Bitcoin’s Governance Problem: Why Ethereum’s Transition To Proof-Of-Stake Is More Important Than Ever

Bitcoin’s scalability debate has flooded news outlets with stories focusing on the decision for Bitcoin to fork (both soft and hard) or not fork. Although the argument has been waging for two years, recent Twitter storms, blog posts, and other public rantings have displayed the escalating battle between developers and supporters of Bitcoin Core and those of Bitcoin Unlimited, the proposed hard-fork counterpart to the original Bitcoin network.

For the uninitiated, Bitcoin Core (BTC), the most valuable cryptocurrency to date, which operates on the original Bitcoin blockchain, has struggled to scale in relation to the increasing demands of the network. The problem is that Bitcoin’s block size (around 1 megabyte) is proving to be too small and inefficient at executing transactions in a timely fashion (processing a mere 7 transactions per second compared to Visa, which processes an average of 4,000 transactions per second). According to a blog post published on March 23, 2017, by physicist and managing editor for Ledger, Peter R. Rizun:

“[O]ne year ago the average [Bitcoin] confirmation time was 18 minutes; now it is 1 hour and 46 minutes. Fees have increased too, jumping from $0.09 one year ago to $0.83 today (28-day trailing averages).”

The increase in confirmation times and transaction fees has essentially caused the bitcoin network to hit a wall, prompting bitcoin’s value to drop over this past weekend to below $900 and its market cap to plunge to under 70 percent. Although the current price has rebounded, this latest fluctuation in price is significant when compared to a few weeks ago, when bitcoin was hovering around all-time highs of $1,300 with a market dominance percentage in the upper 80’s, and prior levels ranging in the 90+ percentile.

The Escalating Debate

The debate on block size to increase or not to increase has caused a schism within the Bitcoin community and has proponents on both sides stating that a Bitcoin fork will either save the cryptocurrency from stagnation or send it crashing into oblivion. CEO of Civic, Vinny Lingham, believes a Bitcoin fork at this time would be detrimental, from a branding perspective. He thinks it would confuse new adopters of the cryptocurrency because of the similarities in name, akin to the trademark issue between Ethereum and Ethereum Classic (ETC) (the chain that broke off from Ethereum that formed after the DAO incident in 2016).

On the other side of the fence are Bitcoin Unlimited supporters like Coinbase CEO, Brian Armstrong, who has compared the hard fork debate to a  Bitcoin election:

“What we’re witnessing right now is an election in the bitcoin space, and like all elections (the U.S. presidential race being one prime example) things can get a bit heated even though they are part of a healthy process.”

He went on to say:

“If you are in favor of decentralization, you should be in favor of competing hard forks in bitcoin. They are the best mechanism we have to ensure that bitcoin continues to evolve, and can’t be controlled or encumbered by any one group.”

The Miner Solution

The control Armstrong refers to is the voting power that Bitcoin miners possess – the basis of the network’s governance model, which Armstrong calls an “upgrade mechanism with an elegant design.” Essentially, all miners hold a certain amount of votes in proportion to the amount of computational power they add to the network. According to Armstrong, “If a majority of bitcoin miners ‘vote’ for a particular upgrade then by definition this is the new version of bitcoin.”

The issue with this model can be compared to the most recent US presidential election, which fostered a climate of much uncertainty and fear. Miners, like citizens, are unsure what direction the network should take in order to ensure the community’s most favorable future. Many are biding their time to see how things will pan out and some don’t want to vote at all.

Because miners generate lucrative income from block rewards as well as transaction fees, they may not want to rock the boat in a way that will decrease their earnings in the short term, nor do they necessarily want to make a decision that will affect them negatively in the long run.

The Miner Problem

While miner voting seems like a democratic solution to solve Bitcoin’s hard fork debate, there remains a problem in placing control of the Bitcoin network in the hands of the few.

Ethereum developer and self-proclaimed absurdist troll Vlad Zamfir takes the stance that block rewards for all miners (of Bitcoin and other blockchains) should be made smaller so that blockchain ecosystems can thrive through fair and balanced governance models. Zamfir recently published a blog post titled “The case for smaller block rewards,” in which he states:

“The increase in the price of block rewards means that miners will have much more incentive and ability to devote resources to participating in governance.

This has implications for the entire Ethereum ecosystem. The miners’ increased willingness and ability to participate in governance means that the rest of the community has a relatively smaller say in the process. The relative clout that participants can justify bringing to bear in the process determines outcomes:

When miners become more powerful, everyone else gets less of a say.”

What Zamfir is describing is food for thought. Besides the financial ramifications of a Bitcoin fork, the issue of how Bitcoin will govern itself now and in future instances points to a bigger problem that’s worth addressing: control of a blockchain’s ecosystem.

Bitcoin’s Internal Strife

Unlike presidential elections, there is no set date for Bitcoin’s election to take place. Players on both sides of the debate are making arguments to support their respective Bitcoin “political party” while also taking steps to prepare for what they believe will occur; either a fork into Bitcoin Unlimited, or business as usual with Bitcoin Core. Community infighting over how to solve the block size issue has etched an even deeper rift over the proposed solutions attempting to assist the network to scale in a secure and cost-effective manner.

A recent Forbes article details the specifics of a brewing war between Bitcoin Core developers and those supporting Bitcoin Unlimited. The article describes an incident that took place about a year ago when a portion of Core developers and miners made an agreement to adopt a soft fork protocol known as Segregated Witness (SegWit) – that although increased block size, was not the desired size increase miners had wanted.

SegWit fundamentally alters the structure of a block on a blockchain currently limited to 1 megabyte in size. The majority of space taken up in a block is composed of the data associated with a transaction, and the majority (65 percent) of space within a single transaction is composed of a digital signature. SegWit “segregates” and relocates the signature to its own structure towards the end of a transaction known as the “witness.” This process makes calculating the transaction ID more predictable and in some cases (but not all) prevents transaction malleability attacks while also increasing the block size to around 3.7 megabytes. However, because of the technical specifications of the data and distribution method within a block, the actual size of a SegWit block is closer 2 megabytes.

Although Jihan Wu, Bitmain co-founder, believes SegWit is good technology that solves a number of Bitcoin’s problems, he and other Unlimited supporters are still angry over the way the 2016 agreement in Hong Kong was handled. According to an email written by Core developer Eric Lombrozo:

“The agreement was not signed by the Core team as a whole…it was signed by a few individual contributors and many of us felt that not only was it impossible to deliver what was expected but that it was contrary to the philosophical underpinnings of Bitcoin…Ultimately, protocol changes cannot be negotiated behind closed doors by small numbers of people.”

Additionally, Bitcoin developer Andrew Desantis has pointed out that Wu has plans to launch new mining facilities that would tilt the computational power of the Bitcoin network in favor of Bitcoin Unlimited. As co-founder of Bitcoin mining chip manufacturer Bitmain and head of operations of Antpool, the largest Bitcoin mining operation in the world, Wu is in a unique position of power. Some Core developers fear Wu will abuse his influence by possibly cutting off miners from the hardware necessary to mine. This move would pressure miners to support Bitcoin Unlimited so as to not lose out on the hardware they need, while also potentially supply the Unlimited camp with enough network influence to “create a new version of Bitcoin that [could] cut off control from the current group of developers, which would then put the Bitcoin Unlimited developers in control and, at the very least, sow confusion in the market about which was the ‘true’ Bitcoin, if not make their version of it the dominant one.”

The Case For Proof-of-Stake  

While both Bitcoin and Ethereum use proof-of-work (mining) as consensus mechanisms, the latter has already gone through a contentious hard fork and survived (some say for the better) with plans to move to proof-of-stake (PoS).

Proof-of-stake has been compared to “virtual mining” or “consensus by bet” because bonded validators make transactions called “bets” that provide them profit in some histories at the expense of loss in other histories.

The crux of PoS is to get players in the Ethereum ecosystem to play by the rules without the need for miners. As previously reported by ETHNews:

“In the switch from Proof-of-Work to Proof-of-Stake, the network will achieve consensus through validators instead of miners. These validators will stake a portion of their Ether as a deposit. Once a staker is accepted as a validator, their locked-up Ether effectively becomes a virtual miner.”

According to Vitalik Buterin and other Ethereum developers, the transition will create a more democratic model of governance by leveling the playing field of miners from a select few to a more distributed and decentralized pool of miners/validators. The gradual move to PoS will occur through a hard fork. However, the decision to decrease the miner block reward and by how much, can be voted on by members of the community. The Ethereum community is partaking in a voting initiative on CarbonVote.com, the same platform used as reference source and voting tool during the DAO hard fork.

Implementing PoS is no small feat, nor is the move without its own debate, but the important takeaway is that, unlike Bitcoin, Ethereum developers have been corresponding productively with the community at large in order to gauge public sentiment over the governance details of the Ethereum blockchain. By removing traditional mining from its consensus protocol, which has become an oligopoly of GPU farms, Ethereum is proactively designing a paradigm to avoid the problems Bitcoin is having while also reducing the network’s reliance on energy associated with mining as a whole.

The transition to PoS may also serve as an example to the entire blockchain space by offering a functioning alternative to achieving network consensus, while reducing hardware and energy costs, as well as creating a framework for blockchain governance that is in line with decentralization.

Furthermore, PoS brings with it other developments such as “sharding” that, according to developers, will greatly advance the Ethereum platform further and inspire innovation for commercial use and mainstream adoption.

This article was updated on March 30, 2017, to clarify that the Ethereum Foundation did not sponsor the voting initiative on CarbonVote.com.