How Does Bitcoin Governance Work?

Bitcoin isn’t a static protocol. Bitcoin developers work to fix critical bugs and provide upgrades that will ensure that the protocol is resilient over time. Who decides which changes are made to Bitcoin’s code? Bitcoin’s decentralized nature makes it much more difficult to evolve than a centralized entity that can make decisions in a top-down fashion. The term “governance” does not apply to Bitcoin. It implies that leaders are acting as a proxy for the masses. This is not how Bitcoin works. While some blockchain-powered decentralized systems may include formal governance processes, such as voting for proposals on-chain and electing leaders, Bitcoin does not. 

The process of improving the Bitcoin protocol has a quasi-political nature in that all stakeholders must compete for power and influence. It’s not democracy, plutocracy, or any other form of the formal political system. The consensus-building process is what makes Bitcoin possible. It involves persuasion and deliberation, but all participants retain their own volition. It’s an opt-in system that allows everyone to choose their path. The choice of what Bitcoin will look like is up only to those who use it. The default culture among Bitcoiners is that the protocol doesn’t change unless necessary. This means that unless the majority of participants agree to a modification, there will not be any change. Those who want to change can always do so at their own pace. 

Understanding that Bitcoin is exactly what its users claim it to be, is a formalized process used to decide at the developer level what changes are required and how they should be integrated. This is how the Bitcoin Core client software is developed. This software is Bitcoin. It defines the rules for the Bitcoin protocol. 

What are Bitcoin Improvement Proposals (Bitcoin Improvement Proposals)? 

The use of Bitcoin Improvement Proposals is the way that Bitcoin’s code upgrades are formalized. These proposals are peer-reviewed, publically debated, and rigorously tested to establish a ‘rough consensus within the community. When most people agree that the objections to the proposal have been wrong, it is called rough consensus. 

After a rough consensus has been reached, the next step will be to integrate the BIP into Bitcoin Core’s Bitcoin software client implementation. One of the few core developers who have ‘commit’ access to the code repository can complete this step (meaning that they can upload the code on a public platform that is recognized by the community). Once the BIP is in the Bitcoin Core code repository, it’s time for the nodes (network of users) to install the latest version of the software client. This last step is crucial because it allows end users to retain full control over Bitcoin. 

The upgrade can only be activated if a certain threshold of nodes has been installed it. This is because the BIPs that are materially changing the Bitcoin protocol has a very high barrier to activation. BIP141 (SegWit), for example, required 95% of network miners to signal their support for the upgrade within a set period of 14 days. 

Most consequential BIPs introduce changes to the protocol that are ‘backward compatible. Backward compatibility is the ability of nodes to use the latest version of the software without affecting their compatibility with the older version. Backward compatibility gives nodes the final say on whether a proposal is implemented. Sometimes, a backward compatible update can be called a “soft fork.” 

What is a hard fork? 

A ‘hard fork’ is the only way to introduce a BIP that isn’t backward-compatible. Only nodes running the latest version of BIP are compatible. This means that all nodes in the community must agree to the new version. If one segment of the community refuses to install or run the new software it will result in two chains that can no longer communicate. Bitcoin Cash, the most important and consequential Bitcoin fork, was created in August 2017, after members of the Bitcoin ecosystem couldn’t agree on scaling methods. 

Who is in charge of Bitcoin? 

Although the formalized process of creating and integrating BIPs is form governance, Bitcoin evolves according to the broad consensus of its users. There are many voices to be heard, including developers, miners, exchanges, wallet providers as well as independent node operators. The participants are part of a dynamic power struggle that prevents any one group or person from gaining excessive power or influence. 

One could look at the fact there are only 100 developers who have contributed to the Bitcoin Core software client and conclude that this is the main driving force behind Bitcoin’s evolution. It is important to remember that at least 80,000 Bitcoin nodes decide which Bitcoin Core client to run. Developers can therefore be considered dependent on nodes. Developers who release software that is not compatible with the consensus of the nodes will be rejected by the network. The end users of Bitcoin, which number in the hundreds of millions, influence the node operators. If a wallet provider (who runs a node), starts running a version of Bitcoin that is not in the users’ favor, they can switch to another wallet provider. 

Another group of participants is the miners, who are often cited as having a large influence on the development of Bitcoin. This argument is that miners determine which transactions are included in blocks. Therefore, miners can control the network and hijack it. The threat of hijacking a network could, so the argument goes. This could influence the evolution and design of the protocol. However, miners are also obligated to nodes and ultimately end users, as discussed above. Because nodes, and by extension end users, can ignore blocks generated by miners not following the consensus protocol, they can ignore them. This scenario will result in another group of miners being able to direct their hashing power toward the consensus protocol. The block reward will provide an economic incentive to this other group of miners. The “renegade” miners will then be able to dedicate their resources to a version that most users don’t consider the real Bitcoin. The renegade miners are allowed to mine Bitcoins on their new network, but market participants will soon consider those Bitcoins less valuable, which could lead to a substantial economic loss. This means that miners are forced to conform to the consensus of all participants by powerful economic incentives. This interplay is why the Proof of Work consensus mechanism, which is used to ensure that Bitcoin is not hijacked or manipulated by an unrepresented group of participants, is so important. 



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