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A Complete Introduction To On-Chain Governance Pt.1

In the past years, crypto has attracted media attention for its market fluctuations and the new speculative bubble that formed around it. Bitcoin and Ethereum’s price shifts continue to feature on main publications’ headlines feeding the hype during bull markets and fuelling skepticism during bear markets. But despite the noise and the one-sided knowledge promoted by the media that reduce crypto and the underlying blockchain networks to objects of speculation, Web3 networks keep evolving and proving each day to be one of the biggest-game changing innovations of the years to come.

The technology is rapidly evolving and it has already begun to uproot many industries. Decentralized finance, or DeFi, is changing our financial system bringing in a more inclusive system and new paradigms for borrowing, lending, and investing. The same is happening with the creator economy where NFTs have empowered creators to put in place fairer monetisation systems and create a direct line between their art and their audience.

On-chain governance is another less explored but incredibly fascinating domain where new use cases and structures are starting to emerge. Decentralized autonomous organizations, or DAOs, are already enabling hundreds of communities around the world to self-govern and run their businesses without central authority. This is possible thanks to smart contracts which lay the foundational rules and execute the agreed upon decisions in an autonomous and completely transparent way. As new tools emerge, more sophisticated and efficient types of governance will be possible and will one day substitute our old institutions and organizations.

The world of crypto is evolving into a new stage, one that demands a more serious look at its innovations, challenges, and future developments. We still lack a substantial understanding of the ways in which crypto can change the way we organize economically but also socially. Taking a look at the way on-chain governance differentiates itself from traditional governance will enable us to gain awareness of the incredible opportunities that crypto is providing and crucially will allow us to start building the fundamentals of a new way of life.

Traditional governance vs. On-Chain Governance Explained

The first step to understand on-chain governance and its potential is to lay out the basic characteristics that set it apart from traditional governance. First of all, the term governance refers to all those processes, laws, interactions, norms that an organization or a government takes to govern a particular social system. In particular, it refers to the decision-making that happens among the different parties involved in an issue that has a collective value and that goes on to reinstate norms. There are different kinds of governance when it comes to the private sector, but we will discuss that in another article. This comparison will help us grasp the main features of on-chain governance and reflect on its possible advantages and disadvantages.

Traditional Governance

Traditional governance distinguishes itself for relying on hierarchical command-and-control structures where institutions are overseeing the making and enforcement of laws. The primary example of this kind of governance is that of nation-states and is therefore inherently political, institutional, and role-based. This mode of governance can also be called identity-based as roles are assigned and performed on the basis of actors’ identity. To better understand this concept, think of a government representative who absolves their function based on what the state represents, that is a legitimate and sovereign authority. In this context, intermediary institutions are also delegated of the state who derive their legitimacy from the state itself. Power is therefore static as authority is permanently assigned to an actor based on its identity.

On-Chain Governance

On-chain governance refers to a kind of governance whereby the rules for instituting changes are encoded into the blockchain protocol. In this system, smart contracts lay the foundational rules to execute collective decisions, vote, and even publicly audit the code itself. On-chain governance then operates autonomously and transparently, and all changes are recorded on the blockchain and can be consulted by anyone.

Community members of a DAO can collectively make decisions about the future of the project such as technical updates and fund allocation by making proposals and coming together to vote. Each member of the DAO then has the ability to influence the future of the organization regardless of his identity and role.

Power in this system is fluid as actors do not have a specific role to fulfil or rather, they can change or carve their own role by creating alliances depending on the issues that are at stake. Participants to on-chain governance are fully free to make decisions according to their best interests and their best interests also coincide with the best interest of the protocol itself, since they need to be token holders in order to be able to participate.

Differences Between Traditional And On-Chain Governance

One of the main differences between traditional governance and on-chain governance is precisely the level of involvement of its members. In a DAO, members are incentivized to be active participants, not only because the decision will affect them and their resources directly but also because there are often monetary rewards for participation. Additionally, on-chain voting successfully avoids some of the challenges of traditional voting, that is, lack of accountability, little transparency, and external influence. Since everything is recorded on a blockchain and is openly available, external meddling is very difficult and practicing accountability becomes easier. Smart contracts in fact can be programmed in such a way to perform actions only when certain conditions are being met.

Traditional vs On-Chain Governance: Voting Differences

A big advantage of on-chain governance is the level of flexibility that it offers to design governance mechanisms that better fit any organization’s needs. Although on-chain governance toolkits are still very basic, new voting models are being put forward:

Overview of different voting mechanisms

The possibilities that on-chain governance opens up are close to infinite and have the potential to disrupt not only the way we organize businesses but also the way we organize politically. The variety of tools and combinations can allow each organization to improve on its governance structure and put in place a model that truly serves its needs– this is the beauty of on-chain governance and what is emerging from it.

In the next article we are going to talk about different kinds of DAOs and governance models and the DAO tooling available on NEAR.

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