Blockchain Governance 101

(Part 2)

Published in

aelf

5 min readFeb 8, 2019

In Part 1 of this discussion, we touched briefly on the debate between on-chain and off-chain governance. Here, we will build upon this debate, establishing some pros and cons for both on-chain and off-chain governance models.

What Do We Mean by On-Chain or Off-Chain Governance?

On-chain governance refers to things that happen through code implemented on the blockchain. In an everyday situation, transactions on a blockchain are confirmed using an on-chain governance protocol such as proof-of-work. Aelf uses the DPoS protocol, which we have explained in a previous article outlining the rationale along with the drawbacks of proof-of-work and proof-of-stake.

However, in all blockchains, there is a need to make decisions that stretch beyond confirming transactions to be added to the ledger. Software upgrades are a vital consideration, whereby the community needs a mechanism to agree which upgrades are implemented.

Furthermore, there is another critical component in the on-chain versus off-chain governance debate, which is what happens when something goes wrong. One of the best examples is the case of The DAO incident that took place on the Ethereum blockchain in 2016. A malicious attacker found a loophole in the smart contract code underpinning The DAO and exploited it to siphon off investor funds. The Ethereum community voted on a hard fork that would undo the damage, recovering the siphoned funds from the account the attacker was using.

This decision was extremely controversial, causing an irreparable division in the Ethereum community. On the one hand, there were those who believed that undoing the damage and returning investor funds was paramount. On the other, there were those who stood by principle that the community shouldn’t act to overturn the immutability of the blockchain.

The argument goes to the core of on-chain versus off-chain governance. It’s precisely because Ethereum has an off-chain governance model that the reversal could happen.

On-Chain Governance in Practice

From the above example with Ethereum, we can see that on-chain governance takes a “code is law” approach. It means that all upgrades and software changes, once voted in by the community, are hard-coded into the protocol. Moreover, some advocates take this as far as to say that the immutability of blockchain should never be challenged.

Proponents of on-chain governance argue that control of the blockchain in off-chain governance is centralized to core developers and mining pools, contravening the core principle that blockchains should be decentralized systems. They also argue that there is not enough incentive for new developers to get involved in existing projects, harming innovation.

One of the most cited examples of an on-chain governance project is Tezos, which calls itself a “self-evolving blockchain.” In the Tezos environment, any developer can submit a code update to the project together with an invoice which is paid if the update is implemented. There is a specific process for the Tezos community to vote on upgrades, which must pass through a test environment before going into full implementation.

Another example is Dfinity, which points to the need of a blockchain to handle high-profile hacks and attacks like The DAO. Therefore, Dfinity allows users to vote whether or not they want to roll back confirmed transactions on the blockchain in the event of such an attack. This is in addition to on-chain mechanisms for voting on upgrades.

On-chain governance has clear advantages. It can allow faster block confirmation times. It also provides a framework for full decentralization of upgrade decisions beyond a centralized developer community which in turn, reduces the incidence of hard forks.

However, on-chain governance relies on the full participation of a voter community, which becomes challenging at scale. It also assumes that all voters are acting in the interests of the broader community, which may not always be the case and can be dangerous where there are voters with more power than others. A further risk is that users who find their decisions overridden by the will of the majority may just leave the community if they have no option to hard fork into a new blockchain.

Off-Chain Governance

Off-chain governance provides a “committee” approach to software upgrades and fault corrections. Both Bitcoin and Ethereum adopt this approach, with their respective foundations playing a role in the governance process to ensure appropriate checks and balances.

The benefits and drawbacks of off-chain governance are diametrically opposite to those of on-chain governance. While humans can intervene to prevent the blockchain from automatically implementing “bad” decisions, this can be divisive if not all parties agree, leading to hard forks. It doesn’t require large groups of voters to get involved. However, it means decision-making becomes centralized to a core group of people, which fails to realize the benefits of full decentralization.

Conclusion

As already stated, aelf operates the DPoS governance protocol. In our whitepaper, we acknowledge the fact that aelf token holders have the greatest right in the future of aelf, and token holders’ interests are linked with the destiny of aelf. Therefore, upgrades to the aelf main chain are decided by our token holders, through their elected representatives.

However, using aelf sidechains, a developer isn’t confined to using the DPoS protocol. They can decide for themselves which governance and consensus protocols they wish to implement on their sidechain. This allows developers to use a consensus protocol that they believe will best meet the specific objectives of the sidechain functionality.

When considering the question of on-chain versus off-chain governance, it’s important to understand that there is no right or wrong answer. There are proponents on both sides who have valid arguments to make. Unless and until someone comes up with a perfect governance design, which seems unlikely, then the ability of blockchain to remain flexible in this regard is perhaps one of the technology’s greatest assets.