Get Trading Recommendations and Read Analysis on Hacked.com for just $39 per month.

The fundamental assumption of any blockchain, whether public or private, is that 51% of actors are honest. For this assumption to hold, there must be decentralization (a sufficiently large number of individual/entity actors to such extent that exercising direct influence on 51% of actors is unfeasible) in four key aspects: developers, miners/stakers, exchanges/businesses, and media platforms.

To place weight on their influence is difficult due to the balance of power between these four fundamental pillars. We can say, however, that developers, who write the rules by code, have slightly more influence than the other three due to their expertise, but this influence vanishes if there are two development teams as the advantage of expertise becomes non-existent.

If the two development teams diverge and the subject matter is sufficiently controversial, the decision moves to miners, who enforce the code, or exchanges/businesses who, as proxy for users, adjudicate on the matter. The balance of power between these two pillars can be complicated and dependent on the specific circumstances. If exchanges/businesses are split within their ranks to a significant extent – say 60-40 or more – then 51% of miners may have a final say. If exchanges/businesses are, however, overwhelmingly in support of one direction, then it would depend on how the code was presented.

Balancing Power

With hindsight, we can say that the primary mistake of the development team in favor of scaling bitcoin onchain was the requirement of 75% of miners prior to activation. This requirement distorted the balance of power and led to a complete breakdown in governance as well as a protracted and never ending debate as a decision was actually never made. Exchanges and businesses, despite being overwhelmingly in favor of scaling and being a pillar of their own, were reduced to a mere media platform while miners were turned into mini-celebrities and forced to identify themselves.

Had it been a flag day, whatever the decision, there would have at least been a decision and the division that currently exists within bitcoin would have long ceased, with the losing side having no choice but to accept the decision or create their own blockchain.


Advertisement:

Ethereum’s historical hardfork followed Nakamoto’s suggestion to have the hardfork as a flag day. However, like bitcoin’s onchain developers, ethereum exchanges and businesses failed to realize their potentially conclusive influence on the outcome and delegated the decision to miners by stating they will follow the longest chain. They may have done so because miners who voted showed an overwhelming support for the fork, but there were many tense moments just hours before the fork which may have been avoided if exchanges had taken responsibility to represent ethereum users and savers who overwhelmingly voted in favor and had stated they were in support of the fork.

If we consider an alternative scenario where 60% of miners remain on the no-fork chain, then we would have had empirical evidence that the interests of miners and savers/users do not align, but such judgment may have been incorrect and the result may have more correctly been diagnosed as exchanges/businesses distorting the power of balance by delegating their responsibility as the third pillar in public blockchain governance.

Had the vast majority of exchanges/businesses stated they will follow the fork chain, then we should expect that to have significant influence on the decision of the miners, therefore maintaining a balance where the fork is a flag day.

The fourth pillar, the media, has the least direct power, but, it keeps the other three in check and may tilt the balance if all three pillars are divided.

The Four Pillars of Ethereum Should Be Separate

Based on the above description of public blockchain governance, we can describe a general law. If any two of these four pillars are centralized to such extent that exercising direct influence over 51% of actors of each pillar is viable, especially if the centralized two pillars are developers, miners or exchanges/businesses, then the fundamental assumption that 51% of actors are honest no longer holds.

The balance of power fails if any one man or group of men control mining and development for inertia and network effects would be decisive, at least in the short term. If one man or group of men control mining and exchanges or development and exchanges, they would have decisive say, at least for that specific blockchain. Any other pillars’ control on the media gives them outsize influence, distorts the balance and may be conclusive, but such control being very difficult, the assumption may still be retained, especially if they do not exercise any overt power over the media platforms.

What happens when the assumption fails we do not yet know empirically. The invisible hand of the market as indicated by the price may keep even dishonest actors in check, but the distortion of balance may lead to mistakes which gradually and slowly incentivizes a brain and capital drain to other blockchains, potentially leading to eventual decay.

Direct Governance by the Honest 51%

The governance described above is similar to the way western societies are governed and the theory that there should be no overlap is taken from the enlightenment’s theory of separation of powers.

An overlap between the pillars in society and, we should expect, in public blockchains, leads to dictatorship which, lacking direct feedback at the local level where individuals are best placed to judge, leads to mistakes, causing a brain drain and eventually decay which provokes an uprising, leading to collapse and eventual regeneration.

The pillars, separated, keep each other in check and balance. Under such governance, no men or group of men is able to usurp the will of the people/users, from whom they gain legitimacy. Thus guaranteeing their freedom, fostering an open environment where ideas can easily be exchanged, leading to flexibility, ability to effect change in a non-violent manner, responsiveness to circumstances and overall prosperity.

Unlike what has been previously suggested, the above analysis leads to the conclusion that blockchains are not an innovation in governance, at least not within a blockchain itself. If there is an anarchic element to blockchains, it is limited to the ability to create your own blockchain or to fork a blockchain through changing proof of work.

The effectiveness of the latter option where a controversial decision is concerned has not yet been tested which itself indicates that it may not be viable. The former option, however, can be effective and as such it does represent a change over the current monetary system which has only one money within a nation.

Public blockchains borrow from Austrian economics which argues that there should be many forms of currency within a nation to compete with each other and thus in a free market manner be chosen. From an economic point of view, that can be an improvement over the current system as it brings the free market to money with the decision on monetary policy made by numerous individuals at the local level who are best placed to make the right choice so having the most information, but this economic point of view is not anarchic in that there should be no governance. To the contrary, it is a mainstream economic theory supported by conservatives and republicans, as well as, now that Keynesianism has clearly failed with negative interest rates across the world, potentially the entire population.

Such ideas of many currencies within a nation competing in a free market manner is not, however, a blockchain innovation. A blockchain can be fully centralized in one node (although that would suffer from a systemic point of failure) with many light clients connecting to it, and it would still provide an upgrade to money in that it turns them into the natural habitat of machines.

Science Trumps Religion

Some suggest public blockchains only have value if they have what is considered by some as an utterly sacred quality – decentralization, immutability, a 21 million limit or even 1MB. That is, the invention is the whole package and any change to any aspect, even to such parameters as a 1MB limit, makes the invention worthless. This brings to mind scenes from Idiocracy where someone with higher intelligence than the overall population presents something novel and all the sudden they are turned into a god and the novel thing into a worshipping object. Though gods walk among us, what they present is not for worshiping, but a tool for use.

The attraction of digital currencies is not primarily because of any specific monetary policy any of them employs. If Nakamoto thought extreme decentralization sacred, he would have explained how it can be maintained. If he thought 21 million was a golden cow, he would have justified the number considering the ever growing population. If he thought the network should never change, he would have not himself carried out numerous forks and if he thought immutability was the whole point, he would have not relied on the assumption of 51% being honest.

In short, Nakamoto provided a tool, not a philosophy. Like any invention, this tool was at first adopted by serving those that were previously not served, but just because a certain people use a certain thing, it does not impune upon immaterial matter human qualities. Blockchains have no inherent politics. Though some use the Trojan horse analogy to suggest that reasonable men or women would all the sudden accept a political philosophy that they have clearly rejected for it lacks basic coherence, the public perception of certain digital currencies clearly indicates otherwise.

Digital currencies are based on a fundamental premise – free market based free choice. With hindsight, or more correctly now that we have been presented with them, their composition is obvious. There is little new in public blockchains. There is no new economics, there is no new governance, all the crypto it uses is copied and there is no new politics. The way such mainstream and long established, long accepted, concepts have been put together is however very new.

That is to say, blockchains are not fringe or based on incoherent philosophy. Blockchains employ the most advanced and proven concepts that we have and bring them to the natural habitat of machines. It’s primary and perhaps only invention is, therefore, an alchemic transformation of value from physical to digital.

Digital currencies and smart contracts which are fueling IoT and other innovations are more than just money and any monetary policy that any currency may adopt is distinct from its primary innovation. Public blockchains are an upgrade to either cash or gold, turning them into pure code and information, allowing machines to interact with value.

I cannot, currently, for example, send money to a fridge because the fridge cannot go to a bank and request a bank account. With digital currency, a chip is all that’s required. Combined with other advances in computer science, the fridge can gain a very primitive level of intelligence, in that it can think by analyzing data, it can act based on them by transacting and of course it has memory. This has the potential to revolutionize industry and greatly improve our world.

An Incremental and Evolutionary Innovation

The innovation of public blockchains is not all encompassing. They reflect current governance because that is the best system man has so far invented. As such, they pass no judgment on the best way to govern, leaving such judgment to the free market. Moreover, they have no say in monetary policy as anyone can produce a public blockchain. The judgment on the best monetary policy is therefore necessarily left to the free market.

The ability of blockchains to upgrade is one of its greatest feature over cash or gold. Its requirement for 51% of honest actors to affect such upgrade is its greatest strength and what rightly leads to such systems being called decentralized. The failure of such assumption in any specific public blockchain only proves the greater point, the most decentralized aspect, the free market, will punish the dishonest actors, by slowly moving to another blockchain.

It is impossible, therefore, to argue that a controversial hardfork should never happen or where a controversial hardfork does happen, even with 51%, that’s a failure for each man and woman has the right to sell the blockchain and move to another one. As we must assume that 51% of individuals are honest for otherwise we would not have a functioning society, the free market ultimately enforces an honest governance structure.

Featured image from Shutterstock.

Advertisement:
Advertisement:

Posted by Andrew Quentson

Feel free to contact me at [email protected] with any information you may have.