain Governance Weaknesses
- Gas: Every vote, proposal submission, and execution means a transaction on the blockchain, which could be very costly depending on the chain (such as Mainnet) and time of the submission.
- Complexity: Crafting proposals that contain executable code requires a certain level of technical ability, which could potentially create a barrier for the more non-technical participants (Tally does simplify this process however).
- Finality: Once a decision is made and executed on-chain, it can be challenging or in some cases impossible to reverse, despite potential unforeseen consequences. Although most DAOs utilizing on-chain governance will implement certain safety precautions such as a timelock contract to delay the execution of a function, this does not mean it is 100% foolproof.
Off-Chain Governance Strengths
- Accessibility: Without the need for any technical skills, off-chain governance can be more accessible to a wider audience.
- Flexibility: Decisions can be discussed, refined, and ultimately improved upon before any actual implementation takes place, which enables adaptability.
- Cost-Efficiency: Voting and discussions are conducted off-chain, avoiding the direct transaction costs associated with on-chain interactions. Platforms such as Snapshot simply require a user to sign a transaction in order to count their vote.
Off-Chain Governance Weaknesses
- Centralization: Final implementations are typically enacted by a protocols core team, which could potentially mean a negative impact in terms of power or influence on the outcome.
- Lack of Binding Commitment: Since decisions are not automatically executed by smart contracts, there may be delays or differences between a successful proposal and the actual implementation.
- Transparency Issues: While proposal and voting details can be public, the lack of on-chain verification could raise questions about the integrity of the outcome.
Hybrid Approach
Some protocols may take it a step further and enact a hybrid approach that combines the strengths of both on-chain and off-chain components. Proposals may be initially introduced off-chain for community discussion and, after a designated time, moved on-chain for final voting. If the proposer wants to make any changes before putting it on-chain, they have the added option of being able to do so. This adds an extra layer of community involvement and decision-making that ensures the outcome is well thought through and quorum can be reached.
Summary
To summarize, off-chain governance offers an accessible and flexible, yet non-binding approach, enabling sentiment voting and detailed discussion before implementation by the protocols core team. Alternatively, on-chain governance ensures a trustless, transparent, and immutable environment, with potentially high costs and technical complexity.
Some protocols may take the route of a hybrid approach that kicks the process off with off-chain proposal discussions, followed by on-chain proposal creation, structured voting, and a timelock mechanism for execution, all with the goal of establishing a fair and well-governed, decentralized ecosystem.
