On-Chain Proposal

An on-chain proposal is the primary mechanism for decentralized decision-making. It is a smart contract transaction that, if approved, automatically executes its encoded logic. This contrasts with off-chain signaling, which requires manual implementation. Key components include:

• Proposal ID: A unique on-chain identifier.
• Executable Calldata: The code or parameters for the change.
• Voting Period: A defined time window for token holders to cast votes.

A proposal follows a strict, transparent path from creation to execution.

1. Submission: A proposer deposits funds (a proposal deposit) and submits the transaction.
2. Voting Delay: A period for discussion before voting begins.
3. Active Voting: Token holders vote using mechanisms like token-weighted voting or delegate voting.
4. Timelock & Execution: If the quorum and majority threshold are met, the proposal may enter a timelock delay for review before final, automatic execution.

Proposals can enact various levels of change within a protocol.

• Parameter Change: Adjusting system variables (e.g., interest rates, fee percentages).
• Treasury Spend: Authorizing payments from the community treasury.
• Smart Contract Upgrade: Deploying or migrating to a new protocol implementation via a proxy contract.
• Governance Meta-Change: Modifying the governance system's own rules (e.g., voting period length).

Understanding these terms is essential for evaluating proposals.

• Quorum: The minimum percentage of voting power that must participate for a result to be valid.
• Timelock: A mandatory delay between approval and execution, allowing users to exit if they disagree.
• Proposal Threshold: The minimum token balance required to submit a proposal, preventing spam.
• Snapshot: A common off-chain tool for gas-free voting signaling that often precedes an on-chain proposal.

Major DAOs use on-chain proposals for critical upgrades.

• Uniswap: Proposals to deploy to new chains, adjust fee structures, and allocate treasury funds.
• Compound: Proposals to add new collateral assets and adjust risk parameters like collateral factors.
• Aave: Proposals to activate new safety modules, upgrade the protocol, and manage the Aave Grants DAO. These demonstrate the mechanism's role in managing DeFi protocol risk and evolution.

Robust proposal design mitigates risks in decentralized governance.

• Multisig Execution: Requiring a multisignature wallet to execute approved proposals adds a final human review layer.
• Emergency Procedures: Protocols often have separate emergency shutdown or pause guardian mechanisms for critical bugs, bypassing the slower proposal process.
• Code Audits & Forks: All upgrade proposals should have undergone extensive smart contract audits. The threat of a protocol fork acts as a final check on governance power.

An on-chain proposal follows a deterministic state machine defined by the protocol's smart contracts. Key states include:

• Submitted/Deposited: Proposal is created, often requiring a deposit.
• Voting Period: Token holders cast votes with their stake.
• Passed/Rejected: Outcome is determined by quorum and majority thresholds.
• Executed: If passed, the encoded transaction is automatically executed on-chain.
• Failed: Can fail due to insufficient quorum, veto, or execution errors.

On-chain governance introduces specific security considerations:

• Proposal Spam: Malicious actors may flood the system with proposals, requiring deposit requirements and spam prevention mechanisms.
• Timelocks: A critical security feature that delays execution after a vote passes, allowing users time to react to malicious changes.
• Governance Capture: The risk that a large token holder (or cartel) can consistently pass proposals against the network's interest.
• Parameter Exploits: A proposal that maliciously changes a critical system parameter (e.g., fee recipient) can be catastrophic.

Voting power is typically derived from a governance token, with mechanisms to prevent Sybil attacks:

• Token-Weighted Voting: One token equals one vote. Simple but favors wealth concentration.
• Quadratic Voting: Cost of votes scales quadratically, aiming to reduce whale dominance.
• Delegation: Users can delegate voting power to representatives or "validators."
• Quorum Requirements: A minimum percentage of total voting power must participate for the vote to be valid, preventing low-turnout attacks.

A passed proposal contains code or parameters for on-chain execution.

• Direct Execution: The proposal payload is a transaction that modifies protocol contracts directly (e.g., changing a fee).
• Social Consensus / Off-Chain Signaling: For major upgrades (hard forks), an on-chain vote may signal community sentiment, but execution requires validators to adopt new client software separately.
• Multisig Fallback: Some systems use a multisig wallet as a failsafe to execute or veto proposals in emergencies.

The security and responsiveness of the system are governed by tunable parameters, often set by prior proposals:

• Voting Period: Duration of the voting window (e.g., 3-7 days).
• Quorum: Minimum percentage of total voting power required for a valid vote.
• Threshold: Majority required to pass (e.g., >50% for simple majority, >66.6% for supermajority).
• Proposal Deposit: Amount of tokens locked to submit a proposal, slashed if it fails.
• Timelock Delay: Time between a proposal passing and its execution.

Different blockchains implement on-chain proposals with distinct flavors:

• Compound & Uniswap: Use token-weighted voting for treasury management and parameter changes on Ethereum.
• Cosmos Hub: Uses a Text Proposal for signaling and a Parameter Change Proposal for direct, on-chain updates to module parameters.
• MakerDAO: Complex Executive Votes bundle multiple spell contract changes into a single proposal, executed via the DS-Chief system.
• Tezos: A self-amending ledger where passed proposals are automatically tested on a testnet fork before final upgrade.

The end-to-end process of an on-chain proposal, from ideation to resolution. A standard lifecycle includes distinct phases:

1. Drafting & Temperature Check: Informal discussion off-chain.
2. Submission: Formal on-chain proposal creation with a deposit.
3. Voting Period: Active casting of votes by token holders.
4. Timelock Delay: Mandatory waiting period post-approval.
5. Execution/Expiry: Final on-chain action or proposal expiration. This structured process ensures methodical and transparent decision-making.