The Need for Formalized Governance

In 2010, Satoshi Nakamoto saved Bitcoin from certain death. The value overflow incident exposed the vulnerability of Bitcoin to human errors and malicious actors, as well as the lack of a formal process for dealing with such issues. About a year later, the Bitcoin Improvement Proposal (BIP) process was introduced to address these challenges. Cardano introduced the Cardano Improvement Proposal (CIP) process in 2020. However, CIPs, as well as BIPs, are only proposals that must be voted on. Let's look into the past to see how governance was formed and what kind of controversy a vote on a protocol change can bring. We will explain why it is necessary to formalize governance.

In the Beginning, a Dictator Ruled

In this article, we will follow up on the previous part and examine how blockchain governance has developed.

People talked about governance around 2010, but not in a systematic or coherent way. The Bitcoin community was still small and mostly composed of technical enthusiasts who trusted Satoshi Nakamoto as the benevolent dictator of the project. There was no clear distinction between on-chain and off-chain governance, nor between different roles and responsibilities within the network. The discussion was mostly informal and ad hoc, taking place on online forums, mailing lists, or chat rooms.

The value overflow incident was a bug that allowed a hacker to create 184 billion BTC coins out of thin air by exploiting an integer overflow error in the Bitcoin code. The incident exposed the vulnerability of Bitcoin to human errors and malicious actors. It also became apparent that Bitcoin lacks a formal process for dealing with such issues. The BIP process was introduced a year later to address these challenges and improve the quality and security of Bitcoin development.

This was an important milestone. The BIP process was one of the first attempts to formalize and institutionalize governance in the blockchain industry. The motivation behind creating the BIP process was to provide a clear and transparent way for the Bitcoin community to discuss and implement new ideas, without relying on a centralized authority or leader.

Amir Taaki created the BIP process in 2011, inspired by the Python Enhancement Proposal (PEP) process, which is a standard for proposing changes to the Python programming language. Taaki believed that the Bitcoin development process would benefit from becoming more structured and accountable, as well as more open and collaborative. He submitted the first BIP (BIP 0001) on August 19, 2011, which described the BIP process itself.

People were convinced that the introduction of the BIP process was an absolutely necessary step because Bitcoin is a decentralized system that requires coordination and consensus among various stakeholders, such as developers, miners, users, businesses, and governments.

Without a formal and transparent mechanism for proposing, reviewing, and implementing changes to the Bitcoin protocol, the network could face problems such as bugs, conflicts, forks, or attacks.

BIPs are formal proposals that suggest changes, upgrades, or improvements to the Bitcoin protocol. They serve as a way to coordinate the development of Bitcoin in a decentralized manner. BIPs cover various topics, including consensus rule changes, community standards, and development processes.

In particular, BIPs have the following advantages:

• They allow anyone to contribute to the improvement of Bitcoin, regardless of their technical skills or background.
• They foster a collaborative and constructive environment for innovation and problem-solving.
• They ensure that the changes are well-documented, tested, and reviewed before being deployed.
• They preserve the history and rationale of the decisions made for future reference.

As you will see below, the BIP process alone is not sufficient for governance to function. One important component is still missing namely voting. We'll talk more about that later.

Satoshi Left Bitcoin

Satoshi Nakamoto left the project in April 2011. He announced his departure in an email to a fellow developer, saying: I've moved on to other things. It's in good hands with Gavin and everyone.

The departure occurred roughly a year after the value overflow incident and shortly before the introduction of the BIP process.

Gavin Andresen, one of the earliest Bitcoin developers and contributors, took over the leadership of Bitcoin after Satoshi’s exit. He was appointed by Satoshi as the lead maintainer of the Bitcoin Core software and the administrator of the Bitcoin website and repository. In addition to other rights, Gavin could decide what changes to push to the repository with the Bitcoin Core software. He also founded the Bitcoin Foundation, a non-profit organization that aimed to promote and support Bitcoin.

The Bitcoin Foundation is still active, but not as influential or prominent as it used to be. The organization has faced several challenges and controversies over the years, such as financial difficulties, legal issues, internal conflicts, and public criticism.

Satoshi's departure is widely misinterpreted by some people as an abandonment of the project in order to decentralize it. The assumption is that the blockchain can only be decentralized if there is no leader present. This assumption is wrong because it contradicts the way software development works and what every blockchain needs in a similar case as the value overflow incident.

First of all, it is necessary to realize that Satoshi formally handed over his position to Gavin. Gavin got the rights that Satoshi had before. So even after Satoshi's departure, Bitcoin still had its leader. In 2016, Gavin Andresen was succeeded by Wladimir van der Laan, who became the new lead maintainer of the Bitcoin Core software.

Wladimir van der Laan resigned as the lead maintainer of the Bitcoin Core software in February 2023. He explained that he was feeling burnt out and tired of the same issues and discussions. He transferred his commit access to other developers, who will take over the maintenance of the Bitcoin Core repository.

Every blockchain project needs and always has a leader or a group of leaders. It can even be a company or a group of companies that share rights regarding access to the main repository. Governance can be transparent and the public knows exactly who has what rights and responsibilities, or it can be shrouded in fog. This does not change the fact that the blockchain project has its leader.

Solana is often restarted by the team, which tends to be the center of criticism. However, the reality is that if any existing blockchain network were to run into similar problems, users would expect a team to restart it. This is the only way users can access their assets. From my point of view, blockchain can be more trusted if users are convinced that a team of experts is ready to solve unexpected problems. Transparency increases trust.

The IOG team is responsible for the research and development of Cardano. Charles Hoskinson is CEO of IOG. It is the IOG's responsibility to create communication channels and processes that allow people to gradually gain control of Cardano from a team management perspective. The CIP process is only one of the first steps. Further steps will be taken.

It is important to note that if Charles Hoskinson ever leaves IOG, he will be replaced by someone else. It's completely normal and natural. This would not make Cardano more or less decentralized. What decentralizes blockchain at the project management level is well-structured and formalized governance.

The BIP Process and Voting

The BIP process is a formal and transparent mechanism for proposing, reviewing, and implementing changes to the Bitcoin protocol. It involves creating a document that describes the rationale, specification, and implementation of the proposed change, and submitting it to the Bitcoin community for discussion and feedback. It facilitates the discussion and evaluation of the proposed changes but it does not guarantee or enforce the activation or implementation of the changes.

So, the BIP process is not intended to vote on whether the change will actually be part of the protocol. In order to change the protocol, some form of vote must occur. In decentralized networks, this takes place through an expensive resource, i.e. in a similar way to the production of blocks. Resource owners have their own skin in the game and can therefore be expected to vote in the best interests of the community and the network. However, this is only an expectation, not a guarantee.

In Bitcoin, the hash rate is used for voting. So miners vote, not users. Voting involves signaling support or rejection of the proposal by including a special code in the blocks, or by following certain rules that determine the validity of the blocks.

The BIP process and voting via hash rate are both part of the Bitcoin governance and decision-making process. They both aim to coordinate the development of Bitcoin in a decentralized manner.

The idea of voting about BIPs emerged from the collective efforts and discussions of the Bitcoin community. The leading proponents of the introduction of voting were Amir Taaki, Luke Dashjr, and Gavin Andresen.

They had different views and preferences on how the voting should be done.

Amir preferred a more radical and user-driven approach to voting, where users could force the activation of a proposal by rejecting any blocks that did not comply with it. Luke preferred a more technical and miner-driven approach to voting, where miners could signal their support or rejection of a proposal by including a special code in their blocks. Gavin preferred a more pragmatic and compromise-driven approach to voting, where both miners and users could agree on a lower threshold and a shorter period for activating a proposal.

The CIP Process

The CIP process has a similar purpose to the BIP process. The first Cardano Improvement Proposal was created by Sebastien Guillemot and Kevin Hammond on May 8, 2020.

CIPs should be used to describe the problem in detail and propose a technical solution. The proposed change can be debated and design decisions can be documented. It is not the role of the CIPs process to decide whether to implement changes. An existing CIP document (proposal) is no guarantee that a change will be implemented in a protocol or otherwise deployed.

CIPs have two essential tasks. To standardize the form of communication between participants and to enable changes to be proposed in a uniform formalized way. Each CIP document has an author and the author must follow the required document structure.

CIP editors safeguard the CIP process. However, their role is not to approve or reject the authors' proposals. They may not agree with the proposal, but if it is technologically sound and complete and the author follows the required document structure, the proposal will be produced.

The current CIPs editors are Sebastien Guillemot, Matthias Benkort, KtorZ, Robert Phair, Ryan Williams, and Adam Dean.

Currently, the CIP process has nothing to do with on-chain governance. It is a community-driven component that can serve as input for on-chain governance. It is theoretically possible to vote on individual CIP documents. As far as I know, there is no direct link between the CIP process and the on-chain governance that is proposed in CIP-1694.

From my point of view, voting on CIPs is absolutely necessary, as changes to the protocol must be approved by the majority of stakeholders. There may be proposals that will be controversial and may divide the community. No central authority may have the final say regarding the approved design and its implementation into the Cardano protocol. This should always be a collective decision.

How Complicated Can It Be to Change the Protocol?

In 2017, the first major controversy occurred in the vote to change the protocol. It wasn't exactly the first vote in blockchain history, but it can be seen as the most complex so far. Let's see what happened.

In 2017, a major dispute arose over how to increase the scalability of Bitcoin, leading to the creation of two competing BIPs: BIP-141 (Segregated Witness) and BIP-148 (User Activated Soft Fork). The former was supported by most developers and miners, while the latter was favored by some users and businesses.

Note that there was no consensus among stakeholders. Most miners and developers had different interests than some users and businesses.

BIP-141 was the original implementation of SegWit, which was proposed by the Bitcoin Core developers. It required 95% of hash power to signal support for SegWit within a two-week period, before November 2017. However, this activation method faced resistance from some miners who opposed SegWit for various reasons (some preferred to increase the block size limit instead of SegWit). As a result, SegWit activation stalled at around 30% of hash power for months.

BIP-148 was an alternative implementation of SegWit, which was proposed in March 2017. It required users (their nodes) to reject any blocks that did not signal support for SegWit after August 1, 2017. This would create pressure on miners to follow the majority of users and adopt SegWit, or risk losing their rewards and fees.

This activation method also faced criticism from some developers and users who considered it risky and reckless, as it could cause a chain split and a hard fork if some miners did not comply.

The outcome of the dispute was that SegWit was eventually activated by a compromise solution that was reached in July 2017. This solution was called BIP-91. It lowered the hash power threshold for SegWit activation from 95% to 80% and also enforced BIP-148 rules on non-compliant miners. This way, it satisfied both BIP-141 and BIP-148 supporters, and avoided a potential chain split and hard fork.

However, some miners and users who wanted a larger block size limit instead of SegWit decided to create a new version of Bitcoin called Bitcoin Cash (BCH), which hard-forked from Bitcoin on August 1, 2017.

As you can see, political interests can affect BIPs when different groups or factions within the community have divergent views or agendas on how to improve the protocol. The SegWit upgrade was eventually activated, but in a different BIP than the original one. In addition, there was a hard fork, i.e. splitting the community, hash rate, and developers. As you can see, decision-making in a decentralized world can be controversial and hard. Governance is not an easy thing.

BIPs are proposed by individuals or small teams. They have to get miners, developers, and the community on their side. Regarding decentralization, we need to examine how difficult it is to get support and how many people need to be convinced about the change.

Perhaps if Satoshi hadn't left Bitcoin, he might have authoritatively decided the fate of SegWit. However, this certainly could not be considered a decentralized form of governance. The resulting chaos and controversy were probably caused by dysfunctional governance and the actors' low experience with it.

The first major power struggle in the blockchain industry has taken place. It was clear to everyone that the governance did not work well. Disputes must not end in a hard fork.

The BIP Process Criticism

Cardano, but also many other blockchain projects adopted the BIP process from Bitcoin. Over time, it turns out that this process might not be perfect. It is important to think about its improvement. The BIP process began to be criticized by its author.

In 2015, Amir Taaki began to criticize the BIP process. He argued that it was too slow, bureaucratic, and conservative. He claimed that the BIP process favored the status quo over technological progress and innovation. In addition, it discouraged radical proposals that could challenge the existing power structures and assumptions in Bitcoin. He also suggested that the BIP process was influenced by political and economic interests, rather than by technical merit and user demand.

Other critics of the BIP process point to the slowness and complexity of trying to reach a consensus, especially in the case of controversial changes. Controversy over the SegWit upgrade in 2017 showed that the concerns were relevant. Furthermore, some perceived strong political and economic influences that may not be in line with the best interests of the community and the network.

You can also hear complaints about censorship and manipulation by powerful actors. For example, miners can censor or manipulate BIPs by choosing to signal or not signal their support for certain proposals, or by rejecting or accepting blocks that follow certain rules. Developers can censor or manipulate BIPs by controlling the codebase of the Bitcoin software, or by influencing the review and testing process of the proposals.

In 2018, Taaki again criticized the current state of Bitcoin development as being too centralized and conformist. He claimed that the BIP process had created a culture of fear and conformity among developers, who were afraid to propose radical changes or challenge the dominant narratives in Bitcoin. He also accused some developers of being corrupted by corporate interests or ideological agendas, and of imposing their views on the rest of the community.

It is important to realize that the interests of some stakeholders may not be in line with the best interests of the community and the network. It is logical, because everyone selfishly wants to get the greatest possible profit, and different paths lead to this for individual groups.

For example, it may be beneficial for miners to introduce tail inflation of BTC, as it would ensure their rewards, but users would not agree with this proposal. It pays for developers to keep Bitcoin's scalability low because they can work on the second layers and profit from running LN nodes. Different stakeholders will pursue different goals and adapt their views on BIPs accordingly.

Governance Must Be Formalized

Currently, I perceive low transparency as the biggest weakness of governance in almost all blockchain projects. Formalization of governance can solve this.

It is necessary to define and document the rules, roles, and responsibilities of the participants in a system, as well as the mechanisms and procedures for decision-making and conflict resolution. The resolution of conflicts can be very complex, as evidenced not only by history but also by the present.

With a formal and transparent governance structure, it can be clear and consistent how decisions are made, who has the authority and responsibility to make them, and how they are communicated and enforced. This can help to avoid confusion, misunderstanding, and conflict among the participants in the blockchain system.

Some form of monitoring and evaluation of the performance and behavior of the participants in the blockchain system must be introduced. The system must hold key participants (especially the team) accountable for their actions and outcomes. This can preserve the trust and confidence in the system and its participants.

Without a formal and transparent governance structure, blockchain systems could face serious problems. It can be easier for malicious actors to exploit the weaknesses or loopholes of the blockchain system, or to manipulate or influence the decision-making process. This can compromise the security and stability of the system and its participants.

Power struggles can be waged in the background and the public may never learn about them. The only way to prevent this is to clearly define roles and responsibilities.

Some people think that a decentralized network, thus code, is enough to protect their assets. They want to trust code only and exclusively. They have to realize that someone has to maintain the code, someone has to monitor the network and evaluate the performance. Trust in a decentralized network also requires trust in people, i.e. in governance. If you trust the blockchain, you're pretty much trusting the team, whether you realize it or not.

Formalization of governance can also help to align the interests and incentives of the participants, ensure the security and stability of the network, and foster innovation and development. This is especially important for Cardano, which must not lose its ability to evolve.

It must be easy and straightforward to propose, review, and implement changes or improvements to the blockchain system, especially when they involve controversial or radical aspects. Adapting to new conditions and innovating software is an integral part of every project, and blockchain protocols are no exception.

An integral part of governance is some form of voting, which in the case of Cardano will be largely (not necessarily exclusively) based on ADA coins. In a decentralized system, 1 person = 1 vote cannot apply, but rather 1 ADA = 1 vote. Voting in the Catalyst Fund10 showed us the weaknesses of this system, which need to be analyzed in order to improve it.

Conclusion

Governance is the evolution of decentralization. It is not enough that the production of blocks is decentralized, because this process is dependent on the existence of software. Every software has to be maintained by someone. Collective responsibility would not work. There must always be someone who is accountable and whom the community trusts. There must be clearly defined rules and processes in the relationship between the team and other stakeholders. There is never a guarantee that the interest of the team is in line with the interest of other stakeholders. Therefore, stakeholders must have control over the team and the source code.