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Theory On Bitcoin Governance; Three Stage Model (v.1.0)

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A cryptocurrency such as Bitcoin needs to be able to change over time. If that was not the case it would imply some degree of perfection. When in reality no blockchain is perfect, including Bitcoin, since it is still the product of human beings. Our technical, economic and political understanding is still constantly evolving, while the pressures we face in our world are also continuously changing. Therefore Bitcoin must also change, Bitcoin does not represent the end of history.

If we can accept that Bitcoin requires change, it also necessitates the need for governance. Bitcoin is supposed to be a decentralized system, this is where much of its value is derived from. Therefore imposing a centralized form of governance over a decentralized system would massively detract from its value. This is why we need a decentralized form of governance in order for Bitcoin to be truly competitive and resilient in changing times, to evolve, or die.

The Bitcoin Civil War

The Bitcoin civil war is one of the best examples for why Bitcoin needs better governance, this period brought about a great schism in Bitcoin, also known as the block size debates.

It all started around a single parameter in the code known as the block size limit.

However, these debates became about much more than just this single parameter in the code, it highlighted differences in the underlying philosophies and vision of Bitcoin, it became a watershed moment in our history. Which led many people to question the underlying fundamentals of Bitcoin from governance, utility, purpose, economics and vision. As is most often the case these ideologies over time polarized and solidified, to a point where they are now clearly identifiable, often achieving a high degree of consistency within their own ideological groups across many different fields of thought.

This in turn led to the strengthening of factions and shifts to the balance of power across Bitcoin. The community itself split in two, even communicating in different forums and threads, this was in large part also due to the censorship according to ideological lines occurring on the original communication channels controlled by the status quo. Eventually this all culminated in the Bitcoin network splitting in two, in response to the introduction of new controversial code within the Bitcoin protocol by the status quo known as Segwit.

The Single Parameter of Difference

Much of the language and semantics of this debate has become very loaded, so for the purposes of this discussion I will simply refer to the different sides of the debate as BTC and BCH, which are the current tickers for the two dominant Bitcoin forks representing these differing ideologies.

At the crux of the debate, a single parameter, known as the block size limit restricts the amount of data that can be stored for each block, therefore effectively placing a limit on the amount of transactions that Bitcoin can support.

The block size limit was introduced by Satoshi Nakamoto as a temporary anti-spam measure while Bitcoin was still much smaller. The block size debate was triggered and initially revolved around this single parameter in the code, with one side wanting to keep it in place (BTC), while the other side (BCH) wanting to increase this limit, raising questions of governance and fundamental design.

To put it simply, in economic terms and in practice, the BTC side wanted Bitcoin to become a high fee, low transaction volume network, while the BCH side wanted Bitcoin to remain a low fee, high transaction volume network.

The BTC side of the debate, represented by the development team Bitcoin Core, believes that the block size limit should not be raised. This forms a fee market, where transaction fees should become extremely high if under any significant amount of use, because of this artificial constraint on the supply of block space. Instead BTC proponents believe that transactions should occur on second layers to the main chain, citing centralization concerns.

The BCH side of the debate, represented by the multiple development teams of Bitcoin ABC, Bitcoin Unlimited and Bitcoin XT, believe that the block size limit should be raised. This means that Bitcoin should be able to keep up with demand, or at the very least maximize utility within safe technical limits, since supply would be decided upon by the producers of this supply, the miners. This creates a fee market based on supply (miners) and demand (users) of block space which should allow Bitcoin to remain usable with low fees on the base layer.

The Security Dilemma of Bitcoin

The truth is that both BTC and BCH are facing a fundamental crisis in their vision and design. Bitcoin was designed to be inflationary during its bootstrap phase as it gradually transitioned into its final deflationary phase.

Bitcoin and for that matter all decentralized cryptocurrencies require a token with value in order to maintain security and function. This is because blockchain leverages value for cryptographic and distributed game theory. In other words, the decentralized network has a very big stick and carrot to dish out reward and punishment in order to incentivize good behavior.

During the bootstrap phase this cost for security is paid for by inflation. However, since the inflation schedule is set in stone, guaranteed by the cryptographic game theory it supports, fees have to replace the value previously generated by inflation or the entire system collapses.

This is the security dilemma of Bitcoin, if the system cannot generate sufficient fees within the next decade the long term security model fails. This gets to the core of the dilemma and gets back to the significance of this debate.

The two dominant streams of thought within Bitcoin on how to deal with this issue are perfectly represented by the BTC and BCH sides. A high fee, low transaction volume network versus a low fee, high transaction volume network. This difference is determined by a single parameter in the code, the block size limit.

The Question of Governance

Disagreement is understandable and even expected. The different sides of the debate can be understood, to me the real problem here is governance. Because there was a major disagreement about how this question should even be decided in the first place, without a common understanding and agreement upon the decision making process, compromise and resolution on the block size limit became impossible. I am confident that if there was a more robust or better understood form of governance there would not have been such a major split since greater compromise would have been found instead, helping to maintain a higher degree of unity.

One of the advantages of having a better form of governance is that it is less likely to result in the blockchain splitting and people leaving. The reason for this is that if people agree with the process of decision making beforehand they are more likely to go along with such a decision even if they do not completely agree with it. This is one of the reasons why we do not see a succession every time a democracy has an election, this is exactly because most people agree with the decision making process and therefore go along with the decision even if they do not entirely agree. This is what fosters a greater capacity for compromise in governance, which is exactly what would have avoided the huge amount of disruption that the Bitcoin Civil War caused.

In reality the block size debates and resulting split was more related to disagreements around governance and politics then it ever was about the block size limit itself.

Defining Good Governance

It is important that we are able to define what good governance is, especially within the context of a cryptocurrency. The answer to this question will ultimately be subjective depending on the preferences of the individual. However, a definition of good governance that most people would agree with is possible, even within cryptocurrency when it comes to describing its objectives.

To this effect, I would argue that a good form of governance would make decisions that are beneficial towards that particular cryptocurrencies goals. In the case of Bitcoin most people would agree that achieving adoption and market dominance while maintaining its qualities as a decentralized and censorship resistant public blockchain is part of that goal.

This then begs the question, how do we ensure that any form of decentralized governance consistently ends up making good decisions? The answer to this question is the proper alignment of incentives reinforced by a cultural understanding of these very incentives and conventions.

How Prescription Effects Prediction

This is where culture plays an important role in the proper functioning of any form of governance. In order for a form of governance to properly function its participants must understand and agree to the process of governance itself, or it will ultimately become perverted, separated from its original governance process. The understanding of a process by its participants directly affects the process of governance, which is how and why we now see radically different forms of governance in practice, over what is essentially the same fundamental design in the case of Bitcoin forks.

In other words, our theory, ideology, understanding and therefore prescription of good governance directly affects the outcome of these social experiments. Therefore any prediction we make here might also influence the actual outcome of events. This is why it is so important that governance is well understood by its participants since it is critical in its potential long term competitive success, since governance is what predominantly determines a cryptocurrencies evolutionary path.

Three Stage Model of Bitcoin Governance

This is why I have developed a theory on Bitcoin governance in order to serve as a guideline for the purpose of avoiding such future conflicts.

I break down Bitcoin governance into three primary decision making groups and phases that act as a division of powers and as a form of checks and balances on each other.

First Decision Group/Phase: Implementations

The first group and phase of decision making is the implementations/clients. In order for there to be any change on the network, code needs to first be written. Developers create this code and compete for its adoption by the network as a whole, including appealing directly to the second and third group of decision makers.

The implementations are the starting point for all protocol changes by virtue of necessity. Requiring highly specialized and skilled developers and computer scientists who are under constant critical peer review by the open source community. In this case code is law and we require specialists to first create the code before being able to even begin the following phases of voting in order to ratify this code/law.

Multiple Implementations

There has to be multiple competing development teams, without this there would be no meaningful choice or possibility for succession. Implementations are still just singular organizations, regardless of how democratic or meritocratic any single implementation might be. It still represents far too high of a degree of centralization and single point of failure for it to be acceptable as a form of effective distributed governance over a truly decentralized cryptocurrency.

It is common for most open source software projects to have dictatorial governance processes, which is in part why forks/splits are so frequent within the open source software community. It is important to note here that this choice of governance is not necessarily bad in this context, since it fosters creativity and better development. Developers do not want to be bogged down by bureaucracy and politics, which is why a benign form of dictatorship makes sense, especially combined with the freedom to always fork.

The problem here is that this type of benign dictatorship is not at all suitable for the governance of Bitcoin, which represents far more value and importance, especially considering that in the case of Bitcoin and unlike most open source software projects, forks do not just fork the software but also split the entire network including all of its users, this is not something we would want to happen with a network such as Bitcoin over a minor disagreement between developers.

This is why there has to be multiple competing implementations, for the effective governance of Bitcoin. If this was not the case, the single dominant implementation would act as a gatekeeper for all decisions further down this line of decision making. At which point the network would be effectively governed by whatever form of governance the implementation might have in place, which are most often dictatorial in nature, where a small group possess veto powers combined with a lead maintainer who would have the final say over all decisions. Effectively turning what was an elegant plutocratic and democratic system with divisions of powers and checks and balances into what is effectively a technocratic one party system, which often has a literal dictator who has the final say over all decisions.

The governance of Bitcoin should match the decentralized properties of the network, otherwise it would detract from the value and utility this decentralization represents. This is why there has to be multiple competing implementations in order to achieve any form of effective governance.

Schelling Points

One of the problems with having multiple implementations is that it can cause unintentional splits, due to technical incompatibilities between client software implementations. Intentional splits should also be considered to be more common under a multiple implementation ecosystem, this second type of split should be considered a desirable feature however since it is what fundamentally supports the freedom of choice for all participants.

There certainly are trade offs here in regards to unintentional splits. However, there are also additional technical risks in having a mono-culture where there is only one dominant implementation, since a critical bug or exploit would make the entire network vulnerable. This is not the case with a more diverse ecosystem of implementations since any single critical bug or exploit would not make the entire network vulnerable, exactly because of this diversity. I would argue that having a higher chance of unintentional splits is better than there being a higher chance of network wide critical bugs and exploits, also considering that unintentional splits are unlikely to survive since they are unlikely to have any ideological and economic support.

There are strong incentives for implementations to remain compatible with each other. This strong incentive can be described as a Schelling point. Implementations gain their value and importance based on the network they support, therefore unintentionally leaving the network goes against the incentives of the implementation unless there is strong ideological and economic support. This is where the coordination game plays out, where there is greater reward in finding a Nash equilibrium, especially when it comes to minor differences in how the code is written for many of the same features.

In a simple Schelling point example we can imagine a grid with four identical squares, where there is only reward for picking the same square. Assuming that participants know which square the other participants are going to pick, it makes sense that everyone will pick the same square even if there is no meaningful difference between the different squares. We can see here that this coordination game already mirrors the reality of coordination between implementations. Which makes this theory highly suitable for the application of coordinating implementation development in order to minimize the risk of unintentional splits.

Formal Specification

A formal specification should be used to describe Bitcoin, this helps to avoid the risk of a centralizing “reference implementation” forming. Instead, new implementations should be built using a formal specification as the primary point of reference. This makes the development of new implementations easier and reduces the centralizing power of any dominant implementation. Such a formal specification should describe Bitcoin, analyze its behavior and aid in its design by verifying key properties of interest through rigorous and effective reasoning tools.

A formal specification describes what Bitcoin should do, not how it should be implemented.

This helps to create a strong distinction between the formal specification and any singular implementation. Such a specification can also be seen as a schelling point in itself, which also implies that there will be multiple formal specifications as ideological differences and engineering trade offs cause further bifurcations. This should be embraced as a reflection of freedom of choice, amplified by the ideological diversity of human beings in our world today.

Second decision Group/Phase: Miners

The second group and phase of decision makers are the miners/pools. Who directly vote on the adoption of changes proposed by the implementations through Proof of Work.

The way in which Proof of Work is used in Bitcoin, is one of the key innovations that has enabled this technology, understandably it should play a key role in its governance, to quote Satoshi Nakamoto:

“They vote with their CPU power, expressing their acceptance of valid blocks by working on extending them and rejecting invalid blocks by refusing to work on them. Any needed rules and incentives can be enforced with this consensus mechanism.”- Bitcoin whitepaper

In many ways Proof of Work can be considered the primary governance mechanism of Bitcoin. The reason why this was such a breakthrough is that it has allowed the network to function without the need for any trusted third parties. In many ways this was the most important innovation; the ability to achieve trust without a centralized authority, which can be extended to many applications.

Proof of Work

In Proof of Work, miners carry out arbitrary computation (work), in order to gain the cryptographic right to create a block and extend the blockchain. If the block is accepted by the majority of mining power (work) then this block becomes part of the canonical chain. The miner is then rewarded for his honest behavior (profit seeking) with the block reward, which contains both the transaction fees and inflation for that one block for the entire system, which in the case of Bitcoin, one block represents ten minutes of time on average.

Miners have to connect to pools due to there being a higher profitability variance based upon the amount of work an individual miners produces. The pools act as a proxy for the miners, pools behave in a similar way to representatives within a representative democracy.

The consensus algorithm of Bitcoin is able to operate in extremely adversarial conditions, this is exactly because of the way it leverages value with game theory. It relies on the miners own self interest, in other words their own greed. Bitcoin harnesses the profit motive to bring about a public good, since unlike hierarchical power structures, the Bitcoin network is flat, as a permissionless network there is no authority other than the network itself. Therefore when miners act in their own self best interests, they are furthering the public good.

It is this large carrot and stick system that can financially punish the miners and reward them that allows the Bitcoin network to become its own sovereign authority, based on the rules of its initial design. As long as the majority of miners act honestly (profit seeking) the system functions correctly. This is where the term “51% attack” comes from, if the majority of miners became malicious they would be able to censor transactions and carry out double spends, which would seriously disrupt the network and its underlying value propositions, potentially even triggering a “death spiral”.

An attacker would have to spend huge amounts of resources to carry out such an attack, since they would have to match the current mining power which can be estimated in the billions at current evaluations. Importantly the cost to attack the network also scales to match the value of the network when it is functioning correctly. Since more miners will join the network when the block reward increases, this can be both due to an increase in price or in total fees. Miners will also leave the network if their profit ratio decreases, since the block reward is divided among all of the miners and inflation always remains on schedule due to the difficulty adjustment algorithm, which adjusts the difficulty of the arbitrary computation based on the amount of mining power present on the network. This allows the consensus algorithm of Bitcoin to become a self balancing system, where miners follow value in a game theoretical system where there is only reward for cooperation.

Proof of Positive Incentive

The problem this solves most critically in the context of decentralized governance within a distributed network is Sybil resistance, since a permissionless network cannot act as a gatekeeper in order to verify the identity of individuals by its very nature. This means that it is trivial to create thousands of “identities” to overwhelm any type of voting process using most metrics. Proof of Work is the exception and does not suffer from this problem because it is backed by irrefutable cryptographic proof of arbitrary computation (work). The mechanism of Proof of Work cannot be Sybil attacked exactly because there is such a large cost/reward attached to the proofs of solving these arbitrary cryptographic puzzles.

This creates a proof of positive incentive, that cannot be spoofed or Sybil attacked. In many ways Proof of Work is an ideal decision making body for the purposes of a decentralized network, since it operates completely on chain in a completely permissionless and verifiable fashion. More importantly is this proof of positive incentive, the representatives of the system (miners) have strong incentives acting upon them to do what is in the best interests of the network and therefore the public good as a whole.

This can be seen as an improvement over some democracies where the representatives often have perverted incentives acting upon them, such as lobbying and special interests. Even though Proof of Work is not one person one vote, it might very well reflect the will of the majority better than most democracies because of the strong incentives combined with having to directly appeal to the third decision making group/phase.

Third decision Group/Phase: Market

The third group and phase of decision making is the market. Under normal circumstances the implementations create code which the miners agree upon and the network upgrades without splitting. However, in the case of a contentious change, the network should and does split, allowing dominance to be determined by the market directly, which effectively turns the market into the ultimate arbitrator of dominance.

The Splitting Mechanism

The splitting mechanism is a critical governance mechanism of Bitcoin, without it there would be no freedom of choice or possibility for succession.

The splitting mechanism of Bitcoin has solved the age old problem of the tyranny of the majority. In most democracies if the majority votes one way and a minority votes another way. The minority have to go along with the majority, this is known as the tyranny of the majority. Bitcoin solves this problem by granting everyone the passive right to succession in the case of any rule changes.

It is critically important that these minority chains can exist, it is this mechanism that provides the freedom of choice and allows for meaningful differentiation, allowing investors and users to decide for themselves which rule-set they prefer. Independently from the other two decision making groups and phases, effectively protecting their self sovereignty by sustaining this freedom of choice.

It is in fact trivial to split the chain, it is not trivial to gain large scale support for any split. This strikes a good balance between disruption and stability, history has so far proven this to be correct, at least in terms of the splitting mechanism not causing too much disruption while keeping the barriers for splitting sufficiently low in the face of legitimate grassroots movements. I refer to this concept as the goldilocks zone of blockchain governance; A blockchain should not be too easy to disrupt or change but also not too difficult to disrupt or change. Striking this balance in terms of long term blockchain governance is critically important. A cryptocurrency can lose dominance through stagnation but also through continued disruption, internal conflict and division.

The Bitcoin UTXO Index

The splitting mechanism itself is ingeniously designed to protect investors and users first. When the network splits the ledger is copied and used as the basis for a new blockchain, currency and network. This means that as an investor or user, if you had one bitcoin before the split, post-split you would have one bitcoin on both networks. Which means that during the interim period when dominance is still being determined investors are protected regardless of the outcome. Investors are not forced to choose a side, since an equal proportional share is maintained in both networks. In terms of users it can become more complicated requiring a choice of which network to use. However, when dealing with merchants it is more straightforward since they determine which mediums of exchange they accept, in this regard the user might not even notice the split except for having a new token dropped in their wallet.

The splitting mechanism ensures that nobody can change the rules without active consent. In the case of any controversial rule change there will always be a surviving blockchain with the original rule-set which all users and investors would be proportionally invested in. A user can therefore easily migrate his value to the blockchain of his choice or choose to keep the old UTXO’s (addresses) intact, effectively creating a type of Bitcoin index which would be proportionally invested in all of the splits after the initial creation of that UTXO. If an investor or user simply does nothing this is what the result of multiple splits will look like to them, which is again an example of how this mechanism actually protects users and investors first.

Soft Forks and Relay Protection

For the sake of protecting investors it is important that replay protection is built into any minority chain splitting off, this ensures that users do not unwittingly send their coins from both sides of the split. It is also very important that hard forks are used for any major changes, since it results in cleaner code and more importantly; soft forks can subvert the governance process by not requiring active consent. However, this can be prevented with a strong cultural understanding of the subversive nature of soft forks since it still requires adoption and can even be effectively ignored and rejected by the economic majority. In a world where soft forks are being accepted, it does mean that there is an increased cost attached to splitting the chain in response to changes implemented through soft fork. However, this cost can still be considered negligible and non prohibitive in terms of any significant successions.

Market Dominance

In the case of a network split, dominance is determined by the market. It is important to note that rational mining behavior dictates that miners follow price, not the other way around. Rational miner behavior dictates that miners should and do mostly operate with multi-pools or internally switch between pools to maximize profit, constantly switching between different cryptocurrencies based on the fluctuations in total mining power, difficulty and reward. This creates an equalization effect where profitability remains the same across all cryptocurrencies that use the same mining hardware, this equalization effect can be clearly observed in the real world, with any exceptions being short lived. This proves that miners follow value, therefore any blockchain that can pay its miners the greatest reward will also eventually have the highest mining power.

This all means that once the blockchain has split, it is up to the market to decide the “winner”, both over the short and long term. Therefore, the ultimate arbitrator of dominance is the market itself.

The Line of Decision Making

Implementations first create code, proposals for change. Miners then vote on these proposals in order to ratify these changes. Proof of Work provides us with one of the strongest proofs of positive incentive. The miners therefore act as a proxy for the economic majority, because miners are incentivized to follow the economic majority. If the change is considered contentious a split will occur where dominance will ultimately be determined by the market, while still preserving the freedom of choice for individuals. Therefore in effect, the economic majority rules Bitcoin, in other words the market rules Bitcoin. Bitcoin relies on the economic self-interest of the masses to govern itself as its own sovereign authority which is an emergent property which flows from the will of the economic majority.

Power Topology

The Bitcoin network has a flat power topology, which is a significantly different power topology compared to traditional hierarchies which can be visualized as a pyramid with the rulers at the top of the pyramid. Whereas a cryptocurrency such as Bitcoin can be visualized as a flat circular disk, not dissimilar to a small-world network graph. Where power exists at the center of this flat disk, this is where negotiation occurs between the major effective powers within any cryptocurrency, acting as a form of checks and balances on each other. Preventing any major circle of power within the center to become too dominant as long as a healthy balance of power is maintained.

The Three Stage Model in practice.

This theory of Bitcoin governance has so far failed to fully deliver in practice. In reality dominant implementations have formed. While miners as a whole have not always made the best decisions.

Implementation Centralization

In reality dominant implementations have formed and through political processes power has further centralized in most cases. Even more concerning is that implementations most often end up being captured by external forces. This is in large part due to a lack of funding which makes developers vulnerable to accepting employment from forces that might not have the best interests of the protocol as a whole at heart and instead push their own limited agendas while restricting, suppressing and disrupting features that do not maximize their own profit or power.

Considering that Bitcoin has no self funding mechanism, implementations really only have two viable options to gain funding. The first option is the “corporate capture” model where a single dominant implementation will need to effectively control protocol development in order to maximize profit for products developed by the controlling companies, this often implies restricting, disrupting and suppressing features that compete with the controlling companies products.

The second option is the “infrastructure capture” model, where many companies support protocol development in order to ensure its continued reliability and robustness, this model most often implies a wider distribution of power since this form of capture is not dependent upon a specific product but rather the wider and common use of the protocol. This can be compared to companies such as Google, Microsoft and Samsung supporting the Linux Foundation for the open source development of Linux which is being widely used in their own infrastructure.

Within the context of Bitcoin, it is clearly preferable to have a form “infrastructure capture” over “corporate capture”. Due to “infrastructure capture” having a better distribution of power and therefore also a better resulting evolutionary path, since “corporate capture” can often lead to the unnecessary restriction, disruption and suppression of features that compete with the controlling companies products, which in the case of a protocol layer such as Bitcoin should be considered undesirable.

Miner Incentives

It should be clear that miners have not always made the best decisions. The best early example of this is during the Bitcoin civil war, where miners failed to activate BIP109,through Bitcoin Classic which would have effectively acted as a check against the power of the dominant implementation at that time. Another example of this is Segwit2x, a proposal that represented a compromise between the two sides that still heavily favored the status quo. There was no good technical reason not to increase the blocksize limit by such a small amount, considering that a split was going to occur regardless it also did not make sense from a political perspective, since a simple compromise would have most likely helped maintain a much higher degree of unity.

It could be the case that miner incentives are too short term for the effective governance of a system such as Bitcoin. This is because the lifespan of the specialized mining hardware used is no longer than two to five years, even more importantly due to the competitiveness of mining and the constant search for less expensive electricity, most mining operations are located in places with excess electricity and have contracts guaranteeing certain electricity rates for set periods of time. Such contracts understandably rarely extend beyond five to ten years. The average incentive time preference for miners therefore most likely sits below five years today. This creates a conflict of interest between short and long term decision making, where miners incentives favor a decision emphasizing short term strategy over the best long term strategy. That miners failed to support a small block size limit increase during the signaling periods could well be an example of such short term thinking, where miners preferred not to rock the boat over maintaining long term sustainability.

These short term time horizons can also lead to another problem, possibly a more likely culprit. Miner apathy, miners are supposed to be one of the stewards of the system, over short and medium time frames their decision making has been effective. However, as industrialists with strong financial pressures acting upon them, they might not always care enough about Bitcoin politics, keeping their eyes on the numbers preferring to be more focused on maximizing profitability over shorter time frames. There is no malice in such short sighted actors but such widespread apathy would lead to the breakdown of this theory on Bitcoin governance, being unable to rely on the miners as a well aligned group and phase of decision making, to act as a check and balance on the other groups and phases.

Difficulty of Change

It is currently not possible to implement a self funding mechanism in Bitcoin, without such a fork losing significant dominance and splitting the chain. The traditional approach of allocating part of the block reward to funding, cannot be implemented in Bitcoin because it would break the social contract and violate one of the most sacred rules of any cryptocurrency; it should not be possible to increase or change the distribution scheme of any sufficiently mature cryptocurrency. This is in fact a good thing, since we can rely on this mechanism to keep the principles of sound money and scarcity intact, which is critical for investor and user confidence.

There is another potential approach which is worth mentioning here. It has been hypothesized that miners/pools could voluntarily give up part of the block reward and donate this to a development fund. However, I do not think that this could ever work, miners are profit seeking, any pools that would implement such a rule would most likely lose mining power, as miners automatically switch to the most profitable pools, this is also known as the free rider problem. Therefore we can conclude that it is not possible to implement a self funding mechanism in a dominant Bitcoin fork due to these preexisting incentives.

This touches on another important point, the limitations that exist within any preexisting cryptocurrency for change. It does seem that certain aspects of a cryptocurrency especially related to its governance and economics need to be set up well from the beginning, since most often changes to these attributes are simply not possible once a cryptocurrency becomes sufficiently mature and established. This is in large part due to the preexisting status quo who most often do not benefit from such changes since they are most likely already entrenched around old rule sets.

We can draw an analogy here with traditional government, it is extremely difficult to turn an absolutist monarchy into a democracy, also because the incentives are not aligned for the people in power. This is why this situation most often leads to bloody revolution which is the equivalent of a controversial and contentious fork/split in Bitcoin. Which is not a desirable outcome for minor changes such as simple protocol upgrades. Such a radical “revolution” can still be justified, if the degree of contention justifies a split. However, its efficiency should be judged by its success. In the case of such a radical change to these key principles I do not think that such a fork would gain much support at all, essentially nullifying its significance and viability.

An important factor for this phenomena is the homogeneity of belief and ideology within any cryptocurrency. People that are attracted to self funding mechanisms for instance have already migrated to alternative cryptocurrencies that possess that feature, while at the same time people that are attracted by the design of Bitcoin are more likely to join and or stay with that community. This homogeneity of ideology and believe makes it almost impossible to gain widespread support for such radical and fundamental changes. Which can be seen as an important virtue and feature of cryptocurrency while at the same time necessitating that some designs have to start with a clean slate.

Time and Scale

It could very well be that Bitcoin has never gained sufficient scale in order for this theory of governance to function correctly. This does however create a dilemma where Bitcoin cannot reach sufficient scale because its governance does not function correctly at a smaller scale. Hindering its competitiveness and inclusiveness, thereby preventing its dominance within the free market of cryptocurrencies. It is true that a greater scale past a certain threshold does allow this form of governance to function better, whether this serves as an insurmountable impediment is still unknown.

It is certainly possible that this theory of governance is in fact functioning correctly but that it will simply take more time for dominance to flip. As an ongoing social experiment we might not be in a position to know whether it is working correctly now until more time has passed. That would mean that there can be long drawn out periods where the market needs to catch up in understanding and correctly valuing different sides of a split.

Beyond the Three Stage Model

It is worth mentioning that this theory on Bitcoin governance does represent an oversimplification, which is necessary for any coherent theory on governance. However, it is still important to understand the other major powers and how they fit within this three stage model of governance.

Power of Influence

One of the most important concepts to explain which falls outside of the three stage model is the power of influence. This is where certain individuals have disproportionate influence over the network due to the respect and following these individuals might command. This directly affects all stages of governance in the three stage model, since all stages of governance still represent human beings who can be swayed through social forces. This is in large part why we still need to deal with traditional human politics as a layer permeating our entire governance process.

Bitcoin is not an automaton where we no longer need to deal with human politics. Bitcoin is closer to being a cyborg, part machine, part human being. The objective being to rely on and modify human behavior through cryptographic game theory within a distributed network, with the objective to bring about a greater public good, greater than the sum of its parts.

This is why politics still plays a critical role in the governance of any cryptocurrency, there is always a tug of war for power and influence over the network. This can extend to influencers or power could even be shared between different media personalities. This is also especially true for the founders of any project and often extends to their attached foundations. In some cases the effective power wielded by such parties outside of the three primary stages of governance can be extreme even outweighing the primary stages of governance, in these cases we can consider the hegemony of the three stage theory of governance to be under threat, this can either be considered a transitional phase or even a failure for this theory of governance.

What is important to keep in mind about the power of influence is that as the size of the network grows, so does the power of the current status quo of influence wane. As a permissionless network there are limited means to block access and opportunity. As new participants join the network it creates a better balance of power, a better distribution of power, which makes it very difficult for the old status quo to effectively maintain its power of influence over the network.

Exchanges

Exchanges have a very significant and disproportionate power within the cryptocurrency ecosystem, especially within the context of this three stage theory on Bitcoin governance. The problem here lies with naming conventions, which can have a significant effect on public perceptions. Exchanges have significant influence during the early stages of any split to determine which side keeps the original name or even whether to list such assets on their exchange in the first place. The support of exchanges can make the difference in terms of which side achieves dominance post split. This is in large part due to people having a bias favoring the original name, where people might have loyalty or trust in the name, regardless of its content. When in reality both sides of a split are effectively Bitcoin, sharing the same history while taking a different path.

This does put exchanges in a difficult position, where the nature of markets also necessitates strong social coordination for naming conventions such as tickers. It is not in the interest of any major parties within cryptocurrency to cause such confusion within markets which is why it is important that consensus is found quickly on the ticker symbol itself which helps to consistently identify these different assets on the market. The naming of a cryptocurrency can remain an objective value judgment for each individual to make as long as there is agreement on the ticker symbols. This atleast helps to resolve certain semantic disagreements and the problems which arise from the need to only have one Bitcoin semantically when in reality there are many.

Infrastructure and Business

There are many pieces of infrastructure beyond exchanges that also have significant influence. This influence is not dissimilar to the influence exchanges hold, even though it is arguably not as significant as the exchanges themselves, this combined power however can definitely make a big difference in terms of which side of a split achieves dominance. The term infrastructure in the context of cryptocurrency beyond the three stage model can extend to many services such as payment processors, explorers and wallets. These parties can have significant power of influence as well as direct power through the choice of which side to support and list.

Businesses that use Bitcoin can also exert significant influence over its governance process. It should be expected that due to their vested interests that they will lobby and attempt to gain greater power over the governance process of Bitcoin. This can take the form of both “corporate capture” and “infrastructure capture”, which as was explained earlier “infrastructure captured” being the more favorable outcome as long as there is a sufficient distribution of power between different businesses lobbying in this fashion.

Considering that economic activity is a key value proposition for Bitcoin, it is important for the first two stages of governance in the three stage model. To take the desires and requirements of business and infrastructure into account in their decision making. Otherwise they might very well lose the support of the economic majority and therefore also their prospects of long term dominance.

Guidelines

The purpose of this theory on governance is to serve as a practical guideline for all versions of Bitcoin in order to avoid future conflicts and improve their evolutionary path.

This theory on governance can also be applied to alternative cryptocurrencies since most of their governance mechanisms are directly inherited from Bitcoin. Therefore this theory can serve both as a partial guideline and cautionary tale for all of the children of Bitcoin, in the sense that we can learn from the failure and successes of Bitcoin and adapt accordingly.

Governance as a Schelling Point

Having a commonly understood and agreed upon governance process, would make most good forms of governance more effective. Therefore by promoting these ideas we are increasing this theory on governance effectiveness. A theory on governance can become a schelling point in itself, bringing people together by adding legitimacy to the decisions Bitcoin makes collectively. Conflict should be embraced, especially within the context of the division of powers, since it allows for a more productive outlet for such disagreements between parties that can have widely different special interests.

This now becomes a question of culture, such a theory does not change the technical realities of the protocol itself but interprets around these preexisting rules to find the best possible understanding of what was always already there. The difference being, is the understanding and interpretation of these preexisting rules, which definitely affect the outcome of any decisions made. A greater understanding of how to do better Bitcoin governance would help close the loop on what can be the most effective positive feedback loop the world has ever seen.

All three stages of governance can be empowered with this understanding. Implementations can have more freedom and creativity without the weight of believe that they are the primary decision maker. Miners can be more bold by understanding their role within the governance process. While a better informed market will make superior decisions providing an even stronger carrot and stick supporting good fundamentals.

Stake Voting & Futarchy

The problem with stake based voting under Bitcoin is that there is a lack of incentive for participation by stakeholders, this is in stark contrast to full Proof of Stake cryptocurrencies which provide part of the block reward and fees for participation. Bitcoin is unable to implement such changes making stake based voting by itself an ineffectual tool for governance.

Futarchy, governance based on prediction markets is another interesting concept worth exploring. However, as it stands now I consider this approach to be insufficiently tested in the real world, for it to by itself serve as an effective tool for governance.

The way we need to look at such solutions is as polling mechanisms, not as a stage in governance in itself. Instead such polling mechanisms can help to directly inform the three stages of governance, since polling still requires decision makers to act on that information. This would help to strengthen the feedback between governance groups improving their decision making by aligning it closer with different segments of the ecosystem.

Implementations

We need to promote and support the use, legitimacy and funding of multiple implementations. This is especially important for companies who profit from the cryptocurrency ecosystem, such companies should support implementations, preferably by paying for developers within different clients. Having multiple companies support the developmental infrastructure in this way would create a better balance of power avoiding problems of “corporate capture” favoring what I have termed “infrastructure capture”.

Schelling points should also be better understood and agreed upon between implementations, which will help to reduce the number of conflicts between clients.

Formal specifications should be created and widely supported since this would help to reduce the number of conflicts between implementations, both intentional and unintentional. While simultaneously helping to increase implementation diversity by lowering the barrier to entry for new competing implementations to be created, while also helping to move the culture away from the idea of a “reference implementation” which is an inherently centralizing concept.

Mining

The potential problems with mining are more difficult to solve. However, a more clear governance feedback loop could significantly improve the situation. Having the first group/phase of decision making be better defined along with the understanding that the market is the ultimate final arbitrator of dominance as the third group/phase of decision making. Putting all of this within this context helps the miners see their own importance within the governance process, which might make miners more bold were before many might have been convinced they were second class citizens, to the first group/phase of decision making.

This is an example of where simply gaining a better understanding of the governance process and coming to an agreement in this regard will improve the effectiveness of this theory on governance.

Market

Value is based on believe, our challenge is to convince the world of our beliefs. This has been an eternal struggle since the dawn of man. This is where the free market presents its virtue, over time we become better informed helping to sort the wheat from the chaff. Favoring truth and utility, we should promote these goals with intellectual honesty, while fighting for an environment free of censorship.

Splitting Mechanism

The splitting mechanism is a critical governance mechanism of Bitcoin, therefore it should be supported and promoted. We should recognise the right for any splinter group to exist, even facilitating for the smooth transition to different splits. We can do this by supporting replay protection and avoiding the use of soft forks. Inclusion of major splits in exchanges and wallets also helps to promote this freedom of choice.

Attacking any splinter group is counter productive and is a dangerous idea to promote, this narrative gained prominence during the BCH/BSV split. Fortunately this idea has been further discredited since that time. Once a blockchain splits carrying out intentional reorgs should be considered a malicious attack as it was also defined in the Bitcoin Whitepaper.

Splitting the chain allows new experiments to take place, we should want to be proven wrong. We can have confidence in network effects not allowing dominance to be flipped over trivial differences. The splinter groups act as the ultimate vanguard ensuring that Bitcoin continues to evolve and stay relevant, allowing it to compete with itself.

Speciation

The splitting mechanism within the free market has much in common with natural evolution, this analogy is helpful in better understanding these governance processes. Speciation being a great example of the splitting mechanism since it also ensures the survival of that genetic line even if that at times leads to the extinction of its own dominant species.

The evolution of cryptocurrency is also similar to biological evolution in that there is change of heritable characteristics over successive generations, through the expression of code. Selection acts on this variation with market and environmental pressures, which gives rise to diversity. Looking at the cryptocurrency ecosystem in this way, a certain degree of pluralism becomes desirable as it improves overall resilience, whereas maximalism is more likely to produce monocultures which are far more prone to collapse.

Alternative Designs

Considering the problems with long term miner incentives, Proof of Stake with long lock in periods and possibly slasher algorithms makes sense as a potential solution for this problem, since it effectively increases positive long term incentives.

In terms of the problems with capture due to a lack of funding, I see self funding mechanisms as being the ultimate solution for this problem, where part of the block reward is put into a treasury, which is attached to a decentralized proposal and voting system for the distribution of these funds. Having a reliable source of funding reduces the risk of capture, perversion and better aligns the incentives of implementations towards the public good.

While most critically introducing mechanisms to shift this funding in the case of capture and perversion, without the need to split the protocol in order to achieve such a shift in the balance of power. Rendering such a governance model more competitive compared to blockchains that experience more frequent splits due to this reoccurring power struggle.

These solutions are very unlikely to be implemented in Bitcoin due to the pre-existing rule set and social contract as was already previously discussed. If these are indeed the type of solutions that are required for effective blockchain governance, I would expect Bitcoin to gradually lose its dominance within the market to competing protocols that are able to implement these potentially necessary changes.

Evolution of Governance

I am convinced that the ideal blockchain does not exist yet, but that it will evolve from the blockchains that have the most effective forms of governance, that by continuously and consistently making better collective decisions it will end up taking a superior evolutionary path, allowing it to better compete within the cryptocurrency ecosystem. This is why gaining a better understanding of the potential governance that is possible over such blockchains is critical for their successful long term development and adoption.

The reality is that this theory of Bitcoin governance that I have described in this paper could be fundamentally flawed, it is my best attempt to create a coherent and effective governance model for a Bitcoin based blockchain. The point of creating this theory is as a guideline, since a greater understanding of these mechanisms will ultimately lead to it being put further into practice over Bitcoin (BTC, BCH, BSV). Even if it fails, it informs us on how to create better blockchain based governance systems, since if Bitcoins governance fails it necessitates us to increase complexity until it brings about the effects we desire.

The idea of Bitcoin and much of its fundamental design with varying levels of complexity and tweaks is very much present in the alternative cryptocurrencies. In this sense these alternatives can be seen as an extension of Bitcoin governance itself at least in terms of the third stage of governance within the three stage model, since it provides individuals with an even greater freedom of choice, while increasing competitive pressure within the crucible of evolution that is the greater cryptocurrency market that Bitcoin lives within.

The advantage of effective Bitcoin governance over alternatives is by virtue of its simplicity, this is something that is definitely worth exploring before completely abandoning such a fundamental design. Most alternatives take the fundamental design of Bitcoin and iterate on top most often increasing its complexity, this might be necessary but it should also be considered extrinsically undesirable, since complexity does increase risk where more moving parts also means that there is more that can go wrong. This is what makes simplicity in design extrinsically valuable, which makes the pursuit of more effective Bitcoin governance worthwhile even in the face of the problems it faces. Especially considering that even in its failure there are lessons to be learned which are critical in designing better blockchain based governance mechanisms.

Bitcoin is an ongoing social experiment, in the same sense that the United States is still an ongoing social experiment, we learn as much from its failure as success.


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