CoinDesk columnist Nic Carter is partner at Castle Island Ventures, a public blockchain-focused venture fund based in Cambridge, Mass. He is also the cofounder of Coin Metrics, a blockchain analytics startup.
A quietly important phenomenon has gained steam in the last few months. And I’m not referring to Grayscale gobbling up all the new coins or Cash App’s bitcoin volumes exploding.
Bitcoin’s patronage system – how future network development is funded – has gained unheralded strength, with many more entities signing on as sponsors. These groups recognize that sponsoring the core developers who keep the system running is profoundly important to keeping this public infrastructure moving ahead.
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For a long time, Blockstream, Chaincode and the MIT Digital Currency Initiative were the major patrons sponsoring core developers. Thanks to their support, a handful of the most critical and engaged developers were able to commit their time fully to Bitcoin. However, many more developers active on the Bitcoin codebase or ancillary projects remained unfunded and had to split their time between Bitcoin development and day jobs.
In 2019, Square Crypto burst on the scene and announced its intention to fund a variety of Bitcoin projects, both relating to the main codebase but also targeting less conventional improvements to Bitcoin’s design and user experience. Notably, its first grant was to BTCPayServer, a project dedicated to facilitating bitcoin acceptance among merchants. This signaled a broadening of the universe of grant-worthy projects and inspired several other organizations to throw their hat into the ring.
Today, the Bitcoin patronage environment is encouragingly vibrant and diverse. Numerous organizations have recognized the favorable economics of supporting Bitcoin development. In 2020 alone, BitMEX has added to its commitments, venture fund Paradigm has jumped into the ring with a sponsorship of Anthony Towns, exchanges Kraken, BTSE and OKCoin made material grants to BTCPayServer, and Square Crypto made a blizzard of grants to a wide variety of entities.
No other public blockchains have Bitcoin’s combination of industry buy-in, accumulated credibility, and neutrality from inception.
For a fuller accounting of Bitcoin patronage initiatives, see this piece from BitMEX Research, with supplemental information here. In short, Bitcoin’s patronage environment has gone from one in which a half dozen core developers were subsidized by a handful of institutions, to a setting where dozens of individuals and projects – many of which lie entirely outside the domain of “Core” – are able to obtain financing from a much larger variety of donors.
Until recently, it had been virtually impossible for individuals to make tax-deductible donations to Bitcoin development (one shudders in recollection of the Bitcoin Foundation). This changed when the Human Rights Foundation announced its Bitcoin Development Fund last month, which comes wrapped in a helpful 501(c)(3) format. For individuals who want to donate directly to core developers, several Bitcoin developers have signed up to Github’s new Sponsors program.
This is incredibly encouraging. Not only is essential but costly security review being funded, but non-Core public goods like BTCPayServer and Lightning are now supported. And critically, the broadening of the donor base means that allegations of capture or co-option ring hollow. Gone are the days where Blockstream faced allegations of hoarding all the most influential developers.
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One imagines that the fundamental logic – firms that rely on Bitcoin should support development, not because it’s the right thing to do, but because it’s the economically rational thing to do – will eventually persuade even the most recalcitrant among them. At this point, large exchanges, custodians and brokers who resist giving back to the protocol which powers their businesses face a PR black eye.
For those versed in the dynamics of open source, Bitcoin’s patronage system as a funding model should come as no surprise. Bitcoin works in ways that are not short-term expedient, but pay dividends in the final analysis. Of course, a protocol-derived pool of rewards with which to pay developers would have been much more convenient, but it would have completely undermined the political neutrality of the monetary system.
Every now and again, critics bemoan the lack of a protocol-financed slush fund with which to pay for improvements and public goods. Such pools of capital, derived either through pre-mines or the ongoing diversion of block rewards, exist in Ethereum, XRP, EOS, Zcash, Dash and many other Bitcoin alternatives. But far from enhancing the prospects for these networks, these funds are a source of bickering, self-dealing and graft. They endow the protocol-proximate individuals who control the purse strings with total discretion to direct funds to allies and friends. Governance controls are generally weak and token holders lack the effective ability to monitor and police these expenditures.
When it comes to monetary neutrality, projects with protocol financing are no better than the deeply politicized USD.
These projects choose the unfortunate path of granting fiscal privileges to network administrators, effectively creating poorly-run bureaucracies. Corruption and malinvestment have been the predictable result. For networks aspiring to become critical financial infrastructure on a global scale, this constitutes a significant liability. When it comes to monetary neutrality, projects with protocol financing are no better than the deeply politicized U.S. dollar.
Even projects that do not currently expropriate validator revenue for development funds are not immune. The siren song of cheap money for development constantly rings in their ears. One notable example is Bitcoin Cash, which is currently embroiled in an ugly civil war over protocol financing.
Due to a paucity of developers on BCH, the most influential among them can effectively extort the community into granting them remuneration financed by the protocol itself. As such, major BCH stakeholders proposed an “Infrastructure Financing Plan” that would divert block rewards to a fund dedicated to development. This would constitute an effective redistribution from the already-questionable security budget towards a fund controlled by a small handful of individuals doled out to cronies.
Because BCH never developed a meaningful patronage system, token holders can now be shaken down to divert funds to certain developers. Even if this plan is rejected, the idea will linger. The only remedy is a stable patronage system. But no other public blockchains have Bitcoin’s combination of industry buy-in, accumulated credibility, and neutrality from inception, so the emergence of similar patronage models appears unlikely.
This is one of Bitcoin’s underappreciated advantages: by committing to a stable set of rules, Bitcoin has insulated itself from the expropriation of its supply for political expediency.
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