What Is On-Chain Governance?
Also known as: Onchain Governance
In short
On-chain governance is a governance model in which proposing, voting on and implementing changes to a blockchain or protocol is carried out directly on the blockchain, generally through the votes of token holders and via smart contracts.
In on-chain governance, proposals are submitted to the chain as a transaction, token holders cast their votes through transactions as well, and the result is calculated automatically according to set thresholds. An approved proposal is usually implemented, without anyone's intervention, after a timelock period. Many DeFi protocols on Ethereum use contracts similar to the Governor model developed by Compound. Some Layer 1 networks such as Tezos and Polkadot are designed so that protocol upgrades can be adopted through on-chain voting; this reduces the need for hard forks.
The advantages of the model are transparency and predictability: how everyone voted is visible to all, and the implementation of decisions is not left to the discretion of a single person. However, it also has risks. Because voting power depends on token amounts, large holders can decide outcomes, and participation is generally low. In 2022, an attacker on the Beanstalk protocol briefly acquired a large number of governance tokens with a flash loan, got a proposal in their favor approved and drained the protocol's funds.
Against such attacks, protocols apply measures such as basing vote counting on balances at a past block, timelocks and high quorum requirements.
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