Governance: Exit, Voice and differing paths to sound money.

Decision making rights can be explicit or implicit. Not defining community governance processes doesn’t mean that power isn’t vested somewhere. While Bitcoin decentralizes monetary policy away from nation states, the lack of clarity in its decision making process has the potential to create new hidden power structures. While Bitcoin as a Digital Gold analogy works in many ways, this thesis needs to account for the fact that Bitcoin is a software project with a small number of unelected developers with access to the code base. Bitcoin holders rely on an unwritten “social contract” with the developers, although this term itself is not defined anywhere. These ambiguous decision making processes may create unaddressed risks in the medium and long term:

In the medium term, if Bitcoin needs to upgrade its cryptography, who gets to decide the process of changes? In the long term, will nation states cede monetary policy making to the Bitcoin network without a governing constitution?

Traditional fiat money is criticized in how it creates unfair advantages for governments whose currency enjoys reserve currency status. If the US or China decide to devalue their currency, every other country holding their reserves in USD or RMB get their purchasing power debased without recourse.

To support a Global Store of Value thesis where nation states will one day hold crypto assets in their reserves, Decred provides a unique store of value where holders of money get a seat at the governance table, along with a guarantee not to be debased.

Without Voice, Exit becomes a threat to network effects

Bitcoin and Decred share fixed supply and sound money characteristics, but take different approaches in incentivizing loyalty. While holding Bitcoin provides an upside in its capital appreciation and an uninflatable asset, holding Decred provides additional benefits of having a voice in the ecosystem’s decision making process.

Economists and social scientists like Hirshman Albert have studied the effects of voice and exit on loyalty. If cryptocurrency adoption eventually reaches billions of people, there will be a large variety of voices and opinions. We need to solve for governance in cryptocurrencies now, so that we have a mechanism to resolve disagreements two decades from now. If Bitcoin represents a sound money exit from inflationary government issued fiat currencies, Decred represents sound money with voice.

Bitcoin’s design is brittle in order to be apolitical, and does not allocate voice to token holders in its decision making process. By contrast, Decred makes decision making transparent and sets high thresholds to retain community consensus, in order to co-ordinate adaptability in the long run. This bodes favorably for retaining network effects.

Bitcoin’s approach to resolve community differences is for people to exit the network. Decred’s approach to resolve community differences is for people to buy more $DCR, so that they can have a bigger voice at the decision making table.

Much like traditional businesses study the concept of leakage, crypto networks need to study how community splits (forks) erode their network effects. When one group exits a crypto network, it implicitly weakens the value for all other token holders. Decred is uniquely positioned to be fork resistant, both technically and socially.

From a technical design, Haon has done some great analysis on how Decred is more fork resistant than networks like Bitcoin and Ethereum.

Over a long term horizon, what further differentiates Decred is its social resilience, in how it creates behavioral incentives for network loyalty. Specifically, Decred’s design of empowering $DCR token holders with voting power over its network, and allocating access to a burgeoning treasury fund are forms of switching costs. Decred holders are incentivized to retain their $DCR ownership, as selling the token implies surrendering governance rights over the ecosystem and the treasury fund. You can leave the network, but you can’t take the treasury with you. Holders are socially and financially incentivized to remain loyal to the Decred ecosystem.