What it means
Every blockchain needs rules about how it can change, such as altering fees, upgrading code or paying for new development. In off-chain governance, these choices are debated in forums and settled by developers and miners or validators agreeing informally.
In on-chain governance, the vote is a transaction on the ledger, and the outcome is counted by software rather than by a committee. A typical process has three stages.
Someone submits a proposal and usually locks up a deposit to show they are serious, token holders then vote for a set period, and if the proposal passes the agreed change is carried out by a smart contract (code that runs automatically when its conditions are met). The rules for quorum and passing thresholds are written into the system in advance.
Votes are normally weighted by the number of tokens held. This makes the process simple to count but also means large holders have more power, which is sometimes called plutocracy (rule by the wealthy).
Many systems allow holders to delegate their votes to representatives who vote on their behalf, and this can raise turnout while concentrating influence. From a finance perspective, governance affects value.
A treasury that holds millions of dollars of tokens is a real pool of capital, and the people who control proposals decide how it is spent. Investors therefore look at turnout, how concentrated the votes are, and whether the rules protect minority holders.
There are trade-offs. On-chain voting is transparent and hard to tamper with, but it can be slow, can be swayed by a few large holders and can lock in mistakes because the result runs automatically.
Some projects therefore add a delay between a vote passing and the change taking effect, giving users time to react.
In practice
Real-world examples.
Example
A lending protocol holds $20 million in its treasury and asks token holders to vote on whether to pay for an external security review costing $400,000. The proposal passes with a clear majority. Payment is made automatically after a two-day delay.
Example
A decentralised organisation that owns a collection of digital assets lets members vote on a proposal to sell part of the collection. A few large holders vote against, and the sale is rejected. Smaller holders complain that their influence was too small to matter.
Example
A payments network wants to change its fee rate from 0.10% to 0.08% to attract more volume. The proposal is put to a vote and passes. The finance team of a business using the network updates its cost model and expects to save $8,000 on each $40 million of annual transactions.
Formula
Calculation
Quorum met if total votes cast >= quorum percentage x total voting supply
Proposal passes if yes votes / total votes cast > required threshold
Suppose a network has a voting supply of 100,000,000 tokens, a quorum of 10% and a passing threshold of more than 50%. A proposal asks for a grant of $500,000 from the treasury to fund a new security audit.
Quorum = 10% x 100,000,000 = 10,000,000 tokens.
Votes cast: 7,000,000 yes and 4,000,000 no, so the total is 7,000,000 + 4,000,000 = 11,000,000, which is above the 10,000,000 quorum.
Yes share = 7,000,000 / 11,000,000 = 63.6%, which is above 50%, so the proposal passes and the $500,000 is released.Case study
Seen in the real world.
Tidewater Protocol is an illustrative, fictional blockchain network that holds a treasury equal to $12 million. A proposal was made to spend $2 million on marketing, and early votes suggested that it would pass easily.
A group of analysts noticed that three wallets held 45% of the votes cast, so the result depended on a handful of parties. They published a short report asking the community to wait, and a second proposal was added to cap grants at $500,000 without further review.
The marketing proposal was reduced to $500,000 and passed with broad support. The illustrative lesson is that the technical process works as designed, but healthy governance also depends on turnout, spread of voting power and sensible spending limits.
Watch out
Common mistakes.
- Assuming one person gets one vote, when most systems weight votes by the number of tokens held.
- Treating a passed vote as a guaranteed good decision, when automatic execution can lock in an error.
- Ignoring low turnout, which lets a small group decide outcomes for the whole network.
Questions
People also ask.
What is the difference between on-chain and off-chain governance?
On-chain governance records and counts votes on the ledger itself, while off-chain governance relies on discussion and agreement outside the ledger before changes are made.
What is a quorum?
It is the minimum amount of voting participation needed for a result to count, and it prevents a tiny group from deciding on behalf of everyone.
Why do some systems add a delay after a vote?
A delay gives users and developers time to review the change and exit the system if they disagree before it takes effect.
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