Cryptocurrency Governance Processes: A Master Class

This summer has seen a master class in the difficulties of “decentralized” governance, at least as practiced by Nakamotoist cryptocurrencies, which are “a tool that we put outside of our jurisdiction in order to have it govern us.” (as Vlad Zamfir put it).

Bitcoin is now in its second year of flailing at the problem of blocksize capacity. A perfectly pedestrian engineering problem, with multiple solutions (each with plusses and minuses) has so far defeated the Bitcoin community’s ability to make decisions.

Despite the existential threat to the whole enterprise, the supposedly democratic process has been revealed to be a democracy of a few large companies, with huge economic interest in doing nothing. So much for “nobody can censor” Bitcoin.

At the same time, Ethereum is walking us through a multi-phase catastrophe that was “TheDAO”. The entire concept of Nakamoto-style cryptocurrency and “Distributed Autonomous Organizatoins” is to eliminate untrustworthy humans, in favor of a laissez faire voting and coded “smart contracts”.

After attracting absurd amounts of investments in advance of any meaningful economic activity, TheDAO was swiftly “hacked”, via a logical loophole it the “smart” contracts. Gosh, who could have predicted that?

The perpetrator takes the position that the autonomous system is, by definition, correct, so the fund transfers must stand. This is certainly the fundamental philosophy of cryptocurrencies and DAO’s.

For some reason, the investors who lost millions of (“fiat”) dollars are less happy with this, and want their stuff back. The Nakamoto style blockchain is highly resistant to either finding the perp or undoing the damage. That’s the whole point.

Furthermore, by definition and design, there is no one in charge to complain to or fix it. Again, that’s the whole point, to remove those pesky “authorities” who might undo a done deal.

Except….

The DAO and Ethereeum do have programmers involved, programmers who have a whole lot at stake personally. These developers have, in fact, stepped in to block the removal of the disputed funds for a time.

But how can this “crime” be undone?

Within the rules of TheDAO, it can’t. Within the rules of Ethereum there is only one way to do it: rewrite history, and have a majority of the users accept the alternate history.

That’s right, the very thing that cryptocurrencies are designed to prevent.

This, in fact, appears to be what is going to happen to Ethereum. A new, hacked up version of the code started Wednesday  (AKA, the “hard fork”), which  basically undoes the disputed transactions by creating a new history out of thin air. If 51% of the computing power of the Ethereum network accepts this new software, it will go into effect, and the old transactions disappear.

How was this decided? The developers have had quiet, behind the scenes discussions with the largest companies (i.e., the largest interest groups), and have decided that this is the best course.

This is so much better than governments and bankers talking quietly behind the scenes to decide important economic policies, no?

Fascinating.

These episodes show us that the Cryptocurrency Emperor has no clothes, and the Great God Nakamoto has feet of clay. These innovative disruptions turn out to, well, not really work at all, let alone as advertised.

And, by the way, the not particularly new, and certainly not “autonomous”, Pokemon.go has been far, far more successful than cryptocurrency in just a few days.

 

Cryptocurrency Thursday

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