written by @emylacapra
In a previous article, BTSE Academy analysed the reasons why leadership and foundation of Bitcoin failed and it is well off without a concentration of power.
We now offer a necessary follow-up on Bitcoin governance, by uncovering the decision making process for the top cryptocurrency. We want to understand how such a concept, that is easily associated with a centralised authority, can survive and thrive in a distributed and decentralised environment without compromising the integrity of Bitcoin’s main proposition.
Bitcoin is the first example of a technology based on distributed, trustless consensus, where decisions typically revolve around network access, funding allocation, block size, reward systems, voting and transaction reversibility.
The word ‘governance’ clearly shares the same root of ‘government’, and it’s a combination of principles, manners and procedures implemented to run a country, a company or an institution.
As per Bitcoin contributor and software engineer Pierre Rochard's definition, “By Bitcoin governance we refer to the decision-making process within the protocol that defines how rules are agreed-upon, created, and changed”.
How Are Decisions Made And Which Stakeholders Play A Major Role In The Process?
Because of its distributed and decentralised nature, the Bitcoin ecosystem is shaped by various actors including mining pools, node operators, users, developers, exchanges, custodians and wallet providers. Even the media and advocacy groups have their say and these forces ultimately decide all together over critical governance issues either by reaching a consensus or by forking.
The main objective of all these actors combined, should be the preservation of Bitcoin’s principal proposition, that is a trustlessness, distributed and decentralised ecosystem, and they should all function to maintain this unique property.
Let’s get one thing straight, right away: contrary to some opinions, the main decision makers within Bitcoin are the users and the miners, not the Bitcoin Core Development team.
Developers make improvement proposals, implement them, and as a consequence miners and users choose whether or not to adopt them.
Under the moderation of lead developers, the network votes on Bitcoin Improvement Proposals (BIP) whereby the proposed changes are either implemented or rejected. Said proposals typically include syntax, data structures, resource usage limits, sanity checks, time locking, reconciliation with the mempool and main branch, the coinbase reward and fee calculation, the block header verification. Along with BIPs, other various channels of communication such as BitcoinTalk Forum and Bitcoin Core GitHub repository are set up in order to reduce coordination problems.
This way, developers are a sort of advisers or consultants; they propose a specific vision or direction for Bitcoin, while miners and users choose whether to engage with it.
Anyone skilled can develop a software to follow the protocol or simply download and run a software developed by others. Bitcoin Core, which evolved from Satoshi Nakamoto’s original Bitcoin implementation, is the most used. Others include Libbitcoin, Bitcoin Knots and bitcoind that follow the same protocol and live on the same network side by side.
Bitcoin Core developers tend to value the security and integrity of Bitcoin at the expense of network accessibility and speed. This is one of the reasons why they have resisted the pressure to increase the block size limit that would have required a hard fork.
Hard forks like the 2017 Bitcoin Cash split, are viewed as contentious unless absolutely necessary, thus are avoided as much as possible. In the case of Bitcoin Cash, it did not obtain a majority consensus and thus immediately became its own network, separate from Bitcoin. Instead, soft forks are widely acceptable because they do not have a disrupting impact on the network.
SegWit, for instance, was welcomed with enthusiasm by developers being a soft fork proposal that is “backwards compatible” for all users. Indeed, soft forks allow compatible changes whereby old and new software can co-exist on the network, while hard forks are backward-incompatible changes to the rules of the consensus.
Miners And Full Nodes
Miners create blocks according to the protocol predetermined rules and submit them to the network of full nodes. These will validate blocks by downloading them and verifying that they match the consensus rules of the software.
If miners do not follow the rules, those blocks will be rejected by the full nodes. Nodes effectively take on the role of watchdogs, constantly watching miners for their compliance with Bitcoin’s consensus rules.
The main role of miners is to provide a chronology of transactions (“timestamping”) with a difficulty-adjusted proof-of-work for which they heavily invest on mining infrastructures. This increases the chances and their incentive to act cooperatively rather than attack the network.
Although miners could threaten to fork (through a Miner Activated Soft Forks (MASFs) or hard forks) or to perform a 51% attack to kill a chain to claim power on Bitcoin governance, ultimately, it is the community of users that decides whether to use their fork or not.
While miners provide a service to create Bitcoin history while developers implement changes, both groups’ influence is related to the choice of which Bitcoin implementation users decide to accept.
The amount of power that users exert is often underestimated among the community, while their reasons for using bitcoin are the fundamental fuel that drives adoption and innovation as a consequence.
Some of them are investors that turn to Bitcoin as a secure and reliable store of value.
They will influence the network differently from consumer users who prefer a convenient, transactional currency for small purchases that is as easy to use as Paypal.
Others may be persecuted citizens who live in authoritarian countries and are looking for a secure system to move funds or make payments internationally.
Ultimately, only if Bitcoin users voluntarily and autonomously download and run a new release on their own computers, will it become part of the Bitcoin network. Developers have no control over which software people run on their own computers.
Ecosystems like Bitcoin get people to “vote with their feet” rather than actually perform some traditional physical voting. The importance of network effects in Bitcoin makes foot voting a very powerful mechanism in Bitcoin governance, because if its users abandon the project the consequence could well be its total downfall. In the case of Bitcoin, users vote with their wallets, impacting the market price by buying or selling their bitcoin.
Economic Bitcoin Nodes
Economic Bitcoin nodes are full nodes that accept Bitcoin in exchange for other forms of value and may range from Bitcoin exchanges, wallets and payment processors to businesses that accept Bitcoin in exchange for goods, services, and other currencies.
Economic nodes in Bitcoin are, in essence, economic users, who will only upgrade their software if the changes proposed by developers or miners support the long-term value of Bitcoin and it is acceptable to most of their bitcoin-holding customers.
A Look At Other Cryptocurrency Governance Models
Ethereum is the second most popular cryptocurrency, and in theory uses a governance model similar to the Bitcoin one.
Users are the main decision-makers on software alterations and express their vote on Ethereum Improvement Proposals (EIPs), which go through different stages, from draft to the final status, before implementation. All past and current implementations can be tracked down in Ethereum's open source GitHub depository.
There’s always been an animated debate over the level of centralisation of Ethereum. Presented as a decentralised network, in reality the system is very much dependent on the input of its founder Vitalik Buterin, who keeps being the main individual responsible for writing the code’s major changes. This was particularly evident for the first time with the infamous DAO attack of 2016 where 3.6 million of Ethers were stolen. The network effectively "undid" the hack by creating a hard fork that would allow users to recover their funds, calling into question the immutability of the project. Those who wished to retain immutability stayed behind with the original protocol, now known as Ethereum Classic. To this day, Ethereum still regularly executes hard forks with ease - seemingly indicating a lack of individuals running nodes themselves and taking part in consensus.
Dash has a network of masternode operators that are heavily invested in the future of the currency (1000 Dash are required to run one), and act as ambassadors of the core protocol development and promotion via a consensus-based voting system.
New proposals are submitted to these stakeholders who, upon deadlines, must announce their decisions, generally every month.
The Dash Budget System, made of masternodes, will accept a proposal from anyone willing to spend the 5 Dash it costs to submit one. The 5 Dash are “burnt” on submission. Once the proposal has been submitted, all Masternode owners can vote on it, one vote per Masternode.
With Dash, the project funds itself. Currently there is a Budget Proposal which pays for the salary of the core development team. So every month, if approved, the Dash Protocol produces a set number of Dash which pay the core developers.
Tezos is built on proof of stake (PoS), therefore its voters and decision makers are its stakeholders, its main investors. The governance model is a “self-evolving” one, that’s why Tezos labels itself as a self-amending blockchain which can evolve according to the needs of the industry without getting fragmented through hard forks.
According to its creators: “Tezos is a blockchain that can evolve by upgrading itself. Stakeholders vote on amendments to the protocol, including amendments to the voting procedure itself, to reach a social consensus on proposals. Tezos supports smart contracts and offers a platform to build decentralized applications”.
The EOS governance model has its very own constitution and a lead governing body , The EOSIO Core Arbitration Forum (ECAF). It features a 21 node strong executive body composed of individual Block Propagators, who collectively make the most important decisions within the network.
For a vote to pass, a 15/21 majority is required for a continuous period of 30 days as well as user approval. In the case of accepted changes, there is an implementation period of 7 days, after which every active node is expected to upgrade.
EOS governance model has sparked controversy within the crypto community as it very much resembles that of a centralised government or entity, thus heavily challenging the essence of a cryptocurrency; decentralisation.
The history of forks in Bitcoin and the limitations that developers and miners face in influencing the protocol and users, confirm that the ultimate decision makers are users and markets rather than a relatively centralized group of leaders. They affect the direction the cryptocurrency will take with regards to its own vital existence.
Given the coordinated multi party management of Bitcoin as well as its reliance on users at the centre of the decision-making processes, as opposed to all other cryptocurrencies, Bitcoin governance remains decentralized and it is unlikely that any single actor could have a disproportionate impact over the protocol.
We can only hope that this model endures the test of time, because up until now it has performed with encouraging results.
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