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Crypto’s Governance Problem

  • The absence of a democratic governing structure has been increasingly making itself felt.
  • The coins with responsive informal governance structures will tend to gain users.
Crypto’s Governance Problem 101
Source: iStock/FotografiaBasica

Crypto's 'governance problem' has been increasingly manifesting in recent years. First there was the long-running debate over bitcoin block size, which threw the bitcoin community into such disagreement and discord that the cryptocurrency ended up forking into Bitcoin Cash (BCH), Bitcoin Classic and Bitcoin Unlimited. Then, more recently, there have been a number of additional tussles overASIC (application-specific integrated circuit) miners and proof-of-work algorithms, while similar (and different) conflicts have gripped Ethereum and other blockchains (e.g. Zcash, Monero, Litecoin).

What makes the disputes above particularly problematic is that cryptocurrency communities have few (if any) means of resolving them in procedural way. This is why wrangles have ended up leading to hard forks in so many cases, since cryptocurrencies generally don't possess a governing structure or mechanism that would help their communities arrive at a workable compromise.

However, while the absence of a democratic governing structure has been increasingly making itself felt, a number of solutions and new cryptocurrencies have emerged recently, promising to increase governance while preserving crypto's decentralised ethos.

'Just eat the damn oranges'

The most recent example of crypto's 'governance problem' emerged with Ethereum’s debate over what to do about the dominance of ASIC miners, which can mine cryptocurrencies more effectively than CPUs (central processing units)/GPUs (graphics processing units) but which tend towards centralisation as a result of how costly they are to run.

In the end, Ethereum decided not to update its Ethash algorithm to make it ASIC-resistant, with Vitalik Buterin, co-founder of Ethereum, telling a developers meeting on April 6 that an upgrade would be “chaotic.”

However, many people in the wider Ethereum community were unhappy about this decision, which was effectively taken by a small clutch of elite developers (if not by Buterin alone).

One frustrated poster to the Ethereum GitHub page wrote several days later, "Just fork the damn network already … I can't believe how ignorant the ETH Devs can be!"

What such dissatisfaction hints at is that it may be harmful to deprive members of wider crypto-communities of a say or role in decision-making. The lack of a formal means for registering views may make people feel less invested in a particular currency, which in turn makes them more liable to leave it behind altogether (e.g. via a hard fork).

Most crypto analysts and experts are in general agreement that something needs to be done here, although some question whether informal governance structures need to be replaced by formal ones. "A better dichotomy is responsive vs. nonresponsive governance," cryptocurrency analyst and Ethereum maximalist Eli Dourado explains to Cryptonews.com.

"How well do the existing governance structures respond to the needs of the community that wants to use that particular blockchain? […] Do they listen to a wide range of voices or do they try to censor those that disagree with them?"

The garden of forking paths

However, notwithstanding all of the above, there are growing signs that cryptocurrencies are beginning to listen to such views.

On the one hand, older cryptocurrencies are slowly realising that they need to introduce more formal/responsive governing mechanisms. Bitcoin developers have been floating the idea of a coin-based user voting system for a couple of years now, while Ethereum developers discussed governance at a meeting in Toronto at the beginning of May. Here, participants agreed on a plan for introducing "open-source tools to collect key signals and metrics," thereby enabling the core development team to determine just what it is that wider members of the community want.

And on the other hand, new cryptocurrencies are emerging that aim to solve the governance problem from the get-go. For instance, Decred is a cryptocurrency that uses a hybrid proof-of-work (PoW) and proof-of-stake (PoS) voting system for all rule changes. Essentially, the PoW and PoS nodes on its blockchain implement (in the case of PoW) or vote (in the case of PoS) for proposed forks, and which enables stakeholders (i.e. coin-holders) to override decisions made by miners if they don't agree with them.

Decred is currently the 26th most valuable cryptocurrency by market capitalisation, and along with the comparable EOS (which uses a PoS consensus mechanism and is currently the 5th most valuable currency), it suggests that older coins such as bitcoin and ethereum may have to update their governance procedures or risk falling behind.

"I think for the time being, governance will remain relatively informal," concludes Dourado, "and the coins with responsive informal governance structures will tend to gain users and the ones with nonresponsive informal governance structures will become more niche."

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