August 12, 2020

on-chain and off-chain management: pros and cons

on-chain and off-chain management: pros and cons

To understand the importance of blockchain management and discussions around this issue, you first need to determine what such blockchain management, its role and goals. The cryptocurrency blockchain management consists of two points: protocol rules (code) and economic incentives on which the network is based.

Blockchain protocols have evolved significantlyfrom the moment of their creation, however, one cannot deny the fact that they are still at an early stage of development and there is a significant reserve for further improvements. Every day, innovative solutions appear and are introduced in areas such as scalability, confidentiality, etc. Some of these solutions are very popular, some of them have failed. Adaptability is the key to success.

The last striking example of such a solutionis the recent Monero hard fork aimed at blocking ASIC miners to avoid mining centralization. This case demonstrates to us that the blockchain protocol must be able to adapt and improve in order to stay afloat in the long run. Such an ecosystem, obviously, needs a management system that will deal with the administration of proposals, the introduction of technologies, etc. Some of the major blockchain projects, such as Tezos, Dfinity, Decret, have already introduced on-chain management models in which management is an integral part of the protocol, like any other component. However, before agreeing to their proposal, it is important to begin to understand how the current management scheme works, as well as its pros and cons.

The key to blockchain management is the analysis of various classes of network participants, their individual incentives and coordination of the interaction of actors.

Different classes of network members:


Miners are the backbone of the network, it is they who helpsupport her work. Their incentives are block rewards and transfer fees. As a result, miners are more likely to prefer changes that will add value to their existing assets, increase / retain rewards for blocks and transfer commissions.


Developers play a very important role, starting fromprotocol ideas, ending with network support after launch. Their incentives are the potential increase in available assets and fame in the community / field for their contribution.


Users, like other participants, prefer updates and developments that not only increase the value of their current assets, but also improve the functionality of the system.

Obviously, all different participants havesome common incentives, however, asymmetries in the incentives do arise, and this causes a lot of control problems. For example, users and developers can insist on changes that drastically reduce commission fees, which miners obviously will not like, which will result in the inability of the network to economically support its existence. Likewise, miners can insist on changes that will increase block rewards, but in the long run this can damage the network. It is important to study such asymmetries and find a middle ground. Let's take a look at how existing protocols such as Bitcoin and Ethereum are managed.


Bitcoin has an off-chain management approach. Its developers are coordinated through the mailing list, and they also support the Bitcoin Offerings Repository (BIP), where everyone can share their ideas on improving the system.

They have access to private funds and contributions.people who want to fund open source projects. However, there is no established reward mechanism for developers in this system. The absence of such an incentive system led people to say that the development of bitcoin does not meet their expectations, and that the direction of the entire system is formed by a relatively small group of developers.

It’s also very important for developers to understanduser response to protocol updates. The Bitcoin-talk forum has become a center for discussing cryptocurrency from the very beginning of the emergence of bitcoin. Portals such as Reddit and Twitter can also be used to gauge community opinions and reactions.


Ethereum has a similar control system withbitcoin. Its development is sponsored and managed by the Ethereum Foundation, based in Switzerland. Development is funded by funds collected during the ICO in 2014 and pre-extracted by the broadcasting organization. It is also important to mention that the Ethereum community has survived hard forks several times and is appreciated for its openness and quick adaptation to protocol updates. One of the reasons for this is the simple fact that Ethereum was born due to several unsuccessful attempts to implement the concept of smart contracts on the Bitcoin blockchain.

Although the off-chain management modelit has existed for a long time and that it served as a means of improving and updating existing protocols; supporters of the on-chain management model believe that the absence of strong incentives for developers can significantly reduce their number, leaving only a small group of major developers. And when a centralized group of people leads the development process, the community becomes vulnerable to bribery and other influential factors.

Let's take a look at proposed and existing management protocols and ideas to compare both sides of the issue.


Tezos is a decentralized platform forsmart contracts, like Ethereum, but with a built-in management model and formal mathematical verification of smart contracts. Tezos takes a fundamentally different approach, creating rules that allow shareholders to approve protocol updates, which are then automatically integrated into the system.

When a developer offers updatesprotocol, he can attach an invoice to be paid after approval and implementation of their updates. This approach provides a strong incentive to participate in the development of Tezos and further decentralized network support. Anyone can propose their idea of ​​improving the protocol and, after it is approved and tested in the test network, this idea can come true. Upon completion of the update, the participant receives payment in Tezzies for his contribution to the system. This is a huge step towards creating a reward mechanism to support the work on the protocol.


Dfinity is “intelligentdecentralized cloud. " The company aims to become the next-generation Ethereum platform, replacing the concept of “code is law” with “AI is law”. As for the control mechanism, Dfiniti adheres to a model similar to Tezos, but also allows you to make changes to the registry, given that both parties reach an agreement. Despite the fact that this contradicts the “unchanging” nature of the blockchain, participants in the system argue that problems that appeared in the past, such as the TheDao fork, could never have happened if such a system existed at that time.

Proponents of this system praise her for herthe ability to freely remove illegal materials brought in by intruders. However, some people believe that this question has a second side to the coin, asking questions like: “What material should be considered illegal, given that there are several jurisdictions”?


Decred is a hybrid PoW / PoS cryptocurrency thatuses stand-alone on-chain control models. Decred, unlike Tezos and Dfinity, has a fully functional core network. It also allows interested parties to make changes to the protocol and to make changes to the blocks, if there is a bilateral agreement.

Despite the fact that the new management model seems incredibly useful, many people are skeptical about it. One such person is Vitalik Buterin. The most common argument of such peopleIt is that the presence of such a management model may deprive miners (and subsequently users) of the opportunity to contribute to the management of the system. In the off-chain model, operators must update the client manually to align it with the new chain. This allows miners to decide in which project they want to participate. However, in the on-chain management model, updates occur automatically and do not require any intervention. Another problem with on-chain management may be that it reflects plutocracy. Protocol updates are solved according to the scheme “1 token - 1 vote”, this leads to the fact that people with a significant share of the total volume of the proposal may have more rights than other network members.

However, these problems may be related tothe fact that the blockchain space is still in its infancy, and a more developed on-chain management ecosystem can exist without problems associated with rewards and risk.

Vitalik Buterin claims that the systemoff-chain management is guided by several factors (roadmap, consensus between the development team, voting by network participants, established standards), in contrast to the on-chain voting system, which is poorly suited for blockchain management. Despite this, Naval Ravikant tweeted: “Most of the coins would not have been born if Bitcoin or Ethereum had incentives for future developments built into the protocol.”

No matter which control systemthis or that platform is used, it will take a lot of time to fully study them and bring them to perfection. Regardless of their pros and cons, both management models should be studied in detail and implemented in a variety of projects.


According to the materials