Too soon?

The EOS fiasco suggests the world isn't quite ready for on-chain governance

Our weekly opinion piece and overview View this email in your browser   CoinDesk Weekly is sponsored by  July 1, 2018 Human failings   The EOS disaster offers a strong reminder of how entrenched human mistrust can be difficult to overcome, suggesting it's too soon for on-chain governance to work, Michael J. Casey writes. Read more in THE TAKEAWAY below.     TOP TRENDS ON COINDESK Eye on zcash Zcash successfully completed its first hard fork: the Overwinter upgrade was activated at 00:42 UTC on June 26 on block No. 347,500. The changes themselves were minimal, intended to prepare the network for the Sapling upgrade scheduled for October. But the days before the hard fork were somewhat worrisome, as one of the developers, D. Jane Mercer, used the moment to threaten to launch a new coin if he didn't get additional funding to maintain WinZEC, a Windows-based zcash wallet. However, community members reached out to fund the developer, and zcash is rolling toward Sapling with a new two-year roadmap. High on the agenda is researching steps toward removing transparent transactions from the protocol, so users will use the platform's shielded "z-addresses" by default and balances and actions will be invisible to observers. Now the community needs to decide on other important questions, such as how to deal with freshly introduced ASIC mining chips for zcash and other issues, some of which are going to be highly contentious, as the cryptocurrency's creator, Zooko Wilkox, acknowledged during Zcon0, the first Zcash Foundation conference in Montreal. Regulatory blotter It was a busy week for regulators and law enforcement in the crypto space, as governments around the world took a variety of steps to tighten their supervision and oversight. The South Korean Financial Services Commission told banks that have cryptocurrency exchanges as customers that they must monitor all accounts of such businesses. Previously, the banks only monitored the accounts used to hold traders' funds, but not the operating accounts for the exchanges' own money. This can open the door to money laundering, as some exchanges were noticed moving investors' funds to their operating accounts, the regulator fears. Similarly, the Bank of England warned the U.K.'s financial institutions to proceed with utmost caution when taking on exposure to crypto-assets, given the risks of market manipulation, money laundering, terrorist financing and reputational damage.   Huobi Pro, the world's third largest exchange by 24-hour trading volume, decided to cease service for customers in Japan, likely because it's not registered with the country's Financial Services Agency (FSA). Earlier this year, Huobi Pro announced a partnership with SBI Virtual Currency – a licensed exchange – to launch a regulated platform in Japan, but the alliance dissolved in March.   U.S. law enforcement seized another big batch of bitcoins: 4,000 of them (worth about $24 million), which are believed to be the proceeds of illegal drug sales on the dark web. The funds were confiscated from Ryan Farace and Robert Swain, who were indicted in Maryland for manufacturing and selling drugs. France weighed in on the case of Alexander Vinnik, who is accused of money laundering through the cryptocurrency exchange BTC-e. While Russia and the U.S. are trying to get Vinnik extradited from Greece and he has maintained his innocence, France announced it was going to put Vinnik on trial for "cybercrime, money laundering, and membership in a criminal organization and extortion," and is seeking his extradition, too. And finally, some encouraging regulatory news for the industry: The China Banking Regulatory Commission (CBRC) published a working paper suggesting that domestic regulators introduce licenses for crypto-related activities. Last year Chinese regulators banned ICOs and fiat-to-crypto trading. See all CoinDesk stories  ⭐ CoinDesk Weekly Sponsor ⭐   Smarter crypto investing. Whether you are hodling, trading, or researching, our comprehensive data sources, insights and sentiment analysis help you understand trends like never before. Get clarity in an increasingly complex market. Ignore the noise and focus on what's important. Learn More QUOTE OF THE WEEK "I've heard that Corda stands for Consortiums Only Rarely Deliver Anything."  – Pete Randall, CEO of SETL, taking a dig at enterprise blockchain consortium R3. (To be fair, others are now building on R3's open-source Corda platform.) THE TAKEAWAY Michael J. Casey is the chairman of CoinDesk's advisory board and a senior advisor for blockchain research at MIT's Digital Currency Initiative. Blockchain governance is hard. That's the only reliable conclusion to draw from the chaotic, contentious rollout of EOS, the $4 billion project whose consensus model was touted as a way to enable smoother governance and scalability in a blockchain industry beset with conflicts and decision-making gridlock. First, it took longer than expected for the EOS community to elect the network's 21 block producers, which are paid $10,000 a day to validate transactions. Then, the EOS Core Arbitration Forum, a body set up to resolve disputes, sent out a memo ordering those block producers to freeze 27 supposedly sketchy-looking accounts. Concerns immediately arose that the ECAF was arbitrarily censoring participants, inevitably raising accusations of centralized control and putting chain immutability into question right at the outset. As an ECAF representative threatened lawsuits against one block producer, and as a separate fake document purporting to be from the arbitration body appeared, one New York block producer threw up its hands and refused to participate. Now, after Dan Larimer, CTO of founding company Block.one, called the ECAF's order a mistake and argued that its handling of the problem did more harm to confidence in EOS than any lost funds that the suspect accounts might have stolen, his company wants to rewrite the entire EOS Constitution. Just three weeks into the launch, the spat has provided a popcorn-worthy spectacle for commentators on Crypto Twitter. But, in reality, as a way to assess on-chain governance mechanisms such as EOS's delegated proof-of-stake (DPOS) consensus mechanism, there's a lot more at stake (excuse the pun) than entertainment. Along with saga at Tezos, another very well-funded on-chain governance project, which was rocked by disputes between the founders and the first director of the foundation overseeing its $243 million war chest, the EOS disaster offers a strong reminder of how entrenched human mistrust can be difficult to overcome. To offset the mistrust there must be a sufficient store of shared community trust in whatever mechanism or institution is in place to resolve those problems. That's the case whether the overall system is described as "decentralized" or "centralized." The problem is that when large amounts of money are involved, forging that common store of trust in the dispute resolution mechanism is especially difficult. The best laid plans... I'm actually sympathetic to the creative efforts of the Tezos and EOS founders – as well as those of a host others, including Decred, NEO and Cardano. In exploring protocol-level solutions such as voting and staking to enable some level of internal, functional democracy, they are trying to help blockchain communities make orderly decisions on important changes and upgrades and to avoid the contentious disputes and chain splits that have rocked bitcoin, ethereum and others. I'm not willing to say that on-chain governance won't ever work – or that our only choice is to either live with disorder, acrimony and gridlock or turn to external legal solutions that expose user identities and require a dependence on external government bodies. But I think we are getting a very clear demonstration that it's very difficult to design the right algorithm to overcome the toxic mix that money and mistrust create. We should note that the ECAF, which was formed in the midst of forum discussions among EOS community members before the launch, was conceived as a solution to these problems. Its existence reflects a recognition that disputes would arise and that an off-chain mechanism was needed. But it was very poorly put together, with unclear rules and processes for arbitration. The question is: Would it have been better designed, more capable of earning the trust of all participants, if the community wasn't founded on a kind of utopian-like blind faith in the DPOS mechanism? In other words, the root of the problem may be the unreasonable claims being made by on-chain governance proponents. As it is, the reliability of the DPOS mechanism was tested by the size of the EOS money pot. The giant fundraise fueled expectations of high valuations, which in turn stoked greed and mistrust. It fed the perception, right or wrong, that those who obtain power and influence inside the EOS network might be able to game the system. Larimer, others from Block.one and many EOS fans swear by the various checks and balances intended to protect users from overly powerful block producers: that it requires agreement among 15 of the 21 block producers to reverse transactions; that ongoing voting holds them to account; and that there's always the option (or threat) of a fork. And yet, despite all that, the system has clearly generated mistrust and, ultimately, dysfunction. And that's not for nothing. While he may have been biased against EOS, there was sound logic to ethereum founder Vitalik Buterin's warnings in a blog post three months ago of the risk of bribes and collusion among block producers operating across different jurisdictions. Money and power breed corruption. Always. Buterin's main point, one that he made in support of his Ethereum developer colleague Vlad Zamfir's critique of Coinbase co-founder Fred Ehrsham's impassioned plea for protocol-based solutions to bitcoin's and ethereum's problems, was that on-chain governance won't work. In terms of where the technology currently stands, I think that's true. The wellspring of trust in these mechanisms isn't yet strong enough to overcome the problem of cross-user mistrust. The solution, for now So, what to do? Bitcoin's drawn-out block-size debate and the contentious hard fork that resulted from it presented an image of dysfunction that undermined mainstream confidence in the technology. And in ethereum, where there has a long been a clearer sense of identifiable leadership, Buterin is himself often accused of having too much CEO-like power. (The slide in ether's price when he was rumored to have died in a car crash illustrated the problems of perceived centralization that have persisted around ethereum ever since Buterin and others supported the hard fork to rescue funds lost in The DAO attack of 2016.) Well, for now – and this will be anathema to crypto-anarchists and some blockchain libertarians – the solution likely lies in recognizing the limits of the algorithms and  relying instead on human-led, legally defined institutions for dispute resolution and off-chain governance. While I have been a constant critic of permissioned blockchains, especially of the risk that the consortia that run them can act as colluding gatekeepers to curtail innovation and hold users hostage, they are popular among companies precisely because they operate within a recognized legal structure that they're comfortable with.  Legal certainty is valuable. The failure of The DAO taught us that code is not law. By defining it as a system in which the software superseded all other legal recourse, that project's founders created a model that allowed the thief who destroyed it to argue, quite reasonably, that he or she was not acting illegally. Yet those who lost money wanted recourse, which is how ethereum ended up with its hard fork. The solution, for now, lies in forming well-designed, trusted mechanisms that reside within a predictable legal framework and which can resolve disputes through fluid, lightweight arbitration rather than being bogged down in courts. They carry the weight of law, but try to avoid the process of it. Key here are the words  "well-designed, trusted." Lightweight, off-chain arbitration might have been the intent of those who created the ECAF, but it was not well-designed and clearly hasn't earned the trust of all actors. It's not at clear how social consensus was formed in support of it. Here, the internet's governance offers a model, as father-and-son team Don and Alex Tapscott laid out in a useful assessment of the outlook for blockchain governance for The World Economic Forum. The Internet Corporation for Assigned Names and Numbers (ICANN), the Internet Engineering Taskforce (IETF) and the Worldwide Web Consortium (W3C) have worked fairly well as trusted avenues for governance and dispute resolution. Understandably, the United States' historical influence over ICANN has been a bone of contention. Yet, even so, the multi-stakeholder structure of these organizations has mostly assuaged concerns that any one party, government or otherwise, has excessive power of the rules by which internet real estate is managed. Blockhains, with anti-corporatist, decentralized principles at their heart, can't and shouldn't try to emulate the process by which these internet bodies were formed, which relied upon the bargaining positions of different governments in international forums like the United Nations. But there's still much that can be done by standards bodies and NGOs to forge consensus among a variety of stakeholders in this industry. (The W3C and other standards bodies are already seeking to establish authority here.) Does this mean immutability and censorship-resistance are impossible? Yes, perhaps, if you think in absolute terms. But these were also aspirational objectives, not absolutes. What matters is a system that works in the service of the widest possible array of users. And, as of now, on-chain governance models like that of EOS clearly don't. – Michael J. Casey Share Tweet Beyond CoinDesk...   OTHERS ARE TALKING ABOUT New York Times: The paper offers a wide-ranging package of blockchain explainers and overviews for the introductory reader trying to get a bead on this complex and multifaceted topic. There's a slang glossary, surveys of how industries and governments are exploring blockchain, an analysis of the main impediments to adoption, a most influential people list (wonder where they got that idea?) and much more.   Computerworld: There will be 50 billion connected internet-of-things sensors and devices in the world by 2022. Blockchain technology may be the best solution to operate these vast networks, provide secure access to devices and support supply chains, this article argues. Knowledge at Wharton: Blockchain is a disruptive technology, but is it a real revolution? Kevin Werbach, a Wharton professor of legal studies and business ethics, is wondering if people are going to use it for something really world-changing, "other than to get rich, to make a point, or to avoid law enforcement."  Wall Street Journal: City agencies in Austin, Texas, are testing a blockchain-based service called MyPass to store the documents of homeless people receiving help from the municipality. Losing IDs is a disaster for homeless people, who in many such cases are denied assistance. In a new system, documents can be accessed via cell phone, computer or text message.  WHAT WE'VE BEEN UP TO We're going to be relaunching the CoinDesk Daily as Blockchain Bites. This will move from a 9AM EST send to 12:30PM and will provide more in-depth curation. Click the "Update Your Preferences" link at the bottom of this email to subscribe.  We're also launching a brand new Markets Daily newsletter, which will go out at 9AM EST Monday thru Friday. We'll be diving deeper into the markets and giving traders a head start on what's moving prices. Stay tuned for more information. And Consensus: Singapore is starting to gain speed. We're confirming speakers and we'll begin making announcements in the coming days. Be sure to register and join us as we take Consensus on the road.  Send feedback on this newsletter to marc@coindesk.com. Follow @CoinDeskMarkets for price updates and market analysis. And everyone interested in keeping up with this rapidly evolving field of technology should follow our main Twitter handle, @CoinDesk.    Thanks, as always, for reading! Until next week... Copyright © 2018 CoinDesk, All rights reserved. You're receiving this email because you subscribed for updates on our website. Our mailing address is: CoinDesk 636 Avenue of the Americas New York City, NY 10011 Add us to your address book Want to change how you receive these emails? 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