Bitcoin: Who decides about $102 Billion USD?

In a blockchain network with a market cap of roughly $102 Billion USD, who decides about platform changes? Which parties have to agree? Can someone dictate proposals? These governance questions are very controversial and will be analyzed in the following.

The level of centralized regulation or governance refers to:

“the non-technology based mechanism by which belief and reliability is created in the blockchain ecosystem” — Walsh et al. 2016

or more simply expressed to the degree to which decision making is distributed in the blockchain network.

When talking about decision making power in a blockchain network, it is important to notice that the Bitcoin blockchain is a decentralized network that runs on a very large number of independent nodes. Currently there are approximately 10.901 mining nodes in the network (https://bitnodes.21.co).

Why is this a challenge?

When major changes are to be made to the core protocol, the majority of the community, especially the miners, needs to adopt them or otherwise these changes will not be realized. For example, if only a few miners upgrade to a new protocol, they will create a blockchain fork. Because every miner in the network is incentivized to mine on the longest fork, only forks that attract more than 50% of the miners will survive in the long-term. That is why for any change to the protocol, the majority of the miners needs to be on board.

As outlined in the previous post about Bitcoin’s scalability, protocol improvements are very critical to the long-term functioning of the Bitcoin blockchain.

Proposals for changes to the protocol can be made through the Bitcoin Improvement Proposal (BIP) process. The process is moderated by a few Bitcoin Core developers with commit access to the bitcoin core protocol.

However, unlike in a centralized system, none of the changes can be forced onto nodes in the network. Thus, the realization of protocol changes finally depends on the willingness of nodes to upgrade to the new protocol release.

Backward- vs. non-backward compatible changes

There are two major types of proposals that can be made by the distributed open-source developer community, namely backward-compatible and non-backward-compatible proposals.

Backward-compatible changes come with a so called soft-fork and do not automatically exclude participants in the bitcoin network that do not upgrade to the new client version.

Since miners are incentivized to mine the longest chain, the majority of miners is required to upgrade in order to successfully implement such a backward-compatible protocol change. If only a few miners upgrade, the longest chain will be the “original” blockchain without the new protocol change.

In contrast, protocol changes that are non-backward-compatible, such as changes to the block structure, require all participants to upgrade to the new version. Otherwise, their clients would not recognize and mine new blocks anymore.

Consequently, the actual implementation of these changes depends on the willingness of miners to upgrade to new versions. In case there is no support for a hard-fork, miners will simply continue to mine on the old protocol version.

Thus, the platform core developers depend on the decision of the miner community to support protocol changes. Discussions can take place over extended periods of time.

SegWit and Segwit2x

An example is the discussion about changes to the block structure. A proposal that came up earlier this year (2017) is Segregated Witness (SegWit), a soft-fork change. The proposal suggested changes to the block structure which would effectively help address scalability and security issues in the Bitcoin blockchain.

Since different interest groups in the network argued for and against SegWit, the supporter group had to agree on a compromise with other interest groups of the network. Only by doing so, they were able to win the support of the majority of miners and other stakeholders for SegWit.

They did so in the so called “New York Agreement”. In this agreement two proposals are combined as a compromise, namely SegWit and a hard-fork increase of the base block size to 2 MB. The agreement became known as “Segwit2x”.

As a result, SegWit has actually been activated on August 24th, 2017. Following the activation of SegWit an increase of the block size is expected in November 2017.

This example illustrates how complex decision making is in the decentralized Bitcoin blockchain network. There is no central authority in Bitcoin that can dictate protocol changes. Decision making rather requires the support from many stakeholders, namely currency exchanges, core developer teams, and most importantly large mining pools.

Without a majority of these groups supporting the change, changes will only lead to alternative blockchains (altchains) that will receive less attention, less peer-review, and eventually drop in currency value.

Because the decision making process in Bitcoin is so complex and requires so many stakeholders to come to an agreement, it is generally perceived as very democratic but slow, compared to other Blockchain platforms.

Decision making also affects changes to scripting, and thus the possibility to develop decentralized applications (Dapps) on the Bitcoin blockchain. Therefore, governance can be highly important for Dapp developers.

But how does Bitcoin support Dapp developers that want to create decentralized applications? To find out, see here.

To see an overview of all articles, go here.