Bitcoin is a highly centralized network — Harvard researcher says

Primavera De Filippi, a hacker and Harvard blockchain researcher, and Benjamin Loveluck, an associate professor at Télécom ParisTech and a research associate at CERSA, argue in a new paper that Bitcoin has evolved into a highly centralized network under the technical control of a few.

After providing an introduction, the researchers analyze Bitcoin’s governance in the first paper, noting that “the intent of Satoshi Nakamoto and early Bitcoin developers was to create a decentralized payment system that was both self-sufficient and independent.” However, they note that they were perhaps naive, “in thinking that it would be possible to create a new technological infrastructure that would be able to govern itself through its own protocols and rules — without the need for any third-party intervention to sustain itself. However, despite the elegant mathematics of the entire system, once introduced into a specific socioeconomic context, it will often evolve in unforeseen ways and can fall prey to unexpected power relations.

After analyzing the entire open source ecosystem, the researchers noted that open source projects fall into two main types of management: "democratic and spontaneous" or "autocratic and mechanical." As the name suggests, the former is a "meritocracy." In contrast, the latter has no formal management structure, but it is implied that the project usually relies on a "benevolent dictator." The researchers said, "Bitcoin definitely belongs to the second category."

To further elaborate, the article proposes:

[T]here is a difference between those who can provide input to a project (the community at large) and those who can ultimately call on the project's progress. In fact, while anyone has the power to submit changes to the software (e.g. bug fixes, incremental improvements, etc.), only a few people (the core developers) have the power to decide which changes should be merged into the main branch of the software.

More precisely, there is only one person in Bitcoin who can ultimately make such a decision, namely the maintainer, currently described as a “programmer from the Netherlands”, as there are no details or indications about his previous work experience as to why he is qualified to occupy such a position. In any case, his statement on May 6, 2015 that he “will not be able to cope with block growth in the near future” may well determine the outcome of the debate.

Bitcoin Management

The researchers argue that Bitcoin does have some formalized process for “consensus formation among Bitcoin Core developers,” but they insist that “the final decision on whether to implement a change rests with Core developers assessing public support for proposals and seeking consensus among those proposals.”

The power of others, including miners, is limited to refusing to run the relevant software to exercise a "veto power", and these groups are powerless to deal with any conflicts over software management, including "the risk of deadlock and division", as if these problems do not exist. The "recent crisis" reveals the limitations of consensus formation among individuals due to political differences and commercial interests, and highlights the differences between the overall goal of the project (a self-regulating decentralized virtual currency and payment system) and the overly centralized technocratic elite in charge of the project.

The article argues that the Bitcoin community mistakenly believes that technical management can make "government agencies and centralized organizations" unnecessary because "people cannot get rid of politics through technology alone, because technical management itself is a broad dynamic power."

The most powerful paragraph in the article argues that there is a conflict between the libertarian will of Bitcoin and its highly centralized and undemocratic governance structure:

“Implicit in Bitcoin’s governance structure is the idea that Bitcoin Core developers (along with a handful of technical experts) by virtue of their technical expertise are likely to make the right decisions about specific improvements to technical features that should be included in the Bitcoin system. This “technocratic” approach to governance is problematic because it goes against the original concept of the Bitcoin project. There is therefore a clear difference between the libertarian Bitcoin as a decentralized infrastructure that cannot be regulated by any third party, and the actual governance structure that determines Bitcoin’s technical development — which is highly centralized and non-democratic despite its open-source nature. While many appreciate or at least acknowledge the political dimension of the former (a), the latter has long been overlooked by the public: the technical decisions taken by Bitcoin developers are not political decisions, and therefore never debated as such.”

Although Bitcoin was closely associated with anarcho-capitalism in its early days, the subreddit has removed r/bitcoin from its sidebar listing, citing certain decisions and actions made by Marquardt, the top arbitrator of r/bitcoin, as violating the general principles of capcap regarding prohibition of censorship and force deletion. Marquardt argues that he owns the subreddit and is therefore free to make whatever decisions please him, but he does not have legal ownership of r/bitcoin and cannot argue that his right to self-control implies ownership, rather than a fiduciary relationship whereby power will be exercised for the benefit owners - the subreddit contributors. Therefore, there seems to be a contradiction between Bitcoin's libertarian principles and the current highly centralized governance structure.

Should Bitcoin be formally regulated?

The paper ends by stating that “we all agree that the governance structure of the Bitcoin project can only be achieved by openly acknowledging its political dimension and removing the technocratic bureaucracy from the power structures and institutional frameworks that currently accommodate the technical and political functions of the Bitcoin project.”

The implication seems to be that the relationship between the five Core developers, the maintainers, and the rest of the ecosystem should become formalized so that there are ways to hold them accountable, rather than maintaining the current opaque, arbitrary granting and removal of these rights, which were arguably abused when Gavin Andresen’s Git commit rights were removed without any public discussion.

Learning from Bitcoin’s experience, Ethereum has established a foundation funded by ICO sales and tends to make decisions in a democratic manner, while Zec’s foundation is funded by 10% of mining funds, formally tying the economic interests of developers with the interests of the wider community, allowing public opinion to directly influence decisions by lowering prices and thus reducing developer income.

Bitcoin largely lacks this formalized connection between the economic interests of developers and the broader ecosystem. An early attempt to create a Bitcoin Foundation funded by the broader ecosystem led to a year-long campaign of malicious marketing attacks by Peter Todd and others against the Foundation, often loudly claiming that it was a centralized force. However, he did not apply the same rhetoric to Blockstream, a commercial for-profit company that employs 12 or more Bitcoin developers, and unlike Ethereum or Zec’s foundations, even the Bitcoin Foundation does not have any formal or recognized structure to formally align the interests of developers with those of the broader ecosystem.

Do developers have a fiduciary duty?

While anyone can fork a digital currency, introducing new features into a digital currency, especially when there are disputes or protocol improvements that affect the fees of some parts/benefits of other parts, how digital currency decision-making should be done is a project that Angela Walch, an associate professor at the Saint Mary's University School of Law, is researching. He believes that developers are entrusted with trust by people, so they bear a fiduciary responsibility to digital currency users and ecosystem participants. Andrew Hinkes, an attorney at Berger Singerman, shared his opinion. He said during the OnChainScaling conference that he believes that whether public blockchain developers should or should not bear fiduciary responsibilities, "they actually" have such obligations.

I argued in an editorial that the imposition of such duty is far too early as it pertains democratically governed digital currencies such as Eth and, perhaps, Zec, but for highly centralized currencies governed in an arbitrary method and, apparently, through “agreements” with miners, any counter-argument to Walch is necessarily weaker as one cannot raise the legitimization of any decision through tokenholders voting.

However, the actual and main impact is not very clear, as the governance of digital currencies has only recently become a hot topic of discussion. In further communication, the publication of this article is very timely, and if its conclusions receive further academic support, it may tilt the debate towards how to operate a governance system rather than whether a system should be established.