Cryptocurrency: governance for what was meant to be ungovernable
Cryptocurrencies have the potential to revolutionize the exchange of information and money through blockchain and distributed ledger technologies. Despite the promise of such underlying technologies, their reliance upon distributed consensus processes to approve software updates raises the potential for governance failures to destabilize a given cryptocurrency. These governance failures, known as ‘hard forks,’ can separate a cryptocurrency into two rival camps. Where such events can destabilize a given cryptocurrency’s value, and instill distrust in the capacity of a cryptocurrency to survive as a reliable vehicle of exchange, it is imperative for the cryptocurrency community to improve their governance processes and limit the potential for hard forks to occur. While the distributed nature of cryptocurrency governance makes any traditional governing process unlikely to succeed, anticipatory approaches that establish thresholds and metrics to determine when software reform is necessary may help alleviate the governance failures presented by many hard forks.
KeywordsCryptocurrency Anticipatory governance Distributed ledger technologies Bitcoin Blockchain
Cryptocurrencies have the potential to revolutionize commerce and information exchange worldwide, and grew from $24 billion in January 2017 to $600 billion by January 2018, and back down to $300 billion in July 2018 (Kornilov et al. 2018). Most cryptocurrencies utilize distributed ledger technologies as the mechanism by which all transactions are stored upon a public ledger. This technological innovation reduces the potential for manipulation, fraud, and theft of transactionary data, and can facilitate faster, cheaper, and safer currency transfers in a manner that eliminates the need for a central authority to process transactions. Unlike many other innovations that exhibited sustained exponential growth, however, cryptocurrency markets show an unprecedented degree of volatility that may impede further development and adoption. There are many causes for such volatility, such as technological immaturity, communication failures, or general rumors surrounding technology adoption in specific countries. Volatility in these cases is generally temporary, and is easily addressed over time through technology maturation and communication transparency. This paper focuses instead upon one of the more functionally troublesome causes of volatility—the inherent governance of distributed ledger-based cryptocurrencies.
As an economic system that facilitates a medium of financial exchange, most cryptocurrencies rely upon algorithms to add additional transaction records to the given currency’s distributed ledger. The collective list of all past transactions on the ledger is known as the ‘blockchain,’ which verifies with all nodes of the distributed ledger’s network that a transaction has taken place. How the next batch of transaction data (or block) is added is determined by the algorithm deployed by the cryptocurrency. One algorithm includes ‘proof-of-stake’ (PoS), where block selection is created through a mixture of sortition and demographic factors of those who hold amounts of cryptocurrency. Likewise, another algorithm includes ‘proof-of-work’ (PoW), which utilizes a system of ‘mining’ whereby computers connected to the cryptocurrency’s network are required to solve an increasingly complex series of mathematical problems. Once solved, a new block is added to the cryptocurrency’s blockchain that includes the latest batch of validated transactions. Currently, Bitcoin makes use of a family of PoW algorithms known as Hashcash, whereby a large amount of data is translated into a fixed-length output known as a ‘hash.’ More specifically, Bitcoin utilizes a permutation of Hashcash known as Secure Hash Algorithm 256 (SHA-256), which signifies 2256 unique hash combinations in order to protect secure transaction data. Such algorithms are made increasingly complex to prevent damage to a cryptocurrency’s blockchain, ranging from theft or data forgery to denial of service. Further consideration is given to prevent the ‘double-spending’ of a specific amount of currency through a decentralized peer-to-peer protocol that tracks the transfer of coins.
While the technological structure of distributed ledger-based cryptocurrencies makes them resistant to fraud or theft, the direct democratic approach to cryptocurrency governance is a considerable challenge to cryptocurrency’s transparency, sustainability, and decision making in the near future. The lack of a central administrator makes it difficult to overcome technological challenges of increasing demand and currency growth (i.e., scalability challenges) by developing and adopting changes to a cryptocurrency’s platform technology. Currently, many cryptocurrencies like Bitcoin possess a decentralized style of governance whereby updates to the currency’s software protocol are determined by a consensus of the network’s participants. Although this process normally operates with minimal disruption, entrenched disagreements between differing factions within Bitcoin’s governance process can generate a rift in the cryptocurrency’s user base. Among the more famous examples of this includes the Summer 2017 rift that split the Bitcoin community into two rival blockchains—Bitcoin and Bitcoin Cash. The demonstrated potential for such rifts is a clear challenge to effective cryptocurrency governance that, if not properly predicted and ameliorated, can reduce trust and use by the public—something critical to cryptocurrency success in the marketplace. Such concerns are particularly salient for the scaling challenge facing many cryptocurrencies like Bitcoin, where software improvements are needed to increase the amount of transactions that the cryptocurrency’s network can process per block. As usership for Bitcoin and other cryptocurrency’s has grown significantly in 2017–2018, increasing demand for limited space in each block has increased transaction fees and transaction time in a manner that threatens the feasibility of such cryptocurrencies altogether.
The distributed style of governance presents a critical problem regarding how disputes in the cryptocurrency reform process may be resolved. Technologically, such governance problems are largely presented through ‘forks.’ Forks occur when the blockchain separates due to changes in software and operating protocols into two separate and unconnected blockchains (Linkov et al. 2018a, b). One component follows the original technological blockchain protocol, and the other follows a separate and parallel protocol. A critical consideration of how forks impact a cryptocurrency’s use includes whether a consensus of miners, cryptocurrency wallet providers, and cryptocurrency exchanges agree to change the software that governs how the given currency operates and incorporates new blocks into its blockchain. When broad consensus is met, the actors within a cryptocurrency’s operating network and their resulting economic activity coalesce around specific changes to the currency’s operating software, leaving alternative blockchains underutilized and thereby possessing minimal economic incentive to pursue. However, when consensus is not established, a cryptocurrency’s user network can split into two factions, rending the economic activity of the original blockchain split into two competing factions.
To better understand the nature of these forks, we distinguish between (a) soft forks, (b) source code forks (‘altcoins’), which are inspired by another cryptocurrency’s software yet generate an entirely independent blockchain, and (c) hard forks. Soft forks generate a change of rules that creates blocks recognized as valid by the old software. Given a soft fork, the new cryptocurrency is compatible with the software of the original cryptocurrency despite any technological changes. Likewise, altcoins inspired by a cryptocurrency’s source code (most notably, Bitcoin or Ethereum) create unique blockchains that operate independently of all others.
Conversely, hard forks generate a new blockchain that is incompatible with its original comparator—fostering two technologically incompatible cryptocurrencies. As such, hard forks may impose governance failures that split cryptocurrency users into two different camps: one that adopts a new technological change and one that retains the status quo. This paper reviews the growth of soft forks, altcoins, and hard forks of Bitcoin over time, and argues that hard forks represent symptoms of cryptocurrency governance failures that have the greatest potential to reduce trust and cohesion amongst Bitcoin’s users. Further, the number of Bitcoin hard forks has been projected to increase in the coming years, raising the urgent need for improvement of the cryptocurrency’s governance in a manner that is consistent with the decentralized software environment that Bitcoin and other cryptocurrencies utilize. To ensure the survival and growth of cryptocurrencies, it is imperative for participants in the Bitcoin network (miners, wallet operators, and exchanges) to generate an anticipatory approach that preemptively addresses governance challenges before they arise (Linkov et al. 2018a, b). Such an approach should be designed in a manner that respects the decentralized nature of distributed ledger-based cryptocurrencies, yet also emphasizes the desire to retain community consensus for software improvements where possible.
To date, only limited reviews of cryptocurrency forks have been published or documented. Further, many forks from the Bitcoin blockchain are never publicly acknowledged or accounted for, while others only survive for a matter of days or weeks. This includes more recent capabilities for individuals to develop their own fork from Bitcoin’s blockchain via software such as Forkgen—making it prohibitively difficult to track all such forks. As such, we review a collection of sources to analyze publicly acknowledged soft forks, altcoins, and hard forks from Bitcoin. Other currencies with forks are also well known, such as the case of Ethereum, yet lack the extensive history or market dominance of cryptocurrency use that is currently held by Bitcoin.
For our search, we sought to review all direct and indirect forks of Bitcoin. This includes hard forks, soft forks, and source code forks/altcoins. Direct forks include those that fork initially from the Bitcoin blockchain. Likewise, indirect forks are either (a) those which fork from a pre-existing offshoot of Bitcoin, yet still operate using Bitcoin-based software, or (b) altcoins whose software was inspired by Bitcoin source code, yet retain independent genesis blocks that do not share transaction history with Bitcoin’s blockchain. The “Map of Coins” demonstrates Bitcoin altcoin and soft fork growth from 2009 to 2015, including notable early altcoin Litecoin (Cointelegraph Media Partners 2018). As one of the more comprehensive sources of Bitcoin’s blockchain and forks, the Map of Coins notes 667 separate blockchains stemming from or inspired by the original Bitcoin blockchain by the end of 2015. Many of these forks existed for only a short period, or were further altered to generate indirect Bitcoin forks. Additional sources like the Bitcoin Exchange Guide (2018) provide more recent accounting for Bitcoin forks from 2015 through early 2018, including the current hard forks (Bitcoin Cash and Bitcoin Gold). The number of new, publicly traded Bitcoin soft forks has appeared to diminish in recent years, with many new coins utilizing Ethereum software and blockchain architecture. However, for future fork projections, online periodicals such as Bloomberg have identified various hard fork opportunities, with up to 50 projected within the 2018–2019 time-period (Kharif 2018).
Although certainly not exhaustive, the list of Bitcoin forks considered in these various sources indicates substantial growth in the number of separate blockchains stemming from initial Bitcoin software. Although many Bitcoin forks and altcoins do not survive beyond a few months of initial use, many last years (i.e., Litecoin, Dogecoin, Vertcoin, etc). Further, two hard forks were executed in late-2017 to early-2018, opening the door to many others in the future.
As the first and most valuable cryptocurrency, Bitcoin has experienced many forks since its inception in 2009 (see Fig. 1 for a demonstration of how fork and altcoin growth greatly expands the number of currencies available for economic exchange). By the end of 2017, nearly 800 publicly traded cryptocurrencies had been forked from or been inspired by the Bitcoin blockchain (Cointelegraph Media Partners 2018); all viable Bitcoin forks prior to July 2017 were recognized as soft forks or altcoins. Bitcoin’s first commercially viable hard fork, Bitcoin Cash, was created in Summer 2017 due to a heated dispute between voting members of the Bitcoin’s governance process regarding whether new software rules were needed to address the growing problem of low efficiency, high cost transactions that plagued an increasingly popular and in-demand Bitcoin (Bitcoin Exchange Guide 2018). Those who favored the status quo disagreed with proponents for blockchain rule change, causing a hard fork to emerge. Although the number of hard forks has been relatively small (only 2 have been formally adopted), possible future hard forks are expected to grow in number, with some sources arguing that up to 50 are possible in 2018 alone (Kharif 2018). At a minimum, hard fork growth presents a potential roadblock to the mainstream adoption of select cryptocurrencies and, potentially, a threat to the cryptocurrency’s ability to maintain a stable and predictable operating platform that is essential to its use as a guarantor for daily financial transactions. Considering this, why would one adopt a cryptocurrency that was likely to change radically in the coming months, and possibly be made obsolete?
It is important to note that not all forks are inherently negative, or present significant concern of cryptocurrency volatility, or a threat to public trust in the long-term survival of cryptocurrencies like Bitcoin. Some offer opportunities for experimentation, where software updates that improve a blockchain’s efficiency and scalability may be evaluated without endangering the primary Bitcoin blockchain to uncertainty or technological error (Herrera-Joancomartí and Pérez-Solà 2016). Further, when participants of the Bitcoin network identify a clear need for software updates to better scale currency use and meet rising demand, forks are both necessary and inevitable. However, popular soft forks do have the potential to capture a portion of Bitcoin’s market cap, while highly contested hard forks like Bitcoin Cash can both capture a portion of Bitcoin’s market cap and usership while also reducing public trust and willingness to invest over time (Kharif 2018). Ultimately, for Bitcoin to become a more predictable, less volatile, and more trustworthy form of exchange, clearer strategies are needed that identify the conditions when a software update is necessary and beneficial, as well as transparent and predictive governance that reduces the potential for rival camps to contest one another and trigger a hard fork in the cryptocurrency’s blockchain.
4.1 Governing the ungovernable: first steps for cryptocurrencies
While it would be counterproductive to the decentralized nature of cryptocurrencies to require a central decision maker to guide governance decisions on hard forks (Baldwin 2018), participants in the Bitcoin network can develop elements of anticipatory governance by identifying potential software challenges early on, and identifying through discourse of various actors what software changes are likely needed to ensure the currency’s long-term survival (Barben et al. 2008; Quay 2010). Under such a governance framework, a cryptocurrency’s user network would establish metrics for key variables that preemptively identify whether or not software changes are needed well before such an inflection point arises. Such variables will likely center upon concerns of scalability. Specifically, such governance concerns will likely focus upon addressing rising cryptocurrency demand in order to (a) reduce software-driven monetary transaction costs and (b) improve the speed in which transactions are processed. Similar governance strategies have been adopted by the environmental management community, which sets quantitative guidance to determine when new ecological management strategies must be shifted due to changing risk profiles or growth of knowledge that reflects the benefit/risk tradeoffs of a given activity (Linkov et al. 2018). An advantage held by the cryptocurrency community is its ability to predict possible hard forks well in advance—affording ample opportunity to anticipate governance needs in a predictable, structured, yet still decentralized decision-making process.
Anticipatory governance neither resists nor encourages change. Instead, such strategies identify looming areas of concern (i.e., Bitcoin scalability to meet future daily demand), and prioritize rational and reasonable responses to meet such challenges over time. Such an approach does not contradict the decentralized nature of cryptocurrency governance and operations, but does require a more proactive approach for goal-setting, problem identification, and compromise between those who resist software updates with those who favor more regular updates. Although anticipatory governance cannot prevent all hard or soft forks from occurring—this is impossible given the lack of a key administrator to align preferences and future priorities—it can help alleviate uncertainty amongst the Bitcoin network by identifying statistical signals where forks are more helpful than not.
Although this paper focused only upon the governance challenges facing many cryptocurrencies, and far more inquiry is needed to address the software and engineering challenges for such currencies, it is imperative for participants within the Bitcoin network and similar networks within other cryptocurrencies to develop greater foresight regarding the conditions by which software changes are warranted. Although some of these situations may be unpredictable or uncertain, others such as the scalability challenge can be preemptively strategized to determine the conditions when Bitcoin’s software protocol should be updated. One notable example includes Bitcoin’s SHA-256 PoW algorithm, which must be updated over time to ensure the continued security and privacy of Bitcoin addresses and transactions.
While no centralized governance structures can execute any formal governing strategies in a manner consistent with other emerging technologies, the likely future challenges facing cryptocurrency software enable opportunities to preemptively identify reform strategies well before they happen. Such discourse would have to involve, where relevant, cryptocurrency miners, wallet developers, and exchange operators, who can collectively anticipate software bottlenecks that increase transaction cost, reduce transaction efficiency, or otherwise reduce the economic and technological potential of a cryptocurrency. Where opportunities for hard forks are likely to grow in number throughout 2018, proactive and anticipatory governing strategies are essential to ensure marquee currencies like Bitcoin do not destabilize within an environment of uncertainty and internal conflict. Further, to strive towards a goal of making Bitcoin a more globally recognized, reliable, and a predictable medium of exchange on an international scale, there is an urgent need for miners and other stakeholders within the Bitcoin network to generate more predictability and stability with its governance by setting clear guidelines regarding when software updates are beneficial and should be adopted.
- Barben D, Fisher E, Selin C, Guston DH (2008) 38 Anticipatory governance of nanotechnology: foresight, engagement, and integration. In: The handbook of science and technology studies, p 979Google Scholar
- Bitcoin Exchange Guide (2018) Bitcoin blockchain forks history—list of all BTC hard and soft forks. https://bitcoinexchangeguide.com/bitcoin-blockchain-forks-history/
- Cointelegraph Media Partners (2018) Map of coins. http://mapofcoins.com/
- Kharif O (2018) Bitcoin may split 50 times in 2018 as forking craze mounts. Bloomberg. https://www.bloomberg.com/news/articles/2018-01-23/bitcoin-may-split-50-times-in-2018-as-forking-craze-accelerates
- Kornilov D, Zaitsev D, Evdokimov N, Raitsyn M, Babaev A, Generalova D (2018) Monthly cryptocurrency and ICO market analysis. Coinspeaker. https://www.coinspeaker.com/2018/02/06/monthly-cryptocurrency-ico-market-analysis-january-2018/