A Postmortem on Naivety
“The Fundamentals of Bitcoin”, wrote Hearn, “are broken and whatever happens to the price in the short term, the long term trend should probably be downwards. I will no longer be taking part in Bitcoin development and have sold all my coins.”
The reasons given for this dire prediction were as direct and harsh as the diagnosis itself:
“[Bitcoin] has failed because the community has failed. What was meant to be a new, decentralised form of money that lacked “systemically important institutions” and “too big to fail” has become something even worse: a system completely controlled by just a handful of people. Worse still, the network is on the brink of technical collapse. The mechanisms that should have prevented this outcome have broken down, and as a result there’s no longer much reason to think Bitcoin can actually be better than the existing financial system.”
Hearn names several reasons for his disillusionment and details the long and saddening via dolorosa of what he claims will eventually lead to the resolution of the Bitcoin experiment. While reading it, an entire soap opera unfolds; starring chinese mining farms, unbelievable centers of power in what claims to be a decentralized system, investors crippling an entire market to serve their special interests and a nasty “civil war”, featuring DDos attacks which deprived whole cities from access to the internet in the attempt to terminate a few “renegade nodes”. Not to forget the rampant censorship on the official Bitcoin forums and the causal character assassinations here and there.
For the uninvolved layperson it might come as a surprise that what caused all of the bad blood was a rather technical debate about the size of entries in the decentralized ledger that records Bitcoin transactions, known as the blocksize. A technical debate indeed, but with all sorts of consequences which might benefit one group of users, harm others and determine the scalability of the project as a whole. Here it is worth noticing that both sides of the argument have very solid arguments that should be inquired and debated thoroughly, what only makes the lack of such a debate even more tragic.
Since Hearns post mid january, the Bitcoin price has more or less recovered and an avalanche of advocacies in defense of Bitcoin’s future has rained upon the blogosphere, sounding at least as convincing as Mike Hearn himself. Seems like Bitcoin isn’t dead yet, and as the saying goes: Those declared dead live the longest. However, one crucial point remains standing without a doubt – The Bitcoin community suffers from serious communication issues and lack of maneuverability to say the least.
A Call for Decentralized Governance
One of the most influential centers of power in the Bitcoinsphere is the Bitcoin Core Project, which essentially develops the software protocol that operates miners and enables Bitcoin wallets to communicate and exchange value.
Bitcoin Core is not an incorporated entity of any kind. It’s an opensource project that in theory allows for the participation of anyone who’s interested and capable of contributing to it, but since it enjoys a sort of monopoly position, originating in the need of the Bitcoin network to be synchronized with itself, this principle of permissionless participation stays very much in the realm of mere theoreticality, or as Hearn phrases it –
“[…] Bitcoin Core is an open source project, not a company. Once the 5 developers with commit access to the code had been chosen […] there was no procedure in place to ever remove one. And there was no interview or screening process to ensure they actually agreed with the project’s goals.”
Now, let us make one thing clear – Bitcoin being a decentralized entity, running on forkable open-source software and operating without corporate structures is obviously a feature, not a bug. This is exactly why anyone was interested in it in the first place. If that wasn’t the case most of us would have sent it to hell a long time ago. But there’s one crucial point that’s being missed all to often: Decentralization doesn’t mean lack of governance, neither does it mean that everyone has to agree with everyone else in order to get things done, nor does it imply that centralized special interest groups have their way in buying overwhelming influence through brute and unintelligent market mechanisms. If anything, decentralization aims to achieve the complete opposite of all these.
Decentralization simply means building mechanisms which allow for a group of peers to efficiently arrive at decisions without having to rely on fixed hierarchies, central coordination and single points of failure. This, obviously, can’t be achieved by merely pretending that they’re abolished or irrelevant to begin with, but rather by developing tools which make them obsolete. Bitcoin Core and various other groups which together could be called the “Bitcoin establishment” lack most, if not all of these tools. Hence the civil war and stagnation we’re witnessing.
In an attempt to deal with this situation, Hearn and his colleges from BitcoinXT proposed to allow Bitcoin miners to vote on the controversial blocksize, a proposition perceived as outright heresy among many leading figures in the Bitcoin scene, or as Hearn cites the admins at bitcoin.org:
“One of the great things about Bitcoin is its lack of democracy”
Could BitcoinXT have prevented or solved the Bitcoin crisis? Maybe. It could have made things worse as well. A lot of brilliant minds differ on this point and the argument won’t be settled here, anyways that’s entirely beside the point. Even if miners were allowed to vote on a specific update with their hashpower, the governing institutions of the bitcoin community themselves lack any kind of truly efficient decentralized apparatus that would allow for further managing the system and improving it, not to speak of a decent compensation scheme to encourage large scale participation in such an improvement and governance process.
The irony of this situation should scream sky high, since it was Bitcoin itself that introduced the Proof of Work algorithm in order to tackle a very similar problem: The PoW protocol allows the Bitcoin network to reach consensus regarding the contribution of each node in the system to the authentication process needed to verify transactions. The moment such a consensus is reached, contributors are rewarded with freshly minted Bitcoins.
The PoW model restricts itself to an algorithmically quantifiable and verifiable action, e.i how much computing resources you’re investing into the network, other value creating actions – like suggesting improvements to the system, writing code, creating software updates or anything their like, which geniune people have to do, are entirely of the scope. Bitcoin knows how to create and distribute value in a decentralized fashion, as long as no dirty humans with opinions are involved.
There’s another major problem with the Proof of Work scheme, especially if one would use it to determine the future of the entire system the way Hearn and his colleges from Bitcoin XT suggested (Voting with hash power to decide on the blocksize): Computing resources are a tradable commodity. Everyone with enough resources is capable of centralizing the entire system under his dominion, both in terms of the revenue stream created through mining, and in deciding how the system behaves, given voting with hashpower would become a thing. This is probably the reason why some consider Bitcoins “Lack of democracy” being such a great trait.
In the early days, many were terrified that some financial interest group like the Fed or some other statist syndicate, consisting of cigar smoking man in black, might bring Bitcoin down in exactly this way. Luckily, that didn’t happen. You only have a hashpower triopol generating about ⅔ of the network’s total hashrate, most of which resides in the People’s Republic of China, behind a stasi-type firewall, making the system painfully slow.
There are alternatives to PoW, like “Proof of Stake”, where the amount of minable blocks is restricted to the amount of Bitcoins a miner holds. This would make it very costly to establish a monopoly position, but would officially transfer the ownership of the network to the 1% Bitcoin oligopoly, which currently holds about 99% of the entire Bitcoin supply (sounds familiar?).
So it seems that all of these schemes do a very good job in decentralizing the technical contribution needed to keep the network up and running, but have very little to do with making decisions, improvements and progress. However, it should be self evident that every system that involves genuine people, as automated and well designed as it first may appear to be, will at some point require adjustments, all of which will most probably necessitate decisions, have consequences for various interest groups and be subject to criticism. All these decisions and adjustments do not only require means to form an informed conesus, they also require a compensation mechanism that encourages improvement and gains the attention of highly skilled professionals – and above all – a sybil proof scheme to keep the system truly decentralized.
But is that even possible? Could we play the same trick, PoW plays on computing power, on human contributions to an evolving organisation? Including assessment of value, establishment of consensus and compensation via cryptocurrency?
At Backfeed we believe that the answer to this question is yes, and we’ve developed exactly such a mechanism, which not by accident goes under the name Proof of Value, or PoV, about which you can learn here. But in order to implement such a system, especially in an environment like the Bitcoin community, you’ll first have to convince those concerned that humans are capable of achieving consensus just as machines are. Luckily, there’s an algorithm for that too.
The Idea here is not only to promote our own enterprise (which by itself is opensource and forkable), but to get the point across that you apparently can’t have a decentralized entity like Bitcoin, without incorporating in it an equally decentralized and flexible governance system that has the ability to assess the value of contributions to the system and compensate accordingly. But than again, you can of course have whatever you like, but the price, as Hearn stated so adequately, is violent discourse, coercion, and inevitable – an unproductive stagnation, if not much worse than that.