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Intro: Cryptocurrency Governance (of, by, for the users?)

‘Cryptocurrency’ and ‘decentralized’ are sibling concepts. The founding paper of bitcoin stresses that a cryptography-based transaction system would be peer-to-peer, free of a third-party authority. This is in contrast to ‘fiat’ currencies centrally controlled by governments, banks, and government-banks. The premise is that no one person or institution controls bitcoin.

The 2015 and 2016 debates on whether and how to address bitcoin’s scalability have supported that characterization: no one really made a decision about it, at least not one that everyone followed. The debate continues to evolve, at the same time, this has has shown that it is truly unclear how the currency is governed—or honestly, what governance means.

This article discusses some of the key concepts behind the governance of bitcoin—not policymaking set by separate government institutions but collective decisionmaking about the future of the currency itself.

It is the first in a series of posts about governance in cryptocurrencies. Bitcoin is the primary case study. The goal is to demystify how bitcoin can change, how other cryptocurrencies have attempted to address bitcoin’s governance challenges, and what this means for cryptocurrencies in the future. We will use bitcoin as the test case, but many of the principles will apply to all cryptocurrencies in different ways. Finally, this article assumes the reader has a basic understanding of how bitcoin works: mining, cryptographic hashing, the blockchain, etc.

What is governance in bitcoin?

The basic functioning of bitcoin is determined by the codebase – the ‘software’ that everyone runs to participate in the network as a miner, coinholder, or service provider. Among other things, the code determines the following.

  • Total money supply and distribution schedule
  • Block size and difficulty of cryptographic hash puzzles
  • How addresses are secured, signed, and verified
  • Mechanism of consensus

These are the rules of using bitcoin. There is no interpretation or wiggle room of these rules; you either are using the right protocols or you’re not on the network.

These protocols give bitcoin stability, which gives it much of its perceived value. For example, the rules determine how quickly coins get distributed to miners, which creates a predictable growth in monetary supply. If that rate doubled, it would mean many more coins out in distribution, which would impact the sales price of one coin.

So the question is how do the rules change?

That simple question is actually two not-so-simple questions rolled together: how can the code actually be changed and how does the community accept or reject those changes?

The code itself is public, easily accessible, and run by thousands of computers around the world. No one institution can make wholesale changes, such as ‘regulating’ it or shutting it down. But here’s where it gets tricky: only a couple people in the world have the technical authority to make changes to the codebase that is used by everyone. Anyone can copy the code to create new coins but only five (or six) can approve changes to bitcoin. Five (or six) people. These people are (mostly) known, and we will cover this in a later post. They can make changes and send the new code out to the network for consideration.

The theory of how the bitcoin community accepts or rejects changes to the code is deceptively simple: if enough people choose to adopt any changes, the changes will be the new bitcoin. No one user or group of users should have leverage over any others.

  • Miners secure the network but because they earn bitcoin, want it to be useable and of high value
  • Users (coin owners, which really means wallets) actually buy bitcoins, giving them value, but they want it to be secure
  • Merchants make it bitcoin more useable as a currency, but they want it to be stable, valuable, and secure. Other services
  • Other services built on the blockchain make it even more valuable but they also want it to be secure and widely used
  • Other non-bitcoin actors, such as the media or regulators, have no real power unless they mine, own bitcoins, or operate services on top of them.

These interlocking incentives discourage greedy changes that disproportionately benefit one group while short-changing others. For example, it’s unlikely everyone would agree to having miners get triple the amount of bitcoin they currently do.

The theory of how the bitcoin community accepts or rejects changes to the code is deceptively simple: if enough people choose to adopt any changes, the changes will be the new bitcoin.

They also encourage consensus, because once the community starts to converge on a change, everyone wants to be part of it to remain on the same version. The alternative is two competing versions of bitcoin, known as a fork. A fork means two blockchains, two protocols, two ledgers, two sets of identical addresses, two sources of bitcoin distribution to miners. In a sense, everyone’s bitcoin holdings double – they have identical accounts on two blockchains and can trade one without trading on the other.

But then, which one is valid? The theory is that users decide, ultimately with one version of the blockchain winning over the other. The one with more miners or more active users or more merchants or more services – all are needed to support a viable cryptocurrency.

It’s a structure inspired by market mechanisms and it takes the burden off any institution or to make changes. It also means there doesn’t need to be collective decision-making–everyone can act individually and the final result will be the aggregate of everyone’s decision.

People have likened the codebase to the constitution, with the developers who can make changes as legislators. The nuance is that people can decide to ignore legislation, and if enough people do, the legislation is invalid.

However, to simply call this “governance” is to sum up US governance by saying Congress votes on bills and the president can veto them. True in theory, but it misses the sausage-making of real policy – deals, negotiations, incentives, parties, and ideologies.

The Theory and Reality of Governance are always different (no less so in bitcoin)

In truth, no one wants a fork. It is seen as apocalyptic enough to force everyone into different forms of deliberation and ward off the core developers from releasing changes that could force a fork. (not 100% true, but more on that later). Now we’re into collective deal-making.

Two things have fundamentally shaped this deal-making.

First, as more and more people build services on top of bitcoin that leverage the stable blockchain, the importance of bitcoin as a viable and valuable currency has become somewhat less important. The blockchain simply needs to be secure, and the value of the currency simply needs to support a high hashrate.

Second, as the mining industry has become more concentrated into mining pools, the different positions of mining pool operators has become paramount, because in the event of a fork, any given mining pool could suddenly control 50% of the hashpower of any version. Mining pools have power – and are targets of influence.

This has changed the relationship of all the incentives. Now, media outlets (including online forums) have enormous influence because they enable ‘public’ discourse. Miners have a lot of power and claim to have become targets of dedicated denial of service (ddos) attacks. No one really knows how to talk about it.

 

Cryptocurrency Governance Flowchart

Rigorous thinking on governance is very thick in matters of governments, and recently, the literature on anarchy, emergence, and other government-less collective action has grown, mostly with more metaphors about bottom-up decision-making.

But that doesn’t apply to cryptocurrencies: in these communities, there are necessary roles and as a result, leverage.

The most rigorous approach to government-less governance is Elinor Ostrom and her expansion on how communities collectively govern resources that impact them all.

Ostrom introduces some concepts that would help us understand the dynamics of governance in cryptocurrencies.

  • Identification of the actual resource system and the different resource units within that system
  • An analysis of the users and the roles they play in using or benefiting from those resource units
  • The importance of trust, context, and culture among the actors, which applies even in a system designed for trustless peers.
  • Action-situations – or the choices that impact the resource units and about which the different actors need to communicate. Notable example: do we increase the block size?

We will not apply Ostrom’s meta-framework in full, but we will draw inspiration from it in a series of articles about it.

Stay tuned.

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