Governance refers to the rules and structures guiding decisions over development, upgrades, and the management of blockchain ecosystems in a cryptocurrency network.
In a more classical system, governance would refer to a top-down, centralized authority decision-making model. Cryptocurrencies seek instead a decentralized governance platform where the community has a say in shaping its future.
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There exist different models of governance in cryptocurrency, which are differentiated by their approach toward decentralization, voting, and consensus. Let's take a look at the most prominent models currently in use.
On-chain governance is a mechanism where the rules and decisions over upgrading or changing a blockchain protocol are hardcoded directly into the blockchain.
In the model, participants-voting participants include coin holders, validators, or miners, but vote on proposals through the blockchain mechanism-result votes being executed automatically, hence not relying on an external authority.
One of the most well-known examples of on-chain governance is Tezos. On Tezos, stakeholders can suggest upgrading the protocol and holders of the native cryptocurrency, XTZ, can vote to accept or reject them.
This implies a constant mechanism of improvement with no contentious hard forks that often splits the community.
On-chain governance is made most transparent and efficient in decision making by recording each action and vote on the blockchain.
On the other hand, it is perceived to be weak and subject to domination by large token holders, which is a result of power centralization.
Off-chain governance refers to the discussions, debates, and voting away from the blockchain. Such events generally occur through forums, social media, or even any community platform.
Once such consensus is reached off-chain, developers and miners implement changes manually.
This is the basis for most large cryptocurrencies such as Bitcoin and Ethereum.
Within these networks, developers forward proposals for upgrades-for example, Bitcoin Improvement Proposals, or BIPs-and these are then discussed within the community.
If the proposal has enough support, miners and nodes will decide whether or not to accept the new change by upgrading their software.
This system is very flexible because decisions are based on feeling within the community and among experts.
But off-chain governance is sometimes slow and contentious. The debate over just how Bitcoin's scaling should increase transaction capacity dragged on for years, only to end in a hard fork that created Bitcoin Cash.
Open discussion is allowed under off-chain governance; but when there's no clear majority, these create divisions within the community.
Some networks have therefore adopted a hybrid model of governance in which on-chain and off-chain mechanisms balance each other not to sacrifice either flexibility or transparency.
An example is Polkadot, which makes some decisions on-chain through staking and voting while leaving others open to broader discussion and community input outside the blockchain.
In Polkadot, coin holders can vote on network upgrades, but the decision-making process also consists of a governance council elected by representatives.
Thus, this council can make emergency changes or intervene when the regular governance process is too slow. Using onchain as well as off-chain elements, Polkadot provides an approach with efficiency and that responds to community demands.
The weaknesses of purely on-chain or off-chain governance are met with attempts at hybrid models which combine both community input and technical solutions.
The governance models within cryptocurrency networks are rather varied, indicating the diverse philosophies and goals in the crypto space. Each governance model- on-chain, off-chain, hybrid-has its own strengths and flaws.
On-chain governance gives maximum transparency while boasting of the power of automation, whereas, off-chain governance is one where flexibility in debate takes more precedence.
The hybrid model seeks to take the best of both worlds. Ultimately, success in any governance model is going to depend on its ability to balance decentralization with effective decision-making and, therefore, sustain the network in the long term.
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