Why Ethereum Classic Should Not Create a Treasury

In light of new reorganization attacks that caused several double spends on the network, and a subsequent discontent with development and lack of innovation, the Ethereum Classic (ETC) ecosystem is evaluating the possibility of integrating a central treasury system on the blockchain.

A treasury system, in the context of blockchain technology, is a financing and decision making mechanism that redirects rewards that are assigned to proof of work miners and reassigns them to a new development fund. This fund is then used to pay for new projects for the network by means of a public voting process, establishing a de facto traditional governance system.

Ethereum Classic Centralized Treasury
Ethereum Classic Central Treasury.

However, the ultimate goal of secure blockchains is precisely the opposite: to not have centralized governance systems, so they can be able to guarantee sound money, property, and agreements, by means of trust minimization, reducing as much as possible subjective decision making.

Why Ethereum Classic Should Not Establish a Central Network Wide Treasury

Following are the reasons why the ETC ecosystem should not go forward with a central treasury system.

It Establishes a Top Down Governance System

By instituting a 20% tax on mining rewards to fund the treasury, at recent prices, it would gather approximately $10 million a year. If the market goes up, that value could increase significantly.

A system that extracts such large amounts money and then uses it to direct development, inexorably turns into a de facto top down government body of the network. The voting feature does not change that fact. In the end, charismatic leaders, entities with large stocks of $ETC, and influential alpha technical leaders will always command control, and impose their personal values and world views.

In the open source software sector, and especially in supposedly permissionless blockchain systems, very few would dispute the sheer power of the treasury.

It Introduces Trusted Third Party Risk

Once a formal, well funded, governance system is in place, that system automatically becomes an insecure trusted third party and a permanent threat to the blockchain. This is because all decision making about network features, policies, and use cases eventually becomes concentrated in the treasury system, which turns into a honeypot for control and malicious actors.

It Creates a Monopoly

Due to the crowding out effect, where the capital and funding of the treasury system through a miner tax will fulfill all the financial requirements of Ethereum Classic, the treasury will disincentivize independent participation in ETC and become a development and decision making monopoly.

As the treasury system is merely a traditional governance system, and traditional governments, including private and public organizations with treasuries and voting, are centralized, it will have absolute decision making power.

This means the rest of the ecosystem will become a mere permissioned user and submissive external observer.

It Directs Funds Only to the Desired Projects of the Managers

The monopoly in decision making means that all projects selected by the system will comply with the values, world views, regulatory needs, and restrictions of the governing body.

It Deters Innovation

As Ethereum Classic will have a monopoly in decision making and projects, any external developer teams or would-be interested parties, not included in the internal social circles of the treasury system, will find a barrier and extremely costly to voluntarily participate, propose projects, or visions for the system.

The way open source software and blockchain innovative technical contributions usually work is that developer teams, sponsor organizations, or investors, one way or another, expect future returns on their efforts, time, or investments post facto, in the medium to long term, assuming real risk and aligning their incentives with the success of the network.

To the contrary, in a treasury system, as the developer teams favored by the monopoly sit back and earn pre-agreed income regardless of the future results of their contributions, they will lack incentives to produce innovative and useful technology for the system.

In other words, innovation will be stifled and restricted to the narrow choices and whims of the treasury managers.

It Increases Risk by Reducing Rewards to Miners

The proof of work based Nakamoto consensus mechanism depends on paying as much money as possible, within the limitations of a sound monetary policy, to miners in the form of fixed rewards, and transaction fees, so they dedicate as much hashing power as possible to the network.

By taxing those rewards and redirecting the funds to other purposes, the treasury effectively reduces miner revenues, therefore adjusting downwards the hashing power dedicated to protecting the system.

It Becomes an Easy target for Government Intervention, Regulation, and Intrusion

Once a central treasury, which is a euphemism for a central administration, is established, it becomes very easy for nation state and government authorities to influence or capture the system. It is only a few phone calls away to the main voters and administrators of the treasury to order them to add changes and features to the system, or to censor and restrict participation, property, and agreements.

It Turns Core Developers Into Trustees Introducing New Legal Risks

There are many efforts in the anti-blockchain establishment, and legal and political circles to restrict or even stop the development of secure blockchain networks. One of those efforts is to declare the core development teams of these permissionless system as trustees. This would automatically make them fiduciaries, which means they would become liable and responsible for everything that happens in the pubic network.

By creating an internal and systematic network based compensation system to developers through a central treasury, the arguments in favor of legally defining them and the treasury managers as trustees would be much stronger and difficult to refute. One thing is to have independent companies, engineers, and computer scientists investing their own time and money, at their own risk, and freely proposing upgrades and changes that can be voluntarily adopted or not by network participants in an open source manner, and another is to position the treasury system as the de facto manager, designer, and decision making entity of the network.

Establishing or closely resembling fiduciaries and being legally defined as such, not only reaffirms the need of even more centralization by the treasury managers to control their liability, but forces them to turn the blockchain into a traditional regulated and restricted system. Very much like central banking, financial institutions, or services like PayPal.

Banking-like regulation is an increasing pressure as well in other traditionally centralized tech sectors such as social networks and cloud services. The latter being a perfect analogy to smart contract networks as Ethereum Classic.

Ethereum Classic Is a Long Term Project

There are many other reasons why a treasury is not a sound choice for ETC, but the problem that is making several participants in the ecosystem become nervous and impatient is high time preference. They want to eliminate reorganization attacks immediately, the price to go up as soon as possible, the market cap to rise fast, to have innovation as frequently as possible, and to magically recruit the best computer scientists in the world now.

However, history shows that low time preference helps human organizations such as nations, communities, groups, families, individuals, businesses, and, why not, blockchain ecosystems, form capital, knowledge, value, wealth, trust, honor, and prestige in the long term.

This is especially true for ETC because of how it came to be; the antagonism with an extended ecosystem that violated immutability and took away talent, network effects, and funds; the subsequent lag in key metrics; and also to the market noise of the current blockchain standards war.

It is extremely important to realize that Ethereum Classic has never stopped working as designed. Even after enduring the terrible hard fork of 2016, the constant and persistent social attacks, and the several 51% reorganizations in recent history.

ETC has principles.

Let it be known to the entire world that on July 20th, 2016, at block 1,920,000, we as a community of sovereign individuals stood united by a common vision to continue the original Ethereum blockchain that is truly free from censorship, fraud or third party interference.

— Ethereum Classic Declaration of Independence

At this point, to solve short term problems with long term structural and centralizing devices can only be described as foolish.

A Genuine Vision and Roadmap for Ethereum Classic

As an incredibly and uniquely decentralized ecosystem, Ethereum Classic has been very consistent and persistent in maintaining a very disciplined set of values around trust minimization and decentralization.

It’s this whole snake’s nest that could be avoided by refusing to be dragged into conflict resolution and quest for justice as related to smart contract execution. And it only requires sticking to principles of blockchain neutrality and immutability.

So, Code Is Law on the blockchain. All executions are final, all transactions are immutable.

Code Is Law and the Quest for Justice, by Arvicco

My interpretation of those principles, as I have written several times, revolve around and affirm a vision for ETC as a highly secure base layer system, very similar and likely complementary to Bitcoin.

If that vision based on those principles is correct, then Ethereum Classic should remain as an independent ungoverned system, with proof of work based Nakamoto consensus at its core, Turing completeness as its key functionality, and with a sound and fixed monetary policy.

Based on the above, the ideal roadmap goals for Ethereum Classic overtime, without undermining its principles, should be along the lines of:

• Gradually and moderately increasing transaction capacity

• Reducing bloat to increase node count

• Building layer 2 connectivity so other systems can work on top

• Lateral compatibility and interoperability with Bitcoin to serve as a programmable complementary base layer system

• Backward compatibility so new features, fixes, and upgrades don’t break past smart contracts

In the short term, a good idea that is being advanced is to change the mining algorithm so ETC is the leader in its proof of work niche. That is a legitimate choice.

A blockchain system that is meant to be trust minimized and socially scalable at a global level; protecting basic rights as money, property, and agreements; and permissionless for everyone in the world regardless of their country, culture, ideology, beliefs, gender, race, or any other human condition; does not have a place for a central treasury.


Code Is Law

Author: Donald McIntyre

Read about me here.