On-Chain Governance

The formal process for suggesting protocol changes, requiring a governance token deposit. Proposals are typically submitted as executable code or formal specifications (e.g., Ethereum Improvement Proposals, Cosmos governance proposals). Key steps include:

• Temperature Check: An informal signal vote to gauge sentiment.
• Formal Proposal: A binding, on-chain transaction with specified parameters.
• Deposit Period: A staking requirement to prevent spam, which may be forfeited if the proposal fails.

The systems through which token holders cast votes to approve or reject proposals. Common models include:

• Token-Weighted Voting: One token equals one vote; used by Compound and Uniswap.
• Quadratic Voting: Voting power increases with the square root of tokens committed, aiming to reduce whale dominance.
• Conviction Voting: Voting power accrues over time a voter remains committed to a proposal.
• Delegated Voting: Token holders can delegate their voting power to representatives or "delegates."

The automated enforcement of approved proposals after a mandatory delay. A timelock is a critical security feature that queues the approved code change, providing a final review period for users to react (e.g., exit positions) before execution. This process is trustless and immutable once the vote passes. For example, a DAO's TreasuryController or Upgradeable Contract logic will automatically execute the proposal after the timelock expires.

The native cryptographic assets that confer voting rights within a protocol. These tokens, such as UNI (Uniswap) or MKR (MakerDAO), are the primary vehicle for participation. Their functions include:

• Proposal Rights: Often, a minimum token balance is required to submit a proposal.
• Voting Power: Voting weight is directly proportional to the number of tokens staked or delegated.
• Economic Alignment: Token value is often tied to the protocol's success, incentivizing responsible governance.

A system allowing token holders to assign their voting power to experts or active community members, creating a representative democracy layer. Delegates (or "guardians") research proposals and vote on behalf of their delegators. Platforms like Snapshot facilitate off-chain delegation signaling, while protocols like Compound and Optimism have on-chain delegate registries. This reduces voter apathy and leverages specialized knowledge.

The ability for any community member to create a divergent version (fork) of the protocol if governance decisions are unsatisfactory. This is the ultimate check on governance power, as users and liquidity can migrate to the new fork. Historic examples include the creation of Ethereum Classic from Ethereum and SushiSwap from Uniswap's codebase. The threat of forking incentivizes governance bodies to act in the network's broad interest.

The most common model where voting power is directly proportional to the number of governance tokens held. This is a one-token-one-vote system.

• Example: Compound's COMP token holders vote on proposals like adjusting interest rate models.
• Mechanism: Users lock tokens in a governance contract to cast votes, with the outcome automatically executed by smart contracts.
• Key Feature: Direct and permissionless, but can lead to voter apathy and whale dominance.

A representative model where token holders delegate their voting power to experts or community representatives.

• Example: The Uniswap DAO, where UNI holders delegate votes to delegates who actively participate in governance.
• Mechanism: Delegates vote on proposals, and their voting weight is the sum of all tokens delegated to them.
• Key Feature: Increases participation efficiency but introduces principal-agent problems and reliance on delegate reputation.

A system designed to reduce whale dominance by making the cost of votes increase quadratically, favoring a more distributed outcome.

• Concept: The cost to cast n votes is proportional to n². This makes it exponentially more expensive for a single entity to concentrate voting power.
• Implementation: Used experimentally in Gitcoin Grants for funding allocation and proposed in early Ethereum improvement proposals.
• Challenge: Vulnerable to Sybil attacks (creating multiple identities) without robust identity verification.

A continuous voting model where voting power increases the longer a voter supports a proposal, simulating accumulated "conviction."

• Mechanism: Users stake tokens on proposals they support. Their voting power grows over time, signaling stronger support. Funds are automatically allocated when a proposal reaches a predefined threshold.
• Use Case: Primarily used for continuous resource allocation in DAO treasuries, such as funding grants in the Commons Stack or 1Hive gardens.
• Benefit: Allows for dynamic, signal-based funding without fixed voting periods.

A more centralized, permissioned form where a pre-defined set of addresses (a multisignature wallet or council) has exclusive power to execute upgrades.

• Example: Early versions of MakerDAO were governed by a Foundation and Risk Teams holding multisig keys.
• Evolution: Often a transitional phase, as seen with Maker's shift to the fully decentralized Maker Governance (MKR token voting).
• Characteristic: Faster decision-making but sacrifices decentralization and censorship-resistance.

A prediction market-based governance system where decisions are made based on market predictions of their outcomes.

• Proposal: A market is created for each proposal, trading tokens that pay out if a specific outcome is achieved.
• Decision Rule: The option predicted by the market to produce a higher value metric (e.g., token price) is automatically implemented.
• Status: Largely theoretical in blockchain; proposed but not fully implemented at scale due to complexity and manipulation risks.

Low voter turnout is a critical vulnerability, as it allows a small, potentially malicious minority to control governance outcomes. This can lead to proposal hijacking where attackers pass harmful changes with minimal capital. The cost of voting (gas fees, time) and voter fatigue from frequent proposals are primary causes. For example, many DeFi protocols see participation rates below 10% of token holders.

Token-weighted voting inherently creates a plutocracy, where the largest token holders (whales) have disproportionate influence. This centralizes control and can lead to:

• Collusion among large holders to pass self-serving proposals.
• Vote buying where proposers bribe large voters.
• Sybil resistance failure, as one entity can simply amass more tokens rather than create fake identities. This undermines the decentralized ethos and can steer protocol development away from the common good.

On-chain governance is exposed to direct financial attacks. Key vectors include:

• Proposal spam: Flooding the system with proposals to obscure a malicious one or induce voter fatigue.
• Time-bandit attacks: Exploiting the time delay between a vote passing and execution to front-run or manipulate markets.
• Treasury drain proposals: A malicious proposal that, if passed, could transfer protocol treasury funds to an attacker. The immutability of passed proposals makes these attacks irreversible if not caught in the voting phase.

The governance mechanism itself is a smart contract, creating a single point of failure. Bugs in the governance contract can be catastrophic, as seen in the Compound Finance bug (2021) where a proposal error accidentally distributed $90M in COMP tokens. Upgrading a flawed governance contract is paradoxically difficult, as it often requires a governance vote to fix itself. This creates a bootstrap problem for security.

The transparent, on-chain nature of votes enables sophisticated manipulation. On-chain bribery protocols (like Dark Forest or specific bribe markets) allow proposers to pay voters directly for their support, divorcing voting from genuine belief in a proposal's merit. This leads to short-termism, where voters are incentivized to maximize immediate payout over the protocol's long-term health, potentially approving risky changes.

Many systems encourage vote delegation to experts, but this concentrates power and creates new risks:

• Delegate apathy or malice: A delegated voter may not vote diligently or may vote against their delegators' interests.
• Private key compromise: If a delegate's keys are hacked, the attacker controls all delegated voting power.
• Lack of accountability: Delegators often 'set and forget,' failing to monitor their delegate's actions. This creates a principal-agent problem where incentives are not aligned.

A fungible token that grants its holder the right to participate in a protocol's governance process. It functions as a voting share, where the weight of a vote is typically proportional to the number of tokens held or staked. Examples include UNI for Uniswap and AAVE for Aave. These tokens are the primary mechanism for aligning stakeholder incentives and decentralizing control.

A formal, executable suggestion submitted to the protocol for a community vote. Proposals are the primary vehicle for enacting change and can include:

• Parameter adjustments (e.g., changing a fee percentage).
• Treasury allocations for grants or development.
• Smart contract upgrades to core protocol logic. Proposals often require a minimum stake of governance tokens to be submitted, preventing spam.

The specific algorithm used to tally votes and determine the outcome of a proposal. Common mechanisms include:

• Token-weighted voting: One token equals one vote.
• Quadratic voting: Voting power increases with the square root of tokens committed, reducing whale dominance.
• Conviction voting: Voting power accrues over time a voter maintains their position.
• Delegated voting: Token holders can delegate their voting power to representatives.

The on-chain controlled pool of assets (often native tokens and stablecoins) owned by the protocol's decentralized autonomous organization (DAO). Governance token holders vote on treasury proposals to allocate these funds for purposes like:

• Protocol development grants.
• Liquidity mining incentives.
• Operational expenses.
• Strategic acquisitions or partnerships.

A governance model where decision-making and coordination occur through social channels (like forums and social media) before any on-chain action. It is a pre-vote consensus-building stage. Examples include Ethereum's Ethereum Improvement Proposal (EIP) process and Bitcoin's mailing list discussions. The final implementation may still require on-chain execution by core developers or miners/validators.

The creation of a new, divergent version of a blockchain or protocol, often resulting from irreconcilable governance disputes. In on-chain governance, a protocol fork occurs when a faction disagrees with an approved upgrade and launches a competing chain with different rules. This acts as a final, market-based arbitration mechanism. Historical examples include the split that created Ethereum Classic from Ethereum.