By Juan Galt
In a recent LetsTalkBitcoin podcast with Andreas Antonopoulos, Pamela Morgan discussed the facts and challenges posed by the legendary DAO hack with Ethereum insider Taylor Gerring and Attorney Brian Klein.
All was well and good on almost everything, and in my humble opinion they did an excellent job of exploring game theoretical costs and benefits or this path of action, or that one.
Should Ethereum soft fork? Should it hard fork? Who is in the wrong and was it really a ‘hack’? Are the ‘Terms of Agreement’ paperwork legally binding? If you want to get caught up on the details and exciting, yet foggy swamps of Ethereum’s current fork in the road, then this show will serve you well.
Here’s where they dropped the ball, though. It’s a somewhat tangential issue, but it matters. At some point during the second half of the show, an audience member asked something along the lines of:
If the Ethereum community has the power to undo a certain transaction or block, and effectively bailout a failing venture on top of its platform. The what is the difference between Ethereum and a Government?
The well-educated folk on the show had nothing. Pamela quite literally said, “I got nothing.”
I was stunned and quite frankly, facepalmed for a moment. Isn’t the cryptocurrency space mostly libertarian? Has the word ‘Governance’ become so prominent in this space that we’ve forgotten the difference between a highly competitive technological space and the monopolistic nature of government?
I think the question posed by the audience member is very important, and I think the lack of an answer by the hosts shows how new the territory is that we are exploring.
I’ve personally struggled with this issue. Blockchains are such a mind blowing, world-view changing technology that everything you thought you knew about systems and power dynamics, about communication and money, gets shredded by Satoshi’s brilliant imagination and reconstructed with subtle yet deeper resolution.
Ethereum Is Not a Government, It Is a DAO
Alright, let’s get to it. Here’s an answer that was not given.
Neither Ethereum, Bitcoin or any other decentralized cryptocurrency, or relatively small company or human organization or corporation are governments. Because none of these function like cartels.
Governments are, at the end of the day, a protection racket. Ethereum is not. Bitcoin is not.
Governments pretend to offer us services. Want some security? Call 911. Want education? We have public schools! Feeling sick? Have some ‘free’ healthcare.
Oh yeah, you have to pay for all of it, whether you use it or not.
But what if you don’t want any of their services?
Security? No thanks, I’ll arm myself, or hire a security company. Public schools? Yeah, I think I’ll just home school. Free healthcare you say? A waiting list you say? I think I’d rather just pay for it up front or get some sane insurance (oh wait, that’s highly regulated and monopolized as well).
And don’t even dream of competing with them, because you know what is going to happen.
The same armed goons that would be allegedly protecting you, will come in through the back door wearing an IRS badge, and say: “Hey, you owe us some ‘taxes.’ You are going to pay whether you like it or not.”
And if you resist, you are off to the cages or worst, under the dirt.
This happened to Peter Schiff’s dad, a very educated tax activist.
It’s a fact and we all know it.
Ethereum does not have an IRS. Bitcoin Does not have an IRS. If you don’t like what a cryptocurrency (DAO for short) offers, you just sell. And no one’s the wiser. No one will come after you, making you an offer that you can not refuse.
That’s a true story.
More than that, cryptocoins (or rather DAOs) are completely opt-in. There’s no way to argue today that Bitcoin or Ethereum, are governments because they are highly esoteric alternatives to the mainstream financial system. They are voluntary and not coerced.
They are one option in a spectrum of many possible financial technologies, alternative investments and decentralized databases. If Ethereum became as mainstream as the USD one day and started hiring thugs to force people to use it as ‘legal tender’ then it would be a government.
What Is Governance?
All that said, I get the confusion. And I get it because of what many cryptocurrency enthusiasts have recognized since Bitcoin’s epic blocksize debate. ‘Governance,’ this thing that seems to look and sound so much like ‘Government’ really, really matters.
But what is governance? Well, the easy answer this: governance is the study and modification of systems, in order to reach a desired power dynamic.
In financial systems like Bitcoin, the ideal power dynamic is one that achieves censorship resistance (at the very least). That is best served by some amount decentralization. It is a balance between miners and mining pools. Between the needs and expectations of users, service providers, developers and the profitability of securing the blockchain.
The name of the game in this example is keeping mining pools with less than half of the mining power, etc.
This is why I say that Bitcoin, Ethereum and every other altcoin and 2.0 platform out there are DAOs. They are literally Decentralized Autonomous Organizations.
Ethereum is just one big DAO with smaller DAOs on top of it.
So is forking Ethereum a Bailout?
Well, this question is tricky.
No matter what action the Ethereum community takes, even with consensus, the damage has been done by the DAO hack.
If Ethereum does nothing and lets the hacker take the money, then it will turn into an ugly mess of DAO wars, trying to hack each other like we saw the past few days. Until all the 140 million are completely drained. A nasty sight that would be.
If Ethereum keeps the soft fork and simply freezes the money forever, not letting the ‘hacker’ nor the investors have an incentive to make poor decisions, then that’s a $140 million lesson.
If the Ethereum soft fork works the ‘hacker’ in the rear and returns the money to investors, by undoing a transaction in ETH’s history, then its claim to immutability will be compromised.
This would also prove that under the right circumstances, Ethereum as a community might be willing to change history, and that could attract the wrong kind of powerful attention.
No matter what, Ethereum will pay some cost for this, as an asset and as a community. The question is how to pay it and what is less costly.
If Ethereum were the size of Bitcoin right now, I’d opine that there should be no intervention. It’s simply against the stated values of the Eth DAO.
But Ethereum is ten months old. It has not even matured into Proof of Stake, and having 5 to 14 percent of the total ETH controlled by an explicitly malicious party, could indeed spell doom for Ethereum’s security or at least credibility. At the very least, it is a terrible way to begin a transition to proof of stake.
So Ethereum is still beta, it is still young and this is the only reason I can think of to soft fork and even hard fork that ‘hack’ out of history.
The lesson about how secure smart contracts need to be has been learned either way.