Off-chain governance is different from ‘on-chain governance,’ in that, you guessed it, decision making happens informally—away from the blockchain’s underlying code base. A network’s stakeholders vie for its control by coordinating through a number different avenues including community forums, social media sites, and the project’s official communication channels.
Off-chain governance looks and behaves a lot similar to politics in the existing world. Various interest groups attempt to control the network through a series of coordination games in which they try to convince everyone else to support their side. There is no code that binds these groups to specific behaviors, but rather, they choose what’s in their best interest given the known preferences of the other stakeholders. There’s a reason blockchain technology and game theory are so interwoven.
In order to understand the tradeoffs at play, it’s important to know who are the primary stakeholders within a blockchain network and what they specifically want:
Node operators are those who run and manage protocol nodes. By running the core software, they are helping distribute the amount of effort required to verify the miners’ work and ensure it’s compliant with the consensus rules. Node operators primarily want to ensure that the network’s rules are being followed and that any individual transactions they send or receive are valid. In PoW consensus, there is no monetary incentive to run a node.
Core developers are the software engineers who maintain and update the protocol’s codebase. They have a large amount of power in terms of protocol upgrades because they’re the ones writing the actual code. Core developers are primarily concerned with two things, that the blockchain they’re working on gets used and that the underlying asset’s price rises. These can sometimes work against each other as remaining conservative helps bolster price.
Miners are the entities that secure the blockchain with hash power. In PoW blockchains, miners have an inordinate amount of influence. Miners are only concerned with one thing, their profits. Miners earn revenue from mining new blocks and verifying transactions. The more transactions there are on the base blockchain, the more potential revenue that miners can earn by servicing it. These incentives have become more pronounced as many protocols begin to explore layer 2 scaling solutions. Miners don’t want transaction bloat to move to a second layer because that most likely means less fees.
There are a number of businesses that leverage blockchain protocols to create value at a second layer. Take for example Coinbase. Their exchange is a business built on top of the Bitcoin, Ethereum, and Litecoin protocols. They capture value by giving people easy access to those protocols. Similar to miners, businesses care about making money. They will support any measure that helps them earn money, and will disapprove of any measure that will hurt their revenue potential.
Users utilize the core protocol to fulfill some unmet demand. Many Bitcoin users purchase bitcoin as a hedge against an inflationary currency. Ethereum users purchase Ether to access specific decentralized financial services. Users want to be able to utilize these networks with as little cost and friction as possible.
How does Off-Chain Governance Work?
Now that we have a grasp of the stakeholders, it’s important to spell out how stakeholders coordinate and make decisions are made ‘off-chain.’
Similar to on-chain governance, protocol updates are submitted by core developers through formal improvement proposals. You’ve probably heard of Bitcoin Improvement Proposals (BIPs) or Ethereum Improvement Proposals (EIPs). These proposals are submitted to the project’s official repository which is most often times hosted on Microsoft/GitHub.
The various stakeholders signal their approval or disapproval for an improvement proposal through private and community discourse. Then, the core developers get a sense for whether or not node operators and miners will agree to upgrade their software. Ideally, all sides agree and the code changes are made smoothly. Everything is announced beforehand and stakeholders have time to update.
In the case of disagreement, stakeholders have two options. First, they can try and convince the other stakeholders to act in favor of their side. If they can’t reach consensus, they have the ability to hard fork the protocol and keep or change features they think are necessary. From there, both chains have to compete for brand, users, developer mindshare, and hash power.
Wrapping It Up
Off-chain governance is a robust system that attempts to take every stakeholders interests into account. But since decisions aren’t binding, power does tend to concentrate within the core developers and miners. This isn’t necessarily a bad thing. Off-chain governance is slow by design. It takes a much more conservative approach because high value protocols don’t always need to be changing. If the rules of a network are always in flux, users are less likely to store value there.