This post is a reaction to the essay “Unpacking Bitcoin’s Social Contract” by Hasu, which uses social contract theory to give readers a better understanding of what Bitcoin is. This text does the exact same for Decred.
Bitcoin is a novel social and economic institution. It is so different from our existing institutions that we should be skeptical and ask many hard, pressing questions before we can trust Bitcoin with any economic value.
Decred is an iteration of the Bitcoin protocol. Similar questions need to be asked before we can trust Decred with any economic value.
The text relies heavily on Hasu’s essay to explain social contract theory and how it can help us to better understand Bitcoin and Decred. Many sentences will reuse or re-purpose his words. You can read the original essay here:
Unpacking Bitcoin's Social Contract - Uncommon Core
Bitcoin is a novel social and economic institution. It is so different from our existing institutions that we should be…
Social Contract Theory
Before we dive into Bitcoin and Decred, it is important to explain the basics of social contract theory. In a nutshell: we are talking about collectively enforced social agreements that can involve any number of people.
Two famous social contract theorists were Hobbes and Rousseau, who both had a significant impact on how we look at social contracts between people and governments:
- Hobbes presumes our state of nature is full of fear and violence, and that it is unbearable for us to live in. According to his theory, we should agree to empower Leviathan, the government, to impose law and order. Every person gives up some of their freedom, while the government is granted sovereignty to protect the people from themselves.
- Rousseau presumes our state of nature is free and happy, but that modern civilization corrupted us. According to his theory, people are sovereign and we should only agree to empower governments if they enact the general will. Rather than giving up our freedom, we all participate in the collective and unite behind the pursuit of the common good.
Interestingly, social contract theory is not constrained to the relationship between people and the state. We can apply the same thought experiment to economics. If enough people are unhappy with the barter economy, they can collectively agree to use a currency to improve the quality of their trading.
Money as a Social Contract
Hasu explains that fiat money is the result of a social contract: people give the state control over the supply and other vital functions of money. The state, in turn, uses that power to manage and protect the monetary system.
However, governments that control money can abuse their power in all kinds of ways: they could confiscate accounts, block certain people or groups from transacting, or print more money which inflates the supply — sometimes to the point of hyperinflation.
When governments cross a line in abusing their power, people will lose their trust in the social contract that granted the government its power. They will return to an agreement that preserves most of the benefits (having a common store of value, medium of exchange, and unit of account) without the worst of problems (abuse of power). This is why Bitcoin is becoming more popular.
Bitcoin as a social contract
Bitcoin’s mysterious creator Satoshi Nakamoto did not invent a new social contract. Satoshi leveraged technology to solve many problems of past implementations and implemented the old contract in a new way.
Instead of getting its security from a central party (a government), Bitcoin has created a competitive market for its own protection. It turned security into a commodity and security providers (PoW miners) into commodity producers. Satoshi found a way for these competing security providers to come to consensus over who owns what at any given time — no trust needed.
The social layer determines the rules of Bitcoin, based on social consensus, and the Bitcoin protocol layer automates the enforcement of the contract.
The two layers are symbiotic: neither of them would be sufficient without the other. The social layer and its rules are the heart of Bitcoin, but the secure and open source protocol layer makes the rules enforceable. This makes the contract credible to outsiders.
The 4 rules of Bitcoin
- Confiscation resistance: only the owner(s) of the coins can produce the signature(s) to spend them
- Censorship resistance: anyone can transact and store value in Bitcoin without permission
- Inflation resistance: there will only be 21 million bitcoins, issued on a predictable schedule
- Counterfeit resistance: all users should be able to verify these rules
These 4 basic rules make Bitcoin’s social contract superior to monetary systems from the past.
Bitcoin’s biggest challenges
By now it should be clear that the Satoshi entity was not omniscient. Three major challenges, identified in 2015, are still plaguing Bitcoin today:
- Project governance: there are no mechanisms in place to smoothly upgrade the protocol layer without the risk of forks or network splits, neither are there formal off-chain governance platforms to build social consensus.
- Funding development: the work around Bitcoin’s protocol layer is largely funded by private entities. This creates real and perceived conflicts of interest. It is not clear how much influence these external entities have.
- PoW miners have too much power: the risks of majority attacks and other misbehavior related to collusion are increasing as the PoW mining industry is becoming more sophisticated.
Back in 2015, during the block size war, it was unthinkable that any proposed solution to these challenges would be implemented. As such, the only way to make real progress on these challenges was to create an alternative project: a project called Decred.
The social contract of Decred
Decred is a blend word of decentralized and credits. The project was created by a group of Bitcoin developers and has iterated on the PoW protocol by Satoshi to give more power to the people who actually hold the currency.
The Decred protocol is based on a unique hybrid PoW+PoS consensus system that splits block rewards between PoW miners (60%), PoS voters (30%), and the Treasury (10%). This consensus system has several characteristics that are different from Bitcoin:
- People can choose to lock up their credits into the PoS system in exchange for voting tickets. Voting tickets are a permissionless and Sybil-resistant way to participate in the project’s governance, both on-chain and off-chain.
- A voter-directed Treasury, funded by 10% of the block reward, ensures that Decred doesn’t have to rely on funding from private entities.
- The added PoS layer hinders PoW miner collusion. PoS voters protect the network against unwanted forks, majority attacks, and other misbehavior such as mining empty blocks.
It is beyond the scope of this article to describe Decred in detail, but if you’d like to read more about the project this canon is a great place to start.
The rules of Decred
Decred is an iteration of the Bitcoin protocol. Therefore, the 4 rules of Bitcoin are valid for Decred:
- Confiscation resistance: only the owner(s) of the credits can produce the signature(s) to spend them
- Censorship resistance: anyone can transact and store value in Decred without permission
- Inflation resistance: there will only be 21 million credits, issued on a predictable schedule
- Counterfeit resistance: all users should be able to verify the rules
On top of Bitcoin’s original rules, Decred has 3 additional rules:
- Formal governance: off-chain and on-chain governance mechanisms to build social consensus and smoothly upgrade the protocol layer
- Sustainable funding: decentralized and self-funding treasury system
- Checks and balances: random voters are chosen to validate and approve blocks, to keep miners aligned with the common good
These 7 rules make Decred fundamentally different from Bitcoin.
Now that we know the rules, let’s answer some hard, pressing questions!
Who can change the rules of Decred?
Hasu points out that the rules of the contract are decided and renegotiated continuously on the social layer. This happens off-chain.
Within the Decred project, the Politeia platform functions as a focal point. In short, Politeia is a formal off-chain governance platform where people can submit and review proposals. It includes a Sybil-resistant voting system to build social consensus and make collective decisions about funding.
When it comes to ratifying consensus rule changes on the protocol layer, there is a formal process in place to smoothly upgrade the code: PoS voters decide with an on-chain vote whether the new rules activate or remain dormant.
Can a software bug kill Decred?
If a bug would ever be found in the protocol layer that could potentially break the rules of a project, how much damage could it do? The answer is the same for Bitcoin and Decred:
Social contract theory can answer that with a resounding “no.” Bitcoin’s rules are made on the social layer, and the software only automates it. Where the social contract and the protocol layer diverge, the protocol layer is wrong — always. A failure of the protocol layer to temporarily enforce the rules of the contract has no permanent bearing on the validity of the contract itself.
How will Decred react to forks?
Decred was designed with fork resistance in mind. Forking the network is unfeasible without the support of miners and voters. Even if you convinced the majority of PoW miners, the attempt would likely fail without the support of PoS voters. As mentioned, there is a formal process to smoothly upgrade the Decred protocol layer. If the proposed changes are significantly better for the project in the long run, voters would likely vote “Yes” and the new rules would automatically activate for the whole network.
If people don’t agree with the voting results, they are free to start their own project. Anyone can fork Decred’s code. However, if they simply changed the rules and ignored the voters, that new project would undoubtedly no longer be Decred. The value of a project exists on the social layer:
all value for tokens is purely a social construct. The tokens do not have any value; they receive their value from social consensus. Forking the protocol doesn’t equal forking the social contract, so the new token is worthless by default.
- Money can be seen as a social contract between people in society.
- Decred and Bitcoin are not new contracts; they are new implementations of a contract that can be traced back hundreds of years.
- In comparison to Bitcoin, the Decred implementation has made several significant changes. It has expanded the rules of the contract which adds extra dimensions to the social layer. Decred enables people who hold the currency to collaborate and decide about the future of the project.
How does Decred compare to Bitcoin? Is it better or worse? The answer will depend on your personal preferences and presumptions. Both projects have their own rules that are based on fundamentally different beliefs.
For people who believe that “the market” makes the best decisions, Bitcoin may be the right choice. During any contentious change, the network may split in two or more forks that will compete (fight) for financial and social support of PoW miners, developers, investors and exchanges.
For people who believe in collaboration, who aspire to pursue the common good, and who are willing to align themselves behind the general will of the decentralized voter collective, Decred may be the right choice.
What is for sure: the values of freedom and sovereignty are present in both projects and both have a high chance of survival in the long run.
Bitcoin and Decred are different social contracts. They can coexist.