The concept of introducing a new currency as a means for financing protocol advancement is arguably one of the most captivating economic breakthroughs to emerge from the cryptocurrency arena. Over the last two decades, we have witnessed an increasing centralization in the frameworks that support the internet, highlighted by the emergence of proprietary messaging platforms and social media networks like Facebook. A significant factor contributing to this trend has been the necessity for monetization; if Facebook were cryptographically secure and decentralized, developers would lack a method for profiting from data mining their users’ behaviors and claiming a 30% share of their internal currency. Consequently, decentralized alternatives to Facebook have largely fallen short due to insufficient institutional backing and funding. However, with decentralized protocols, we have uncovered a fresh approach to monetizing them: generating internal assets and selling them to finance protocol development.
Broadly speaking, we currently recognize two categories of “internal assets” that can be marketed in this manner; firstly, there is the notion of creating an internal token framework, a crypto-fuel with a fluctuating value that holds significance within the network, and secondly, one can implement name registrations; for instance, a decentralized Twitter could sustain itself by integrating its own decentralized username registration system akin to Namecoin and selling off names composed of 1-4 letters. This innovative monetization strategy is robust, having already demonstrated several successful implementations in the first of the two approaches mentioned, but it is also remarkably non-intrusive – it demands no licensing arrangements, proprietary software, crippling installations, or violations of privacy, and indeed, no one actually has to explicitly “pay” for anything at all (when you acquire tokens, you are merely exchanging them for a different asset, which can readily maintain its value relative to other assets). Nevertheless, within this framework, one concern that numerous individuals have raised pertains to the issue of forks. In essence, if a new decentralized protocol is released that uses a token system, why wouldn’t someone else introduce a fork featuring either their own token system or a token system linked to an asset with an existing user base? Furthermore, if a decentralized Twitter is launched with a built-in name registration system, why wouldn’t someone create a fork that directs users to their own name registration system or even the original Namecoin?
In conventional business, there are two potential solutions to this dilemma. One option is to abandon the notion of making everything open-source and retain at least the most recent version of the client as proprietary. The other option is to provide the protocol free of charge and subsequently sell services. Naturally, both strategies come with their own well-recognized shortcomings. In the realm of a decentralized blockchain application, most of the advantages of decentralization vanish when the code becomes proprietary – utilizing a proprietary mining algorithm, for instance, eliminates any possibility of proving that it lacks a backdoor for its developers, effectively akin to the developers simply operating a centralized server and expecting the community to place their trust in them. The second method, providing services, is similarly flawed; firstly, the revenue is typically vastly inadequate, and secondly, it incentivizes the organization to produce merely a minimal decentralized protocol in order to sell centralized services on top of it, rather than cultivating an entire decentralized ecosystem.
Numerous decentralized projects are following neither of these tactics; for instance, Ethereum itself is entirely open source, and has been since even before its public launch. A variety of protocol organizations, including our own, aim to evolve into “decentralized autonomous organizations”, which inherently entails a significant level of transparency. Given this, what constitutes a decentralized protocol’s “moat” against forks? What prevents another group from appropriating all our code and research, essentially assembling their own version of the blockchain, possibly with one or two superior features (or simply possessing a substantial endowment and investing it all into better marketing), thereby outpacing us? This inquiry poses a complex challenge, yet it offers several intriguing insights, both regarding Ethereum specifically and decentralized protocols in general.
On Flimsy Moats and Dictators
To address this query, it is essential to first appreciate that, within the domain of tech firms and especially social networking startups, a considerable number are essentially supported by little more than social consensus. Theoretically, it’s entirely feasible for all employees at Snapchat, Tinder, Twitter, or any comparable startup to suddenly agree to resign and establish their own venture, completely rebuilding all of the software from scratch within months, and quickly constructing a superior product. The sole reason why such companies hold any valuation whatsoever is due to a pair of coordination dilemmas: the challenge of getting all employees to resign simultaneously, and the hurdle of persuading all customers to concurrently transition to the new network. In the setting of a service like Dropbox, the latter problem does not exist; since Dropbox is equally beneficial to each individual whether one other person is utilizing it or a million, there is no reason why people can’t migrate over gradually. However, in the context of a social network, which is of no use unless everyone else is participating, this issue is fundamental.
In the abstract, this may appear as a tenuous rationale for the valuation of tech companies; when contemplating something that signifies billions of dollars in worth, one typically anticipates that value to be supported by tangible assets such as physical resources or governmental power, rather than merely an ephemeral embodiment of the fact that it’s challenging for large cohorts of individuals to abruptly switch from one social arrangement to another. In truth, however, even physical assets and governmental authority rely on nothing but a social coordination dilemma – if 70% of a dictatorship’s subjects were to rise up simultaneously against their ruler, the regime would likely be dismantled quite swiftly, and yet most dictators, even those presiding over harshly oppressive regimes, remain comfortably ensconced in their high seats, knowing that such an occurrence is highly improbable.
Given this theoretical backdrop, what precisely are the social coordination challenges supporting a decentralized blockchain? What is this “moat” that underpins the value of the “official” Ethereum blockchain or Mastercoin state transition system, and ether as a medium of storing value and paying for transaction fees, in contrast to alternate clones like “aethereum“? More specifically, what are the critical elements that render the original version of a particular decentralized protocol superior, especially when all of its foundational features can be effortlessly replicated, and those enhancements can be implemented as soon as a group identifies even a single weakness in the original (in the case of Bitcoin, for example, one can trivially enhance the Bitcoin protocol by eliminating the stipulation for multisig spending transactions to have an unnecessary zero in the spending script code, which is an anti-feature.which was introduced by chance)? It appears that there is indeed a substantial amount.
Teams
To begin with, every initiative has an essential development team. In reality, this element is often more robust in the context of a decentralized token system compared to a conventional tech corporation. In a traditional tech firm, there could be only a limited number of individuals holding shares in the company and thereby motivated to remain committed to it and witness its success. Conversely, in a decentralized token ecosystem, there are many individuals, potentially dozens or even hundreds, possessing tokens linked to the project; notably, numerous individuals tend to prefer receiving their compensation primarily in tokens. Take Ethereum, for instance; currently, there are sixty-eight individuals on the list who will be compensated with ether for their contributions, and this number is expected to rise over time. Moreover, all of these tokens are, naturally, non-tradable until the protocol officially launches, meaning all token holders are strongly motivated to strive for the optimal performance of the system. Therefore, the team, which consists of the individuals who have the most knowledge regarding the protocol’s functioning due to their development experience, is a decentralized project’s principal asset that competing spinoffs cannot readily “fork” and imitate, and it is this team that will significantly contribute to the project’s overall “moat.”
Network Effects of Exposure
The most straightforward explanation for why individuals prefer the original blockchain over a fork is rather simple: it is the default option. People first encounter Bitcoin, prompting them to visit bitcoin.org to download the Bitcoin client and use Bitcoin for transactions, rather than opting forBitcoin Scrypt. For similar reasons, individuals favor the official versions of most open-source projects rather than the multitude of forks available, buy music, books, and films instead of attempting to download them through torrents, and utilize popular Bitcoin wallets instead of lesser-known alternatives. Any fork of a specific protocol is bound to emerge after the original, making it significantly less likely to capture media attention.
Moral Pressure
Another crucial factor influencing why the original iteration of a protocol is more prone to receiving media coverage than a fork is simply public ethics: individuals feel that the developers of a project warrant compensation, thus a fork developed primarily to deny the developers this compensation is likely to be perceived unfavorably, or at least less positively, by many. This moral influence can be significantly robust, heavily contributing to the original protocol’s greater visibility; the most compelling empirical evidence of this may be the success of platforms like Netflix over file-sharing alternatives.
Conversely, if the original developers of a protocol begin steering development in an undesirable manner (e.g., implementing backdoors, introducing excessively invasive monetization strategies, or simply being overly sluggish), then the moral influence can swiftly reverse, potentially endorsing the first credible attempt to reclaim the project from its creators; following the previous example, a pertinent case here is the media reception of the Pirate Bay and Popcorn Time. Therefore, moral pressure can be both beneficial and detrimental to a decentralized protocol, and it is the duty of the protocol developers to ensure that the community’s opinion of their project remains favorable, serving as a critical check-and-balance to guarantee that the core team continues to advance the project efficiently and in a desirable direction.
Network Effects of Currency Unit Liquidity
A frequently cited argument against Bitcoin forks relates to liquidity, specifically market depth: smaller currencies are inherently less robust compared to larger currencies due to a lower number of people engaged in buying and selling them, resulting in significant price fluctuations if one attempts to sell substantial amounts. However, this argument only holds weight up to a certain threshold; once a currency attains a sufficient magnitude, it possesses adequate market depth to accommodate all standard usage, reducing the value of additional depth. Consequently, this network effect provides a reasonably strong advantage against forks with new token systems, which will initially present very low market depth, albeit at the expense of a slight disadvantage against forks that connect with existing large currencies via two-way-pegging mechanisms.
Ecosystemic Network Effects
A critical characteristic of decentralized protocols, and social protocols as a whole, is their capacity to cultivate ecosystems. For instance, in a social network, there exists a one-dimensional network effect: a social network gains usefulness with an increasing number of users. In the case of a currency, this effect becomes two-dimensional: a currency draws more participants if there are additional merchants, and vice versa. Once development efforts, security, and liquidity are factored in, this can expand to three to six dimensions. All these interconnections complicate the entry of a new social network version into mainstream acceptance since it essentially starts with nothing.
Regarding Ethereum, the closely woven nature of the currency system translates into a highly multi-dimensional network effect in various respects. A key aspect of the Ethereum architecture is the first-class citizen property of contracts: contracts can interact with, transmit and receive messages from, and maintain accounts with other contracts similarly to how external accounts do. This allows for the innovative assembly of extensive chains of contracts and applications, employing different contract types at each stage of the interaction sequence. For example, I could possess some shares in a decentralized autonomous organization (contract A), with these shares held on a decentralized market (contract B) within a multisignature account (contract C) to enhance security. The co-signer of this multisig account is concerned about quantum computing, therefore he utilizes custom cryptography (contract D) that is based on Lamport signature verification for authentication. The organization could then allocate some of its resources in a USD-pegged asset via a financial derivatives market (contract F), utilizing a blend of centralized and decentralized data feeds (contracts G, H, I), and internally implement a name registration system (contract J) to store all the functions it invokes. A solitary transaction could ultimately end up invoking all of these contracts multiple times.
Liquid markets for on-blockchain“`html
assets, fluid markets for message dissemination, alongside a strong ecosystem of DAOs, decentralized exchanges, financial markets, and data streams, all support one another and enhance the Ethereum blockchain’s strength. The Ethereum blockchain transcends being merely a blockchain; it constitutes one extensive decentralized computer where all elements are intricately interconnected, and each element offers supplementary tools for others to utilize.
Flaws and Assaults
This may seem a minor point, yet it holds significant importance. There is always a possibility that either the protocol or the client implementation may have some shortcomings. Despite the diligent efforts of Bitcoin developers, the bitcoind source code has encountered issues over the years, and on two occasions in Bitcoin’s history (notably, the integer overflow exploit in 2010 and the fork in 2013), such issues have led to a consensus failure requiring manual intervention. In theory, developers of every protocol strive to prevent bugs from occurring in the first place. However, in reality, there is always a risk that an oversight may occur, leading to a significant price drop of ten or twenty percent within an hour, requiring developers, miners, and large enterprises to swiftly coordinate a solution. Sometimes, such mistakes may not even originate from the protocol itself; a massive corporate or state-sponsored 51% assault or a globally coordinated distributed denial of service attack on the entire network are viable threats, necessitating special strategies to address them. Thus, despite the aspirations of peer-to-peer protocols to be fully decentralized, they significantly benefit from certain levels of institutional backing during crises – a support that the original developers, possessing the best understanding of the protocol and software, are uniquely suited to provide.
Protocol Advancements
Ethereum 1.0 is far from flawless, and during our conversations on the development roadmap and the Hard Problems of Cryptocurrency, we have been quite transparent about this. There are numerous methods to enhance blockchain technology, ranging from research into price-stabilized currencies to improved fee structures, alternative consensus mechanisms, and the ultimate goal of multi-blockchain architectures or SCIP. Nevertheless, the complexities involved in formulating the mathematics and subsequently executing these methods, as well as determining their feasibility, are so intricate that we have concluded there is a lengthy list of features we will simply not pursue for Ethereum 1.0. Accordingly, we have put in place a long-term roadmap that aims for the release of Ethereum 1.0 by Q4 2014 at the latest, and concurrently, we have begun initiatives to investigate the types of enhancements we can theoretically incorporate, particularly concerning scalability, with a vision to materialize them into Ethereum 2.0 around 2016. Ethereum 2.0 will utilize “ether 2.0” as its currency, where the primary initial mechanism for obtaining a unit of ether 2.0 is simply to verifiably eliminate a unit of ether 1.0.
Consequently, the currency within a protocol is founded not only on the utility and network effects of the current implementation but also on the assurance of improved future iterations of the protocol. Undoubtedly, altering cryptocurrency protocols can be challenging, and in practice, Bitcoin has proven to be particularly resilient to short-term modifications; however, more substantial re-architectures tend to be somewhat easier to execute than minor adjustments when considering the effort-to-effect ratio. We have already observed the Master Protocol implement several upgrades, and we are likely to witness Ethereum 2.0, 3.0, and perhaps even further advancements in the coming years and decades.
What’s the Purpose?
Ultimately, the most crucial question is, what is the purpose of a fork? In the context of Bitcoin, there are numerous motivations for forking the code – one might wish to introduce support for additional transaction types, alter the currency supply, replace the currency with a centralized alternative backed by the US dollar, or modify the type of cryptography employed. Nevertheless, if a protocol is appropriately generalized, there is simply no enhancement that cannot be replicated within the protocol itself. For instance, if one is utilizing Ripple, they can equally easily use Ripple to store XRP, cryptocurrencies, fiat currencies, local community currencies, or even Little Bobby’s Magic Token Points. Therefore, concerns regarding optimal monetary policy, the politicization or depoliticization of money, or many of the other discussions surrounding Bitcoin hold no relevance to the success of the Ripple protocol itself. In the context of Ethereum, the protocol features a versatile programming language, rendering the system even more adaptable: if someone devises a blockchain-based system that surpasses Ethereum in some manner (with the exception of secure near-instant block times), then someone else can seamlessly fork it back into Ethereum itself by simply implementing it as a contract. This fork would immediately leverage Ethereum’s ecosystemic network effects, enabling users to gain from both the enhanced feature and the capacity to interface smoothly and directly with an existing ecosystem of fluid markets, data streams, and DAOs. Through the utilization of this contract mechanism, Ethereum will be capable of encompassing side-chains of Bitcoin, Litecoin, and Dogecoin (yes, even Scrypt-based currencies can be transformed into side-chains via computational stack traces and an economically incentivized challenge-response protocol), name registrations, post-quantum cryptography, and an endless array of other features.
Thus, overall decentralized protocols occupy a fascinating position in the contemporary economy. On one hand, similar to Bitcoin itself, they can be seen as “backed by nothing” quite transparently. On the other hand, they possess a substantial backing that is difficult to displace; in practice, there are very few instances of any open-source software fork successfully unseating the original, both in the cryptocurrency domain and beyond. Nothing has dethroned Bitcoin, nothing has dethroned Litecoin, and nothing has dethroned Dogecoin. The only forks that achieve substantial community acceptance are those that introduce a significant array of new features, and such forks consistently manage to carve out their own distinct niche. Fortunately, we still have many decades ahead to observe precisely how the decentralized protocol ecosystem will evolve.
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