Common sense thoughts on Ethereum’s network effect and governance

Get ready for a new generation of Ethereum killers claiming that they can steal Ethereum's network effect through "superior" technology. We've already see it a bit with Polkadot, but we'll start to see it more from projects like Cosmos, Dfinity, and Tezos. But as I said in this post a couple of weeks back, they're going to compete with each other more than they do with Ethereum.

If Ethereum was stagnant, they might be right- Ethereum could be ripe for disruption. But Ethereum can and will copy their best ideas (where there are not technical limitations to prevent it), and will continue to improve the most widely used and developed for smart contract platform in existence. And where competitors see usage that is "not significant to create a durable network effect," I see on-chain tokens and assets for a wide variety of dapps, and people (like me), who don't want those types of assets spread out over 10 or 100 different chains. And I see dapps now interoperating with each other at scale, with some dapp functionality (like Maker) becoming a primitive to build upon for other dapps.

If you look through the history of platforms which lost their first mover advantage, it's often because they couldn't adapt to the market fast enough, in the face of competitors who often provided initially lightweight, tailored, and more useful functionality. Facebook started as an exclusive network for students at elite colleges who wanted their own, semi-private social network. Many of these new Ethereum competitors are taking the exact opposite approach. These competitors are not providing niche functionality which disrupts Ethereum- they are providing incredibly complex solutions to problems which don't yet exist (like connecting many blockchains together into an interoperable mesh). Further, there are not any restrictions on Ethereum which would prevent the platform for adopting similar functionality via L2. It won't be long before we see alternatives to Polkadot/Cosmos on Ethereum as L2, and we already see Loom is creating a bridge to Cosmos.

And then there is a question of governance, with incredible amounts of theoretical bluster being thrown around for why it's needed. These discussions, seemingly lost in borderline philosophical proofs, miss a very obvious point: if the market demanded it, it would shift to L1 solutions which offer that governance. They also seem to miss that platforms like Ethereum were designed to escape governance models which could be easily captured, and many (if not nearly all) users of Ethereum have the expectation that state changes are unacceptable, except for situations where there may be an existential threat to the network.

In the case of Ethereum versus other platforms on with on-chain governance, like EOS, Polkadot, and Cosmos, I think you're seeing / going to see that the market doesn't value those on-chain governance approaches, and they are actually a detractor for adoption by devs who care about decentralization and censorship-resistant activity- especially when they are combined with flawed token disributions. Many of the most enterprising devs in this space, who are developing actually useful dapps right now, are those who embody a "cypherpunk" ethos, and most of them develop for Ethereum precisely because it has no formal governance. They want to build unstoppable applications. They know the responsibility and difficulty that comes with L1 development on Ethereum (i.e., no reversibility)- yet, they do it anyway. And yes, that may mean in the future that some apps are not suitable for L1, and will instead rely upon governed or reversible L2s. That's fine, because they will be forced to provide the ability for users to still exit to and interoperate with L1.

I want the highest security possible for my on-chain assets, and I want the confidence that they cannot be seized or adulterated through poorly crafted governance mechanisms. If I want poorly crafted governance systems, I have countless "real world" financial institutions and apps I could use, powered by blistering fast SQL databases. Until someone else figures out "fair" on-chain governance first (either a competing L1, or an L2 on Ethereum), I won't be advocating for Ethereum to take on the bold experiments in this space. I don't dismiss the possibility of governance being useful one day, but right now, I believe the value that Ethereum provides to the world as a mostly ungoverned (read mostly un-capturable) blockchain is worth that tradeoff.

Some will tell you this is antithetical to the governance norms of humanity as shown over thousands of years of history, but I ask you this: when has it ever been possible before now to have the current form of informal governance, with code-driven operation which Ethereum has? We have thousands of years of examples of governance that "sort of works," before it inevitably fails (and yes, they almost always eventually fail, with empires falling and nation-states failing).

What if informal blockchain governance could be an antidote to the issues which come with that traditional governance, like avoiding capture? Yes, it introduces its own issues, but they very well be worth the tradeoff- especially when you consider the existence of opt-in L2s which allow for different forms of governance. If you want an experiment in governance, it's happening right now, on platforms like Ethereum and Bitcoin. If you don't like the terms of that experiment, I get it. Go use one of the governed chains, or just use AWS- it'll be a lot faster.

Advertisements