To realize an on-chain governance on the blockchain, you have to have two elements:
1. system variables or system contracts: these are special variables that are stored in the blockchain itself and the consensus algorithm of the nodes are dependent on these variables. As an example, difficulty of the standard bitcoin blockhain can be regarded as such a variable. Optimally even the exact consensus mechanism can be stored in such a variable and the nodes might pick an exact algorithm based the variable on the fly. Examples might be changing from proof of work to proof of stake or byzantine fault tolerance.
2. A changing mechanism of the variable. There might be different mechanisms for the change, like:
- totally centralized: there is an authorized actor with a special secret key who can change the value.
- community voting: several actors, like prominent community members vote for the change and if the majority or super majority voted for the same value, the value will change.
- voting by mining: indirectly miners can initiate changes in the protocol itself as well, this is kind of a voting by work (at proof of work), or voting with stake (at proof of stake). Similar mechanism is implemented at some cryptocurrencies where the blocksize can be configured by the miners.
Certainly, extreme attention has to be payed at realizing such a systems, as at the changing the consensus mechanism there might be a totally new form of attack, which is attacking the on-chain governance change itself, like with forking attacks. For this reason, it is always proposed to implement such a governance rules taking effect longer runs as the standard transaction validation. Similarly, as in Bitcoin, the coinbase transaction taking effect only after 100 blocks.
Another option might be to realize something as "soft governance" in some cases. As an example, we can say that the block size limit is a governance variable that can be increased if a certain agreement was made among participants. However we can do something as a "soft governance", like the block size limit can be increased by every miner, only it is disincentived.
