Market Governance FAQ

Why does this FAQ exist?
There are two main theories of how upgrades to Bitcoin should occur: Market Governance (sometimes called Market Consensus) and Extreme Social Consensus Governance.

Market Governance is very frequently misunderstood by its opponents and also by its supporters. Like microeconomics (on which it is largely based), Market Governance an extremely deep and nuanced subject.

Understanding Market Governance is important because disagreements about Market Governance underlie most disagreements about how to scale Bitcoin and how the Bitcoin protocol should be upgraded.

What are Market Governance and Extreme Social Consensus Governance?
A basic description of both can be found here.

In short, Market Governance is the theory that when serious disputes about how Bitcoin should be upgraded occur and cannot be resolved via discussion, users should be given a choice (usually via the occurrence of a hard fork) and the dispute should be resolved by letting market forces play out. This involves users individually deciding which rules they want to use, and users deciding how to value coins on the networks produced by each rule set.

Extreme Social Consensus Government is the theory that no forward-incompatible change to the Bitcoin protocol should be attempted unless nearly all Bitcoin users agree with it.

What’s all this “governance” stuff? That doesn’t sound very Bitcoin-like!
Here “governance” just refers to the mechanism by which changes to the protocol either occur or not. Bitcoin governance need not have any relationship to the type of governance used by countries.

If controversial hard forks became acceptable, wouldn’t Bitcoin’s most important properties be at risk?
This is unlikely, precisely because Bitcoin's most important properties (censorship resistance, limited coin supply, the potential for anonymity) are properties that make a currency more valuable. Any fork that compromised these properties would be less attractive to users and its adoption and market value would therefore render it not a threat to the non-compromised chain.

For a longer discussion of why the market would preserve the 21 million coin limit, see here

Market Governance reminds me of voting. Why would we expect the market make better decisions than a voting system?
Consider the example of an attempt to raise the 21 million coin limit. The main differences between market valuations and voting are:


 * In a market, you are punished for being wrong, and rewarded for being right. If a fork occurred raising the coin limit and you thought the new fork with unlimited coins was more valuable, you'd perhaps trade some coins on the old fork for coins on the new fork, and buy additional coins on the new fork. You would end up losing all the money you invested to people who are better informed than you about what makes money valuable.


 * In a market you can add weight to your "vote" proportional to how confident you are. Your reward or loss will be proportional to this weight. Your investment in the new chain with unlimited coins could either be $5 or $5,000,000. This gives people with the best information a strong incentive to devote lots of resources to correcting any errors they see in market prices, and it gives people without good information an incentive to stay out of the market so that their ignorance isn't taken advantage of.


 * In a market, the 'votes' are open to the whole world, which usually includes lots of very smart people whose main goal is not biased by the particulars of a decision. Their goal is simply to make money. In markets you make money essentially by correcting pricing errors. So no matter how biased and rich some group within the Bitcoin community is, they could only reliably make the market prices inaccurate if they were richer than the entire rest of the world combined.

Incentives are very powerful, and the above incentives lead markets to be far more accurate than votes could ever be.

Can't Market Governance be easily manipulated by holders of large amounts of coins, or other wealthy groups?
In markets, attempt to manipulate prices are expected to make prices more accurate in the medium and long term. When someone tries to manipulate prices in a market, they are essentially giving away free money to those with accurate information. Signs that a market is being manipulated are basically advertisements for free money.

This is essentially what happened when ETH/ETC split. ETH holders tried to drive the price of ETC into the ground to kill it. The market very quickly adapted and the result was that anyone who was selling ETC just to drive down its price ended up giving their money away.

Is Market Governance just a variant of democracy?
No. We've already seen why voting and market decisions are very different. However, even if market prices worked exactly like votes, Market Governance would be very different from democracy.

There are some superficial similarities to democracy which encourage this error. Users can “vote” on which chain they like best via the software they run. Miners in some sense also get a “vote” to determine which fork will have the most hash power behind it.

Despite this similarity, democracy and Market Governance are fundamentally different in a very important way: In a democracy the majority forces the minority to adopt its favored outcome. In Bitcoin people are free to join, leave, continue using, and create forks without anyone stopping them, even if they’re part of a minority.

I run Bitcoin because I want to only have to trust math and code. Doesn't Market Governance make me also need to trust the market?
No matter what form of governance is used by Bitcoin in the future, it's impossible to escape the fact that when you use Bitcoin you are trusting other people to value your coins in the future. You could own 1,000 bitcoins right now and consider yourself rich, but if next month people stop caring about Bitcoins, your 1000 coins will be worthless even though nothing about math or Bitcoin's code has changed. So you always need to trust the market to some degree.

So the fundamental question is: is adding a barrier between Bitcoin and the market by creating a social norm against all controversial hard forks worth the cost in a Bitcoin's reduced ability to change? Naturally, if you think markets will do a really good job of preserving Bitcoin's important properties, adding an extra mechanism to resist all controversial changes is more likely to seem counterproductive.

If we had a persistent hard fork and both chains attempted to claim the name "Bitcoin", wouldn't that be confusing for users?
Yes, this would be more confusing the more equal in popularity the two chains were. If one is significantly more popular, there is much less confusion. This is one of the costs to controversial hard forks, and one of the reasons that we would expect splits to not happen unless both sides feel very strongly that it was in their best interest to split.

Doesn't a split risk the network effect of both sides of a fork?
Yes, this is another cost to splitting, and is another reason why different sides in a disagreement will usually try hard to work out a solution where they don't have to split. However, this cost is not so high that it is never worth it to split. If one side of a disagreement feels like they are poised to retain the overwhelming majority of the network, they have a lot less to lose.

Don't Bitcoin forks undermine the concept of digital scarcity?
There is a worry that since it costs almost nothing to create a fork of an existing cryptocurrency, and because technically the fork would be just as good as the original (aside from the network effect), that there is an infinite supply of cryptocurrency tokens. What if people value Bitcoins today because of a shared social consensus to pretend that it's not OK to create a bunch of other digital tokens via forks?

In practice, cryptocurrency users seem to have a strong natural inclination to stick together on one network unless something very compelling requires a persistent chain split. The fact that there are so many altcoins out there yet Bitcoin still retains its dominant position is one argument against the idea that people will lose faith in digital scarcity as other digital tokens appear. The only persistent chain split in a significant altcoin that I'm aware of is the ETH/ETC split. ETH seems to be doing fine, and a proliferation of other persistent forks of Ethereum have not appeared.

This is an interesting theory, but there does not appear to be much evidence that people's sense of digital scarcity is fragile enough to be destroyed by a persistent chain split.

What do supporters of Market Governance like so much about hard forks?
The main virtue of hard forks is that they allow everyone to make an explicit, voluntary choice about whether they want to stick with the old network rules or join a fork of the network with new rules.

Market Governance supporters believe that people have a right to (1) run whatever software they want, (2) use or not use any cryptocurrency network whenever they like, and (3) value coins on a network however they choose.

From the Market Governance perspective, a hard fork is mostly the aggregation of a bunch of people exercising their rights to do the three things above.

Hard forks do usually involve one more controversial step: see Isn't it unethical for supporters of a new fork to call it "Bitcoin"?

Isn't it unethical for supporters of a new fork to call it "Bitcoin"?
It depends on the effect of keeping the name.

Words are just tools to help humans communicate and think more easily. Although some words have a precise definition given by someone with legitimate authority to define the word, Bitcoin is not such a word. Satoshi never gave a precise definition of what things are and are not Bitcoin.

Supporters of a hard fork that keeps the "Bitcoin" name may believe that nothing essential about Bitcoin is changing with the fork. These people view Bitcoin more as a software project whose aim is to maintain a shared ledger, with the general architecture described in the Bitcoin whitepaper.

For instance imagine if transaction malleability somehow had to be fixed with a hard fork. Many people would not consider transaction malleability a fundamental part of what makes Bitcoin Bitcoin, and therefore not feel compelled to rename the network if such a hard fork occurred. Others might claim that even in the case of a hard fork fixing transaction malleability, if anyone wanted to keep using the original rules the new fork should change its name. These people might view "Bitcoin" as referring to the specific network rules in effect right now.

Without existing norms about whether "Bitcoin" refers more to the project in general or a specific set of network rules, it seems most natural to fall back onto a utilitarian argument which considers the purpose of names/definitions.

Since names exist to help us communicate and think about things clearly, a relevant question is: does calling the new fork Bitcoin help people understand it better, or does it mislead them? If you called the new network "Bitcoin", and then explained the fork history to people, would they feel mislead by the fact that you called it Bitcoin earlier? If so, and if you know this, then calling the new fork "Bitcoin" is probably unethical. If people would not feel mislead after a full explanation of what's going on, then keeping the name "Bitcoin" is OK.

In the case of a fork fixing transaction malleability, we can imagine that if a small minority convinced the majority on the new fork that they were obligated to change the name to something with no reference to Bitcoin, like "Foocoin", that it would actually lead to a lot more confusion than if the new fork had used "Bitcoin." Regular users who didn't closely follow the forking debate and who heard the name "Foocoin" would likely be more confused than necessary, not realizing the connection between Foocoin and Bitcoin. One could imagine that if you explained the history of the fork in full to people, 99% of them would regard the new fork as still Bitcoin. In this case, it could be argued that those insisting on the original chain keeping the name "Bitcoin" are behaving unethically if they know that this would mislead users.

We can imagine other cases where it is unethical for a fork to refer to itself as "Bitcoin." For instance if the new network rules somehow required all users to use their real names in all their transactions, and established a centralized point of control to enforce this. In this case, describing this new network as "Bitcoin" would be deceptive because it if your listeners understood the difference between the old and new networks, they'd probably think that the new network departs completely from Bitcoin's key properties of censorship resistance and (pseudo-)anonymity.

This suggests that when evaluating how to name a new fork, the main criteria should be maximization of the understanding of whoever hears the name, and minimization of confusion and deception.