Governance Models in Crypto
Recently we’ve seen a massive surge in investor and industry interest in the crypto/blockchain space. For those of us that have been around for a while, this isn’t too surprising. It’s been expected for some time now. Maybe not this soon, or with this much stamina, but the technology and it’s ability to change the way applications are developed, information is stored and accessed, resources are shared, and the overall decentralization these systems make possible, is beyond clear. The future is bright, but we have a pressing issue that must be addressed.
Just this week Bitcoin has reached a consensus in regards to the scaling issues it’s been experiencing. This isn’t something that hasn’t been foreseen for quite some time, nearly 2 years actually. The issue is a bit complex and I don’t wish to dig into all the details. If you’re interested, you can read more about it. However, to give this article some groundwork, I’ll recap the primary issue.
In recent months, the number of unconfirmed transactions on Bitcoin’s blockchain have skyrocketed. That’s the number of transactions that have been placed on blockchain that have not been confirmed by miners. The reason this has happened is because there are a limited number of transactions that can fit into a 10 minute block. Only the transactions paying the highest fees are getting confirmed in a reasonable amount of time. There are multiple solutions that have been presented to address this issue. However, like any ecosystem, changes don’t come without compromise - this isn’t any exception. The consensus reached this week will increase the blocksize to 2MB. That’s great, this will allow for more transactions to be processed within a 10 minute block time.
Now, you may be asking yourself, why would this be an issue. Well, in order for people to get Bitcoin transactions processed in a reasonable amount of time, people were paying higher transaction fees. The result of this was massive profits for miners. An increased block size will decrease the amount of profits miners will see, initially, since it would essentially increase throughput, thereby decreasing the transaction fee required to get a transaction confirmed within a reasonsable amount of time.
This issue and the lack of a consensus to date has led to a lot of uncertainty surrounding Bitcoin. You may not have realized it, especially given the growth Bitcoin has seen in recent weeks. However, it’s been there and evident.
Let’s talk about another blockchain mainstay, Ethereum. Ethereum is facing similar uncertainty at the moment that’s currently damaging it’s position. This can be seen through Ethereum Classic’s recent increase in demand. The issue with Ethereum is similar in some ways, but actually quite different. Ethereum is also facing scaling issues, especially looking to the future, and a lot of talk has been had about this issue. The Ethereum team has a working solution to this problem in the form of POS (proof of stake) with their Casper algorithm.
Ethereum is currently a POW (proof of work) consensus blockchain. The difference between POS and POW is, tied to how transactions reach consensus. Again, the issue lies with the current network’s miners. With POW, miners are currently netting 15x their daily mining overhead. Why would they want to give up these profits with a POS consensus? POS solves the scaling issue, but severely hurts mining profits, favoring stake holders - those that hold more ETH as a validator.
As a result of this inevitable move, the miners of Ethereum, are putting up a fight. This could lead to another phantom Ethereum chain, or the resurgence of the Ethereum Classic chain. Regardless of what happens here, we’re just creating more fragmentation and confusion in the ecosystem. Keeping up with these forks and variations is difficult and complex - impossiblef for some.
I’m not going to go into the economics and game theory of POS and how this is going to bring in major institutional capital, in a potentially unhealthy way, that damages the overall distributed nature and consensus model. This is far too speculative and complex of a topic for this article, but very much an interest of mine - maybe another article.
All of this is said to draw light to an underlying issue within the greater blockchain ecosystem. There have been countless other examples of these types of issues with other blockchains. However, they haven’t been in the lime light as much and haven’t had the impact on the greater blockchain ecosystem as these have. There will be more of these in the months and years to come. Additionally, I feel the apex of one of these issues will present the first real setback the blockchain ecosystem will see. The kind of setback that will have people second guessing the viability of blockchains as mainstream solutions to our current centralization challenges.
You see, when issues arrise, you have two camps that disagree on the direction forward. In the end, the two camps either split ways, or there is a consensus.
In the case of splitting ways, you have fragmentation of the ecossytem, general uncertainty, less focused resources and overall confusion.
In the case of a consensus, buy-in is generally fairly political and involves the major players. In the case of Bitcoin’s recent consensus to move to a 2MB block size, the decision came after gathering the support of, some, 80% of the network’s hashing power. This 80% comes from a very small number of entities. It’s already bad enough that 80% of the network’s hashing power comes from so few entities. But, even worse, is the ability of these entities to dictate the direction and decisions for the network.
Blockchains, distributed trustless consensus ledgers, were designed to break free from the types of influence/power a select minority of entites and individuals had over currencies and assets, both through verification and politics. This was one of the main designing principals. There are many other benefits as well, but this is what gave rise to blockchain popularity.
The issue that we face today and will see much more of in the future, isn’t much different from the issues we have in any typical democratic government. Many discussions have been had about this and governance in general. There are various DOAs (Decentralized Autonomous Organizations) currently trying to address this issue through programmatic and interventive means. Whether or not any of these projects prove to be successful in discovering a solution to true democratic consensus is to be seen. I have my doubts.
Personally, I don’t really wish to promote or advocate for a DAO, or DAO like implementations on top of current blockchains, especially those we have today. What I do wish to bring attention to, is the need for a general governance model built into any new or existing blockchain.
What this means is, any new or existing blockchain, including Ethereum and Bitcoin, need to develop, in the general sense, an agreement, processes and plans for resolving these issues that allow for consensus to be achieved through a clearly stated process. This process should be dependent on the blockchain and it’s own unique ecosystem requirements. By doing so, users and participants of a blockchain are agreeing before hand to be a part of an ecosystem with a governance model designed to resolve any future issues.
Without this, we’re subject to the current state of political jockeying and power plays where a select minority of individuals and entities call the shots, generally in their best interest. And where consensus isn’t able to be reached, forks happen, fragmenting the ecosystem and delivering uncertainty.
A governance model, not only addresses how to handle these issues, but also lays a foundation that provides comfort for participants, even when a decision is made that they do not necessary agree. Therefore, it’s in the best interest of all blockchains to implement these processes, so as to avoid fragmentation, uncertainty, and overall blockchain distrust.
It doesn’t have to be overly complex or difficult. In fact, it should be very clearly understood and promoted, almost like an “about us” page for a company website. It should lay out the processes and proceedures for resolving any conflicts that might arise within an ecosystem. Every ecosystem is going to be different, as will the requirements. It could be as simple as pro-rata based voting, or a model like Steem’s witness elections. Regardless of the approach taken, all blockchains should be held responsible for providing this clarity.