Josh Kroll, Ian Davey, and I have a new paper, The Economics of Bitcoin Mining, or Bitcoin in the Presence of Adversaries, from the Workshop on Economics of Information Security. Our paper looks at the dynamics of Bitcoin, how resilient it would be in the face of attacks, and how Bitcoin is governed. Today I want to talk about governance in Bitcoin.
I wrote previously about how Bitcoin relies on two forms of consensus: a social consensus about the rules that govern which transactions and log blocks are considered valid, and an informational consensus about the contents of the Bitcoin log (a list of all the transactions that have occurred). These two forms of consensus make possible a third consensus: that Bitcoins have value. I described in the previous post how the Bitcoin community has changed the rules, by consensus, to deal with technical mishaps. We argue in our paper that further rule changes will be necessary to deal with longer-term economic challenges, such as how to maintain a sufficient level of mining activity.
At present, governance of Bitcoin is tied together with governance of the Bitcoin reference software, because most people either use the reference software or emulate its behavior. So Bitcoin has a de facto governance structure, based on the governance of the reference software—and in fact the lead developers of the reference software are seen as leaders in the Bitcoin community.
The reference software follows a standard open-source model. And the political dynamics of open-source projects are interesting. Typically there is a person or group who makes final decisions about which proposed changes to the software are accepted into the next release. In one sense, these deciders might seem to have absolute power to determine the direction of the software. But their power is limited by the possibility that someone will fork the software. Anyone, at any time, can create their own version of the software, by copying the code and then setting themselves up as deciders for the new “forked” copy. Of course, the fork is unlikely to survive or to have any importance at all, unless a substantial number of participants switch from the original version to the forked version.
So the possibility of a fork disciplines the deciders. As long as their decisions are well-aligned with the interests of the participants, then there is little chance that participants would want to start or join a fork. But if the deciders start to deviate from what participants want, then a fork becomes likely—and the forked version may acquire dominant market share and become the new de facto standard. It’s a standard story about how the possibility of exit disciplines the leaders of a group—except that forking is an especially strong form of exit in which the departing members get to keep using and improving the group’s main product, so the right to fork gives members more power than a simple right to exit would.
But it’s not just the …read more
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