Understanding the Need for Governance

Many perceive the team's existence with skepticism because they see it as a form of centralization. However, without a team, any blockchain would cease to exist. For example, in 2010 Satoshi saved Bitcoin from certain death. We will talk about what happened in the past and how to understand it in the context of decentralization. This article is dedicated especially to newcomers who want to understand why governance is a necessary part of every blockchain and what forms it can take. You will understand why Cardano is moving in the direction of decentralized governance and what position ADA holders will have in relation to the team.

The Team is Said to Be Centralizing the Blockchain

Blockchain networks should be decentralized. From the definition, we know that in a decentralized system, there must be no authority or third party that has a significantly higher decision-making power than everyone else. In an ideal case (which does not exist), all network participants should have equal status.

We divide blockchain decentralization into block production and project management. While people know relatively much about block production today, governance is still shrouded in mystery and myth.

People sometimes have distorted ideas about what blockchain is. They think that it is only a network in which a few enthusiasts run nodes or pools for a reward. Users are free to use this network and enjoy all the benefits of decentralization. From the user's point of view, and also from the point of view of producing blocks, this is how it works.

The other part of the reality is that the people running the nodes are basically just taking over the software they run on their hardware.

So it's important to ask where the software came from, who maintains it, and how it relates to decentralization.

People know that software is mostly made by companies. For example, Windows is developed by Microsoft, and Facebook is developed by Meta. These are mostly large global companies. They are centralized, they have CEOs, and the source code is closed (nobody from the public can see it).

It is logical that people think that there cannot be a company with CEOs behind the blockchain. So isn't governance just a fancy word that doesn't fit blockchain?

Some perceive governance negatively, as it always represents some level of centralization in a system that should be decentralized. At least that's what some people say.

The reality is that software development has always been and to some extent will remain centralized. What's more, every software needs a team, coordination, management, and someone to take responsibility for key decisions.

Blockchain cannot exist without a team. There must always be someone available to solve an urgent problem and think about increasing efficiency and scalability, as well as improvements and innovations. Blockchain without a team would die.

Don't you believe? Come and see with us how Satoshi saved Bitcoin from almost certain death.

How Satoshi Saved Bitcoin

Did you know that on August 15, 2010, an unknown hacker nearly destroyed Bitcoin? The hacker generated 184.467 billion BTC coins out of thin air in what has become known as the Value Overflow Incident.

Satoshi Nakamoto quickly hard-forked the blockchain to remove the 184.467 billion BTCs. It saved Bitcoin from dying an early death that day.

Satoshi Nakamoto created a code fix within 3 hours. Early Bitcoin developer Gavin Andresen worked alongside Satoshi to bring about a quick resolution. Within 5 hours of the incident, Satoshi released version 0.3.1 of Bitcoin, which prevented future printing of Bitcoins via this exploit.

This was a hard fork. Two different versions of Bitcoin existed in the immediate hours after version 0.3.1 was released. Satoshi urged miners not to mine the bad chain because doing so would make it take longer for the good chain to become the dominant chain. Just 19 hours after the incident began, the good chain became the dominant chain.

We will return to the story in the article.

Blockchain Needs a Team

What did Satoshi have to do to save Bitcoin?

Satoshi and Gavin Andersen (team!) had to find a bug in the source code and fix it. Then they had to release a new version of the software (client). But it wasn't enough. It was necessary for people to learn about the bug and agree to the fix, that is, to install the new version of the client on their computers. Satoshi and Gavin had to inform people about the bug and instruct them in order to save Bitcoin. It was necessary to convince the majority of miners (more precisely, obtain a dominant hash rate) in order for the bug-fixed version of Bitcoin to prevail over the older version. The influence of authority was exercised.

This was the first major blockchain incident that needed some form of governance to resolve.

These questions will be extremely important. Would Bitcoin have survived if Satoshi hadn't fixed the bug? What would happen if a similar bug occurs again, say next week? Do you see any forms of governance in this story?

It is obvious that without the intervention of Satoshi, or anyone else, Bitcoin would not have survived. This finding can be applied to every other existing blockchain including Cardano. Blockchain clearly needs a team capable of solving an urgent problem.

Any technology, even the best, can fail, because its individual components can become obsolete, or the environment in which it is deployed can change. Or there may be significantly better competition and people migrate to something new. It is therefore necessary to think about technological dominance.

Satoshi and Gavin were at one point in a position where they weren't sure if they could save Bitcoin. And this despite the fact that they had a new version of the Bitcoin client with a bug fix.

The team had to communicate with all the people running the full node and convince them to deploy the new version. However, people did not have to agree.

It is obvious that in the event of a fatal problem, everyone tends to cooperate. However, sometimes it may be just a minor upgrade, which may be controversial, and full node operators may have a different opinion on it. Some of them will install the new version and some will not.

This form of governance still works in Bitcoin today, and I hope you won't be surprised that it also works in the Cardano ecosystem.

Bitcoin has a team. I could even say that it has several teams. Some of them are financed by VC funds. Cardano also has a team, namely Input Output Global (formerly Input Output Honk Kong).

The IOG team releases new versions of the Cardano client and offers it to pool operators. The same client reaches people through the Daedalus wallet. It is not possible to impose a client on people in any way. The IOG team does not know the pool operators and does not have their addresses. The team can only release a new version, issue a list of updates, and allow people to review the changes in the source code. People can test the new version of the client on their own or public network and voluntarily choose to install it on their computer.

There must be some communication channels between the team and the full node operators. These can be social networks or some publicly available chat application.

In the picture below you can see the basic form of governance between the IOG team and the Cardano pool operators (there is only one operator in the picture). The pool operator doesn't necessarily trust the team, but can only trust the source code (don't trust the people, trust the code) and decide whether to install the new version on his node. Every operator in the Cardano network can do this. The new version of the client must be accepted (and installed) by most pool operators in order to use new features or bug fixes. Otherwise, the network will remain on the old version.

One of the key aspects of the blockchain industry is that the client source code is open and anyone can look at it. This is a big difference from companies that sell their solutions to people in some form (it doesn't matter if people pay directly or are the subjects of targeted advertising).

How does it work in Bitcoin?

Basically the same, with the difference that there are fewer important nodes, i.e. pools, so communication with pool operators is easier and faster. They probably all know each other.

To summarize, both Bitcoin and Cardano have a team. Teams maintain the source code, improve it, and innovate. Sometimes they release a new version that they offer to full node operators. This is a basic form of decentralized governance.

Difference between Bitcoin and Cardano Launch

It is important to understand how Bitcoin differs from Cardano in terms of the role of the team. Satoshi launched Bitcoin as an experiment. He did not want to be associated with it, because, in the past, similar attempts to launch some form of non-state money ended in criminal prosecution of the authors.

Satoshi handed over the Bitcoin project to Gavin Andreson and disappeared. Maybe he didn't even think too much about governance. Maybe he thought that it was enough for someone to have control over GitHub and the release of new versions.

Bitcoin's source code was not of the highest quality and is still being refactored by the team today. Maybe even Satoshi didn't believe how far Bitcoin would go.

Satoshi's position was completely different from that of the IOG team.

From the beginning, the IOG team wanted to give people quality and reliable software without silly bugs. The goal of the Cardano project is to have a decentralized system enabling the construction of alternative financial services. That's a huge responsibility. Moreover, it was obvious from the very beginning that such a system would take years to develop. The IOG team has been an integral part of the project since the beginning.

There are 5 eras in the roadmap. The last era, Voltaire, is dedicated to decentralized governance.

The Cardano network was launched in 2017, but since 2015 the team has been doing scientific research and implementing the source code using formal methods. Network upgrades and incremental improvements are an integral part of the project.

After the departure of Satoshi, the narrative took over that Bitcoin was finished and there was no need to improve it too much. Although it is only a narrative and the code was being refactored, everyone began to agree that Bitcoin would be a conservative project with a minimum of changes.

Bitcoiners began to project this attitude onto other blockchain projects as the only correct one. Some people have sometimes gone so far as to argue that Bitcoin has no team or leader, or that if blockchain has a team, it is necessarily centralized. All these claims stem from ignorance of how software is developed and maintained.

The importance of the team can be downplayed, it is possible to pretend that the team does not exist, or conversely that the code can be modified by anyone in the world, but it is important to remember that there must always be someone to solve an urgent problem and perhaps save the network from death.

In the case of the problem we described above with Bitcoin, it is necessary for someone to communicate publicly and coordinate a possible restart of the network or recommend which chain is the right one (whatever that means).

If blockchain didn't have a high-quality and experienced team of experts, I honestly wouldn't even want to use it for security reasons.

Is It Possible to Improve Governance?

Do you know what was the root cause of the Bitcoin bug?

The code for checking Bitcoin transactions did not work well. Outputs could be so large that they overflowed when summed. A hacker figured this out and took advantage of it. Bitcoin should only have 21M BTC coins. The hacker, in a single transaction, created 8,784 times more bitcoins than should ever exist.

For the team, the fix was straightforward and relatively easy. But it's not always that easy.

Some problems may be of a long-term nature or stem from inefficiencies that were not previously apparent or were not an obstacle to using the network. Such problems are, for example, low scalability or a problem with the long-term economic sustainability of Bitcoin (security budget). Individual team members, as well as community members, may have different views on these problems and may propose different solutions.

We come to other important questions. Who is to decide on these issues? Who is responsible for implementing the solution? What is the team supposed to be financed from?

The team can make decisions from a position of power in the good faith that they are doing the best for the project. This can also mean not doing too much and maintaining the status quo. Or the team can make decisions together with other members of the community. With which members and what does the communication should look like?

One important aspect is missing from the basic form of governance described above. An expensive or scarce resource around which governance should be built. In the case of Bitcoin, it is the hash rate while in Cardano it is the ADA coins.

Pool operators run some version of the client, but the power of a given node in the network (this is the number of blocks that the pool can produce) is decided by a delegated power. This may not apply to all blockchains. For both Bitcoin and Cardano, the resource of decentralization is owned by many entities. Miners delegate hash rate to pools while stakers delegate ADA coins.

Which version of the client will be dominant is therefore decided not only by pool operators but also by delegators. Pool operators are forced to behave in such a way as to retain the favor of the delegators.

In the image below you can see the operator running the pool as well as the delegators who have chosen to support the pool by delegating ADA coins (or hash rate). This not only increases the pool's chances of producing more blocks but also indicates support for a particular version of the client. Many people may not even realize it and see staking (or mining) only as an opportunity to make a profit from producing blocks. Delegation of coins is a manifestation of governance.

Delegators are an active part of governance. Where are the boundaries of the delegators' responsibility for the project? Should delegators only decide on the version of the client by delegating to a pool (whose operator installed a specific version), or should they have more control over the team?

If the delegators had control over the team, it is actually only about making communication more efficient. Instead of deciding on the result of the team's work, i.e. on a new version of the client, the delegators decide on what should be in the client. It is a more active form of governance that requires higher involvement.

If delegators don't have control over the team, the team can do or not do pretty much whatever they want. The team decides what problems it will solve, when it will solve them, and in what specific way. The team can be seen as a form of dictatorship.

The involvement of delegators in this process can accelerate the resolution of some problems and define priorities. In a way, the team becomes a servant of the community.

Could or should delegators have more control over the team?

In the picture below, you can see that delegators not only delegate to the pool but also decide what changes get into the source code. They decide what the team will work on.

Cardano has the advantage that all ADA holders can participate not only in staking but also in governance. Who but the users should decide how the network should work and what features it should have? Users are stakeholders, so incentives are well aligned. In the future, however, not all users will be ADA holders.

In the Bitcoin network, the distribution of power is different, as delegators are miners and not necessarily BTC holders. There are significantly more BTC holders (hundreds of millions) than miners (tens to hundreds of thousands).

Users (coin holders) can run their own full node. Think for yourself how a normal full node differs from a pool to which the ADA coin or hash rate is delegated and which produces blocks. Obviously, the position of these nodes is not equal. An expensive resource is always the best protection against Sybil attacks.

Thus, it is possible, and even desirable, to increase the influence of an expensive resource on team functioning. Governance does not have to be limited only to deciding which version of the client will be dominant in the network. It is possible to involve delegators in the management process and give them control over the development of the client.

Conclusion

From a decentralization perspective, delegating responsibility to ADA holders is a logical step, as a team cannot remain in a position of power forever. The project must evolve and come up with innovations. Someone has to decide the direction. If the team won't do it, this will be in the hands of the community. ADA holders as a whole must be engaged and have sufficient knowledge in various areas to make good decisions. One of the concepts to achieve this is delegated representatives (DReps). We'll talk about that next time.

One of the biggest myths is that Charles Hoskinson has a STOP button that will allow him to shut down Cardano. This is total nonsense. Charles is the CEO of IOG and has control over the source code with the team. In principle, it is exactly the same as with Bitcoin. You would of course find some partial differences. The team's influence on the blockchain ends with the release of a new version. The teams have no chance to fundamentally influence the installation of the client and the production of blocks.