Does Decred have the answers to on-chain governance?

Introduction

Crypto governance is a hotly debated topic that quickly descend into political battles. The purpose of this piece is to inform what crypto governance is, why it matters and why Decred may have solved some of the answers.

Let’s start even simpler though: what is crypto governance?

Quite simply put it’s a set of rules that us humans agree to and then code and run on computers all over the world. However as we all know, the rules need to be changed/updated for various reasons. The process of these changes is what we define as crypto-governance.

Governance in PoW Systems

In the realm of crypto-networks, we have the following stakeholders:

• Miners
• Users
• Speculators
• Developers
• Exchanges

Poorly drawn circle of crypto life

All five play a crucial role in the ecosystem and their importance can not be stated enough.

Miners:

They’re responsible for using electricity to determine the correct secret for each block of transactions. Without them the network is open to attack from malicious entities.

• Think: security providers

Users:

Users make transactions to one another and fill blocks up thus creating demand for mining blocks for miners.

• Think: users who derive real value from the network (escaping inflation, cross-border payments)

Developers:

Creators of the software who brought the network to life. They usually have a big social influence over what gets decided but are still at the mercy of other stakeholders.

• Think: programmers (Satoshi, Vitalik etc)

Exchanges:

Platforms to connect buyers and sellers globally with high quality infrastructure for trading and financial services. They also create a valuable market for miner to cash out block rewards to sell. Lack of liquidity on exchanges can be detrimental as the asset’s value is significantly reduced regardless of other factors.

• Think: Binance, Coinbase etc.

Speculators:

Usually participate as buyers on exchanges and increase through each successive wave of crypto. Without them crypto is never able to reach a greater mindshare.

• Think: your family and friends who purchased Bitcoin at $20k

Contention in PoW

Now that we know the various actors in the game, how do they actually interact with each other? Well, let’s use a real case study: Segwit2x.

In 2017, a proposal called Segwit2x was the first proposal from outside the Bitcoin Core team. The key idea around it was to increase the block limit from 1mb to 2mb, which would in turn increase the number of transactions the network can handle per second.

Sounds great on the surface — no? Yes, however by increasing the size of blocks it means that the cost of storing, downloading, validating and verifying blocks increases at a rate more than double. Such changes mean larger mining rigs can earn more and commercial business can expect to see a higher throughout of transactions. This comes at the expensive of smaller miners being able to run nodes on the network thus centralising mining and compromising diversity.

The two camps in the debate:

• Large mining pools, Bitcoin startups (Coinbase, Bitpay, Blockchain) and notable developers — this group benefits from increase throughput and stands to benefit commercially from such a change
• Node operators, Bitcoin users, Bitcoin Core developers — this group is against anything that threatens the principals of decentralisation

Ultimately the hard-fork was called off after the CEO of BitGo claimed they were abandoning their support — this was alongside all the other commercial players rooting for Segwit2x. It’d be easier to leave it at that but why did it happen is a more interesting point.

Depending on how plugged you are into the entire Bitcoin ecosystem, one key idea will become very clear: the developers and loudest cheerleaders are very pro-decentralisation, crypto anarchists that will slander any chain that isn’t Bitcoin (including Ethereum). However this can also be viewed in the lens of an evolutionary trait the network has developed through time.

How did it help Bitcoin in the times of Segwit2x? Well many core developer and influencers launched what’d be essentially known as a hate campaign against all those who supported Segwit2x — mainly commercial profit-seeking entities. This played well into their agenda of painting them as large corporations that wanted to centralise Bitcoin to themselves (which has merit). An offensive campaign at this scale effectively threatened the business of companies such as Bitgo and Coinbase who’s users were influenced by Core developers and influencers.

In this case the large miners could have easily pushed the upgrade and forged ahead, although it would have been at the expense of users who would ditch key stakeholders such as BitGo and Coinbase which in turn hurts miners. This case in particular is extremely fascinating as it shows how social power can often mean more than raw mining power. Coming back to our original framework, the dynamic can be expressed below:

• Developers (Core) have the highest social capital as they created and maintain the network. This power translates to the ability to influence users.
• Users are the largest holders of Bitcoin and their belief is what makes the currency valuable to begin with.
• Exchanges serve to provide a marketplace to users, they operate as a profit seeking entity that follow their users at the end of the day.
• Miners can be altruistic as a contributors but ultimately aim to make profit from their share of earnings. They also follow users however unilaterally can actually fork and set change the rules provided they have enough hash power. Important to note that a chain with no activity is a worthless chain to mine.
• Speculators act as a multiplier on whichever way the action is going but more importantly will buy up more of the original currency to receive any coins resulting from a fork.

Bitcoins’s dogmatic ideal is useful for it’s purpose depending on who you ask. However, such a model doesn’t work for other crypto-networks. Adaptability and agility are equally as important. How does a crypto network adapt to its circumstances when a north star or narrative such as “decentralise at all costs” can’t be maintained?

Governance in POS

On the other side of PoW, we have PoS-based systems. These systems are similar in some ways except for the fact that miners are replaced with validators who own the native currency of the network and bet on what the correct block is rather than using electricity and computing power.

What separates PoW from PoS is the fact that rather than using electricity to correctly infer the hash for each block you can use your tokens/currency to bet on what the correct block is. Betting on the incorrect block leads to your stake being slashed (or other forms of punishment). What it also means is that malicious behaviour leads to all of your capital lost. Because of the way slashing and rewards work, having a network where the concentration of tokens is in the hands of a few can be problematic as it actually impacts the security of the network. Furthermore, a low price and market cap can result in the cost to attack the network decreasing dramatically. Proof of Work outshines Proof of Stake as acquiring 50% of hash power can be much more expensive than acquiring 50% of the active circulating supply. Many nuances have been left out to keep the scope of the article defined.

Governance in PoS systems is slightly more interesting as a result of the fact token ownership = actual voting power in how the network is governed. However, the hardest unsolved challenge with Proof of Stake is token distribution to ensure sufficient decentralisation and people actually turning out to vote.

There’s a few ways that this can be achieved:

• An initial coin offering which allows rounds of investors to purchase until the coin is listed on an exchange. This is the most well adopted model but has probably resulted in the least success as early investors get a disproportionate amount of tokens compared to later stage investors. Depending on how much markup there is before listing, significant sell pressure can be expected on exchanges. This leads to a classic HashGraph or Algorand style chart.
• Airdrops where a large group of users is incentivised monetarily to perform some kind of action and get a hold of the tokens for free. Unfortunately this still doesn’t align incentives close enough as the liquid nature of the tokens allows them to sell on listing.
• Lockdrops are where capital from one currency is used to secure another. A recent example of this is Edgware. The key issues with this form are that they replicate existing distribution models (ETH/BTC) holders and prevent true network participation from key stakeholders.
• Gradual coin offering is referred to the MakerDAO model where tokens are generated from day 1 but liquidity is limited and built up gradually over the years. There’s good evidence to suggest that a model like this could work although the number of investors willing to invest with venture scale time horizons in crypto is very limited. I suspect we’ll start to see this model explored more as time goes on.

To summarise, Proof of Stake empowers users of the network (token holders) to have a larger say, however the method to distribute these tokens is still to be determined over the next few years. Ethereum or Bitcoin are one of the only two networks that would be very well suited to transition to a PoS consensus as their currencies have endured many crashes and rises while still retaining value.

Enter Decred

Decred was born out of frustration from Bitcoin’s governance.

The vision of Decred is to be a crypto-network that truly governs itself and can adapt as needed, a clear narrative isn’t very obvious at the moment. Decred didn’t execute an ICO or financed by VC money. 4% of the currency was pre-mined at fair, transparent terms and 4% was airdropped (8% total). There may be arguments to say that it wasn’t fair as miners could mine cheaply but on the flipside the price chart shows the story of humble origins (where anyone could accumulate) while achieving moon returns.

What makes Decred unique is that it combines the various aspects of a PoW network and a PoS network together creating a hybrid between various trade-offs. So how does it work? Let’s get into it.

At a high level the Decred network is split up into two main parties:

• Miners who produce blocks similar to a traditional Proof of Work system
• Validators (ticket holders) vote on whether mined blocks are valid and decide on treasury management

In a Proof of Work system, miners are the ones at the end of the day who determine which chain to mine on. If they decide one fork is more profitable than the other, they’ll mine it. As we saw in the case of Segwit2x, Bitcoin holders only real power in the network is to signal their support. While this can be powerful, it wouldn’t work if users are just as conflicted about which fork to support. Decred flips this dynamic.

Users who stake their DCR effectively become governors of the network itself and perform 3 key roles:

• Vote on consensus change rules
• Validate miners blocks produced
• Allocate treasury funds

By decoupling a miner’s political power from their monetary incentive, Decred manages to achieve separation of concerns in the realm of crypto governance. Furthermore, simply staking does not automatically give rights. The process is more rigorous in the fact that it demands participation as well. How so?

1. A cap of 40960 “tickets” is maintained in the Decred network
2. DCR must be staked and locked up in order to generate tickets. The amount generated is dependent on the stake difficulty (similar to block difficulty)
3. Each ticket will be chosen to execute block validation duties at least once every 28–142 days. For more information read https://docs.decred.org/proof-of-stake/overview/
4. Each block that’s mined requires 3 out of 5 randomly chosen tickets to vote in-favour of it. Any blocks which don’t get 3 or more votes are rejected.
5. Miners receive 60% of the block reward, chosen ticket holders split another 30% and the remaining 10% is kept in the Decred treasury
6. When funds need to be spent from the treasury, ticket holders need to vote on through an off-chain governance process with tickers (not DCR directly).

Why is this approach superior? A few key reasons:

1. Users are the ultimate owners of the network through the power tickets grant them
2. Miners strictly provide security to the network and can not hold users hostage
3. Staking to generate tickets prevents speculators from having a say on how the network is run
4. The Decred network can dynamically adapt and allocate funds based on what it deems appropriate

Traction

To illustrate the effectiveness of this system it’s worth taking a look at what the Decred network has achieved in its 4 years of existence.

After being close to $1 for the first 1 year of existence, Decred shot up to over $100 a coin and then subsequently retracing to $20. The current treasury balance remains at about $12.5M USD. Not the largest compared to other foundations but can be effectively allocated based on the community’s guidance. They also don’t suffer voter apathy nowhere near as much as other networks.

What has Decred’s community voted to approve so far? Everything from marketing campaign to building Decentralised Exchanges! I personally find the marketing proposal a good example of how something which isn’t really a clear cut yes/no answer is decided upon.

Example 1:

Two PR firms (Ditto and Washman) were competing to win a 6 month communications plan which would be worth close to $150,000 USD equivalent of DCR. Ultimately the community went ahead with it but it’s amazing to see the amount of participation and nuance given to each proposal using the collective wisdom of the community.

The full Reddit thread can be followed directly at: https://www.reddit.com/r/decred/comments/9rpze2/wachsman_or_ditto_which_proposal_will_you_vote_for/

Example 2:

Two developers wanted to build a DEX that works with Decred as all existing DCR trading activity happens on centralised exchanges. This proposal was a much easier sell to the community which is mainly technologists however what surprised me about this proposal was the amount paid out. 2 full time developers charging $230,000 USD for the proposal. That’s still super cheap in comparison to the value that they’ll create but comparing it to open source pay it’s phenomenal. Contribute to a network you believe in and get paid — what more could you want?

Follow the discussion directly at the Politeia proposal page: https://proposals.decred.org/proposals/417607aaedff2942ff3701cdb4eff76637eca4ed7f7ba816e5c0bd2e971602e1

Example 3:

Pretty self-explanatory but great to see regardless.

Key highlights from the developers in past interviews:

“It seemed contentious when you read the comments because we have a Reddit-style thing going on with proposals, and if you read all the comments on those proposals, you’d be like, ‘Oh my God, this sounds like it’s going to be really contentious,’ but then the proposal passed with 90% approval.”

It’s a pretty common problem across social media, he says: “Anyone who’s nominally on the internet with any frequency knows there’s a very vocal minority whether it’s on Reddit or Twitter or Facebook and when they stamp their feet and start yelling and screaming and howling, it might seem like people are gonna set fire to cars in the streets if we don’t do X, Y, or Z, but in reality, it’s maybe 0.1 percent who are really angry people.”

In Closing

Crypto governance is still very early in a multi-decade journey, however as we gather more data about various experiments we can be in a stronger position to create truly permissionless, governable networks. Decred in my view presents itself as great contender of a network that will stand the test of time, however it still has a few challenges ahead of itself:

• Being able to generate a compelling value proposition/narrative around the network (compete to be SoV, smart contract platform, etc) and show traction
• Ensuring the community stays engaged and doesn’t become apathetic towards proposals

To summarise, Decred’s prime highlights creating a true on-chain governance structure that has a sound, engaged community with sufficient resources to capitalise on. This advantage has been carefully thought of from the inception of the network — by keeping a low premine, distributing tokens as far as possible and being transparent throughout the way. Many will criticise that Decred doesn’t have anything valuable yet, although that’s not the sustainable advantage here, it’s that they’ve created the prerequisite conditions for it to happen through time.