Bitcoin Governance: How BTC’s Consensus System Works & Why It Matters

How Bitcoin’s Governance System Works – And Why It Matters

We hear a lot about bitcoin’s governance system being decentralized.

“Bitcoin is governed by a decentralized network of nodes,” we say. “No single person owns or controls the bitcoin network.”

It’s easy to repeat phrases like this – but do you actually know how the bitcoin governance system works? Well, Pierre Rochard of BitcoinAdvisory.com recently explored the issue in a Medium post. He explained why bitcoin’s governance system is so important, how bitcoin’s governance system works, and why you should care about bitcoin’s governance.

“Conversations regarding bitcoin’s governance tend to focus on who the decision makers ultimately are, perennial candidates include miners, nodes, and investors,” explains Rochard.

“The purpose and mechanics of governance are often just implied or even disconnected from reality. Views on the efficacy of past governance are often driven by who “won” or “lost” a specific decision, rather than the adequacy of the decision making process itself.”

With that in mind, let’s take a look at how bitcoin’s governance system works and why it was established as it is today.

What Is Bitcoin Governance?

Rochard sums up bitcoin governance better than I could, saying,

“Bitcoin governance is the process by which a set of transaction and block verification rules are decided upon, implemented, and enforced, such that individuals adopt these rules for verifying that payments they received in transactions and blocks fit their subjective definition of “Bitcoin”.”

When two or more individuals adopt the same set validation of rules, it creates a consensus. That consensus is an agreement about what bitcoin is.

When more than a certain number of nodes achieve consensus about what bitcoin is, then that consensus governs the bitcoin network. Just like in a democracy, majority rules.

Why is Bitcoin Governance Important?

Bitcoin’s governance system serves a number of crucial roles. However, there is some debate over the true purpose of bitcoin’s governance.

It Creates Trustlessness

Matt Corallo, for example, argued in 2017 that the most important property of bitcoin is the fact that it’s trustless. You can run bitcoin without needing to trust anything but the open source software you’re running. Without trustlessness, all other positive aspects of the bitcoin network are jeopardized, and we have trustlessness because of the decentralized governance structure.

It Creates the Optimal State of Bitcoin Through Upgrades

Daniel Krawisz, meanwhile, argued in 2015 that the primary goal of governance is to achieve successful bitcoin upgrades and reach the full potential of bitcoin. The governance system ensures that the best (or most popular) upgrade always wins, which theoretically leads to the optimal state of bitcoin over time.

As pointed out by Rochard, these two views “mirror the classic divide between deontological and consequentialist ethics respectively.”

On the one side, you have a long history of central banks, ancient coin producers, mints, and governments abusing their power. The people trust central banks and similar institutions, and these institutions have abused their power over time.

On the other side, you have people who argue that the fundamental value of bitcoin lies in its ability to upgrade itself without the need for a central power.

Before we dive deeper into these contrasting viewpoints, it’s important to understand how bitcoin’s governance system really works.

How Does Bitcoin’s Governance System Work?

Bitcoin’s governance system is based on a set of verification rules.

These verification rules, at a high level, cover syntax, data structures, resource usage limits, sanity checks, time locking, reconciliation with the memory pool and main branch, the Coinbase reward and fee calculation, and block header verification. These high level rules are some of the fundamental aspects of the bitcoin network.

Many of these rules come directly from Satoshi Nakamoto. Other rules have been amended over time to address bugs or other issues.

Other changes have been introduced to allow bold new projects on the bitcoin network. The bitcoin network recently introduced the Check Sequence Verify opcode, for example, to enable new scripts on the network.

It Starts With Research

All rule changes on the bitcoin network begin with research. The SegWit proposal, for example, began with research into how to fix transaction malleability. Transaction malleability had become a serious problem because it was preventing the Lightning Network from being deployed on the bitcoin network. Researchers collaborated to create the SegWit proposal. When a new bitcoin proposal gets researched, it typically falls into one of two camps: “scientific simulation” or “engineering experiment.”

This Research Forms a Proposal

After sufficient research, the researcher will discover a solution to the problem faced by the bitcoin network. At this point, the researcher can share their solution with other developers. When a solution is shared, it becomes a proposal. A proposal can be something as simple as an email to the bitcoin-dev mailing list. Or, it could be a formal whitepaper or a bitcoin improvement proposal (BIP).

The Proposal is Implemented

The researcher has created a solution and proposed it to the bitcoin development community. That proposal is implemented in the node software by the researcher who proposed it, or by other bitcoin developers who believe in the proposal and support it.

In some cases, a proposal will not get past the implementation stage. The proposal may have attracted unfavorable peer reviews, for example.

It’s important to note that no bitcoin developers can vote a proposal. However, the reputation of the person proposing the initiative can still play a role. Here’s how Rochard explains it:

“While this may give the impression that the contributors to Bitcoin protocol development can veto a proposal, a researcher can make their case to the public and route around existing developers. In this scenario, the researcher is at a disadvantage if they lack reputation and credibility.”

Even if a proposal is widely supported, and that proposal has been implemented into a node, then the rest of the network may not follow suit. If an implementation is seen as contentious by the bitcoin community and bitcoin protocol developers, then those who maintain the reference implementation of bitcoin may choose to not install it.

Today, the bitcoin network’s most popular node implementation is found at https://github.com/bitcoin/bitcoin, where you’ll find the C++ reference implementation that’s the direct successor of Satoshi’s codebase. It’s the most popular, mature, and reliable implementation of the bitcoin network. Those who maintain the reference implementation will not implement proposals that are seen as contentious by the bitcoin community. These maintainers follow the consensus of the community – they don’t propose new objectives.

Soft Forks and Hard Forks

Those who maintain the reference implementation of bitcoin at Github.com/bitcoin/bitcoin have some degree of power over the bitcoin community, although there are ways to circumvent that power.

“To circumvent the reference implementation’s maintainers and make consensus changes regardless is as simple as copying the Bitcoin codebase and releasing the proposed changes,” explains Rochard. “This happened with the BIP-148 User Activated Soft Fork (UASF).”

Some proposals can only be implemented as a hard fork. A hard fork is forward-incompatible, which means that pre-fork nodes will end up on a different network as post-fork nodes. The pre-fork nodes will need to upgrade their software if they want to continue validating blocks on the post-fork network.

A soft fork, meanwhile, is forward-compatible. With a soft fork, the pre-fork nodes do not need to upgrade their software to continue validating the pre-fork consensus rules. The only difference is that nodes that don’t upgrade their software are unable to validate the rules implemented in the soft fork.

Overall, soft forks are seen as safer than hard forks because they don’t require an explicit opt-in. However, some people see soft forks as more dangerous because they can be coercive: someone who disagrees with a soft fork must hard fork to reverse it.

Deploying the Proposal Change

After a proposal is implemented in the node software, users must be persuaded to use the node software. Not all node users are equal in their importance. Blockchain explorers, for example, have more power because many users rely on their node.

Exchanges and other centralized authorities also have power over which set of rules gets which symbol. We saw this issue during the Bitcoin Cash versus bitcoin hard fork. Bitcoin Cash claimed (and continues to claim) to be the true version of bitcoin. Some exchanges, however, refused to attach “bitcoin” to the Bitcoin Cash symbol, calling it BCash instead. Today, Bitcoin Cash continues to use the BCH symbol while bitcoin uses the BTC symbol.

How Much Control Do Miners Have Over the Bitcoin Network?

Miners have significant control over the bitcoin network, although this control can disappear quickly. For example, mining pools that choose a contentious upgrade may lose their mining support, which means miners start dedicating their resources to another mining pool.

Rochard also explains how some soft forks have an on-chain governance feature measuring mining support:

“Softforks have an on-chain governance feature called (BIP-9 Version bits with timeout and delay). This feature measures miner support for softforks on a rolling basis. Miner support for proposals is used as a proxy measure for the wider community’s support. Unfortunately this proxy measure can be inaccurate due to mining centralization and conflicts of interest between miners and users. On-chain “voting” by miners also perpetuates the myth that Bitcoin is a miner democracy, and that the miners alone decide on transaction and block validity. BIP-9 is useful to the extent that we recognize and accept the limitations of proxy measurements.”

The primary role of a miner is to time-stamp each block and secure that timestamp with a proof of work. At its essence, that’s all bitcoin mining is. Miners are mercenaries, however, and the amount of hashrate they provide is based on the cost of hardware and electricity balanced by the reward they receive from the Coinbase reward and fees.

It’s important to note that miners are mercenaries. They have little incentive to enforce validation rules on their own, and in the past, they have provided timestamps without full rule validation. Centralized mining power means we cannot fully trust miners to enforce validation rules on their own.

How Are Bitcoin Proposals Enforced?

Any changes to bitcoin’s validation rules are enforced by the decentralized peer-to-peer network of fully-validating nodes.

Each node uses the verification rules to independently verify that payments received by the node operator are in valid bitcoin transactions and are included invalid bitcoin blocks. Nodes won’t propagate transactions and blocks that break the rules, and peers that send invalid transactions and blocks will be banned by these nodes.

Bitcoin has been described as “an impenetrable fortress of validation” because if everyone determines that a mined block is invalid, then the miner’s Coinbase reward and transaction fees from the block are worthless. There’s no incentive to submit rule-breaking blocks to the network.

Bitcoin is an impenetrable fortress of validation.

It doesn't matter if you created the transaction/block, or if someone else sent it to you: If it's not valid it's not getting in.

All nodes enforce validation in tandem.

Some people still don't seem to understand this concept. pic.twitter.com/sqc2bLeNH1

— 💯 (@StopAndDecrypt) June 1, 2018

Does Bitcoin’s Governance Lead to More Trustlessness?

Up above, we mentioned that one of the goals of bitcoin’s governance structure was to increase trustlessness. Has this really occurred? Or is bitcoin going the other way?

Rochard believes bitcoin’s governance system has led to less trustlessness:

“In my opinion, the current Bitcoin governance model has prevented a degradation of trustlessness. The dramatic increase in on-chain Bitcoin transactions over the past 5 years seemed to have no end in sight. If Bitcoin’s governance model had not been resistant to last year’s miner signalling for a doubling the maximum block weight, a precedent would have been set of valuing transaction throughput above trustlessness.”

Does Bitcoin’s Governance Lead to the Optimal State of Bitcoin Through Upgrades?

The other argument is that bitcoin’s governance structure leads to the optimal state of bitcoin by reinforcing the best possible upgrade. Has this occurred? Rochard agrees that bitcoin has been continuously upgraded over time, but that it’s hard to link these upgrades with the governance structure of bitcoin:

“I think it’s impossible to establish a causal relationship. The price is much higher than it was 2 years ago, but it seems to be an endogenous process driven by trader psychology, not technological fundamentals. Regarding fundamentals, it’s undeniable that Bitcoin’s governance has delivered on consensus changes which the Lightning Network depends on to operate.”

Rochard is a huge supporter of the Lightning Network and believes the launch of the Lightning Network will increase bitcoin’s value further. However, it’s not totally clear if bitcoin’s governance structure has facilitated the launch of the Lightning Network.

You can read Pierre Rochard’s full essay on the governance structure of bitcoin here.

https://medium.com/@pierre_rochard/bitcoin-governance-37e86299470f