L1 Governance

A system where governance proposals and voting are executed directly on the blockchain via smart contracts. Votes are typically weighted by a user's stake in the native token (e.g., staking or delegation). Key characteristics include:

• Transparency: All proposals and votes are immutably recorded on-chain.
• Automated Execution: Approved proposals can trigger automatic code upgrades.
• Examples: Cosmos (Prop #XYZ), Tezos (on-chain upgrades).

A social coordination process where protocol changes are discussed and decided through informal channels before being implemented by core developers. This is the dominant model for networks like Bitcoin and Ethereum. It involves:

• Discussion Forums: Proposals are debated on platforms like GitHub, forums, and community calls.
• Rough Consensus: Decisions are made based on broad community and developer agreement.
• Client Implementation: Node operators must voluntarily upgrade their software to adopt changes.

Native digital assets that confer voting rights within a protocol's governance system. Holding these tokens is the primary mechanism for participating in on-chain governance. Their functions include:

• Voting Power: Voting weight is often proportional to the number of tokens staked or delegated.
• Proposal Submission: A minimum token balance is typically required to submit a governance proposal, preventing spam.
• Value Accrual: The token's value is partly derived from its utility in steering the protocol's future.

The ultimate governance mechanism, where dissenting community members create a new, incompatible version of the blockchain. This is a credible threat that incentivizes compromise. There are two main types:

• Soft Fork: A backward-compatible upgrade; non-upgraded nodes still see the chain as valid.
• Hard Fork: A non-backward-compatible change that creates a permanent divergence in the chain (e.g., Ethereum → Ethereum Classic, Bitcoin → Bitcoin Cash).

A system where token holders can delegate their voting power to representatives or validators who vote on proposals on their behalf. This is common in Delegated Proof-of-Stake (DPoS) and liquid democracy models. It enables:

• Scalability: Reduces voter apathy by allowing experts to manage complex proposals.
• Specialization: Delegates can develop deep expertise in protocol governance.
• Liquid Democracy: Delegators can override their delegate's vote on specific issues or re-delegate at any time.

A core function of L1 governance is the allocation of the protocol's community treasury, a pool of funds (often from transaction fees or inflation) used to fund ecosystem development. Governance oversees:

• Grant Proposals: Teams submit proposals requesting funding for development, marketing, or research.
• Budget Approval: Token holders vote to approve or reject treasury expenditures.
• Examples: Polkadot's Treasury, Cosmos Community Pool. This aligns incentives by directly funding public goods that benefit the network.

A prediction market-based model where governance decisions are made based on the expected outcome of a proposal, as signaled by market prices. Voters bet on future metrics (e.g., token price) to determine policy.

• Key Feature: Uses market mechanisms to aggregate information and assess the potential value of a decision.
• Example: While not fully implemented at the L1 level, Tezos has explored futarchy concepts. It is more commonly a theoretical framework discussed in decentralized governance.
• Trade-off: Conceptually complex and requires robust, manipulation-resistant prediction markets.

A model where control over key protocol parameters or a treasury is managed by a council or committee whose actions require a multi-signature (multisig) approval.

• Key Feature: Explicit, known set of entities (often foundational teams or elected representatives) with shared custody.
• Example: Early Polygon (Matic) governance relied on a multisig council of 5/8 signers for treasury management and emergency upgrades. Many L2s start with this model before decentralizing.
• Trade-off: High-trust, permissioned model that is more centralized but operationally efficient for young networks.

Protocols that combine elements of on-chain and off-chain governance to balance efficiency, security, and decentralization.

• Key Feature: Leverages different mechanisms for different types of decisions (e.g., parameter tweaks vs. core upgrades).
• Example: Tezos uses on-chain voting for upgrades but its development is driven off-chain by research teams and bakers (validators). Cardano employs a combination of ballot voting for funding proposals (Project Catalyst) and off-chain research (IOG, Cardano Foundation).
• Trade-off: Aims to capture the benefits of multiple systems but can increase complexity.

Validators (in Proof-of-Stake) and miners (in Proof-of-Work) are the network operators who run the consensus mechanism. They are the ultimate arbiters of governance by choosing which software version to run.

• Their client adoption determines if a protocol upgrade (hard fork) is successfully activated.
• In many PoS systems like Ethereum, they also vote directly on-chain for certain parameter changes.
• Their economic stake (locked ETH or hashrate) aligns their incentives with network security and stability.

Token holders are the owners of the network's native cryptocurrency (e.g., ETH, ADA, ATOM). They participate in governance primarily through on-chain voting or delegation.

• They vote on treasury fund allocation, parameter adjustments, and sometimes protocol upgrades.
• In delegated systems (e.g., Cosmos, Tezos), they delegate voting power to validators or professional delegates.
• Their influence is proportional to their stake, leading to models described as token-weighted plutocracy.

Delegates (or Protocol Politicians) are individuals or entities who actively participate in governance debates and vote on behalf of token holders who delegate to them. This role is formal in systems like Compound or Uniswap, and informal in many L1s.

• They analyze proposals, publish voting rationale, and represent a constituency.
• They help overcome voter apathy by allowing less active token holders to participate.
• Their performance and alignment are often tracked through delegate platforms and dashboards.

Node operators run full nodes or archive nodes that verify transactions and blocks but do not participate in consensus (e.g., RPC endpoint providers, exchanges, wallet services).

• They exert governance power through client diversity—their choice of software client affects network resilience and can signal support for upgrades.
• They are critical for enforcing network rules; if they reject a validator-produced block, it is effectively orphaned.
• Their operational requirements (hardware, bandwidth) are a practical constraint on protocol changes.

Foundations (e.g., Ethereum Foundation, Cardano Foundation) and Grants DAOs (e.g., Polygon Community Treasury, Optimism Grants Council) are entities that manage substantial ecosystem resources.

• They fund core development, research, and public goods that benefit the protocol.
• They often have significant sway in setting the initial governance agenda and coordinating upgrades.
• While sometimes criticized for centralization, their role is often to bootstrap and support the network until fully decentralized governance matures.