Deep thinking on the meaning of decentralization: Who controls the blockchain?

Blockchain networks tend to support the principles of openness and permissionless use, similar to how the early Internet operated. To protect this concept from political pressure and regulatory intervention, blockchain networks rely on a decentralized architecture to operate without the control of any person or organization. Unlike political management, blockchain management does not come directly from the community. Instead, it is a pre-emptive measure that is coded into the protocol and operates as an integral part of the initial network architecture. Membership in this community requires support for the blockchain network rules that have been perfected and established from the beginning.

In blockchain transactions, you do not have to trust your counterparties to fulfill their responsibilities or properly record transaction data, because these processes have been standardized and automatically executed, but you must trust the code and believe that the network can operate as you expect. Once the network has political tendencies, can the immutability of the blockchain ledger continue to be maintained? The answer is, it is unlikely.

Consider the example of The DAO. Short for Decentralized Autonomous Organization, The DAO is a fiduciary obligation management software for holding and spending blockchain assets, with no human involvement at all. The DAO application is a "smart contract" that runs on the Ethereum blockchain. The DAO issued tokens through its smart contracts and traded them with the Ethereum blockchain token Ether. The token sale was conducted through a massive crowdfunding campaign, raising more than $150 million worth of Ether.

The original vision of the founders of Ethereum was that computer code should be considered the law of the community and serve as a substitute for legal agreements and regulatory rules. To achieve this vision, the founders of The DAO said that participants should recognize the code of the application as the only source of decision-making. The code is the contract and the law of The DAO. Unfortunately, there was a loophole in The DAO smart contract: a DAO token holder used the code loophole to transfer one-third of the funds in the application (approximately US$50 million) to his own account. Although this fund transfer was unexpected, it did not violate the rules of Ethereum or The DAO at all, and did not violate any laws.

However, the funds transfer ultimately resulted in losses for too many Ethereum community members, including some of its leaders, who believed that something should be done to recover their losses. Ethereum leaders were able to coordinate network participants to perform a so-called "hard fork," a permanent split of the Ethereum blockchain, so that the transferred funds could be returned to them.

The new Ethereum blockchain created by the hard fork has been criticized for being solely intended to recover the losses of The DAO token holders. If you happen to lose your ether due to market manipulation or another attack, the "code is law" rule still applies - you're out of luck.

For some community members, the decision to hard fork was a violation of the core principles of the community. While protesting, they decided to continue running the original unmodified blockchain, resulting in two Ethereum networks. Confusingly, the original Ethereum network was renamed "Ethereum Classic" (ETC); while the new network continued to use the original name Ethereum (ETH).

Blockchain prophets may say that smart contract applications such as The DAO will replace lawyers and subvert the legal industry. But this accident fully proves that smart contracts are not smart, and they are not enforceable agreements. Blockchain is indeed an innovative way to manage networks and machines, but we must not create "humanized" codes, nor can we abuse the management of machines into social systems. For machines, code is law, and for people, law is rules (code). Once we confuse these concepts, The DAO incident will happen again.

Think again about controversial topics related to Bitcoin. First of all, it is important to understand that on the Bitcoin blockchain, power is distributed among all stakeholders in the community. No one of them has more influence or power than others to change the Bitcoin protocol. They are interdependent and work together in the form of economic incentives to maintain the existing network rules. Any improvement to the network rules requires coordination and consensus among all stakeholders. Therefore, when Bitcoin software developers began to argue about the issue of network expansion, the discussion turned into a free-for-all between multiple stakeholders, which was also called a "governance crisis" by the mainstream media. Some developers wanted to change the Bitcoin codebase, which would not be backwards compatible, and therefore could cause the network to split into multiple blockchains - the hard fork mentioned above.

Most Bitcoin developers opposed the hard fork expansion plan, and instead supported a more conservative approach that would at least ensure the uniqueness of the Bitcoin blockchain. Other stakeholders began to see this process as an obstacle and began to launch so-called "democratic movements." But no matter how loud they were, those attempts to change the Bitcoin power structure and circumvent the consensus of Bitcoin developers all failed. For most people in the community, Bitcoin's ability to resist such activities proved its success in the blockchain governance structure and proved that the "governance crisis" was a myth.

As the blockchain community continues to grow, it becomes increasingly difficult for stakeholders to reach consensus on improvements to the network rules. This is a fundamental principle set by the creators of the blockchain, and changing the network rules is to split the network, creating a new blockchain and a new community. Blockchain networks are resistant to political management because they are managed by all participants, and no one person has absolute power.

The power of blockchain technology lies in its ability to enforce private contracts and community principles on a global scale through computing power by shifting trust and coordination costs. This is why blockchain can enable new types of markets, whether for political or economic reasons. To achieve this goal, we must trust the blockchain, not the people who control it.