On-chain governance is a blockchain-based decision-making system where stakeholders vote on proposals, and the process is transparently recorded and executed via smart contracts. For Web3 startups, this approach simplifies decision-making, builds trust, and ensures tamper-proof records of governance actions.
Key Highlights:
Transparency: All decisions are stored on the blockchain, ensuring visibility and accountability.
Stakeholder Participation: Token holders vote on proposals, submit ideas, and delegate voting rights.
Automation: Smart contracts streamline governance tasks like proposal validation and fund management.
Challenges: Low voter turnout and power concentration among large token holders can undermine fairness.
Solutions: Strategies like quadratic voting, voting caps, and tiered decision-making balance decentralization with efficiency.
To start, Web3 startups should:
Define roles and voting power.
Choose voting mechanisms (e.g., token-weighted or quadratic voting).
Use smart contracts for automation.
Address challenges like voter apathy and governance manipulation.
On-chain governance evolves with your project, transitioning from centralized models to decentralized systems as your community grows. Successful examples like Tezos and Decred show how structured governance can support long-term growth and engagement.
Web3 Summit Governance Panel with Vlad Zamfir, Gavin Wood, Arthur Breitman & Adrian Brink
Core Principles of On-Chain Governance
On-chain governance operates on key principles that enable Web3 startups to build trust and actively engage their communities through open and participatory systems.
Transparency and Accountability
Transparency is the backbone of on-chain governance. Every proposal, vote, and decision is permanently recorded on the blockchain, creating a public ledger that anyone can access. Thanks to blockchain's immutable nature, once a record is created, it cannot be altered or erased. As the Algorand Foundation explains, "Immutability allows us to trust a blockchain and is what many projects rely upon to avoid manipulation, replacement, or falsification of data on the network."
This level of transparency minimizes the risk of fraud or manipulation because stakeholders can independently verify every action without depending on third-party reports. A transparent record of decisions also fosters a stronger connection between the core team and the community.
The 2016 DAO incident on Ethereum serves as a prime example. After a vulnerability in the code led to the theft of 3.6 million ETH, the community engaged in a highly visible, on-chain debate about whether to reverse the transactions. This discussion ultimately resulted in a hard fork, splitting Ethereum into two separate blockchains.
Stakeholder Participation
Beyond transparency, on-chain governance empowers token holders to play a direct role in shaping a project's future. Instead of concentrating decision-making power within a small group, the governance model invites the entire community to participate.
Voting power is typically tied to the number of tokens held, ensuring that those with the most at stake have a significant say. But participation doesn’t stop at voting. Community members can submit proposals, engage in discussions through public forums, and even delegate their voting rights to trusted representatives. This layered approach accommodates different levels of involvement and ensures decisions align with the broader community's interests.
With real-time visibility into community sentiment, startups can adapt their strategies quickly and more effectively.
How to Implement On-Chain Governance in Web3 Startups
On-chain governance is all about striking the right balance - encouraging community involvement while keeping operations efficient enough to support long-term growth.
Set Up Governance Roles and Responsibilities
The first step in building a strong governance framework is defining who gets a say and how much influence they have. Your governance structure should reflect your project's core principles and decision-making needs.
In many Web3 projects, token-based voting is the go-to system. Here, voting power is tied to the number of tokens a person holds. While straightforward, this setup can create an imbalance, concentrating power in the hands of a few large token holders - potentially clashing with the decentralization ethos of Web3.
To counter this, you might consider a layered approach. For instance, core contributors could have more sway on technical decisions, while the wider community focuses on broader strategic calls. Another option is to issue separate governance tokens, keeping them distinct from utility tokens to clarify their purpose.
Delegating voting rights is another way to encourage participation and foster leadership. This allows token holders to pass their voting power to trusted representatives, ensuring that their voice is still heard even if they can't participate directly.
Finally, to prevent spam and ensure serious proposals make it to the voting stage, set a minimum token threshold for submitting proposals. This simple rule helps filter out less serious initiatives.
Choose and Set Up Voting Mechanisms
Once roles are established, you'll need to decide on a voting system that fits your governance model. Token-weighted voting is the most common choice, where voting power scales with token holdings. While this aligns decision-making with financial investment, it can lead to a concentration of power. To mitigate this, consider options like voting power caps or quadratic scaling.
Quadratic voting is an intriguing alternative. It curbs the influence of large token holders by making additional votes more expensive. Though more complex to set up, this system often results in decisions that better reflect the community's overall preferences.
Another option is time-locked voting, where participants must commit their tokens for a set period. This approach encourages long-term engagement and helps deter short-term manipulation.
Timing is also critical. Voting periods should be long enough to allow for meaningful discussion but short enough to keep decisions moving forward.
Keep in mind that governance and voting systems are not set in stone. They should evolve as your project grows. Start with simpler systems and add complexity as your community becomes more experienced. This gradual approach can make decision-making more inclusive and help your startup scale effectively.
Use Smart Contracts for Automation
Smart contracts can take your governance processes to the next level by automating tasks and reducing the need for manual oversight. They can handle everything from proposal submission and voting to treasury management, ensuring decisions are executed quickly and transparently.
For example, smart contracts can automatically check that proposals meet specific formatting and documentation requirements, filtering out invalid submissions. They can also include emergency pause mechanisms, allowing for swift action in response to security threats or critical bugs without sacrificing transparency.
By embedding automation into your governance framework, you can minimize delays, reduce potential points of failure, and build trust within your community through clear and transparent fund management.
However, it’s important to keep things simple in the early stages. Complex governance mechanisms should only come into play once your startup has found product-market fit and built a strong, engaged community. Starting small allows you to refine your processes as your project matures.
Common Problems and Solutions in On-Chain Governance
Even with well-thought-out governance mechanisms, on-chain governance isn’t without its challenges. These issues can affect decision-making, community involvement, and the overall effectiveness of decentralized systems. Let’s take a closer look at some of the common problems and practical solutions.
Low Voter Participation
One of the biggest hurdles in on-chain governance is voter apathy. When only a small number of token holders participate in votes, decisions may not truly reflect the community’s collective will. This lack of participation can call the legitimacy of the entire governance process into question.
The reasons for low participation are often practical. Many token holders simply don’t have the time or technical knowledge to analyze detailed proposals. Others may feel their vote doesn’t matter, especially in systems where large token holders dominate the process.
To encourage more participation, consider offering incentives such as token rewards or simplifying the voting process. Providing clear summaries of proposals in plain language can make complex topics more approachable. Hosting community calls or AMAs with proposal authors is another way to help people understand what’s at stake. The easier it is for members to grasp the issues, the more likely they are to engage.
That said, it’s important to avoid creating incentives that lead to careless or random voting just for the sake of earning rewards. Thoughtful participation is key to maintaining a governance system’s integrity.
Risk of Governance Manipulation
Another major challenge is the concentration of voting power. When a handful of wallets control a large percentage of tokens, they can steer decisions in their favor, often ignoring the broader community’s interests. This imbalance undermines the decentralized spirit that on-chain governance aims to uphold.
Large token holders can use their influence to pass proposals that benefit them or block initiatives that might reduce their control. This creates an uneven playing field for smaller stakeholders.
To counteract this, several strategies can be implemented:
Multi-signature approvals: For critical decisions, require additional layers of approval from elected representatives or technical experts. This ensures no single entity can act unilaterally.
Voting power caps: Limit the influence of large token holders by implementing diminishing returns for additional tokens. This prevents a single entity from monopolizing the governance process.
Time-based restrictions: Require tokens to be held for a minimum period before they can be used for voting. This discourages bad actors from quickly acquiring tokens to manipulate outcomes. Similarly, snapshot-based voting - where token holdings are recorded at a specific block height - can prevent last-minute token purchases from swaying critical votes.
Balancing Decentralization and Efficiency
Striking the right balance between decentralization and operational efficiency is another tough challenge. While decentralization is a core value in Web3, startups often need to act quickly to stay competitive and adapt to market changes. This creates a tension between inclusive decision-making and the need for speed.
Here are some strategies to address this:
Tiered decision-making: Reserve community-wide voting for major issues like protocol upgrades or tokenomics changes. For smaller, day-to-day decisions, delegate authority to elected councils or core teams while maintaining community oversight.
Emergency procedures: Define clear guidelines for bypassing normal governance processes in urgent situations, such as addressing security vulnerabilities or fixing critical bugs. Ensure these decisions are well-documented and reviewed afterward.
Gradual decentralization: In the early stages, startups might rely on more centralized governance to build momentum and refine their processes. Over time, as the community grows and matures, more authority can be transitioned to decentralized mechanisms.
Parallel processing: Allow different governance tracks to run simultaneously. For example, while the community debates long-term strategies, operational teams can handle routine decisions within pre-approved limits. This prevents governance from becoming a bottleneck.
As your project evolves, regularly revisit and adapt these approaches. What works during the early days of a small team may need to change as your community grows and your treasury expands into millions of dollars. Flexibility and continuous improvement are key to sustaining effective on-chain governance.
Case Studies: Successful On-Chain Governance Models
Looking at real-world examples can provide Web3 startups with valuable lessons in decentralized decision-making. These cases shed light on practical ways to ensure transparency, encourage stakeholder participation, and maintain decentralization.
Tezos: Self-Amending Blockchain
Tezos stands out for its self-amending governance model. Since its launch, it has undergone multiple protocol upgrades without triggering divisive network splits. Its governance process is organized into clear phases, allowing token holders to propose amendments, vote on them, and test changes before final implementation. One notable upgrade demonstrated strong community consensus and was executed smoothly, showcasing the importance of designing protocols that can evolve over time. For startups, Tezos highlights the value of embedding upgrade mechanisms early to ensure network stability and maintain community trust.
Decred: Balancing Stakeholder Interests
Decred uses a hybrid governance model that blends proof-of-work and proof-of-stake voting, giving both miners and token holders a role in decision-making. An off-chain proposal platform channels community ideas into on-chain votes, ensuring proposals are thoroughly vetted. Decred also features a treasury model, where a portion of block rewards is automatically allocated to a decentralized fund that supports development, marketing, and research. This approach emphasizes the need for balanced governance structures that prioritize long-term growth and public goods. For startups, Decred demonstrates the importance of creating systems that sustain development over time.
Both Tezos and Decred offer governance principles that startups can adapt to build effective frameworks.
Example Framework for Startups
Web3 startups can benefit from a phased approach to on-chain governance:
Phase 1: Foundation
In the early stages, rely on a council-based model where a small group of elected representatives handles daily decisions. Use tools like Snapshot for off-chain signaling to gather community input. Allocate a portion of tokens to a community-controlled treasury to fund future initiatives.
Phase 2: Transition
As the project scales, introduce delegation mechanisms, allowing token holders to delegate their voting power to trusted representatives. Refine proposal requirements by setting minimum deposits and establishing public discussion periods. Specialized committees can be formed to focus on areas like technology, marketing, or partnerships. Increasing treasury funding can further support key contributors and strengthen the governance system.
Phase 3: Full Decentralization
In the final phase, implement on-chain voting for major decisions, such as protocol upgrades or treasury allocations. Consider advanced voting methods like quadratic or conviction voting to balance stakeholder influence. Establish emergency procedures using multi-signature controls to address critical issues. Introducing governance incentives can also drive active participation across the community.
Education plays a crucial role in governance. For instance, Tezos provides detailed documentation and hosts workshops to explain its amendment process, while Decred publishes governance reports and organizes stakeholder calls. These efforts ensure that communities stay informed and engaged, setting the stage for sustainable governance.
Conclusion: Building Long-Term Governance for Web3 Success
On-chain governance is reshaping how Web3 startups create sustainable, community-driven organizations. But governance goes beyond just voting systems - it's about designing frameworks that grow alongside your project while keeping stakeholders' trust and involvement at the forefront.
The best Web3 projects understand that their governance structures need to align seamlessly with their tokenomics and overall business goals. This means carefully coordinating token distribution, voting power, and treasury management to uphold transparency and efficiency.
By following the principles we've discussed, transitioning from council-based models to full decentralization can serve as a practical path forward. This gradual shift allows communities to take on more responsibility while maintaining operational stability.
Engaging your community is essential for making sound decisions and achieving long-term success. Active participation strengthens the transparent and accountable decision-making processes that are vital for any Web3 project.
To recap: Web3 startups need to act now. Start with simple tools like Snapshot, set up clear proposal workflows, and adapt your governance systems as your project grows. The key to future success lies in striking the right balance between decentralization and operational effectiveness. On-chain governance is your foundation for achieving that balance.
FAQs
What can Web3 startups do to improve voter participation in on-chain governance?
Web3 startups have a real opportunity to increase voter participation in on-chain governance by focusing on strategies that make the process both engaging and easy to navigate. A good starting point is to clearly define who has governance rights and to design voting mechanisms that are straightforward and intuitive. This clarity and simplicity can go a long way in encouraging users to get involved.
Offering incentives for voting, such as tokens or other perks, can be another effective way to boost participation. Rewards not only encourage action but also show appreciation for stakeholders' time and effort. Beyond incentives, educating participants about why their votes matter can spark deeper engagement. When people understand the impact of their choices, they’re more likely to take part.
By combining user-friendly tools, transparent rules, meaningful incentives, and education, Web3 startups can build governance systems that are more active and inclusive.
What are the pros and cons of quadratic voting versus token-weighted voting in on-chain governance?
Quadratic voting and token-weighted voting represent two distinct approaches to decision-making within on-chain governance systems, each carrying its own strengths and challenges.
Token-weighted voting is simple: the more tokens you hold, the more voting power you have. This method aligns influence with financial investment, making it easy to implement and understand. However, it has a downside - large token holders can dominate the process, creating a plutocracy where smaller stakeholders may struggle to have their voices heard.
Quadratic voting takes a different route. Here, participants receive a fixed number of votes, but the cost of casting additional votes rises quadratically. This structure limits the outsized influence of large token holders, promoting a more balanced and inclusive decision-making process. That said, quadratic voting can be trickier to implement and may require safeguards to avoid potential manipulation.
Each method serves a purpose, and the best fit depends on the specific goals and governance needs of your project.
How do on-chain governance models like Tezos and Decred promote growth and engage their communities?
On-chain governance models, such as those used by Tezos and Decred, promote growth and active community participation through decentralized and transparent decision-making processes. These frameworks empower token holders to directly propose and vote on protocol upgrades, ensuring that any changes align with the collective vision of the community.
Take Tezos, for instance. It operates with a well-defined self-amendment process where proposals undergo several voting rounds and require a supermajority to gain approval. This approach ensures that updates have broad support, minimizes the chances of community divisions, and allows the network to evolve seamlessly without resorting to hard forks. By emphasizing broad participation and flexibility, these governance systems cultivate a cooperative and resilient environment, setting the stage for sustained progress.
