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Ethereum: Governed by a benevolent dictator?

Who is governing the second largest blockchain with a market cap of roughly $29 Billion USD? How are decisions made in Ethereum? How does decision making differ from Bitcoin? As these questions are highly relevant for protocol improvements, we will go into more detail on Ethereum’s governance practices in the following.

With respect to platform governance, the Ethereum community has seen some very interesting and for some members concerning events over the past year.

Officially, the Ethereum community acts as decision maker. The community refers to the group of people, institutions, companies and other organizations that together support and maintain the Ethereum blockchain. Within this community, core developers have influence over which concrete proposals are brought to the community and are trusted by miners to provide technical guidance. In case of major changes to the protocol, miners have control over which hard-forks are accepted by the majority of the network.

The DAO

The decision making process was illustrated last year by the famous DAO hack hard-fork. The DAO, a Decentralized Autonomous Organization, was set up to form a decentralized venture capital fund. It has been one of the largest crowdfunding projects so far, receiving about $150 million USD worth of ether during the 28-day funding-period in May 2016.

Investors in the DAO received voting rights for their investments and were directly able to vote for project proposals. Due to programming flaws however, a hacker was able exploit vulnerabilities in June 2016 and steal $50 million USD worth of ether. As the DAO code required him to hold the funds for at least 28 days before he could spend them, the Ethereum community had time to decide whether to copy, fork, the blockchain and remove the hacker’s transactions or not.

Core Ethereum developers were in favor for such a hard-fork in order to return stolen funds. Most miners followed their lead. However, a minority of miners rejected the controversial idea to change immutable transactions and continued mining the old blockchain. This divided Ethereum into two co-existing blockchains, the new one, Ethereum (ETH), and the old one, Ethereum Classic (ETC).

This incident illustrates decision making and power distribution on the Ethereum blockchain. After such a fork, a larger community of developers, companies and others determines which post-fork chain attracts the most talent and resources. If not a minimum minority stays on one chain, then over time, there will be less value on that chain, as the community is less interested and for instance will not provide innovative updates. Such a value decrease of a blockchain fork can actually be observed when taking a look at the Ethereum Classic currency valuation over the past months.

The Ethereum Classic (ETC) currency decreased in value from a maximum of nearly $23 USD in June 2017 to a low of about $11 USD in October 2017. (https://coinmarketcap.com/currencies/ethereum-classic/#chart) Compared to the Ethereum currency (ETH), which is today valued at $308 USD, this is a significant difference.

The promise of immutability

The DAO example illustrates how immutability of transactions can be broken in blockchain platforms that originally build on the promise of immutability. Moreover, it illustrates the strong informal influence that core developers have on the community.

Thus, the decision making process in Ethereum can be somewhat opaque to the wider community. Information about decisions are mostly spread across online forums and email subscriptions. In addition, public resources from news articles and blog posts seem insufficient and incomplete.

One of the consequences to critics of Ethereum’s governance processes after the DAO, has been the introduction of Ethereum Improvement Proposals (EIPs). EIPs enable the community to propose changes to Ethereum on different levels. They range from improvements of the core code that require consensus about a hard-fork, to application-level standards and conventions that do not require a hard-fork.

The process demands a person from the group that is proposing the EIP, to be the “EIP champion” and to thoroughly discuss the proposal with the community. After that he should describe it officially in a Github pull-request. A team of currently nine EIP collaborators, administers the process and maintains the status of EIPs. For an EIP to finally pass, it needs to be accepted by the community, especially by miners.

This process brings some structure to Ethereum’s governance process. However, the core Ethereum development team with it’s founder Vitalik Buterin is still perceived to have strong influence on miners and the rest of the community. As they are the most experienced in the technology, many follow their recommendations.

Some authors see Buterin’s role as “benevolent dictator” who can persuade other stakeholders on which direction to go with Ethereum, as long as it is for the good of the blockchain platform.

This set-up on the one hand is considered less democratic than Bitcoin’s distribution of power, but on the other hand leads to quicker decision making about protocol improvements. Thus decisions about protocol changes are made more efficiently at the cost of blockchain principles, such as the immutability of transactions. The DAO has examplified this as core developers have been able to persuade the community to revert past blockchain transactions that have previously been considered immutable.

For developers of decentralized applications (Dapps) who depend on Ethereum’s ability to solve scalability challenges efficiently, a more centralized governance approach might be an acceptable sacrifice. This is especially interesting, considering that most developers that build complex Dapps are currently choosing Ethereum as blockchain development platform.

Why is this the case? To find out, see here.

To see an overview of all articles, go here.

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Tjark Friebe

Tjark Friebe

enjoys learning about technology and new ideas.