Why Non-State Governance for Bitcoin, Ethereum and other Cryptocurrencies is so hard

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This is Part 1/chapter 10 in The Blockchain Economy serialised book. For the index please go here.

A lot of early cryptocurrency enthusiasts have views typically labelled anarchist or libertarian or anti-state. What Satoshi Nakamoto enabled was asset exchange regardless of geography/jurisdiction without going through an institution licensed by a nation state.

In an earlier chapter/post we looked at how Governments are reacting to this and why Some Governments Want To Shut Down Bitcoin But They Don’t Know How.

This chapter/post looks at why non-state governance is difficult. The cryptocurrency mantra is that  “code is law”, which is true but there are two inconvenient truths:

  1.  Humans write the code that is law and humans are not omniscient and perfect code is impossible.
  2. Humans are needed if something comes up that the code developers did not envisage and a dispute has to be settled.

This chapter/post shines a light on the issues that make non-state governance so difficult :

  • Code-enforced Monetary policy.
  • The critical difference between Satoshi Nakamoto and Vitalik Buterin.
  • Who decides what to do after a big fraud breach?
  • What we learned from the Bitcoin “civil war” around the block size
  • The Tezos debacle for irony aficionados
  • Who controls the code?
  • Who controls the brand?

Code-enforced Monetary policy 

This is the easy part. The code enforces a monetary policy. This can be a totally fixed supply like Bitcoin or a more nuanced gradual inflation policy like Ethereum.

Which monetary policy is better can be debated by economists for a long time. What is certain is that the idea of a stateless code-enforced Monetary policy is fundamentally new.

Think of the code-enforced Monetary policy like a Central Bank where the Governor has no decision-making leeway. This is more complex than it sounds if that code is controlled by a human being, which brings us to the critical difference between Satoshi Nakamoto and Vitalik Buterin

The critical difference between Satoshi Nakamoto and Vitalik Buterin

Both are off the charts brilliant – beautiful minds. The critical difference is that Satoshi Nakamoto is not a flesh and blood human. Or if he/she is a flesh and blood human, nobody can find him/her (and lots of resources have been spent trying).

In contrast, Vitalik Buterin is a flesh and blood human. You can see/hear him at MeetUps. He seems incorruptible and driven by non-material motivations but it is possible that some pressure point could be found. There is a lot at stake.

Or he could decide to do something that he judges to be in the best interests of Ethereum and some may disagree with what he decides. This is not an academic point; it has already happened.

Who decides what to do after a big fraud breach?

The DAO (Decentralized Autonomous Organization) hack of 3.6 million Ether in June 2016 – now valued in $ billions –  forced a tough decision on Vitalik Buterin and his Ethereum colleagues:

  • Tough Road 1: let the hackers get away with it by doing nothing.
  • Tough Road 2: fork the code in such a way that money was returned to its rightful owners and the hackers lost.

Vitalik and co chose Tough Road 2. Those who disagreed with that decision then created a rival cryptocurrency called Ethereum Classic.

In a traditional institution managed currency, Tough Road 2 would have been the obvious decision. Who would not want to protect honest people from thieves?

It is more a more complex and tough decision in a decentralised, trustless cryptocurrency where immutability (nobody can change the ledger) is core to the proposition.

The debate continues to rage on nearly two years later and goes to the heart of the Non-State Governance issue.

If the Ethereum code had been designed with a feature that prevented anybody from doing this, Vitalik could have taken his flesh and blood out of the equation. He could have said “I have no decision-making capability, the code is law and nothing can change that”.

That is like having a written Constitution that can never be amended. We can only interpret the “tablets of stone” passed down in a white paper. Which brings us to the even more bitter governance battles around Bitcoin.

What we learned from the Bitcoin “civil war” around the block size

Developers typically come from the scientific mindset where something is either factually right or wrong. Code either works or it does not.

What we learned from the Bitcoin “civil war” around the block size was that when a lot of money is at stake, it is more like politics – a dialogue of the deaf where facts are collateral damage. In the long term, facts may outweigh opinions. Or they may not. Who wins a civil war like this comes down to a strange brew of technical merit, market clout, ability to tell a story and ruthlessness. The governance issue in Bitcoin boils down to two issues that we will explore later:

  • Who controls the code?
  • Who controls the brand?

First we look at at an attempt to build a better governance model than either Bitcoin or Ethereum. Is there any alternative to either trusting a brilliant team or letting a bitter market battle decide? An entrepreneur called Arthur Breitman convinced a lot of people that he had found the answer.

The Tezos debacle for irony aficionados

In August 2016, Arthur Breitman wrote a white paper in the form of a blog post entitled Why Governance Matters. Irony aficionados enjoy the fact that about a year later after raising what at the time was record amount for an ICO, Tezos collapsed into law suits and bitter governance battles.

Breitman framed the challenge well in his white paper/post:

“In some cases, their design can be overwhelmingly resilient against externalities, but it comes at the cost of an inability to adapt dynamically. In other cases, they advance full steam ahead with tweaks and innovations, but this leaves too much power in the hands of a few influential developers.” 

He offered a solution:

“Instead of pretending that these tensions will cease to exist, the Tezos project built a mechanism for aligning the interests of decision makers with stakeholders.”

He claimed a technical way for “governance itself to evolve” by putting “everything in scope”:

  • the operations of the ledger itself (dubbed “transaction layer”)
  • the consensus algorithm,
  • the governance model itself.

Sceptics have only to point to the law suits and bitter governance battles. In short, Breitman was right – governance matters – but it is far from clear that he has a real solution. It is like saying “a cure for cancer matters” and that is not the same as finding a cure for cancer.

Arthur Breitman is clearly a flesh and blood human as are all the other actors in this drama. That by itself does not invalidate Tezos. The American Constitution was written by flesh and blood humans and lasted a long time.

Another irony is that Arthur Breitman is a self-proclaimed libertarian and yet he built a technical solution to a market problem.

In contrast, the battle over who controls Bitcoin – the block size civil war – is a classic market battle in all it’s messy glory. This market battle is all about:

  • Who controls the code?
  • Who controls the brand?

Who controls the code?

According to BitcoinCore.org

“Bitcoin Core is an open source project which maintains and releases Bitcoin client software called “Bitcoin Core”.

It is a direct descendant of the original Bitcoin software client released by Satoshi Nakamoto after he published the famous Bitcoin whitepaper.”

There are Maintainers and Contributors:

  • Project maintainers have commit access and are responsible for merging patches from contributors. They perform a janitorial role merging patches that the team agrees should be merged. They also act as a final check to ensure that patches are safe and in line with the project goals. The maintainers’ role is by agreement of project contributors.
  • Everyone who contributes to the Bitcoin Core project is considered a contributor. A list of code contributors for the last year can be found on Github as well in the historical release notes for each Bitcoin Core software release.

This raises the question of who pays the piper. The developers are paid through the Bitcoin Core Sponsorship Programme. This is like other open source projects, where Sponsors get recognition and maybe some inside knowledge and influence. This is where it gets controversial. Does the piper call the tune?

Sponsorship is supposed to be an “unrestricted gift” (ie without influence). Cynics and promoters of other cryptocurrencies question that. Nobody can know for sure. The sponsorship process is managed by MIT Media Lab’s Digital Currency Initiative which has some credibility. Sponsors at time of writing include mining specialists BitFury and Bitmain, wallet service Circle, API-provider Chain, the Nasdaq stock exchange, venture capitalist Fred Wilson, LinkedIn co-founder Reid Hoffman, Blockstream, Chaincode Labs, BTCC and others.

Today the sponsorship is geared to “larger industry participants”.  As they admit “we have no mechanism for taking smaller donations.” Some form of crowdfunding with voting rights attached – like a form of Proof Of Stake could go a long way to making the next civil war more civil and less war like.

Who controls the brand?

The short answer is the market. There is no authority that grants a license to use the Bitcoin name. Today there is Bitcoin Core (with a market cap of $183 billion) and Bitcoin Cash (with a market cap of $21 billion).

Note: market cap is a snapshot in time in late February 2018.

Messy as it is, this market based approach is very resilient – may the best coin win.

From Utopian dreams to dystopian nightmares?

Many early cryptocurrency enthusiasts dreamed of a better world free from nation state authority and big banks. The non-state cryptocurrency governance issues show that it is not that simple. In 1651, Thomas Hobbes wrote in Leviathan that without political community, the life of man was:

“solitary, poor, nasty, brutish, and short.”

In short, governance matters.

There are three scenarios:

Scenario 1: Cryptocurrencies form into global non-state governance structures that operate entirely outside nation state jurisdictions.

Scenario 2: Cryptocurrencies get taken over by nation states and simply become more efficient versions of Fiat currency.

Scenario 3: Some mix of 1&2. Some people use cryptocurrencies to hide their actions from nation state authorities – just like they use cash today. Other people use cryptocurrencies legally and transparently within the system. Most people do a bit of both depending on circumstance.

In that Scenario 3 – which I think is most likely – cryptocurrency governance does not need to be perfect because there is always the backstop of ye olde nation state jurisdictional governance.

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