The Coming Battle Over Bitcoin Governance

In 2021, Bitcoin has reached a crucial inflection point. At its peak in November 2021, Bitcoin traded at more than $69,000 in a trillion-dollar market. The year also saw El Salvador’s historic adoption of Bitcoin as legal tender. Meanwhile, the institutional and corporate adoption of Bitcoin as a store of value continues unabated, with significant purchases by companies like MicroStrategy, Tesla and Square. And financial institutions like Goldman Sachs and Citi are offering Bitcoin to their clients. Bitcoin has come a long way since its inception in 2009 as a fringe cypherpunk and libertarian movement, which sets out to use strong cryptography and privacy-preserving technologies for social and political change.

These successes are largely attributed to the decentralised, permissionless and mathematics-driven protocol underlying Bitcoin. While this is true in many respects, Bitcoin’s maintenance mechanisms are ultimately dependent on human actors, and governance crises in Bitcoin’s early years have revealed centralising elements. More importantly, as Bitcoin becomes normalised with the traditional financial system and broad swaths of the economy, traditional political and economic players will attempt to subject Bitcoin to bureaucratic routines, governance and oversight. Their ideologies and practices could be superimposed on Bitcoin if centres of control creep back into the network. In this context, it is important for us to critically examine the evolution of Bitcoin’s governance structure and major players, and the implications on the vision of the network.

Bitcoin’s governance structure

The emerging literature on Bitcoin governance increasingly recognises that Bitcoin is not completely decentralised and trustless, but filled with centralising elements and human discretion. This is in part due to the fact that Bitcoin is a socio-technological assemblage made up of a large variety of actors, which acts as obligatory ‘passage points’. First, core developers, open-source contributors, mining pools and node validators contribute to actual code production and maintenance of the network (‘on-chain’ governance). Second, actors that subsist outside of the technological infrastructure can often exercise varying degrees of influence over protocol changes and mainstream adoption (‘off-chain’ governance). These include Bitcoin holders, users, exchanges, private firms, investors and governments.

In the first decade of Bitcoin’s history, the majority of governance activities were conducted by on-chain players directly maintaining the network. Core developers rely on informal processes and rough consensus to maintain and consider improvement proposals to the Bitcoin protocol. A series of controversial events concerning the reliability of Bitcoin’s network and protocol has revealed the idiosyncratic nature of the on-chain governance mechanisms. These incidents, which include the 2010 value overflow incident (an integer overflow bug rewound by Satoshi), the 2013 accidental hard fork (an erroneous upgrade roll backed by coordination between developers and miners), the Bitcoin block size debate (a polarising dispute about Bitcoin scaling solutions settled by hard forking), and the 2018 inflation bug (which allows for potential double-spending), highlight the central role of human agency and hierarchies among various actors, including developers, miners and nodes.

In recent years, we are seeing the nascent emergence of governance structures in the Bitcoin ecosystem beyond on-chain players. With the increasing interaction between Bitcoin and the broader economy, a wider range of actors are exerting more influence over Bitcoin. For example, a number of exchanges and payment companies have started offering Bitcoin developers grant programmes, which could steer the development of the Bitcoin protocol in certain directions. With the concern over Bitcoin’s energy usage in the context of environmental, social and governance (ESG) investing, a group of private companies have convened the Bitcoin Mining Council to promote renewable energy sources among miners. In order to manage and control financial stability, regulators are working towards analysing risks of decentralised protocols like Bitcoin and overseeing markets and platforms that interact with them. While these investors, private firms and nation states play no direct role in maintaining the technological infrastructure, their high social and political capital means that they could exercise a certain degree of influence on decisions over protocol changes in future.

These evolutions lead De Filippi, Mannan and Reijers (2020) to conclude that Bitcoin is in fact not a ‘trustless system’, but a ‘confidence machine’ whereby governance is constructed in such a way as to distribute trust over a large number of actors with different interests and preferences. Parkin (2020) further points out that Bitcoin instils a unique form of ‘senatorial governance’ in which a structured hierarchy of actors compete for power over protocol updates, crisis management and dispute resolution.

The battle for governance

Amidst the nonlinear and unpredictable nature of Bitcoin governance, and its increasingly broad and complex ecosystem, calls to improve the governance of Bitcoin multiply. As early as 2015, Walch scrutinised the operational risks of Bitcoin with principles and standards for financial market infrastructures. Hacker (2019) suggests adapting the theory and practice of corporate governance codes to blockchain systems such as Bitcoin, so that key stakeholders can rely on them to strengthen order and regularity. If we can learn anything from the rise of the Internet, it is that the governance of a decentralised global network can be gradually transformed through introducing new points of centralisation and governance mechanisms, such as, in the case of the Internet, the Internet Engineering Task Force (IETF) and the Internet Corporation for Assigned Names and Numbers (ICANN).

The principles for corporate governance and financial market infrastructures might serve as a good starting point for us to think about improving the governance of Bitcoin. However, they were designed with centralised institutions in mind, and may not be compatible with Bitcoin’s original vision as a decentralised architecture. As Bier (2021) notes in his closing reflections in The Blocksize War, as the financial and political establishment finally realises the potential of user-driven money, the pressure on the system will grow, and future battles will be fought over critical values like censorship resistance and political neutrality. The big question is whether we can improve the robustness, predictability and power balance of Bitcoin’s underlying governance mechanisms while preserving the decentralised nature of Bitcoin and opportunities for experimentation and innovation.

Andy Yee is an Industry Associate at the University College London Centre for Blockchain Technologies.