On Nick Szabo's Criticism of EOS' Governance

Vlad Costea

nick-szabo-eos-cryoto-globe.jpg

If you have watched the popular Netflix documentary "Banking on Bitcoin", you will know about the prolific cryptographer Nick Szabo and his experiment with BitGold - the single closest invention to Bitcoin we've ever seen. Taking a look at Mr. Szabo’s ‘unenumerated’ blog it is clear he is a polymath whose research transcends unitary fields of science. Therefore, it makes sense to pay attention to what he has to say and consider his views on the most important topics in crypto, in this case EOS.

As a computer scientist, he wanted to create money that can't be censored by human intervention. As a law graduate, he sought to extend the scope and usability of these money with smart contracts that execute operations and transactions fairly, according to pre-determined rules. The combination of these factors and the sum of innovations in the cryptocurrency field make Nick Szabo a leading expert and a reliable source for constructive criticism.

This time, the cypherpunk has tweeted his thoughts on the EOS governance - and the result proved to be controversial among supporters of the newly-launched coin. In Mr. Szabo's view, cryptocurrencies should be immutable (so that value can never get taken away from the owners), and the trust should be vested in code and algorithms rather than greedy human beings – Vires in Numeris. That's why it makes sense that he resents the EOS Constitution and shows very little faith in a project that tries to make investors believe in the governance of a selected elite.

In classical political terms, EOS can be described as an aristocracy - a polity where the power is held by a few wealthy ones who are deemed most fit to govern.

While believing in benevolent rulers is a common characteristic among Proof of Stake coins, the newly-launched crypto project already has a bad precedent with freezing funds within days of its debut. This practice finds a primordial place in Mr. Szabo's criticism and it's hard to deny the fact that the human-governed system will act just as arbitrarily if not more so than a central bank.

With Bitcoin, everything makes sense and it's a simple (at least by today's standards of advanced coins) yet functional protocol which allows users to trust the system while never relying on others. This simplicity alongside the tangible costs that go into mining are what make it the most secure currency in the world. The king of cryptos is akin classical participative democracies where anyone can hold a stake in governance by establishing a node and choosing which version of the protocol to run. There is no central planning, and decisions are made according to the users' majoritarian interest.

EOS Centralisation and Distribution CryptoGlobe Research

In contrast, EOS operates under a constitution, has modified its whitepaper in late March to change the governance and consensus algorithm (after a year-long $4billion ICO), and is also highly concentrated in terms of ownership, even after considering the exchanges that are large holders.

On the plus size, the system is easier to change in order to closely follow the vision of the creators, and the energy consumption to create security and mint new coins is minimal. But the downside is that the rules are fluid and bound to be written and rewritten according to precedents and arbitrary decisions. You can't trust the neutrality of the system as long as humans are involved in its governance, and you can't be sure that governments and regulators crack down or force you to comply with abusive rules.

 

The whole point of cryptocurrencies is to be censorship resistant, secure and decentralized. Constitutions are for governments, not cryptos.

If they become subject to human intervention, then their value is questionable: how is a centralized coin any different from a government's central currency or a system like PayPal? Both of them can enable all the features and provide fast and cheap transactions under their laws, terms, and rules of conduct. They possess a more complex system to resolve conflicts at a national and international level, benefit from a series of well-established precedents, and are completely able to scale organically like centralized banking systems had been doing for years.

But if we've learned anything from a long history of human constitutions, it's that they are fluid in nature and bound to get changed in both interpretation and structure. They aren't trustless in the sense that you can blindly believe that the system will self-regulate by virtue of some principles. Every generation of elites will try to impose their own vision on the project and govern differently from the predecessors.

The simple fact that the EOS Constitution contains a special chapter called "Emergency Changes" is a loophole in itself.

The American Constitution, for instance, can proclaim martial law under the provisions of Article 1 Section 9. The French Constitution allows the state apparatus to allocate funds to an urgent situation under several conditions that are highly subjective, and sometimes executive orders for controversial matters can be used to bypass democratic parliamentary votes.

How is freezing money any different from what a government does? Well, you have to trust in the benevolence and vision of a selected elite and hope that no authority decides to suddenly take down the entire operation. Truth be told, every coin that isn't Bitcoin has a breaking point and a method of destroying the credibility by imprisoning certain key figures. Bitcoin Cash would be worthless without Roger Ver and his business plans, Litecoin would lose its vision and purpose if Charlie Lee suddenly disappeared, and Ethereum's future would be questionable without Vitalik Buterin. In the cases where benevolent dictators are present to arbitrarily correct some situations, the value and trust in the project is directly proportional with the opinions and activity of said ruler. But in the case of Bitcoin, the system is much more free and open, you believe only in the code and its ability to solve disputes. You can hold a stake by mining, running your own node and participating in the community.

I do hope EOS will succeed and reach its goal. But when it is being mis-sold to the crypto community and the wider world as a secure and decentralised ‘Ethereum Killer’, it's hard to refrain from criticism. Without voicing our critical opinions, the system can become much more corrupt than we can imagine and the credibility of cryptocurrencies as a whole will be damaged.

When cryptocurrencies such as EOS claim to be decentralized it is important to remember that Bitcoin is the only cryptocurrency of ‘Virgin Birth’, the absence and anonymity of Satoshi Nakamoto is Bitcoin's greatest strength.