2. A Heuristic Model of Governance Factors in Online Services

It is useful to consider the governance of Bitcoin using a heuristic model of governance factors impacting user behavior in online services in general. This model differentiates between the components of code, state law, contracts and social norms.[12]

Figure 1. Oermann/Lose/Schmidt/Johnsen (2014), note 12: fig. 1, p. 18.

“Social norms” in this heuristic refer to all of those rules emerging from general tacit conventions in a society or norm sets developed by and applied in a specific social formation, such as the community of users of a certain online service. We sometimes find these norms codified as codes of conduct or (n)etiquette. These social norms are both established and executed by the social formation, which reacts to violations with social sanctions. In contrast, “state law” contains provisions for user behavior in online services stipulated by the state in codified legal norms, which are enforced by state institutions like courts and public authorities. “Contracts” in the case of online services are found mostly in the form of Terms of Service (TOS) and are for the most part laid down unilaterally by the service providers and executed through mechanisms like content removal.

While the above three forces on user behavior are fairly self-explanatory, the concept of “code” in this model is less clear. Harvard Professor Lawrence Lessig applied this concept to online user behavior in 1999 with his famous analogy “code is law.”[13] However, there still is no widely shared understanding of what is meant when we talk about “code” in the normative context of governance. Surely it is not just software source code, because software requires hardware in order to shape user experience. So we have to take the aspect of hardware into account, too. Furthermore, the source code alone does not help us understand how certain technology is used, nor does it explain the effect that technology will have on user behavior on a structural level. But we can look at the interfaces of technology and human behavior in order to analyze the affordances that the code (hardware and software) offers the user and the constraints it sets to them.[14] For our purposes, therefore, we refer to code as all the normative aspects of a certain technology, which encompasses more than simply source code.

So far we have established that all four concepts introduced above share a common quality: they constrain and shape user behavior. These predictions differ in their normative strength. If social norms, law, contracts or code provide the addressee with several possibilities for action (“If x is the case, you can do a, b, or c…”), they can be said to have minor normative strength. On the other hand, if they prescribe just a single course of action (“If x is the case, you must do y.”), they have maximum normative strength. Of course, all gradations of normative strength are also possible for each of the four factors. The four concepts also differ concerning the consequences in case of deviating behavior. If we look at phenomena of human interaction in online services, we will always find a complex structured normative background formed by these factors, on which the application potential of the services are realized by the users and on which their behavior is coordinated. This is what we call the governance structure.[15]

If we now consider Bitcoin in light of this model, we see that this cryptocurrency is conceptualized in a way that three of the above factors should and actually do just play a minor role in its governance structure—at least as far as this is possible without endangering the functionality of Bitcoin as a means of payment:

There should be no influence of law: Control by the state on payments, transactions and the underlying business deals should be prevented;

Social norms should be also prevented from having an influence on the behavior of Bitcoin users, at least as far as they concern trust in the institutions that act as the conduits for offline currencies. Bitcoin is designed to prevent any connection to the traditional, regulated financial system;[16]

And, because there is no central administrator in the system or any TOS that users have to accept, contracts are also not essential to governing how people use Bitcoin as a means of payment.[17]

So we can conclude that, owing to conceptual reasons, the central factor in Bitcoin’s governance structure is code. The primary way to govern user behavior and tackle practical challenges resulting from its conceptual shortcomings, therefore, is to adjust the code of Bitcoin.

The introduction of “multi-signature” transactions, through which an automated arbitration mechanism can be realized in the Bitcoin architecture, represents a prominent and interesting case of such an adjustment by a change of code. Bitcoin is a complex, decentralized technological system offering advanced network-based services that was able to adapt to a conceptual challenge through activating its own governance structure, and in the process creating a structure for resolving conflicts with deals and transactions.

With these reflections on the mission and function of the change of Bitcoin’s architecture in mind, we will now change our perspective to focus on the governance structure of Bitcoin, which enabled this change to take place.

[12] Deviating from Lessig’s model we do take the “market” into account as a factor of governance because a “market” lacks in itself a normative dimension from our point of view. Saying that “markets” are comparable to law and code analytically could lead to misunderstandings because it could invite comparisons between the “natural laws” of markets of macroeconomic theory and the “designed” norms of law and code. We think that it is more fruitful, therefore, to look at social norms, which function as a transmitter of normative predictions which have been associated with “markets” when approaching governance in online services on a structural level. For a more detailed explanation of this argument, cf. Oermann, Markus/Lose, Martin/Schmidt, Jan/Johnsen, Katharina (2014): Approaching Social Media Governance. Berlin, HIIG Discussion Paper Series, (May 2014), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2498552 (retrieved September 10, 2014).

[13] Lessig, L. (1999): Code and Other Laws of Cyberspace. New York, U.S; Lessig, L. (2006): Code: And Other Laws of Cyberspace, Version 2.0. New York, U.S.

[14] Oermann, Markus/Ziebarth, Lennart (2015): Use of Cultural Artifacts by Way of Interpretation and Application—or: Adapting the Methodology to Analyze the Normative Contents of Law for the Analysis of Technology. Computer Law and Security Review, vol. 32(1) (forthcoming).

[15] Cf. Oermann, Lose, Schmidt, and Johnsen (2014), supra note 12, at 8-17.

[16] Certainly there are general social norms on how to process business deals and there are also special social norms concerning the “right” ways of using Bitcoin evolving in its user community. Both of these affect user behavior, but the concept of Bitcoin does not rely on these elements to fulfill a central function in its system. Cf. https://bitcoin.org/en/developer-guide#contracts (retrieved September 10, 2014).

[17] We have to distinguish these from the contracts that are concluded between Bitcoin users to process the underlying business deals. These business contracts include reciprocal provisions for user behavior, e.g. that a user has to initiate the transaction of bitcoins when he received the good he purchased. But the original concept of Bitcoin did not cover these contracts, which meant that enforcement mechanisms in case of a breach have been missing.