“Is it priced in?” – thoughts on valuing BTC and the upcoming Halving

Is the Bitcoin halving priced in?  If so, when did that happen?  Are all future bitcoin halvings priced in today?  I promise to come back to these questions, but first I’ll explore the idea of information and events being “priced in” in traditional asset classes.

Pedantry Disclaimer: I oversimplify a bit in this essay, in ways that I think don’t sacrifice any meaning.  For example, a stock’s fair value is dependent not just on its earnings, but also its current book value, interest rates, volatility, and even tax policy, but I’m only focusing on the first variable here.

Legal disclaimer: I may be long or short BTC in the past, present, and future.  Not investment advice.

Is it priced in?  The question implies that there is some “fair” price for an asset after the effects of some new information or new event.  A trader who says they’re bullish because of an upcoming event would reasonably ask if the bullish impact of that event is already reflected in the current price.  For example, let’s imagine you said that you were bullish on Amazon because it has an amazing CEO, monopolistic power in some business lines, and strong network effects.  I might ask you if you think that other market participants who are setting the price for AMZN disagree with you.  If they agree with you, then presumably the current price of AMZN already embodies all of these positive attributes – maybe that’s why Amazon is valued at $886 billion.

In equities, bonds, and consumable commodities, there are robust frameworks for identifying intrinsic value.  These assets ultimately provide concrete value to holders in countable USD terms.  An owner of AMZN is entitled to their share of AMZN profits via dividends or share buybacks.  So all an investor has to due is to accurately identify AMZN’s future profits to come up with a “fair” value for the stock.  Of course this is a tall task, but it facilitates easy discussion around valuation.  If someone thinks AMZN is worth more than you do, they likely believe that future profits will be greater than you think they will be.  You can then dig in to why.  And they “why” falls into two categories:  analysis or information.  For example, you and another investor may analyze the same information but you may conclude that Amazon’s expansion into same-day delivery is likely to turbocharge sales, while another investor may be skeptical of the expansion.  Alternatively, another investor may have information you don’t.  Maybe Bezos told a few friends that he’s considering retiring, and this investor is bearish on the basis of this non-public information (which may be legal to trade on, depending on how the information was gained.)

In the context of AMZN, “is it priced in” is asking, “does the market have this information, and are they appreciating its bullishness or bearishness as I see it?”

Now for Bitcoin: while there are some nascent valuation approaches to Bitcoin, models like Stock-to-flow don’t even attempt to identify intrinsic value.  Rather, they observe a historical relationship.  What is the intrinsic value of bitcoin?  1. Bitcoins are how you pay to transact on the bitcoin protocol, so the value of a bitcoin can be modeled as a derivative of transaction demand, but this gets circular given that many bitcoin transactions are currently speculative in nature (arbitrage, trading, etc).  Any valuation of Bitcoin based on this approach yields a fair value far below the current price.  2.  Bitcoin provides utility to a holder who wants to store wealth in a confiscation-resistant way.  This doesn’t easily contribute to a pricing model however, since for this use case, the bitcoin buyer is entirely price insensitive.  If I want to store $10k of wealth in a seizure resistant way, I need to buy $10k worth of Bitcoin, regardless of the price per BTC.

So, we don’t have an easy way to connect fundamentals to price for bitcoin (or other speculative commodities).  Imagine this conversation in late 2017:

Bitcoin bull: over the next 12 months, we’ll see further development in all areas around Bitcoin – infrastructure like ATMs and trading products, development of LN and the core client, broader education and adoption etc.  So…I’m bullish.

Bitcoin bear: I agree with everything you said, but the current price is a bubble and even with improving fundamentals, we’ll still have a lower priced BTC in 12 months.

The bear is arguing that the “fair” price at the end of 2017 was much lower than the market price, and so despite their optimism for fundamentals over the coming year, they’re still bearish on price.  How is the bear deriving a “fair” price?  Not from a fundamental model, but with a trader’s mindset – by noting that the price was driven higher was short-term speculators, “weak hands”, and that when these people inevitably cut their overextended positions, we should expect a crash.

Okay, so what about the halving?  With only 2 prior data points, we’re far short of sufficient data for a quantitative model, but it’s still worth a look.  If I showed you a chart of Bitcoin, you couldn’t identify the halvings without knowing where to look ahead of time.  Both halvings occurred in the midst of bull runs, without a clear change in slope of the rally.  The simplest interpretation would be that the halving appears to have no effect.  But how can that be?  How could a 50% reduction in new supply be irrelevant?


One possible explanation is that the halving is “priced in” ahead of time.  But when?  Are all future halvings priced in today?  I think the problem is that the whole framework of “pricing in” is wrong for long-term early stage investments.  The concept of an efficient market, or of information being “priced in” is an inherently short-term framework.  It assumes a consistent set of market participants who are constantly evaluating an asset.

In contrast, bitcoin wasn’t “investable” by a pension fund or bank in 2011.  They didn’t avoid buying it in 2011 because they thought it was overvalued, they couldn’t buy it.  It wasn’t part of their investable universe for a mix of regulatory, operational, and bureaucratic reasons.  As bitcoin matures, the market participants who set its price evolves.  In 2011, the exchange price was set by a small number of early bitcoin miners, investors, and developers.  Today, the bitcoin price is set by that group, but also by professional crypto funds and some traditional investors and funds.  Soon we may have pensions and sovereign wealth funds participating in price discovery in a big way.  “Is it priced in” assumes some group doing the pricing.  For an early stage asset, the pricing group evolves over time.

But I still haven’t answered the questions.  Is the halving priced in?  The lack of clear inflection points on the chart suggest that if the halving has an effect, some sort of “pricing in” must be happening.  Often events are partially priced in to asset prices  Rational traders and investors require a return for every risk.  On average, they should “underprice” every bullish event by a bit – that bit is the profit on the trade or investment.  This is the average result, but not a consistent one.  Sometimes the market certainly “overprices” a bullish event, leading to the common “sell the news” situations.  But I struggle to think of why the halving should be viewed as an “event” at all.  I think it’s best characterized as just part of the general optimistic roadmap of bitcoin continuing to gain adoption and accrue network effects.  Certainly bitcoin’s emission schedule is core to its value proposition.  If 2020 was scheduled to be the last bitcoin halving, BTC probably wouldn’t have a $137 billion market cap today.  So in that sense, all future halvings are “priced in” to some degree – they’re intrinsic to what Bitcoin is and why it’s as valuable as it is today.  But again, this is an ineffectual framing.  So let me throw it out and try for something different.

My mental model for Bitcoin’s returns is the same as for an early stage project with value coming primarily from network effects: its current value includes optimism about all future possible events, but the price increases over time as our confidence in those future events increases.  Within this framework, the halvings are more like signposts that Bitcoin is passing along its trajectory of accruing network effects and intrinsic value.  And as that future fundamental value becomes less risky, the BTC price increases over time.  And, the BTC price increases as the project matures, and the pool of market participants who view it as within their investable universe increases.

With all of this said, when we zoom in a bit to a trading timeframe (<6 months), I do think “is it priced in” is a useful question, but as applies to second order effects.  The halving causes miner profitability to suddenly plummet.  This may cause miners to liquidate BTC to cover fixed costs or to invest in more ASICs.  To at least some degree, miners try to “price in” these issues and adjust their behavior in advance.  Diving deeper into these questions require an exploration of miner incentives and the current mining ecosystem, which will have to wait for a future essay.

Posted in Cryptocurrency | Tagged , | 2 Comments

Millennials and Crisis

(this is a repost of an essay I wrote in 2016, perhaps more relevant today.)


This is going to be a very strange commentary, almost entirely sociological in nature. I think I’ve found a useful lens to explain a wide variety of emerging social/political/economic puzzles.

  • Why do 70% of Americans think the country is heading in the wrong direction even as violent crime, deaths from terrorism, and unemployment are near the lows of the last 100 years?
  • Why do so many people from all over the ideological spectrum think the US is in the midst of a crisis (for such wildly different and conflicting reasons)?
    Why do young progressive liberals seem to be demanding very “illiberal” social justice policies (like racial quotas for professors and campus censorship)?
    Why is most popular media today so “squeaky clean” (Taylor Swift, Drake, “Modern Family”, super hero movies)?
  • Why are technologically “boring” products like Twitter, Game of War, and Pokemon Go so successful, and should we expect that to continue?
  • Why did Bernie Sanders produce such strong youth turnout and earn nearly half of Democratic support in the primary; can we expect high youth turnout going forward?
  • Why are teen suicides rising even as academic performance and optimism among that age group are off the charts, and violence in general is falling?
  • Will the push for radical changes to our economy and political system from both left and right succeed? What form will the changes take?

The questions above became less puzzling to me after thinking about them within a generational framework that properly identifies the Millennial zeitgeist.
Millennials (currently aged 12 to 34) are civic-minded collectivists. They trust authority and government institutions, but think little of current leadership. They are optimistic and conformist. They’re outer-directed; instead of self-improvement, they focus on improving the world around them. They’re team players.

As consumers they will look for products that let them engage with a community (e.g. Twitter, Pokemon Go), they will continue preferring media that is idealistic and “clean” (e.g. Taylor Swift, “Modern Family”, and simple super hero movies.) As voters they will produce record turnout and throw their support behind politicians who promise ambitious social reforms via a larger federal government (i.e. Bernie Sanders.) As employees, they will demand meaningful work and a sense of being part of a team. As citizens, they will be honest collectivists with a strong sense of social responsibility. They’ll ambitiously and optimistically rebuild large institutions around themselves and their vision for the country. While they tend to be more liberal and atheistic than previous generations, the civic collectivism crosses party and theological lines. Religious millennials are embracing huge christian rock concerts and public purity ring ceremonies. Millennials are in many ways traditional, non-rebellious, and conformist; a generation of boy scouts…and occasionally bullies.

I am of course grossly simplifying when I reduce the extreme diversity of a generation to a set of common traits, but capturing general trends is useful. This commentary draws very heavily on the work of authors William Strauss and Neil Howe.

​​Social Justice: Rejecting Baby Boomer Individualism
There have been major protests on over two hundred college campuses in the last 18 months, with some of the most newsworthy at the University of Missouri, Yale, and Amherst. The protests have centered primarily around social justice for black Americans, with demands and tactics that are problematic for even most self-described leftist liberals. For example, students at many schools are demanding quotas for black professors, mandatory “cultural competency training” for all students, censorship of political discourse, and the renaming of buildings named after US presidents like Thomas Jefferson and Woodrow Wilson. The latest version of the “Movement for Black Lives” platform (which has been endorsed by Black Lives Matter), demands legalized racial discrimination, including free national education exclusively for people with black skin. To many veterans of the civil rights movement, these demands threaten the rights of others, through active censorship and racial discrimination.

I previously thought of Millennials as continuing the idealism, materialism, and individualism of the Baby Boomers, and that left me perplexed by the form that some of the recent social justice protests have taken. The Baby Boomers (born between 1943-1960) were inner-directed idealists. Some of their most famous and representative members were president Bill Clinton, comedian Steve Martin, and entrepreneur Steve Jobs. They believed in the individual – individual rights, individual transformation (through drugs and dance as adolescents, and now through diets and exercise schemes and religious revival movements as adults), and individual success (through materialist consumption). The civil rights movement was focused on the individual and the argument could be summed up simply: people are people, treat them the same. A black person should be treated equally to a white person, a gay person deserves the same rights as a straight person, immigrants the same rights as native born Americans etc.

In contrast, Millennials care about injustice, but frame it not as justice for individuals, but as justice for groups. Previously, assistance to the poor or oppressed was generally framed in terms of providing equal opportunity. But the rhetoric of Bernie Sanders, the Millennials’ candidate, is about outcomes of groups – that income inequality is in itself an obvious problem and inherently wrong. To put it simply: Civil rights advocates of the baby boom generation were fighting to remove institutional obstacles from individuals. Social justice minded millennials are fighting to provide equal opportunity for groups, and measure opportunity in terms of outcomes.

The inward-focus of Baby Boomers led to the surge in psychedelic drug use, therapy and self-help books, fad diets and gym memberships. As adolescents they sought inner purity, as adults they chased personal wealth and happiness, and as parents they believed in coaching their children to personal perfection. In contrast, Millennials are outward-focused; when they talk about “fixing things”, they don’t mean their waistlines or relationships with their mothers, they mean the environment and the societal institutions around them.

Optimism and Ambition: Rejecting Gen X Cynicism
Gen X (born 1961 to 1981) was a cynical, pessimistic generation. Nihilistic, rebellious, and scared, they came of age in an atmosphere of low expectations and neglect. They caused a spike in crime rates and a drop in academic performance. Gen X is the generation of punk rock, Marilyn Manson, Dennis Rodman, “South Park”, and “heroin chic” fashion. Gen X views the world as a cold and unforgiving place. They don’t trust authority or each other and subscribe to a mantra that if you don’t look out for yourself, no one else will. To Gen X, success is self-sufficiency, independence, and survival.
In contrast, Millennials are incredibly optimistic and ambitious. They reject the cynicism of “Seinfeld” in favor of idealistic “Modern Family” and “Parks and Recreation.” Their favorite musicians are squeaky clean idealists in every subgenre – Drake, Taylor Swift, NSYNC, and Skrillex. I’m personally a fan of electronic music so I’ll use that as an example to dive a little deeper: Gen X listened to electronic music in illegal underground raves in filthy warehouses in groups of a few hundred or a couple thousand adolescents; millennials fill stadiums to hear their favorite DJs and buy their tickets 6 months in advance via Ticketmaster.

Boy Scouts: Embracing GI Collectivism
So if Millennials are are wildly different from Gen Xers and Baby Boomers, who can we compare them to? The GI generation (currently between 93 and 115). As youths they were similarly civic-minded team players. Theirs was the generation that started the Boy Scouts, built the nation’s highway system, and put a man on the moon. They gave us sunny idealists like JFK and Reagan the pols, Artie Shaw and Judy Garland the musicians, and Joe DiMaggio the sportsman.

Millennials began developing their worldview with a childhood of “gold stars.” They grew up in a culture that embraced children as the future, with mothers that kept a pile of child-rearing books on the bedside table, and with schools that sought to replace competition with encouragement. They could do no wrong. Unlike most previous generations, they were told even as children that their views were important and valuable. Their parents and society as a whole demonstrated they were constantly here to protect and support them.

By the time Bill Clinton took office, “kinderpolitics” dominated the political scene – it seemed like every public policy debate was framed in terms of what was best for children. “Children are our future” became the mantra. Adults were expected to embrace parenthood as a defining role of their life. Adults who chose not to have children, or to have children but not make them a central priority of their life, were viewed as selfish.
As a result, Millennials trust authority and are quick to anger when high expectations aren’t met. Their childhood made them ambitious, confident, demanding, and fragile. They don’t know how to deal with disappointment or failure. On college campuses, this manifests as a very specific type of protest. Unlike the civil rights protesters of the 60s, today’s students have no desire to “burn it down.” When they encounter something they don’t like, like a school newspaper that publishes Op-Eds they view as insensitive, today’s protesters don’t react by creating an alternative/competing paper – rather they demand that the administration fix or replace the existing newspaper. Millennials believe in institutions (even if they think those institutions are currently run by corrupt people).

Millennials’ life is always quantified. They count their Facebook “likes” and Twitter “followers.” They know how many Pokemon are in their Pokedex. Their popular computer games always include some form of “leveling up.” In public policy, they reject abstract ideals in favor of tangible results on both sides of the political spectrum. Debates over the role of government or constitutional interpretation, are the domain of ideological Boomers. For Millennials, these abstract discussions are uninteresting and unimportant. They’re far less interested in thought experiments than concrete results.

Sense of Crisis:
Strauss and Howe’s generational model suggests that “hero” generations like the GIs and Millennials always come of age during a time of crisis. The idea of “crisis” is less about fact than about narrative.

I look at statistics that define our quality of life – violent crime, deaths from terrorism, hunger, infant mortality, life expectancy, etc, and by almost every measure imaginable, Americans (and people throughout most of the world) have never had it so good. Yet, 70% of Americans say they believe the country is headed in the wrong direction. Many black Americans feel like they’re in the midst of a crisis after watching youtube videos of police killing unarmed black teens. The LGBT community feels under assault after the North Carolina Trans Bathroom bill and Orlando terrorist attack. Middle-America whites feel under assault from a variety of angles – they feel unsafe from foreign risks due to Islamic terrorism, unsafe from domestic threats of racial violence and the recent assassinations of police officers; and they feel like they’re losing the “culture wars” and being painted as villains for being christian, straight, and white. Blue collar workers have a sense of economic hopelessness after a generation of stagnant wages and decreasing job security. Parents feel helpless in the face of school shootings.
Perhaps most nefarious is the perception that our political system is increasingly corrupt. More people believe that the economy and political system are rigged and controlled by a small number of elites. People have less faith in police and congress and industry leaders than at any time in the last century.

This sense of crisis was launched by the 2008 economic collapse. High school and college age millennials went from a certainty that they would have wonderful job offers showered on them to a reality of moving back in with their parents, scrambling for unpaid internships, and returning to grad school or taking disappointing low-skilled jobs as a fallback. It seemed like overnight the narrative for a 16 year old went from, “get good grades, go to a good college, and you’ll have a wonderful life” to “if you’re lucky, you may some day be able to pay off your student debt and afford a mortgage.” The financial sector bailouts made Americans believe the economy was rigged in favor of the already rich and powerful. Some of the hardest hit in the Great Recession were the black and hispanic poor who experienced a disproportionate increase in unemployment and destroyed the sense of slow progress in those communities. While the economy has largely recovered since 2008, the sense of disillusionment and lack of opportunity remains.

For the GI generation, the crisis began with the 1929 stock market crash and culminated in WW2 victory. So far we seem to be following a similar timing. If history continues to rhyme, this crisis period might culminate around 2022, possibly against an external threat like Radical Islam, or perhaps as domestic crisis in the form of a massive corruption scandal that shakes our confidence in government (far deeper than even our current distrust.)

This sense of crisis spawned both the Trump and Sanders candidacies. Millennials are still too young to take control of the political sphere, but we can expect to see them playing an increasing role each coming election.

Millennials as Populists: The Dangers of Collectivism
What’s the next step? This cohort of Millennials isn’t going to fade away quietly. Rather, we’ll see a rebirth of civic engagement, rising rates of voter participation, and increasing (often shrill) public discourse over expanding the role of government. The danger (at least to people with Boomer values) is that the civic minded Millennials will demand too heavy handed intervention from the government. Their trust in authority and belief in collectivism may slide into fascist tendencies. Millennials weren’t outraged by Edward Snowden’s revelations of government spying; they’re more outraged by a lack of government action to right historical wrongs, to prevent domestic violence, to censor hate speech, to prevent terrorism, etc. Traditionally, liberals believe in “big government” on economic issues, and “small government” on social issues, while conservatives believed in the opposite. But millennial liberals expect increasing involvement from the government on social issues as well to enforce their sense of fairness, shifting liberalism into populism.

The Millennial belief in collectivism can take the form of bullying. In the Baby Boomer’s adolescence – individualism was hip. In the Gen X world – rebellion was cool. In the Millennials world – being a team-player is paramount. The millennial generation is quick to ostracize, condemn, and bully those who fail to conform. As a result, we’re seeing an increase in teen suicides and an increase in school shootings by self-identified outcasts.

This whole essay is a great oversimplification of the infinite diversity of humanity…but hopefully a useful one for explanatory and maybe even predictive purposes. Let me try to reduce all of this to a single takeaway that transcends context and may be useful to you when you think about economic and political issues:
In every aspect of life, Millennials want to join a team, set a quantifiable goal, and climb a ladder with measurable steps to that goal. They are collectivists, and institution builders.

This essay is based directly on work by Strauss and Howe, especially “Generations” and “Millennials Rising”, (with a few twists by me, for better or worse). Finally, I owe thanks to my friend Ben Kream for recommending the authors to me.

Posted in Cryptocurrency | 2 Comments

Thoughts on Cryptocurrency Lending

There’s two basic models, custodial and non-custodial. The vast majority of options are custodial, and that means a third party has your coins. This entails counterparty risk.

What is a reasonable return to lend out your Bitcoin? Is 6% good? Is 15%? It entirely depends on the counterparty risk. You’re not earning money for lending out BTC, you’re earning money for lending to a specific counterparty like BlockFi.

So, what’s a reasonable yield? Junk bonds in the US have typically paid 4-6% over treasury rates. For a risky start-up, uncollateralized loans would typically be more like 15-25% over treasury yields.

Short-term treasury yields are currently 2.5%, so I’d look for ~22%+ yield to lend my BTC to a start-up at a minimum. Now, this superficial analysis is unfair to Blockfi and others who would rightly argue this isn’t a purely uncollateralized loan.

On their website, Blockfi says they “typically lends crypto on overcollateralized terms.” The specifics matter a lot here. If that collateral was legally owed to you as a specific lender, these should probably be viewed as collateralized loans. They’re probably not.

If you as the lender have no legal right to specific collateral, then you’re simply a creditor to a single company, Blockfi (or whomever else), and you might not even be a senior creditor (for Blockfi, I believe you are a senior creditor, but this should be confirmed for each platform.)

So the right way to think about making a loan on a platform like this is very similar to if a crypto start-up asked you for a loan and offered you some interest to borrow your money, and promised to keep a pile of cash representing their general obligations to investors.

Non-custodial solutions are very different. With these, you may potentially have zero counterparty risk, rather you’d be subject to some sort of liquidation risk and protocol risk. If the market gaps lower, the proceeds from liquidating collateral might not pay you back.
Additionally, using things like multisig solutions for a lending platform have serious risk of bugs. Just how serious? Ask Parity, undoubted experts on ethereum smart contracts, who twice lost tremendous sums to bugs in the simplest type of multisig smart contract.
TDLR: The growth in crypto lending markets is awesome for the ecosystem (separate topic), but is extremely risky today however it’s done, and I think the yields are far too low to price that risk from my perspective.
Posted in Cryptocurrency | Tagged | 2 Comments

Some high level thoughts on cryptocurrency governance

This essay is an overview of some high level concepts in cryptocurrency governance, followed by some specific examples.

Governance: Control and Power

Governance is the process by which the members of a community or organization make decisions.  More than any other topic, the question of “who runs Bitcoin?” is the one that takes newcomers to cryptocurrency the longest to grasp.

Power in cryptocurrency is often indirect.  The executives of Coca-Cola have great control over the product they release, but ultimately serve the demands of customers or the company will go out of business.  Similarly, cryptocurrency miners with specialized hardware (ASICs) have strong incentives to support the long-term demands of cryptoasset buyers since their mining is only profitable if they mine an asset that someone else wants to buy.  When thinking about power in cryptocurrency, it’s useful to note both who has elements of direct control, and also who sets incentives that strongly influence those with direct control.  Those setting the incentives may have more power in most scenarios.  In the case of Bitcoin, miners collectively have control over which transactions to include in blocks, but the community of current and potential BTC buyers may have more power, since miners must cater to their desires to be profitable.

Developers are sometimes more ideologically motivated, but still want to develop a protocol that will be used.  Usage is supported by service providers like exchanges, hardware wallet manufacturers, and custodians.  Developers also want a secure protocol, which requires the support of miners or validators.  Developers often have powerful influence over changes to the protocol, but must serve the other stakeholders or their changes are unlikely to be adopted, or unlikely to result in a valuable cryptocurrency.

Most stakeholders benefit if the value of the crypto asset and size of the network is maximized, which requires support from other stakeholders. This produces a “Keynesian beauty contest”, in which stakeholders bet on what other stakeholders will support.  This results in lots of public debate in which parties attempt to convince other stakeholders that their own position has the strongest support.

Who are the stakeholders?  Anyone who contributes to a cryptocurrency’s value and benefits from that value.  This includes holders and buyers, developers, exchanges and other liquidity providers, some types of service providers, and those securing the network (miners, stakers, etc).  Stakeholder are aligned in wanting to maximize the value of the asset, but may differ on important specifics.  For example, miners generally want to maximize revenue from transaction fees, while service providers and users may want to minimize transaction fees.


All governance introduces incentives for ‘corruption’ and rent seeking behavior.  The more complex the governance model and the more it supports swift decision making and implementation, the greater the potential attack surface.  We can minimize the effects of bad governance and minimize the uncertainty that stems from unknown future governance decisions by choosing to have as little governance as possible, resulting in a relatively static protocol.

Alternatively, the lack of governance at the base layer may slow down valuable innovation.  Developer resources may not be well organized, and may not be directed to the needs of the broader community.  Additionally, even when there is strong consensus supporting a change, a lack of governance processes may make implementation of the agreed upon changes difficult.

Perhaps crypto assets should adopt the mindset of federalism and have minimal governance at the global protocol level, and more active governance for “local” protocols that can exist as layers on top of, or connected to, the global protocol, or for more specialized ‘local’ use cases?   There may be a lot of interesting ways to combine different governance models for various use cases, similar to how a US citizen is subject to US national governance, and can then choose which state and municipality governance they prefer.

A few types of governance

As a rough mental model, I think about governance as divided into the following categories, but many examples are some blend of the below:

  1. On-chain governance: decision making that is built into the protocol itself.
  2. Formal off-chain governance: decision making that occurs outside the protocol in a pre-specified way. Authority may be vested by law, by direct control (like the ability to directly edit a live smart contract), or by strong social consensus.
  3. Informal off-chain governance: decision making that occurs by weak community consensus.


Bitcoin’s governance is primarily informal off-chain.  Changes to the Bitcoin network follow a process supported by a weak form of community consensus.  Specific proposals usually begin life as conversations among developers on technical Bitcoin mailing lists or other mediums.  A developer will then produce a specific BIP (Bitcoin Improvement Proposal), a standardized format for proposing changes.  This will be subject to public peer review, and may then be integrated into a future release of the Core client.  Individual node operators and miners may choose to install the new client or not.

Bitcoin’s governance may best be described as “governance by exit.”  Changes to the consensus rules produce a chain fork.  There is a strong community norm that the protocol should not be changed without near unanimous support.  Governance in Bitcoin often means “exiting” the existing network and creating a new community as we saw with the birth of  “Bitcoin Cash” (BCH).

Bitcoin has made use of on-chain signaling mechanisms for miner activated and user activated soft forks (e.g. BIP 148).  Miners or users may update their Bitcoin clients to take action automatically if a critical threshold of mined Bitcoin blocks contain a signal for a change, or at a pre-specified time.

To learn more: https://bitcoin.org/


Ethereum’s governance is formal and informal off-chain.  Ethereum has a proposal process, EIP, similar to Bitcoin’s BIP process.  A key distinction is the strong leadership of founder Vitalik Buterin and the coordinating and financing role of the Ethereum foundation.  Vitalik and the Ethereum Foundation have no direct control, but have strong community support.

Ethereum has community norms supporting relatively frequent major protocol changes, and many in the community support the idea of at least a temporary “benevolent dictatorship” to coordinate development for faster innovation.

In July of 2016, Ethereum underwent a contentious hard fork in response to the DAO hack, that led to the creation of “Ethereum Classic.”  This changed the makeup of the Ethereum community as crypto investors supportive of the fork stayed, and some of those opposed left the community.  It is easier to “move” from one cryptocurrency to another than from one political regime to another.

This ease of movement may lead to a self-reinforcing governing dynamic in which a community becomes more similar over time via self-selection.  In the case of Ethereum, self-selection after the fork may have strengthened norms of immutability in the ethereum classic community and weakened that norm in ethereum.  This is not intended as a criticism of either community.

To learn more: https://www.ethereum.org/


EOS governance is primarily on-chain and formal off-chain.

EOS utilizes on-chain voting by token holders voting for block producers (1 token, 1 vote.)  EOS also has a formal constitution governing behavior by block producers and empowering them to make off-chain governing decisions, like coordinating to freeze accounts that have engaged in criminal activity.

EOS is a new protocol (launched June, 2018) and one of the many governance experiments in cryptocurrency.  Ideally, token holders will vote for block producers who are “good actors” for the ecosystem, which could include building general tools like wallets and block explorers.  We’ve already seen evidence of cartels forming amongst block producers, and of “vote buying”, but also of block producers responding to incentives and investing to strengthen the ecosystem and increase token value.

As with any political system that involves voting, one challenge is complexity and voter knowledge.  It is difficult for EOS token holders to intelligently monitor, analyze, and then vote for a slate of block producers who are likely to be “good actors.”  This is something that fascinates me personally in both politics and cryptocurrency.  How can stakeholders make informed decision under antagonistic conditions?  In a conflict between stakeholders (or in an attack by external actors), we can expect disinformation campaigns and confusion in both cryptocurrency and politics.  This applies to all cryptocurrency governance models, but is exacerbated when stakeholders have to make frequent decisions about a wide range of topics with a diverse set of choices.

To learn more: https://eos.io/


Storecoin is an early stage project that aims to primarily make use of on-chain and formal off-chain governance.  It is loosely modeled after the US representative democracy with an emphasis on the checks and balances reflected in the various branches of government.  Storecoin aims to implement a “one entity one vote model”, in contrast to plutocratic proof of stake systems that are “one token one vote.”

Like the US government, Storecoin aims to balance responsiveness with steadfastness; change should be possible, but difficult in this community’s view.  Additionally, different types of responsibilities (e.g. validation, network security) are managed by specialists, but subject to review by other governance ‘branches’, aiming to balance the benefits of specialization while limiting the potential for abuse of power.

To learn more: https://storeco.in/



I view all cryptocurrency governance models as experiments.  We’re just now leaving the first decade of live crypto networks and still have much to learn from trial and error.  We may also find that some forms of governance perform better in different contexts.  Perhaps on-chain governance makes sense for some use cases and off-chain governance is preferable for others?

My intuition for cryptocurrency is the same as for politics.  The more diverse the stakeholders, the simpler we want the governance.  In politics, this suggests something like the federalism model we see globally today with minimal global governance, stronger national governance, and stronger still local governance.  The smaller and more homogenous the set of stakeholders, the more likely a strong governance model is to produce more good and less harm.

Imagine if we had a global democracy and voters in Asia could assert their will over voters in the rest of the world combined?  We’d likely want to minimize how much control the majority could assert over the minority.  In contrast, a stronger form of governance in a small town might be fine, since the residents are more likely to be closely aligned in their values and similar in their resources.

I look forward to learning from these real-time experiments.

Disclosures: BlockTower is a cryptocurrency investment firm that may take long or short positions in crypto assets, and our positioning may change suddenly.  At the time of publication, we have long positions in each of the assets discussed.  Nothing in this essay is intended as investment advice.

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