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 Near-Unanimous 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 is an extremely deep and nuanced subject.

Understanding Market Governance is important because disagreements about Market Governance underlie most current debates in the Bitcoin community.

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

In short, Market Governance is the theory that when serious disputes arise about how Bitcoin should be upgraded and these disputes can't be resolved via discussion, giving users a choice (usually via the occurrence of a hard fork) will result in the dispute being resolved by market forces in a way that preserves Bitcoin's important properties. This market process 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.

Near-Unanimous 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. The "social" part of the name comes from the fact that this consensus is measured via human interaction on forums, IRC, mailing lists, in person meetings, etc. Supporters of this theory believe that it should be enforced via social norms which regard controversial hard fork attempts as inappropriate or unethical.

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.

Is Market Governance the same thing as Emergent Consensus?
No. Emergent Consensus is a specific algorithm for users of Bitcoin software to automatically adjust their block size, given the behavior of the rest of their network. One can be in favor of Market Governance and against the Emergent Consensus algorithm.

If controversial hard forks became acceptable, wouldn’t Bitcoin’s most important properties be at risk?
This is unlikely, because Bitcoin's most important properties (censorship resistance, limited coin supply, the potential for anonymity, etc.) 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 network.

For a longer description 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 to 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 network with unlimited coins was more valuable, you'd perhaps trade some coins on the old network for coins on the new network, and buy additional coins on the new network. 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 network 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 their stake in the decision. Their goal is simply to make money. In markets you make money 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.


 * Because market participants lose money for being wrong and make money for being right, over time those with better information and better judgment gain more influence over prices, and those with poorer judgment and worse information lose influence. This means the market as a whole will trend toward a state where prices are determined by those with the most wisdom and expertise.

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, attempts 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. However, because ETC actually offered something valuable (a version of Ethereum that was more committed to a "code is law" philosophy) the market very quickly adapted. The result was that anyone who was selling ETC 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 the bitcoins on your network, your 1000 coins will be worthless even though nothing about math or Bitcoin's code has changed. 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 reduction in Bitcoin's 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 make Bitcoin much harder to change is more likely to seem counterproductive.

If we had a persistent hard fork and both networks 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 networks were. If one network were significantly more popular, there would be 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.

[I would add my usual point that insofar as the market abhors a split (such as due to confusion) it would to that degree refuse to value a second (minority) coin, meaning investors would pile into the winner as soon as one pulled ahead. That also seems to contradict the idea that it is a cost.

Also, as a general point for the FAQ, hard forks (which could result in tradable splits) cannot really be avoided if there is enough controversy, so the Market Governance position isn't really a matter of "we should use MG" but rather that MG is the inescapable reality, and attempts to avoid it are just ostriching. In this section, for example, it wouldn't make that much sense to call it a cost (even if it did carry a cost) since it is unavoidable. -ZB ]

[I'm not quite sure about your first point. It could be more like a public goods problem, where the minority network gains value from the confusion because it gets some of the reflected glow from the majority network, and the majority network shoulders more of the harm. I'll think about this more.

Regarding the second point, I see the main "should" claim of that MG position to be that we "should" stop trying to shield Bitcoin from the market, because not interfering with market governance has good effects. Yes, we can't completely escape MG, but by trying to implant a preference in market participants to be extra afraid of hard forks, the market can be influenced by NUSCG supporters -- EO]

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 often try hard to work out a solution where they don't have to split. However, in some cases a split should be so beneficial as to be worth the cost.

For instance, if each side of the split is aiming to fill a different niche, they don't lose as much from reduced network effects. Or, if one side of a disagreement feels like they are poised to retain the overwhelming majority of the network, the expected cost to them may be minimal.

Do 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.

A powerful argument against the idea that a network split would compromise digital scarcity is the fact that although a split creates more coins on a different network, people's ownership of those coins remains in proportion to their ownership before the split. If you own 0.001% of all bitcoins, then no matter how many times the Bitcoin network splits, you'll own 0.001% of the coins on every chain. If one of the forking chains becomes the most valuable one in the future, your wealth has been preserved and you've suffered no dilution. See here for an exploration of the implications of this idea.

Don’t hard forks allow “double spending”, since the same coins can be spent on both chains?
Not according to the traditional concept of “double spending.” When a chain forks, there are two separate networks and the corresponding coins on each network are not the same coins.

Double spending refers to spending the same coins multiple times on the same network.

As noted in Do Bitcoin forks undermine the concept of digital scarcity?, a chain fork is not inflationary (it does not dilute anyone's ownership) because everyone's proportional ownership of of coins is preserved on each chain.

In a hard fork situation it is possible for users to behave unethically by trying to mislead others about which fork they’re sending them coins on, but this is a different issue from double spending.

Does Market Governance take into account "adversarial thinking"?
Yes. As we've seen above, markets are very resistant to sustained manipulation because of the incentives involved.

It could be argued that Near-Unanimous Social Consensus Governance fails to take into account adversarial thinking, because any group that wants to attack Bitcoin can simply join the Bitcoin community and then oppose any hard forks. They will then have complete veto power over all hard forks. A counter argument would be that even though this attack is very easy, it isn't so bad because the Bitcoin protocol is already pretty good, and we can do a lot with soft forks, so letting attackers veto hard forks isn't that harmful. The argument would then depend on how harmful it actually is for an attacker to be able to veto all hard forks.

Why do Market Governance advocates prefer hard forks to soft forks?
Hard forks require users to opt-in, and they allow the market to make an explicit choice between the new network rules and the old network rules.

Soft forks require users to opt-out, but users can only opt out if they coordinate among themselves and create a hard fork of their own which separates from the original network. This is a large burden on users who want to opt out, because coordinating with similar users in a decentralized network is hard, and it requires development work. If no one who wants to opt out organizes their own hard fork, then the soft fork essentially bypasses the market decision process and forces everyone onto a network that uses the new rules.

Can't a group advocating a hard fork essentially destroy Bitcoin by forking away with a large fraction of the network?
Not really. The great thing about Bitcoin is that due to its voluntary nature if there exists a group of people who are committed to not forking, they can continue using their preferred network among themselves and there's little that anyone else can do about it.

Imagine that initially 10,000 cypherpunks are using Bitcoin. Then Bitcoin appears in the media and 1,000,000 casual users start using Bitcoin. They don't appreciate Bitcoin's properties, they just use it because it seems "cool." Now imagine that someone proposes a fork that is cleverly designed to seem even cooler than the current Bitcoin network to the 1,000,000 casual users. These users all join the new fork and the original network is back to the original 10,000 users. Has Bitcoin been destroyed? Not unless you'd say it was in a destroyed state before the casual users arrived. (Technically, the original users may have to do a hard fork to reset the mining difficulty after the 1,000,000 users leave).

Do hard forks allow the developers behind the new fork to take control of the protocol?
For the new fork to gain users, these users have to choose to join the new network. Any future changes that these developers want to make via hard fork would similarly have to be chosen by the users. Users are always free to reject further changes by the same group of developers, or to switch to software written by other developers.

So in a sense, developers “control” the protocol to the same extent that a cereal producer “controls” what you eat for breakfast. If you eat their cereal every day, it’s because you’ve chosen to eat it, because you like it better than other cereals. However if a cereal producer makes their cereal worse or someone else invents a cereal even better than the one you currently eat, you’ll switch to a new cereal.

In other words, developers only have the power to present the user with options. The user always has the ultimate power to choose which options to accept. On the other hand, we know that many users don’t pay that much attention to software upgrades. Maybe some people will automatically accept updates from their existing software because it’s easy. To the extent that people do this, any developer team who ends up producing popular Bitcoin node software will have more power than we’d expect under an idealized situation.

Note that this means that when one group complains that a group of developers is trying to take control of the protocol, they are essentially admitting that the producers of the current popular node software already “control” the protocol to the same extent that they’re worried that the new team will control it.

Wouldn't Market Governance make Bitcoin more political?
This seems unlikely. Would a rule making it almost impossible for husbands and wives to divorce reduce the amount of marital conflict? Like a divorce, a hard fork is a very peaceful way to resolve a dispute.

We've seen that in the aftermath of the ETH/ETC split, both sides have largely left each other alone. Just before the split, there was a lot of anger and toxicity in the community, almost rivaling the current situation in Bitcoin. Similarly, much of the animosity in Bitcoin stems from the fact that the two factions are fighting for one network, which they both feel compelled to politically squabble over. If there were instead two networks, people could vote with their feet instead of arguing. See Balaji Srinivasan's excellent talk describing how "exit" is generally preferable to "voice" as a governance mechanism.

If either Market Governance or Near-Unanimous Social Consensus Governance ever became overwhelmingly accepted in the Bitcoin community there would likely be a reduction in politicking, but under either theory some politicking would still exist.

In Near-Unanimous Social Consensus Governance, people will argue about whether a change has near universal consensus or not. Those in the majority will try to argue that those in the minority are being so irrational that their objection shouldn't count against consensus, and those in the minority will accuse those in the majority of trying to subvert the social consensus agreement.

In Market Governance, people advocating hard forks will spend a lot of time trying to persuade others of the merits of their forks. However, without both sides arguing about how the decision itself should be made and claiming that the other side is unethical because of how they want to decide the issue, a lot of the rancor would likely disappear. The amount of politics between different forks would probably look like the amount of politics between Bitcoin and Ethereum, where each camp mostly believes that the persuasion tactics of the other camp are at least ethical.

Note that it is impossible to completely eliminate politics from cryptocurrencies, since money's value and usefulness depends on network effects, which is based on the currencies people choose to use, which is something that can be influenced via persuasion.

Aren't we already in a Market Governance situation? After all, people can hard fork right now if they want to
It's impossible to totally escape governance by the market, as long as people are free to fork and use whichever cryptocurrency network they want. However, we currently have a large part of the Bitcoin community advocating Near-Unanimous Social Consensus Governance, which attempts to put a social barrier between protocol decisions and the market process of a hard fork occurring and market forces resolving the dispute through the price and usage of each chain. This barrier works by people using social pressure to encourage people to not support any controversial hard fork, or claiming that others are unethical for advocating controversial hard forks.

The main message of Market Governance advocates is "If everyone eases up off all this social pressure against controversial hard forks, things will work out well. The market isn't as scary as you think. Bitcoin will be able to adapt more quickly while also preserving its important properties."

Is there any way to minimize the downsides of hard forks?
Hard forks should be done in a way that minimizes deception, and strives for everyone being able to make an informed choice about which network they prefer (or everyone being able to delegate this choice in a way they're happy with).

Hard fork developers should try minimize collateral damage where possible. For instance, hard fork code should make replay attacks impossible, and prevent the original chain from orphaning the new chain if it ever overtakes it. Hard fork authors should also work with SPV wallet developers to ensure that SPV users can make an informed choice in the event of a hard fork.

What is it about hard forks that makes Market Governance supporters think they are fundamentally ethical?
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 some key properties, using 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. They wouldn't 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 be more confused than necessary. They wouldn't realize the connection between Foocoin and Bitcoin and would lose a lot of context. 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 if listeners learned of 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.

Are hard forks "attacks", where promoters of the new chain try to forcefully take over the network?
Because hard forks give every user a choice about which network to join, they are not inherently forceful.

It is possible for hard fork supporters to use force if they go out of their way to do so. For instance they might 51% attack the original chain. This is not in line with the philosophy of Market Governance because it prevents users from making a voluntary choice.

What about when hard fork supporters deceive people about the effects of their proposed fork? Isn't that unethical?
Yes -- if you think deceiving people is generally unethical (a reasonable position), then these things don't magically become ethical when part of a hard fork campaign.

If you pay attention to most people's criticisms of hard forks, you can generally trace back their objections to a claim that the hard fork is being done in some sort of deceptive way, or being done in a way that goes out of its way to cause unnecessary harm to users.

Market Governance supporters don't claim that all hard fork attempts / tactics are ethical, just that hard forks are ethical when they are free of deception and they make reasonable attempts to avoid causing unnecessary harm.

If the original network is much smaller after a fork, aren't its users essentially forced to join the new network because of network effects? Isn't this unethical?
if almost all Bitcoin users follow the new fork, the users who don’t like the new fork are in a bad situation. They can stay on the old fork but the value and usefulness of their coins on that fork are reduced. They can join the new fork, but they apparently don’t like something about the rules of the new fork. These people were better off before the fork.

Imagine a situation in which there was no fork. Instead, the majority of Bitcoin users just decided to sell and their coins and stop using Bitcoin. The users who still want to use Bitcoin are worse off, and their coins are less valuable because they’ve lost a lot of network effect and demand for bitcoins is reduced. Is this unfair?

If you think that’s unfair, what is the solution? Should Bitcoin users be able to prevent other Bitcoin users from selling their coins, or from leaving the network?

Market Governance supporters generally believe that no one has a right to force other people to provide them with a network effect. Other people might join your network, and you might benefit from that, but you don’t have a right to make them continue to benefit you. People might make you worse off by leaving the network, but they never promised you they would use it forever.

Imagine you have a girlfriend. In some sense you are providing each other with a network effect. You both enhance each other’s lives. One day your girlfriend decides to leave you for another man. She has withdrawn her part of the network effect and your life is now worse than it would have been if she didn’t leave. It should be clear that just because you’re worse off because she left, that doesn’t mean her leaving was a violation of your rights or somehow unethical.

When you use any currency you’re taking a risk that other people will value it less or use it less in the future.

Description of why we shouldn't fetishize the current software rules
Following Bitcoin's current validity rules isn't good for its own sake -- it's a means to an end. Bitcoin software is a tool to make it easier for people to maintain a shared ledger with properties that they like: resistance to censorship, limited coin supply, etc.

Imagine a magical ledger which could guarantee the properties above, as well as perfect privacy, no transaction fees, infinite throughput, and the best scripting language that you can imagine. The magical ledger requires no proof of work. Transactions are ordered according to when they’re first seen by the magic ledger, instead of via mining. Double-spends are impossible.

Assume there is zero chance that the magical ledger could ever behave in a way other than as the perfect ledger described here.

Suppose we know the magical ledger will come into existence on May 1st 2017, and everyone who owns bitcoins at this time will get a proportional amount of magical ledger coins.

If such a magical ledger existed, would it still be important to run the Bitcoin software?

The reason people run Bitcoin software is that it’s currently the best way for a group of people to maintain a shared ledger with the properties that are important to Bitcoin users. If it were possible to maintain this shared ledger in a sufficiently better way, Bitcoin software would be pointless and people would stop using it and stop valuing its tokens.

I'm still not sure how I feel about Market Governance. Where can I read more?
Two of the most prolific and clear writers on the theory of market governance are the reddit users Capt_Roger_Murdock and ForkiusMaximus. Click on their names to browse their comments and posts.