Decentralization can be measured in multiple ways.

Let’s look at a rigid example with StableLab’s DAO meter data as a framework for measuring decentralization and maturity in DAOs. While the frameworks can be expanded, transitioning to on-chain governance is the closest a DAO can get to being sufficiently decentralized. Presently, most DAOs use off-chain processes such as Snapshot for signaling, and then actually implement a proposal through a multisig contract, making the governance susceptible to a single point of failure.

As Arbitrum further decentralized by airdropping tokens to the community and putting the governance in the hands of the community, they faced severe backlash in their first proposal as the community voted against the proposal, but the decision had already gone the other way. This example has been one of the most compelling problems with off-chain governance. As the proposal vote may not be put into action due to reliance on social trust and not being a trustless mechanism.

The Benefits of On-chain Governance

On-chain voting is the process of casting the vote directly on the blockchain by encoding governance rules via data storage and executing their operations autonomously.

On-chain governance results in directly changing the protocol’s codebase, parameters, etc., and it requires the protocol to make the management of its smart contracts objective.

Some of the benefits of on-chain governance include:

• Seamless execution of proposals in a trustless manner without dependence on a trusted third party

• Voting on-chain is transparent and permanent

• On-chain voting is best suitable for critical processes such as treasury allocation and protocol upgrade

On-chain voting is often added with an on-chain or off-chain poll before the proposal is decided with on-chain voting. Off-chain signaling can be used to determine governance processes outside the technical realm, form consensus on important community goals, determine the proposal that goes for on-chain voting, and ratification of technical parameters.

While on-chain voting can be used for objective proposals such as treasury allocation, parameter changes for DeFi protocols, and technical upgrading of smart contracts, the most optimum on-chain governance system is a hybrid structure which uses off-chain signaling tools to structure a proposal that can then be executed on-chain.

How Off-Chain Governance Complements On-Chain Governance

While on-chain governance epitomizes the gold standard of decentralization, protocols often adopt off-chain governance mechanisms such as Snapshot voting due to its simplicity and built-in composability features. On-chain governance involves high audit costs, voting costs in the form of gas fees, the contracts are inflexible leading to bureaucracy and voter fatigue, limited to technical layer use, and limits scalability.

Aave’s $2.8M in bad debt caused by a trader is an example of how time delays in on-chain governance can be exploited, and manipulated, to act in an unintended way due to the parameters being generalized and the requirement for on-chain governance.

Speaking of off-chain governance, Snapshot is the most widely used tool for governance voting. However, Snapshot is not without its limitations — namely various bugs and the inability to implement proposals on-chain. Snapshot has launched Osnap, a tool for making on-chain transactions based on off-chain decisions. Osnap uses Snapshot and Safe (formerly Gnosis Safe) to execute the outcomes of DAO governance proposals in a decentralized manner, requiring no other intermediaries. It’s designed to let DAOs autonomously execute outcomes of Snapshot votes via a Safe wallet. Tools that connect off-chain governance with on-chain governance in a trustless manner could assist in fostering a robust governance system.

DELV (Formerly Element Finance)

Element’s Council has released a new governance UI built on top of the Council kit, enabling contracts to use the security of on-chain governance while allowing unprecedented contract flexibility.

The Council kit serves as a new governance framework that differs from existing on-chain contracts or hybrid models. The protocol introduces a Core Voting Contract with dynamic voting strategies, a dynamic quorum, and optional time lock features, along with four modules that are adaptable for different use cases. The voting vaults module solves the limitation of token-weighted governance by allowing protocols to define accepted strategies, while the Governance Steering Council module introduces a board of directors-like entity with customizable permissions. The modularity of the Element Council allows for customization, enabling Element Finance to add and remove modules according to the protocol’s evolution. This model addresses the inflexibility surrounding present on-chain governance models.

Optimism’s Governance by Agora

Optimism has decentralized gradually, and has now moved on to on-chain voting as the next step of decentralization.

Optimism uses liquid delegation as the voting mechanism. Building a tool for on-chain voting on top of it is challenging, and could suppress the innate features of delegation. Optimism has transitioned to on-chain voting using Agora. Agora is a set of new tools that make it easier and more transparent for people to participate in decision-making for Optimism, a blockchain network. These tools enable a new set of features for people who hold a large amount of tokens, allowing them to delegate their voting power in more flexible ways. The tools also provide real-time information on who is delegating and voting and track the progress of projects that are being voted on. Agora aims to make it easier for people to participate in decision-making and attract more high-quality contributors to the network.

Since the launch of Agora on Optimism for its first on-chain vote, Agora has seen more than 100k unique visits and 50K voters on their first proposal, making it the most participated in on-chain vote ever. The tool also incorporates Professional Delegates such as SNX and GFX to vote through their multisigs.

The Current Landscape of On-chain Governance

Gradual decentralization is seen as a time-tested approach to decentralization.

Protocols often start by relying on the core team for executions or implementation and move on to off-chain governance with multi-sig execution to advance to the next phase of decentralization. As the DAO achieves more maturity, it shifts to a hybrid or completely on-chain governance system, signaling better decentralization. Presently, most DAOs practice either off-chain governance or hybrid governance.

On-chain governance is a goal and a path that has taken the DAO closer to the dream of decentralization. But, it does not solve for governance issues such as low voter participation and the other drawbacks of on-chain voting across the spectrum of governance.

Gas rebates have helped to address the issue of increased on-chain governance costs, while gasless voting options, such as uni.vote by Uniswap, have also emerged as solutions. Toolings have also been under development around leveraging off-chain voting to be integrated into trustless on-chain execution, such as Snapshot’s Osnap and Aragon ZK’s Batched Ratified Voting. Aragon and Aztech network are currently working on developing a private voting structure for Nouns.

Closing Thoughts

While on-chain governance may be the gold standard of decentralization, the current landscape shows that off-chain governance complements on-chain governance, and vice-versa.

On-chain governance is the next step towards decentralization as it provides a trustless and transparent governance mechanism that enables the seamless execution of proposals. On-chain governance also eliminates reliance on third-party governance processes, making the governance process objective.

While on-chain governance may face some challenges such as voter fatigue and limited scalability, it can evolve with improvements in voting processes, delegation schemes, defense against attack vectors, and newfound flexibility in smart contracts. Combining off-chain and on-chain mechanisms will foster participation and decentralization within a DAO. The current progress of on-chain governance shows that it is a path to better decentralization, and as more protocols gradually decentralize, we can expect to see more innovative governance models emerge. DAOs must choose the right governance framework that meets their needs and goals, and it’s important to strike a balance between decentralization and practicality.

As the blockchain ecosystem evolves, we can expect to see more advancements in on-chain governance, such as improved scalability, lower gas fees, and more flexible smart contracts. These improvements will enable more efficient and effective on-chain governance, making it a more attractive option for DAOs.

In conclusion, on-chain governance and off-chain governance both have their strengths and weaknesses. DAOs should strive for a hybrid approach that leverages the benefits of both methods to achieve better decentralization and more efficient decision-making. The evolution of on-chain governance is an ongoing process, and we can expect to see continued innovation and development in the coming years.