Why is governance needed?

Ethereum is not a static protocol. To fix critical bugs, to scale, and to respond to evolving market conditions, changes to the Ethereum protocol are constantly needed.

Ethereum governance in practice

Ethereum integrates a formalized process for proposing, debating, and integrating upgrades to its protocol. At the core of this process lies the Ethereum Improvement Proposal (EIP). Broadly speaking, individuals or teams within the Ethereum developer community draft EIPs and the wider community debates their merits vigorously. Proposals are amended, resubmitted, and debated further until rough consensus is achieved amongst the most active participants in the community. When developers have completed the code needed to bring an EIP to life, it's audited and rigorously tested on Ethereum's 'testnet.' Finally, an upgrade to one or more of the Ethereum clients (aka the Ethereum 'software') is merged into the public code repository, at which point the entire community of nodes must voluntarily choose to install and run the new upgrade. Only then can the changes brought by an EIP be considered part of Ethereum.

The difficulty of achieving consensus in a decentralized system

As a decentralized system, the process for evolving the Ethereum protocol is necessarily one of deliberation, persuasion, and volition amongst stakeholders. In other words, its a quasi-political process. This is in contrast to more centralized systems such as private companies, where there is much greater capacity for unilateral decision making.

Thus, while anyone can draft and submit an EIP as described above, the real challenge is to garner support for the proposal, gather the resources to develop the needed changes to the Ethereum software client(s), and - most importantly - convince the entire community of stakeholders to adopt it.

In Ethereum, the stakeholders include miners (who run server farms to validate transactions and secure the network), node operators (which may include cryptocurrency exchanges, wallet providers, block explorers, Decentralized Applications (DApps), and more), core protocol developers, DApp developers, users of DApps, and holders of ETH. All of these stakeholders have an interest in the evolution of the protocol.

It's always up to the community itself to determine what a decentralized protocol like Ethereum is. This means that the values of the community tend to guide the evolution of the protocol. The question, then, is what values do the Ethereum community espouse?

Credible neutrality: Ethereum's guiding principle for governance

The community of stakeholders around a cryptocurrency inevitably develops its own culture over time. In Bitcoin, for example, the culture has converged on values such as self-sovereignty and distrust of authority. This has led to the adoption of maxims like "not your keys, not your Bitcoin" and "don't trust, verify." The Ethereum community certainly shares many of the same values, but, as Ethereum is aiming to achieve a rather different function than Bitcoin (more on that below), it should, perhaps, not be surprising that Ethereum's community has a different culture with correspondingly different values.

In a 2020 essay entitled, "Credible Neutrality as a Guiding Principle" Ethereum's inventor and co-founder Vitalik Buterin laid out some of his thoughts on the importance of getting governance right in systems where high-stakes outcomes are on the line (as is the case for Ethereum, where the network manages billions of dollars in value).

When looking at "how to build efficient, pro-freedom, fair and inclusive institutions that influence and govern different spheres of our lives," Buterin emphasized the importance of 'credible neutrality,' which he defined as follows:

In other words, the goal for evolving Ethereum over time, according to one of Ethereum's key figures, is to ensure that it doesn't favor any of the stakeholders in the community. But does Buterin's goal match reality?

Read more: Who created Ethereum?

Progressivism vs conservatism

If the process of deliberation and persuasion amongst stakeholders in a decentralized system breaks down, and when rough consensus cannot be achieved, there's a chance the community will split. In Ethereum's case, only one major split has occurred thus far. When the community was unable to agree on the best way to handle a hacking incident in 2016, a fork was created. Specifically, the majority of the community decided that rewriting the blockchain to reverse the hack was the best course of action, while a minority converged on the conservative approach of sticking with the rules and moving forward with the original blockchain unchanged. The original chain, then, become known as Ethereum Classic (ETC) while the forked chain, which, again, retained a much larger share of community support, kept the Ethereum (ETH) moniker.

Can the decision made by the majority in this case be considered to have been in line with the principle of credible neutrality? The answer is certainly debatable. While critics might argue that neutrality was compromised by the tyranny of the majority, another way to look at it is that the community converged on progressivism over conservatism.

Ethereum's vision is to serve as a platform for the next generation of the Internet itself (Web3). In this respect, it is very much a work in progress. At its current stage of development, Ethereum frequently suffers extreme network congestion that leads to delayed transaction processing and unsustainably high fees - and that's despite the network facilitating a relatively small number of users interacting with a still-limited range of applications, at least compared to what's required to achieve Ethereum's vision.

Given the need to make rapid progress on improving Ethereum (a need that's made more pressing in the face of growing competition from alternative smart-contract platforms), it would seem essential that Ethereum's governance process allow for sweeping changes to be made when needed.

By comparison, with Bitcoin aiming to fulfill the role of 'just' **an alternative to government-issued money, a censorship-resistant store of value, and peer-to-peer medium of exchange, it is perhaps much closer to being 'complete' or 'perfect' in its current state. Further, one can argue that, in Bitcoin's case, changing the protocol risks undermining its value, particularly since Bitcoin, in its current state, already seems to be serving its intended purpose to a large degree. Thus, in contrast to Ethereum, it may be advantageous for Bitcoin that its community has converged on a policy of (relative) conservatism.

Read more: How does governance work in Bitcoin?

The blockchain trilemma

The blockchain trilemma refers to the widely held belief that with respect to decentralization, security, and scalability, blockchain networks can only optimize for two of the three features at once. In other words, the only way to scale a blockchain for instance, is to sacrifice either decentralization or security. Critics of Ethereum often argue that its speed and throughput advantage relative to Bitcoin, for example, comes at the cost of decentralization.

Criticism of Ethereum's level of decentralization

The decentralization movement, at its core, is about reducing the ability of a small group of participants to control a system. In this regard, the presence of a robust and diverse community of node operators is typically deemed important. Reason being, since nodes run the software that defines the protocol, anyone who wants to change the protocol must first convince nodes to install and run their new version. Therefore, in a world where, for instance, only large businesses or institutions have the capacity to manage a node, the protocol may change over time to suit the interests of those organizations rather than the interests of more widely varied individuals. This would compromise the network's ability to achieve credible neutrality.

One way to ensure there's a robust and diverse community of node operators is to retain a low barrier to entry for setting up and operating a node. The argument here is that if there are no major technical hurdles or cost barriers to running a node, a widely varied pool of people will do so. Adherents to this point of view were adamant, for instance, that increasing the Bitcoin block size would lead to centralization as it would increase the cost and complexity of running a Bitcoin node - something that would, over time, reduce the number and diversity of node operators. Disagreement over this issue, in fact, led to the splitting of the Bitcoin community and the creation of a 'fork' that became known as Bitcoin Cash.

A common criticism of Ethereum is that the community of Ethereum node operators is, or will be, less robust and diverse than that of Bitcoin due to a current or future higher barrier to entry for operating an Ethereum node.

The danger of node centralization in Ethereum was highlighted in November 2020 when a single node operator called Infura temporarily went down due to a technical malfunction. As many ecosystem participants had been relying on Infura's data rather than independently running their own nodes, several major exchanges were forced to temporarily halt ETH and ERC-20 token withdrawals. If such a disruption is possible when a single node goes down, the argument goes, Ethereum's ability to retain credible neutrality could be compromised by, for example, a government putting pressure on a pivotal node like Infura.

As it relates to the barrier to entry for setting up a node, critics often point to the relatively large size of the Ethereum blockchain. While the Bitcoin blockchain, which has been around twice as long as Ethereum, is measured in hundreds of gigabytes, Ethereum's blockchain is measured in terabytes. This means that running a full archival node (which requires the operator to download and verify the entire history of the blockchain from genesis to present) is considerably less data-intensive for Bitcoin than for Ethereum, with the result that less people in the Ethereum community run full archival nodes.

Read more: What is ETH 2.0 and can it solve the blockchain trilemma?