The Limits of On-Chain Governance

For blockchain enthusiasts, on-chain governance is the dream. In theory, it promises full transparency, full automation, and no middlemen, just pure code.

On the other hand (in practice), many projects are struggling with on-chain governance.

The Problem with On-Chain Governance

Looking at various protocols that have fully implemented on-chain governance, it became crystal clear to me that the dream of on-chain governance isn’t as glamorous as it sounds.

First, smart contracts are not sacred. They can be hijacked. We’ve seen attackers buy tokens, push a proposal that drains a treasury, and walk away rich. And it’s not the fault of the code. It’s just doing exactly what it was told to do. Problem is that by the time someone realizes it, it’s too late to stop it.

Second, on-chain votes leave no room for trial and error. If a proposal passes and turns out to be a disaster, reversing it requires another vote. Again, by the time the community realizes it, it’s usually too late to do anything.

Third, DAOs normally start with high engagement. But overtime, most people decide they don’t want to vote anymore. Too many votes and too many technical details leave only the nerds and whales participating, beating the whole purpose of decentralized voting.

The Balanced Approach: Hybrid

Some critical decisions need flexibility. Governance needs the ability to test new ideas, respond to its risks, and act accordingly, without requiring a vote every time!!

Some protocols, like Optimism, use off-chain governance for discussions, and on-chain governance for execution. This way, disastrous ideas get disqualified before they become code, and there’s flexibility to adapt without waiting for another slow vote.

Final Words

On-chain governance is still the backbone of blockchains, it’s not useless. The mistake isn’t using it, it’s thinking on-chain governance can solve every governance problem. Remember, governance isn’t just code, it’s also coordination.

Until the next hash, Abed.