Nov 15th BCH Fork: Nakamoto Consensus will FINALLY be tested!

Nakamoto Consensus is upon us! All hail!

With the first real hash vote ever to occur in Bitcoin Cash set to occur in less than 10 days, it’s time to take a step back and really take in the enormity and the significance of this event.

We are literally seeing the FIRST practical application of a mass decentralized consensus system (aka ‘vote’) that needs no administrator, no organization, no coordination, no public debate, no polling stations, nor any face to face meetings! It is Nakamoto Consensus, as Satoshi created it. It itself is a pure system. Like the evolution of life, it needs no coordinator. Nobody tells a honey bee how to build the cells in the hive. Nobody tells each ant what to do or manages its daily work schedule. Nature just figures this out by way of naturally finding the most efficient solutions. But humans are a strange creature. We like to think. We rationalize. We are a social animal, and as such, we are predisposed to rely on social consensus systems. We create rules for ourselves, and we like to negotiate these rules amongst ourselves so that everyone concerned feels like their individual needs were considered, for a common sense of enfranchisement.

But Nakamoto Consensus doesn’t work like that. It, like mother nature, has a very simple rule: those who behave in a coordinated way that benefits the network will profit more than those that defy consensus. It’s as simple as that. The only remaining thing we need to add to that formula to make it all work is the simple assumption that people tend to want to be profitable, rather than not. With that one simple assumption, the automatic consensus system is complete, and we can rest assured that consensus will be obtained, passively, automatically, without supervision or orchestration.

Well, at least in theory. That is the idea of how it will work, but because Nakamoto Consensus is a ‘natural’ system, it is very hard to analytically work out exactly how long the consensus process will take in practice. There are just too many variables that factor into this equation to model, and much like trying to predict the market, which is the sum aggregation of millions of independent decisions being made by individuals, it is not trivial. That is what makes what will happen on Nov 15th very interesting to those of us who have been in Bitcoin for years, but have never been able to witness how well it holds up in defending against competing protocol changes via a hash vote.

As is the case for most natural phenomena which have yet to be well understood, there is no lack of theories concocted by pundits on all sides on whose votes actually count in such a hash vote. Their arguments generally fall into one of the following categories:

Individual Nodes decide

This is the belief that a majority of the nodes in the network (ones run by individuals like you or I) collectively decide what the network will accept as protocol changes. This is of course, a fallacy, because it is only in the extreme case where all nodes of the whole network were controlled by a collective power would all the nodes be able to rob the dissenting miners of the value of the rewards that they mine. This is of course an impossible situation on premise alone as the assumption is that the nodes are individually controlled. If we had a system that could coordinate the collective behavior of all the individual nodes in the network, then we would have no need for a decentralized consensus system in the first place. This misguided belief was the origin of the “UASF” movement, which was a grass-roots lobbist group which tried to convince the market that the node population (the common man) had enough power to influence network changes. They were never given a chance to be proven wrong, unfortunately, as after the NY Agreement, the supporters of big blocks conceded to split off into BCH instead of forcing the fork.

The ineffectiveness of individual nodes and their irrelevance to the network was later demonstrated when researchers confirmed that the Bitcoin network was a small world network, (one in which the number of average hops between any given 2 nodes was less than 3) and that most important connections exist between mining pool nodes. If individual nodes wish to partition themselves from the network it would not affect anyone else but themselves.

Economically Significant Nodes decide

This is the idea that nodes of exchange businesses, wallets or otherwise ‘economically significant’ players in the community have a vote in the decision. This believe isn’t too far-fetched. In reality, exchanges have some influence as the decision of whether or not to trade a split coin is in the hands of each individual exchange, and the decision to support a given upgrade fork of a blockchain is made by every wallet service provider.

The belief though that their opinions influence a hash vote, however, is less grounded in reality. In truth, although they are well within their rights to provide whatever service they wish to the public, using this support (or threat of withdrawing said support) as leverage during a hash vote is nothing but posturing. Exchanges and wallet service providers are businesses. (With exchanges having to further operate under strict regulatory regimes). If the market demands a service, someone will provide it. But as they are not miners themselves, they will have no way to provide the security support needed for a minority fork chain. Without this it would be very risky for them to provide services to their customers, but it is entirely up to them.

Developers decide

This is the biggest misconception in the industry. It is the myth that the developers that maintain the blockchain client code are the ones that control or influence the decisions to be made on the network. This is the model that most of the legacy bitcoin (BTC) developers operate under, (even though they will deny it themselves). Developers see themselves as the defacto ‘stewards’ of the system, and thus, their opinions should matter the most in guiding what the market and community should expect in terms of features or changes to the network. They use security and network integrity concerns as a basis for this claim, in which they convince the community to ‘leave it to them’ as they know what’s best for everyone. It is very much the nanny-state mentality, or a technocracy. The idea is that this does not devolve into an abusive dictatorship so long as no contentious changes can ever be approved by all developers. Unfortunately, it also ensures that needed changes or upgrades can never make it in either, as there will always be at least one developer to veto (perhaps maliciously) any change request.

Notable personalities decide

This is a slight variation on the case above, where the notable ‘luminaries’ or visionaries, are seen to hold more influence over the system direction than others. This is the model seen in Ethereum presently where Vitalik Buterin (one of the original founders of the project) is seen to have undue influence over what changes are allowed into the project. The power of such leaders was demonstrated when the DAO roll back hard fork was initiated and which produced Ethereum Classic (ETC). The dangers of this system of course is that it can easily devolve into a dictatorship, albeit a benevolent one.

Mining Pools decide

Most people make the mistake of thinking that the mining pools count in the hashpower vote, and this is an understandable mistake. That is because when people ‘see’ the miners of a blockchain, what they are actually seeing are the mining pools. The mining pools are actually just service providers. They run networks and server nodes and they maintain the ‘miner network’ that most people think of when they imagine the backbone of the blockchain. Indeed, it is between these pools that the small world network that has been much talked about actually exist. When blocks are found, they are found by the mining pools, and they are communicated the quickest among the pools. However, these companies, are not the ones that have a vote when it comes to a hashpower vote. If the power to vote belongs to ‘citizens’ of a country, then the mining pools are the companies in a country. They only provide the infrastructure of the network so that the true citizens of the Bitcoin ecosystem can participate in the network. It is true that without them, there would be no way for the network to operate, but if they were to act in a way that defraud the network’s constituents, or if they are not faithful to the wishes of the hashpower constituents, then hashpower will leave them and they would be out of business.

Hashpower decide

Hashpower is the true decider in a hashpower vote. That is to say, those that own the hashpower production assets are the only ones that have a vote in a hashpower election. They decide which mining pool to build blocks for, therefore they effectively decide which chain in a fork to build upon. They have the most skin in the game (collectively) because they are the ones that have committed 100% risk capital to the success of the blockchain and the appreciation of the coin. Data centres can be re-purposed, servers can be re-sold, coins can be dumped for others, but the only thing that becomes worthless scrap if the blockchain fails is the ASIC mining assets. They cannot be repurposed, and therefore they must be written off as losses. As it is, the industry writes down mining assets to zero after just 2 years of depreciation. If they don’t make back their value in 2 years or less, then the business may as well have thrown their money into a bonfire. That is the fundamental reason why hashpower are the only ones that you can be assured of to care the most about the long-term value proposition of the blockchain that they are mining, and the reason why they are the ones that can be trusted to make the best decisions for it. Their vote is weighted in proportion to the amount of hashpower that they own. The larger the portion, the bigger vote they have and the more influential they are. (and subsequently, the more invested they are in ensuring the maximal value be realized on the blockchain).

At present, the only (known) mining pools that own their own hashpower at present are:

Coingeek

BMG

BTC.top

The other mining pools that are listed at sites such as coin.dance are actually mostly hosting businesses and the hashpower that they host are actually their clients. Whenever you have clients, you are answerable to them.

I hope this illustrates why the fork on Nov 15th will be very interesting to watch. We already have plenty of ‘noise’ posturing by companies announcing their support for one fork or the other. At the end of the day, unless the company owns hashpower they actually don’t matter at all and they are only declaring their disregard for their clients if they promote one chain vs the other for ideological or political reasons. The only constituents that have the right to be political are hashpower owners. They paid for the right to vote. They paid for their opinions to be counted. (in proportion to their investment).

So on ‘election day’ on Nov 15th, we will see the actual constituents of Bitcoinland speak, and speak with their investments. Make no mistake, if you don’t own hashpower, you don’t get a vote in this election. Some folks may tell you that you do. Some folks may say that the market decides, by way of resulting price of the coins (subject to manipulation) and they will offer you the option of participating by way of buying one fork coin while shorting the other. Do not be fooled, these are only derivatives, and carry with them all the risks that derivatives do. If an exchange offers you claims on the forked chain coins BEFORE the hash vote has determined the majority winning chain, then they are offering you a HIGHLY leveraged bet, as ANY balances in a minority chain may be unpayble if the majority chain eliminates the minority chain (when most hashpower stops mining the minority chain). All minority chain balances disappear as fast as they were created.

The right thing for exchanges to do is to withhold trading in BCH until the majority chain is determined, and then switch to that chain. As an exchange that values the integrity of their customers deposits, they should not be favoring one chain over another, and certainly not encouraging rampant speculation on assets that may not even exist by supporting one chain as a matter of principle. The only right chain, is the longest PoW chain.

In summary, unless you own hashing power, you don’t have a vote. You may think you do, you may want it to seem like you do in order to influence others, but at the end of the day, the only party that answers to nobody is those that own hashpower. Everything that everyone may say or do or proselytize about, is nothing but political posturing, amounting to nothing more than campaign commercials. In the end, only the hashpower is counted, and the hashpower should be highly incentivized to come to consensus on a majority chain, and let the remaining one expire. Than is Nakamoto Consensus.

We don’t need anything else.

Nepotism vs Meritocracy: Which would you prefer?

If you ask anyone who works at any company, which would they prefer, they would most likely say meritocracy.  Meritocracy is the form of corporate governance that bases rewards and prestige on how much one contributes to the company and the value of those contributions, as opposed to nepotism, which rewards people for who they know, or if they have a personal connection with those in power at the company.

 

I was thinking a lot recently about nepotism and trying to challenge my own preconceptions of the practice and whether or not it is a good practice in the perspective of the corporation as a whole.  I find that when you really sit down and challenge the preconceptions of some of the things around us which we accept without question, we often find that the answers are illuminating and not at all what you would imagine at first glance.

 

Nepotism:  “the practice among those with power or influence of favouring relatives or friends, especially by giving them jobs.”

 

So what is the problem with this behaviour? Especially as China seems to make nepotism a common practice among those in the corporate world so much so that they have a special word for this — “guanxi”.  Most westerners would grimace at the thought that a company would reward some coveted positions in the company only to those who have personal relationships with those in power.  But this practice is widely seen in countries like Japan and Korea as well.  It is very common to see the daughter of a famous politician working at top tier western investment firms, or sons of wealthy businessmen finding their way into positions of power at legal firms.  But is this so bad?

 

 

After all, what is so bad about giving jobs to relatives of those who stand to potentially give your company favorable treatment in the future?  How much different is this from sales and client relationship management?  The line is definitely grey.  Who is to say that the potential business and profits that this practice may bring in isn’t more than the investing the money and effort into developing better talent for actual skilled workers?

 

If you think a bit on this and you ignore all the personal reasons or the negative secondary effects that this practice may breed (a negative impact on moral of the other employees for instance) then really the only problem with using nepotism as an effective way of increasing profits is that it shifts the company focus from the importance of internal capability and talent to that of a dependence on external parties.  Instead of building up your own capability to create value, you defer this to an IOU that you hope an external party will one day reciprocate.  Most of the time, this may pay off if the external party is influential enough to make a significant difference to your bottom line, otherwise employing nepotism won’t be worth the risk of the negative stigma that it would entail.  That is why it is rampant everywhere in corporate life around the globe. Because it works, in the short term at least. (But isn’t this true of most forms of corruption?)

 

But if it is a viable way to curry favour and increase the bottom line of your company, then why is nepotism seen as being an “unfair” practice?  After all, if you don’t like the fact that the son of the golfing buddy of the CEO just took your senior management position in your firm, why don’t you stop whining, and start practicing golf yourself instead?  Why do people complain that it isn’t ‘fair’?  Most likely because the fact of the matter is that nepotism tends to favour people within the same social circles.  And it is much harder for people of lower class statuses to mingle or even get to know people of the upper classes.  So it’s not so much the skill of your golf game that matters, it’s the fact that you would never have a chance to play golf with the CEO at all, because you are not of sufficient social wealth and influence to even interact within those circles.

 

Said tersely, nepotism favours those who have ‘earned’ their right to their position OUTSIDE of the confines of the system, while others in the company must earn their right to their station while operating WITHIN the system of evaluation of the companies’s KPI.  The tension is between those who work hard at the company and do their job well to earn the company profit, and who earn their way up the corporate ladder through merit, vs those who are rich and influential (or their progeny) who earned their wealth doing something outside of the company’s purview.  Those who earned their station via hard work, naturally feel it unfair that those who got a free ride into their position, by way of ‘cheating’.  In fact the game analogy fits very succinctly here.  Those who get their job via nepotism can be seen the same way as a team that wins a football match via paying off the referees.  Namely, they exploited an advantage that is external to the rules of the game, in order to beat their opponents at it.  Nepotism is bribing a judge at the Olympic figure skating championship; it is greasing the ball in the pitchers mitt; it is using steroids before the 100m sprint.  You are winning because you exploited an advantage that was outside of the rule confines of the game.

 

The notion of a ‘fair game’ is one which treats all the players equally and fairly.  Such that the winner wins based solely on their merits of performance within the rules of the game as agreed upon by all the participants.  This is a game which everyone can play, without fear that they would be taken advantage of, and this is the only type of game in which the losers can accept their defeat gracefully, without complaint, commotion, or resentment.

 

If we can all generally agree that nepotism, while potentially beneficial to the corporate body as a whole, in the long term breeds ill will among its honest employees, and also sacrifices internal talent and competence for dependence on the favours of external parties, then why pre-tell, are we in the crypto industry so hell bent on creating Proof of Stake systems? (as in Ethereum)

 

After all Proof of Stake systems, in which your influence in the blockchain system is proportional to the amount of native tokens that you have locked up or ‘staked’ and put at risk to ensure you perform your validation duties faithfully, are just the same thing as nepotism.  It uses the same model which rewards those who earned value external to the system, and bestows advantages to them by giving them influence in the system.  The similarities are plain to see if you just take time to look.  In a Proof of Stake system, you lock up some value in the native token (this is the opportunity cost that you pay to buy your influence).  This amount is static and you don’t need to pay any continual costs while you enjoy this position of influence.  Isn’t this very much like the daughter of the US Senator who got a sales manager job at Goldman Sachs? Her family earned a lot of money outside the system (the company) and they then pay some opportunity cost to get an influential job within the system (commits to spending their time at the company as opposed to working elsewhere), and then while employed, she doesn’t really need to do any real work, because she got the job due to her connections, and the company hired her only to curry favour with the father who is an influential politician.

 

Sounds a lot like a PoS validator!  (Sorry Ethereum, EOS, Tezos, and all the other Proof of Stake blockchains).

 

Compare and contrast, if you will, the lowly programmer, who works their butt off to develop great software products for the company.  Their position in the company is based entirely on their performance and value that they have created by way of real work delivered as software products.  Their commitment to the company is constant, as they constantly have to perform and ‘give time and effort’ to the company in order to maintain their status.  They cannot rest on their laurels.  They not only give up opportunity cost by choosing to work at this company and not another, but they also have to pay the daily cost of their labor to the company, and if they ever ceased to perform or ‘pay’ this maintenance cost or labor effort, then they would be fired.  Doesn’t this remind you of something?  Yes, Proof of Work miners!

 

Proof of Work is the only system that ensures that the game is fair, and that all participants are treated equitably and are equally incentivized to keep on paying the constant maintenance costs to earn wages in the company.  And very much like the system of corporations and capitalism, Proof of Work mining is the only blockchain verification system that has positive externalities.  Just like how employees of a company all pursuing their own advancement has the net positive externality of the company earning profit, PoW mining may soon incentivize research and development in efficient power generation and transmission, developing unused power sources, and even space exploration.

Who says Proof of Work mining is a waste of energy?

 

This is why Bitcoin Cash and only Bitcoin Cash makes sense as a global blockchain.  Because it is the only one that has both the history, and the focus on PoW miners being the most important part of the growing ecosystem.

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Coming to Consensus: Governance is just as important as Blocksize

One of the heated debates that has raged over the years in Bitcoin space is whether the idea of a developer team lead by a benevolent dictator is the appropriate model to employ for a network worth more than 15 billion dollars in market capitalization.  Many have cited examples of how Satoshi, and then Gavin himself were benevolent dictators, and also how some well known projects have been successfully managed under the watchful eye of a wise and benevolent (though sometimes abrasive) dictator such as the Linux project.  It is also true that most civilizations evolve from dictatorships, starting with the tribal chiefs, to feudal warrior kings, to aristocratic monarchs, to emperors.  The transition to a democracy is not always a smooth one, and is mired by both slippages into oligarchies, totalitarian fascism to misguided experiments into socialism.  It is important then, to keep in mind that while most organized groups start as dictatorships, they eventually evolve into a system that is more inclusive of the common people’s will.

Oh, Glorious Leader, shepherd for the weak, show us the way!

Firstly, let’s get the obvious out of the way.  Dictatorships are vastly more efficient than a republic or democracy.  635984715851776795-AFP-551724097This is due to the fact there is little bounds on the leaders power, and his followers will carry out his instructions in the most expedient fashion.  Contrast this to a democracy where leaders are continually second guessed by their opposition, and their political opponents who are all vying for their own chance to run the show.  In a dictatorship, the only way a change of regime is possible is through open and widespread revolution.  This is why despotic Chinese emperors of old made it illegal to congregate in groups of 3 or more, restrict what can be discussed in public and on occasion just committed mass murders of all the academics and scholars for fear that they may spread seeds of dissent and dissatisfaction among the peasants with their pesky logic, philosophy, and ideals of morality. Continue reading

Emergent Consensus: Guide to Forking Safely

Early this year, when the debate on how to manage the meta-consensus issue of hard fork management arose I wrote an article about emergent consensus.  This basically outlined the idea behind Bitcoin Unlimited‘s proposal of letting the network decide when it is collectively ready to move the block limit higher, and by what amount.  At the time, I wrote that the issue was lack of good UX tools which would be able to track network participants (whether mining node, or regular full-node) votes and show them in real time.  After all, emergent consensus can only work if there is a sufficient feedback loop so that the collective group decision making process can be facilitated, and overestimates and underestimates can be corrected.  Safe Forking!This is much like how a liquid market of bid/asks facilitates price discovery in every financial market since the beginning of human commerce.  It is only by repeated and constant dogmatization of the block size limit as a ‘sacrosanct’ part of the protocol, has the proponents of a smaller block restricted Bitcoin been able to convince everyone that the limit cannot be changed, lest the network be subject to catastrophic attacks or instability.

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Ethereum: A Hard Fork Lesson for Bitcoin

imgresEthereum made crypto-history this week by being the first PoW blockchain to execute a hard fork. They claimed it was done after getting unanimous consensus from the community through stake voting which many have criticised as being nothing more than a farce, as less that a total of 13% of the coin population bothered to turn up to vote, and some sources say it was even possibly less than 2%. Nevertheless, the hard fork was devised and coded, hastily tested, and released, and when the fateful day arrived when it was pre-programmed to activate, July 21st 2016, the network indeed split into two. Quietly, smoothly, without much fanfare.

A week before a group of developers and supporters who opposed the hard fork on ethical principles formed a movement called Ethereum Classic, and pledged to reject the new fork which would see the seizure and confiscation of the ETH that the DAO attacker had acquired during his raid. This movement also saw the defection of about 5% of the mining power in the ethereum network.

What happened after the fork block made history. Contrary to what the ETH developers said, the fork did not remerge and the minority chain persisted. At first the block rate was a fraction of the majority chain. But now after 2 days the block rate has stabilized and the minor chain is mining blocks at about the same rate as before the fork. In addition, the difficulty of the mining is only 1% of the majority chain, which adds an economic incentive for miners to mine on the minor chain in order to make more rewards. This second chain represents the split-fork scenario that many Bitcoin core devs have been warning the community that would cause chaos and destroy both systems. Only, it didn’t. At least not yet.

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On Ponzi’s, Equity Derivatives, and Ethereum

Charles_Ponzi

Many people will talk about ponzi schemes without actually thinking about what that actually means. They say that Ethereum will fail because it was founded on and funded by lies. But when it comes down to it, how are these different from that of the current central banking debt based fiat money system?

Fund first, ask questions later

Ethereum was a project funded with 18m USD of value mostly in BTC. After writing a whitepaper and creating a proof of concept prototype, they hired developers to write it. Most of them were loaned money and worked for free but were promised exorbitant 20% bonuses after the crowd-sale.  They made a windfall after selling ETH before the blockchain was even in operation in what is called an initial coin offering or ICO to the public. Once the money was raised they patted themselves on the back, and all the developers who were promised pay in stock options (ETH) simultaneously breathed a sigh of relief and cheered.

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The DAO: ‘the Way’ — but to what?

Big news for ETH supporters as the DAO finally launched and have their token traded for the first time.  After a day of trading, it seems the DAO tokens closed trading under par. (ETH value).  What went wrong?

If you ask me, the DAO is an ambitious project.  It makes Macbeth look like Ben Carson by comparison. In order to understand it to any degree, first you will need to gather some things:

  1. A bottle of Jack Daniels
  2. The DAO whitepaper
  3. 10 cans of Red Bull
  4. 12 hours of free time, preferably in the dark
  5. some psychedelics
  6. 1 towel

Lock yourself into that dark place, and let nature take its course.  If you need to, use the towel.  After the elapsed time, you may emerge understanding DAO well enough to maybe want to put some money into it, or pray to it.  At which point you really should stop what you are doing, and go to sleep (because let’s be frank here, you are probably drunk and hallucinating) and pick up again in a couple days time.

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Bitcoin: Getting to the Moon 101

Easter weekend.  Family reunions, liturgical services, fasting for some, feasting for others, a time for renewal, time to dispel some crypto myths!

Everyone talks about “going to the moon” in crypto but few if any really knows what that means.  Cypherpunks care about privacy and censorship resistance, libertarians care about political ideology and businesses care about making money. But how many of them actually think through how to get there?

I don’t mean in a metaphoric sense, I mean pragmatically. What is the adoption roadmap? What do we mean by ‘moon’? Price?  Resistance to government usurpation? Censorship resistance? Self sustaining system without any oversight?

True, most people who say “To the moon!” are just pumpers or speculators trying to incite a windfall profit from the penny stock altcoin that they purchased for the express purpose of dumping it for a profit on unsuspecting suckers.  But let’s consider a moment the goal of Bitcoin –becoming a widely accepted alternate money to fiat currencies– how does Bitcoin get to there from where it is today?  What challenges and obstacles must it overcome?  What different stages of development and growth must it evolve through?

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Roundtables vs. Honey Badger (0-2)

As the ongoing debate in Bitcoin between the Core and the Classic camp rages on, early signs of tentative order emerging spontaneously from the un-orchestrated chaos can be seen.  For one, most of the intelligent proponents on either side finally seem to have recognized the fundamental irreconcilable differences of opinion on either side of the divide, having spent the last 3 months weeding through the army of trolls and sycophants which always seem to amass around idealogical movements.

escudo-shatoshi

The industry has started to look upon itself in a satirical way, from high profile jokers like Samson Mow, to the absurd display at the Miami Satoshi RoundTable, organized by Bitcoin Foundation Bruce Fenton, which sported such medieval artifacts as an actual suit of armour and a Bitcoin Magna Carta which would make 45 year old AD&D live roleplaying nerds giddy.  The industry has certainly reached its apogee of insanity, absurdity and self flagellation, and it can’t possibly get any worse, and thus, we should expect to see things starting to come back to reality very soon.

Several promising things have been happening recently that give me cause to be hopeful that we may yet see the end of this “Rite of Passage” in the life of Bitcoin:

  1. Core has started to consider a hard fork proposal themselves.
  2. Interest in Bitcoin has been re-kindled in the form of 2000+ (as of writing) new nodes added to the network.
  3. Mining pools have started to implement miner voting systems within their constituents.
  4. New consensus tools have emerged which help bring visibility to and encourage people get involved in, the decentralized crypto-governance process.
  5. A total of 4 past attempts at securing industry participants into binding agreements have all failed to produce consensus.

Let’s examine each in turn.

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