This post was inspired by a similar piece written by Derek Hsue. In his post, Derek provides a thorough analysis of Grin’s governance system — highlighting its power structures, decision making processes, supporting infrastructure, and the tradeoffs accounted for in its design.
Like Grin, Decred is a cryptocurrency based off of Bitcoin, but with structural changes designed to optimize for security, adaptability, and stakeholder governance. Jake Yocom-Piatt — Decred’s project lead — summarized Decred’s motivation as fixing governance, project funding, and miner centralization. Now that it has been 3 years since the network’s launch, it’s important to understand how these goals have manifested themselves and what’s still left to build.
In this post, I go over Decred’s formal governance system.
- Who are the network’s core stakeholders?
- Who has decision making authority?
- How are decisions made?
- How is the network funded?
- What supporting infrastructure is in place today?
- What types of issues might the network face in the future?
Table of Contents
- Overview of Decred Governance
- Voter Turnout
- Treasury and the DAE
- Decred’s Contributor Model
- Ecosystem Infrastructure
Decred is a cryptocurrency that uses hybrid Proof of Work/Proof of Stake consensus in an effort to foster decentralization and enable stakeholder governance. In Decred, miners propose new blocks by solving PoW hash puzzles, and stakeholders are responsible for approving the miners’ work. Both parties are rewarded for their help in securing the network via the block reward, of which 60% goes to PoW miners, 30% goes to PoS voters, and 10% goes to the network’s treasury. Requiring each valid block to have both a certain hash value and a certain number of PoS votes makes it extremely expensive to 51% attack the network. Similarly, Decred’s treasury supports protocol development by creating a monetary incentive for stakeholders to actively contribute to the network. Because of these features, the Decred community has recently dubbed the asset a ‘secure, adaptable, and self-sustaining cryptocurrency.’
Decred’s governance system attempts to iterate on Bitcoin’s by creating a system with more checks and balances between users, developers, and miners. Not only do stakeholders ensure that miners are acting in the network’s best interest, they also get to vote in consensus rule changes and participate in off-chain governance through Politeia. Politeia is a GUI + backend system developed by the Decred developers to allow stakeholders to submit and vote on contributor proposals. To date, a number of proposals have been enacted through Politeia, and the developers are working towards further decentralizing Decred’s power structure by relinquishing funding to a community-controlled DAO.
Decred aims to be a digital store of value similar to Bitcoin. Apart from its fixed supply and security characteristics, Decred offers stakeholders a great deal of influence in controlling its future state relative to other networks. Users who participate in Proof of Stake can vote on protocol changes as well as where to allocate the network treasury.
Decred has a thriving two sided network effect today. The demand side primarily uses Decred as a way to store wealth and access passive income. In this way, Decred is very much acting as a productive asset in that holders can generate an inflation offsetting return — 11%-12% APR today — by participating in Proof of Stake. It’s important to note that this figure will trend towards zero given the block reward decreases over time as the circulating supply increases.
The supply side consists of Proof of Work miners and voting service providers, both of which create infrastructure to secure the network. Decred’s supply side has grown tremendously since its inception. Today, the total network hashrate is ~600,000 Thash/S and roughly 48% of all DCR is locked in Proof of Stake tickets.
While it may not have been clear up until recently, Decred is slowly developing the necessary features to become a premier store of value. Layering Proof of Stake on top of Proof of Work makes it much more expensive to attack the network, a thorough analysis of which can be found here. Given the high cost to attack the network, the yield generated from Proof of Stake, the current levels of network utilization, and upcoming privacy enhancements, Decred is becoming a strong contender in the race to capture store of value market share.
Decred’s fascinating story dates back to 2013 in the trenches of Bitcointalk. In April 2013, an anonymous member of Bitcointalk that went by the name ‘tacotime,’ responded to a forum post saying he was looking for help on building a new altcoin. Not long after that, tacotime posted another thread introducing Memcoin2 (MC2), a new hybrid PoW/PoS cryptocurrency that was designed to relinquish control of the money to its users through a voting system.
An important feature of Memcoin2 was that it was intended to be built on btcd, an alternative Bitcoin full node implementation created by Conformal Systems, which is now Company 0. Despite its technical soundness, btcd was rejected by the Bitcoin Core developers because of their single implementation philosophy. Frustrated with Bitcoin’s power structure, Conformal Systems began working with the creators of Memcoin2 to develop an alternative cryptocurrency aimed at fixing the problems they viewed inherent to Bitcoin’s power structure.
After more than a year of development, Jake Yocom-Piatt — CEO of Company 0 — published a post titled ‘Iterating Bitcoin,’ in which he claimed he and his team have developed a new cryptocurrency with stratified consensus and a way to self fund development. In December 2015, Jake formally announced Decred, a new cryptocurrency based on Memcoin2 that was designed to create more checks and balances between miners and network stakeholders.
Decred went live on mainnet in February 2016 and took one of the most progressive launch approaches seen to date. Rather than asking investors to fund the initial development period in exchange for coins once the network went public, Company 0 self-funded the project and compensated themselves with a portion of the network’s small premine. In total, Company 0 and its developers earned 4% of the total supply for their work, valued at $415,000 USD.
Decred’s launch was also unique in that the other half of the premine was given away to interested stakeholders through an airdrop. This was different from most PoW launches at the time in that miners weren’t the only ones who could get their hands on the cryptocurrency immediately after the genesis block — a strategy very much aligned with how Decred’s developers viewed the imbalance of power in traditional cryptocurrencies. Rather than pursue a pure ‘fair launch,’ the development team felt that distributing a small portion of the supply to dedicated stakeholders would better decentralize the project from the start.
Registering for the airdrop was open to the public, but the total number of participants was capped at 5,000. The goal of the cap was to ensure that stakeholders who seemed committed to helping the project grow would receive priority over passive holders. In total, there were 8,793 airdrop registrants and 2,972 successful participants who each received 282 DCR.
Arguably the most important justification for the airdrop was that the network’s PoS layer needed stakers at launch to prevent a chain attack. As a system with both PoW and PoS, Decred needed a method to get DCR in the hands of stakers who would help secure the chain.
If miners were the only ones who could acquire DCR, they could easily hoard the coins and acquire as much stake as possible rather than selling on the secondary market. Similarly, with enough stake, miners could use it to halt the chain, which would effectively kill the network.
While airdrops have been stigmatized by ICOs today, they were much more respectable when Decred launched. ICOs with large premines largely used airdrops as a way of maneuvering securities regulation. On the other hand, Decred’s airdrop was much more meritocratic and smaller in scale. Rather than give away 50% of the total supply like most ICO projects, Decred only gave away 4% to ensure most DCR would be allocated to the miners, stakers, and developers who help grow and secure the network.
To fully comprehend any governance system, it is important to know the stakeholders who makeup the network and their interests. If we assume stakeholders act in their economic self-interest, which is always the case in adversarial environments, we can more easily understand how they will react in response to specific protocol changes.
Decred is comprised of three core stakeholders:
This cohort includes every individual that holds DCR. As is with most public blockchains, users are generally concerned with two things: 1) price and 2) being able to use the network with as little friction as possible, namely low transaction costs and fast settlement times. Holders also want high security (in the form of high attack cost) to protect from centralized seizure.
Decred is unique in that its consensus system has a Proof of Stake component, so users are also interested in capturing as much yield as possible. The higher the stake reward and the cheaper it is to participate in Proof of Stake, the better it is for the user.
2. PoW Miners
Miners in Decred are similar to miners in any Proof of Work blockchain — they want to capture as much of the block reward and as many of the transaction fees as possible. This is in contrast to users who want to use the network’s block space as cheaply as possible. This tension is healthy, and forces the demand and supply sides to find an equilibrium price for the network’s value. In theory, users should be comfortable paying a higher price for increased security and censorship resistance.
In general, Miners are mainly driven by profit. Even if they believe in a network’s long term potential, their number one priority is making money. Miners expend capital on both building the actual machinery and on acquiring the resources (electricity, ventilation, facilities) to run their operation. Most of their rewards are sold off immediately to cover these expenses, making their affinity for a network largely dependent on profitability. Decred employs the BLAKE-256 hashing function, so miners are free to move around between other BLAKE-256 enabled blockchains if a more profitable opportunity arises.
Developers are unique in that their interests are both ideological and profit-driven. In terms of the latter incentive, Decred developers earn DCR for their work so they naturally want to see their earnings increase in value. Similarly, we can assume that a large portion of their DCR is locked up in the Proof of Stake system, further aligning their interests with the network’s growth. This means that developers are incentivized to work on whatever they think will increase the value of DCR. And while it’s good to have developer interests in line with the asset’s price, their views on what would drive price appreciation might be at odds with the views of other stakeholders.
Overview of Decred Governance
Decred was one of the first blockchains to attempt a truly formal governance system. Both Peercoin and Memcoin2 previously brought forth the concept of hybrid consensus systems, but Decred was really the first to extend additional governance capabilities to Proof of Stake participants.
Decred’s governance system takes a very progressive approach, all of which is based on ticket-holder voting. Tickets can be thought of as the atomic unit of account in Decred governance — they are the only way to participate in decision making and votes are tallied in tickets, not DCR. To acquire tickets, DCR holders have to time-lock their funds for an average of 28 days.
Once holders have acquired tickets, they can use them to vote in on-chain and off-chain decisions. On-chain voting is comprised of validating blocks and consensus rule changes, while off-chain voting is centered on Politeia proposals.
As I previously mentioned, blocks are only considered valid if at least three out of five tickets approve it. This voting power gives stakeholders a check against malicious miners and also helps mitigate the effectiveness of minority forks. If a minority fork were to take place, this three of five ticket requirement actually makes it so the chain with the most stakeholder support is always valid — minority forks can’t succeed because the longest chain is always the one with the most support. For a detailed analysis on Decred’s ‘fork resistance,’ check out these two posts.
It’s important to note that Decred can’t prevent forks from occurring — in a free market, nothing can. What Decred’s Proof of Stake system can do is make it both extremely easy to identify the valid chain and extremely expensive to continue supporting a minority fork.
The other element of on-chain voting is direct consensus rule changes. In Decred, hard forks can be activated with enough stakeholder support. The process works like this: a developer or group of developers will create a Decred Change Proposal (DCP), a concept similar to Bitcoin’s BIPs. From there, the developers must release new software that incorporates their protocol changes. After that, both PoW miners and PoS participants must upgrade their software, and once specific upgrade thresholds are met, voting begins. For an upgrade to be locked in, 75% of all non abstaining votes must be in support of the agenda. After an upgrade has been locked in, the remaining network participants have about 4 weeks to update their node software before the upgrade goes into effect.
Decred’s off-chain component allows ticket holders to vote on work proposals made by ecosystem participants who want to grow the network. All off-chain voting takes place in Politeia, where anyone can create a funding proposal and have it be voted on by stakeholders.
Skin in the Game
Perhaps the most important aspect of Decred’s governance system is that it requires voters to have skin-in-the-game when making decisions. Since funds are time-locked, stakeholders are incentivized to exercise their vote and deal with the repercussions of every outcome. Therefore, we can assume that any rational economic actor would vote in whatever way they think will help protect the value of their assets the most.
Similarly, acquiring influence is costly because the price of tickets get more expensive the more they’re purchased. This makes it more costly to subvert the governance system as buying more voting power becomes prohibitively expensive. A malicious attacker would only carry out an attack if they stand to gain more value than the capital they lock up.
In this way, Decred’s governance system helps coordinate all of its stakeholders to maximize the value created by the network. Rather than thinking of Decred’s governance system as a way to govern a society, it’s more of a meritocratic system that helps build value in the network. By forcing decision makers to have skin in the game, the network can more efficiently accrue value. Decred developer Luke Powell summarizes this thought well here.
To illustrate Decred’s skin in the game, let’s run through a scenario proposed by Meltem Demirors in which an attacker would attempt to buy enough tickets to direct all of the treasury funds to them. For the sake of the example, let’s use the value of the treasury today, which is $14.5 million USD.
In order for an attacker to successfully pass a Politeia proposal, they would need to acquire 60% of all tickets in a given vote window. Given that close to half of all DCR is locked in PoS, acquiring 60% of all tickets would be ~30% of the circulating DCR supply. Today, that value is around ~2.45 million DCR, or $68,600,000 USD. Not only is the cost to acquire enough DCR multiples higher than any potential payout, attempting to buy that much DCR would be extremely difficult given how much of the total supply is staked. A purchase of that size would skyrocket the price and be immediately detectable by the entire network.
As with any governance system, one way to monitor its effectiveness is through voter participation. Unlike most blockchain governance systems, Decred has a relatively high turnout. Over 50% of ticket holders cast their vote in all three of the network’s consensus rule changes, with the PoS staking algorithm change in particular garnering an 87% participation rate. An interesting point to make is that abstentions have increased over time, most likely as a result of new holders purchasing DCR more so for speculative purposes rather than for participation. As more software is built to help holders participate in network governance, this trend will hopefully reverse.
Not only does Decred have a much higher voter turnout, According to Wave Financial’s recent governance report, the DCP002 and DCP0003 votes saw more than 14% of wallet addresses participate. The other networks mentioned, which included 0x, Aragon, and MakerDAO, all had less than 1% of wallet address participate. Again, this all goes back to the fact that voters are forced to lock up stake if they want to participate in the block reward.
When it comes to off-chain voting, participation in Politeia has been similarly strong. Across all approved proposals, the average voter turnout was 31.46% of all tickets, with Ditto’s Communications proposal drawing 51.25% of all tickets to vote.
In terms of rejected proposals, the average turnout 27.78%, with Wachsman’s communication proposal drawing the most ticket voters.
A number of interesting observations can be deduced from these numbers. One, proposals submitted by contributors employed by Company 0 or those close to the Company 0 team have a much higher turnout. This is likely because the community is partial to the developers that bootstrapped the project. Over time, Company 0 should look to dilute this effect in an effort to eliminate any centralization bias. Second, proposals that request more funding have a higher turnout. This is a healthy sign that Decred’s skin in the game system is working. Lastly, it seems like on the whole, voters are more likely to vote if a proposal already has a lot of votes. Proposals that are either controversial or dead on arrival are obvious to voters, so it makes sense that controversial proposals have a higher turnout, whereas lack luster ones don’t.
Treasury and the DAE
Back in the early days of Bitcoin, it became evident that funding ongoing development would be a big challenge. Without a formal corporate structure or foundation, developers had to rely on donations, or in many cases, contributed to the core protocol without any pay at all.
In order to ensure that developers could maintain the Bitcoin protocol, outside entities, most notably Blockstream and MIT Media Lab, began funding core developers by hiring them as salaried employees. Many community members felt this created a conflict of interest as the needs of a private venture-backed company could potentially influence bitcoin core development.
To ensure outside entities could not exert a disproportionate amount of power over protocol development, Decred was designed with a network treasury that could autonomously and sustainably fund its development over time. With 10% of every block reward going into what will soon be a DAO-controlled treasury, stakeholders should always have the means to fund new developments.
Today, the treasury is centrally controlled by Decred Holdings Group LLC, a corporate entity which owns the keys to the multi-sig treasury address. For security purposes, the trustees to the address are not disclosed.
The payment process for today’s contractors is pretty straightforward. Once a prospective contractor is approved through the Decred Contractor Clearance Process, they’re able to submit monthly invoices of their work which are reviewed by the treasury auditors. Contractors are free to work on initiatives laid out in approved Politeia proposals or they can create their own statements of work for the stakeholders to vote on.
Over time, the developers plan to transition control of the keys to Decred’s stakeholders through the DAE — a decentralized entity that has complete autonomy over what gets funded. The motivation behind decentralizing control of the treasury via a DAO is to give stakeholders complete sovereignty over how their funds are spent. Also, the DAE design removes any potential single points of failure so the treasury funds can never be tampered with.
As the price of DCR and the total amount of funds available within the treasury grow over time, Decred stakeholders will be armed with hundreds of millions of dollars which can be used to fund new developments and recruit talent all over the world. In this way, Decred can become the first truly meaningful and capitalized decentralized organization — an unstoppable, global, an open source project attempting to build the best form of digil money.
Decred’s Contributor Model
Since Decred aims to be a completely open source project, anyone in the world is able to work on Decred. More importantly, Decred can autonomously reward anyone who provides value to the network via the treasury.
Becoming a contractor is open to anyone, but the prospective candidate must first produce some preliminary work to show their dedication to the project. The following rules govern the process of becoming a contractor:
- Demonstrate an interest in Decred
- Prove that you understand the network in-depth
- Choose a specific project or domain to contribute to
- Connect with existing stakeholders in your domain
- Submit work for review
Once a candidate has officially completed those steps, they’re eligible to become a contractor and to submit monthly invoices for their work. Contractors contribute across a number of disciplines including software development, design, communications, and research. Decred already has over 50 total contributors, all of which can be found here.
More importantly, there is a large number of developers who contribute to Decred across a number of key repositories.
The most notable work development initiatives being built today are:
The most notable contributors to the Decred project based on GitHub commits are:
- Dave Collins
- Marco Peereboom
- David Hill
- Luke Powell
- Josh Rickmar
- Jonathan Chappelow
- Alex Yocom-Piatt
- Matheus Degiovani
- Donald Adu-Poku
Furthermore, Decred’s contributor model may very well be a glimpse into the future of how open source organizations will be structured — a number of autonomous companies and individuals building tools from anywhere in the world, all incentivized via a cryptocurrency to build the best software possible.
As is with any governance system, it’s important that there is sufficient infrastructure to help secure the network, allow users to acquire DCR, and enable them to participate in decision making.
The easiest way to acquire Decred is to purchase through the spot market at one of the exchanges DCR is listed on, the most liquid of which is Binance. For institutional investors, the easiest way to acquire DCR is through an OTC desk. I2 Trading is particularly active as they’re also one of the larger miners on the network.
In terms of security, the two most integral pieces of infrastructure are mining pools and stakepools. On the mining side, a majority of the largest pools in the world now support Decred including Antpool (Bitmain), f2pool, btc.com, and Luxor Mining. Similarly, Decred recently experienced an explosion in hash rate after a number of mining groups commissioned the development of BLAKE-256 ASICs. While the subject will be saved for a different post, MicroBT’s Whatsminer D1 and Bitmain’s DCR5 are the driving force behind Decred’s near 100x increase in hash rate since the start of 2018.
On the staking side of things, there are currently 23 stakepools that make it easy for stakeholders to participate in voting. With a stakepool, ticket holders to not be responsible for constantly maintaining online staking infrastructure. Creating a stakepool is fairly straightforward for any competent developer, and was purposefully designed that way to ensure proper decentralization.
Lastly, the easiest way for ticket holders to vote on politeia proposals is through Decrediton, the most popular GUI wallet for the network. Within Decrediton, stakeholders can purchase tickets, participate in Proof of Stake, as well as browse and vote on upcoming governance decisions.
Decred is one of the most uniquely designed cryptocurrencies in the space today. The network strikes a more level playing field between users, developers, and miners, while at the same time preserving the features that make any money a quality store of value. Rather than being constrained to either Proof of Work or Proof of Stake alone, Decred borrows favorable traits from both to create a more stratified consensus architecture that better secures the network. Given the implications that hybridized consensus has on the cost to 51% attack the network, we will likely see more cryptocurrencies take after Decred and adopt some type of hybrid model.
Core to Decred’s design is its progressive form of stakeholder governance in which DCR holders can lock up skin in the game to make protocol decisions. While more and more protocols are opting for stakeholder input via Proof of Stake or pure token voting, Decred continues to have one of the highest voter turnout rates across all projects. In the early stages of on-chain governance experimentation, Decred is proving that the best way to create a flourishing system is to force stakeholders to have skin-in-the-game.
Arguably the most overlooked aspect of Decred’s governance system is the protocol’s ability to autonomously fund its development. Assuming Decred can successfully convert the network treasury into a DAO, it will become the first truly decentralized entity governing a meaningful amount of capital.
Overall, Decred’s approach is extremely innovative and may provide a glimpse into the future of the processes by which public blockchains evolve.The model isn’t without its flaws. For one, Decred’s on-chain governance system may centralize control of decision making into the hands of early adopters, making it difficult for new stakeholders to have any say in the network. Similarly, the jury is still out on whether or not allowing stakeholders to have ultimate veto power will alienate miners in the long run. Over time, Decred’s governance system will be put to the test, and we’ll be able to analyze whether or not a more progressive approach is the best form of blockchain governance.
Disclosure: I own $DCR
Big thanks to Jonathan Zeppettini, Luke Powell, Justin Yashouafar, Murad Mahmudov, Permabull Niño, Derek Hsue, Sid Ramesh, and Richard Red for providing feedback on this post and engaging in discussions that led to many of the thoughts presented here.
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