On-chain governance is a mechanism used in blockchain networks to make decisions, implement protocol upgrades, and manage the network’s operation directly on the blockchain itself. It allows network participants to have a say in the evolution of the blockchain and its rules by using tokens or other forms of stake as a voting mechanism.

Here are the key characteristics and components of on-chain governance:

Token-Based Voting: In on-chain governance, participants often use the native tokens of the blockchain network to cast votes on proposals or decisions. The more tokens a participant holds, the more influence they typically have in the decision-making process. This is sometimes referred to as “coin voting.”

Proposals: Any network participant can create a proposal for changes or upgrades to the blockchain protocol. Proposals can cover a wide range of topics, including protocol upgrades, changes to network parameters, funding allocation, and more.

Voting: Once a proposal is created, network participants can vote on it using their tokens. The voting process can have various rules, such as requiring a minimum threshold of votes or a supermajority to pass a proposal.

Smart Contracts: Smart contracts are often used to facilitate the voting process and automate decision execution. These contracts enforce the rules of the governance system, tally votes, and execute the outcome of successful proposals.

Transparency and Immutability: All governance activities, including proposals, votes, and outcomes, are recorded on the blockchain, ensuring transparency and immutability. This means that anyone can audit the governance process and verify its integrity.

Forks and Upgrades: On-chain governance can lead to forks in the blockchain when there are disagreements over proposed changes. If a significant portion of the community disagrees with a decision, they may choose to fork the network and create a new chain with different rules.

On-chain governance is used by several blockchain projects, including Tezos, Decred, and Polkadot, among others. It is seen as a way to make blockchain networks more decentralized and community-driven, allowing stakeholders to participate directly in the decision-making process without relying on centralized authorities. However, it also has its challenges, such as voter apathy, plutocracy (where the wealthy have more influence), and the potential for contentious forks.