Forking and Governance Challenges in Public Blockchains:
Public blockchains present unique governance challenges compared to traditional governance models. The old model of governance assumed a static protocol that guaranteed honest users would follow it forever. However, software needs to evolve, necessitating a mechanism for agreeing on protocol upgrades.

Taxonomy of Forks:
Soft forks reduce the set of valid messages under the new rules and can add new features. Hard forks expand the set of valid messages and require miners, developers, and users to adopt. Maximally hard forks involve arbitrary new rules.

Governance Properties of Different Forks:
Soft forks rely heavily on miners and have a failure mode where users adopt but miners don’t, leading to a split chain. Hard forks require miners, developers, and users to adopt and have a failure mode where miners adopt but users don’t. Maximally hard forks have the highest risk of failure as there is no guarantee of adoption by any group.

Hard Fork Failure Modes:
Hard fork failure occurs when some users adopt the hard fork while others do not, resulting in a chain split. To address this, social consensus is needed beforehand to ensure a majority of users agree on the hard fork.

Schelling Points in Hard Fork Decision Making:
Schelling points are salient choices that people tend to agree on without explicit communication. In hard fork decision making, the choice is whether to install software that accepts the fork or not. The Schelling point is the choice that is more salient and likely to be adopted by a majority of users.

The Pregame: Signaling and Manipulation
Before the hard fork, each side engages in signaling to make their victory seem inevitable, encouraging others to join their side. This behavior is observed in both Bitcoin Core and Bitcoin Classic supporters.

Manipulating Schelling Points:
In the Bitcoin scenario, the Schelling point is the idea that forks are accepted only if a majority of miners support them. This Schelling point can be manipulated by signaling and other strategies to influence the majority of miners.

Fork Dynamics and Manipulation:
Imperfect shelling points create incentives to manipulate the definition of mining acceptance to support a particular outcome. Disagreement can lead to prolonged controversy until the fork deadline. Brinksmanship and probabilistic punishments in game theory can influence political maneuvers during a fork.

Post-Fork Timeline:
1-4 hours: Community realizes the split and the unwillingness of either side to back down. 1-2 days: Exchanges start trading BTC-A and BTC-B as distinct currencies. 1-7 days: Businesses decide to support one, neither, or both forks. 1-2 weeks: One fork may gain clear dominance, or both may remain viable.

Blockchain Peace Treaty:
If neither fork gains a clear advantage, developers may negotiate a peace treaty. This involves soft or hard forking to ensure transactions on one chain are not valid on the other. The peace treaty improves security for both chains and is mutually beneficial.

Market Cap Implications:
The total market cap after a fork is uncertain and depends on network effects and anti-network effects. Network effects make a currency more useful and powerful with increased usage, leading to higher liquidity and lower spreads. Developer mindshare can be cross-protocol, allowing sibling protocols to benefit from shared resources.

Blockchain Growth Dynamics:
As blockchains grow larger, they experience positive network effects such as increased economic security due to more hash power or stake deposits. However, there are also anti-network effects such as blockchain congestion leading to higher fees and slower confirmation times.

Challenges of Blockchain Governance:
Political infighting and the attraction of larger attackers are additional challenges faced by larger blockchains. Smaller blockchains, despite their lower economic security, often survive due to the low incentive to attack them.

Firm Theory in the Blockchain Context:
Vitalik Buterin draws parallels between blockchain governance and firm theory. He discusses the concept of public goods and how corporations can provide certain public goods that are difficult to organize and coordinate among independent contractors. The trade-offs between centralized and decentralized governance are also examined. While a single giant corporation may avoid some of the problems of fragmentation, it also risks the failures of a monolithic structure, as seen in examples like North Korea.

Balancing Left-Side and Right-Side Failures:
Vitalik Buterin introduces the idea of left-side failures (fragmentation) and right-side failures (monolithic centralization) in the context of blockchain governance. He highlights the challenges of finding a balance between the two extremes.

Exit vs. Voice in Blockchain Governance:
The presentation concludes with a discussion of exit versus voice in blockchain governance. Vitalik Buterin emphasizes the importance of considering when exit is preferable to attempting to change the system through voice (participation and governance).

Forking and Exit in Open Source Projects:
Forking in open source projects involves creating a new version of the codebase, often due to disagreements with the current project direction. Forks can be friendly and maintain close ties to the original project or diverge significantly over time. Unlike open source projects, countries and corporations cannot be forked, leading to the option of exit (leaving the entity) instead.

Secession vs. Exit in Countries and Corporations:
Secession, splitting off a part of a country, is feasible when disagreements are localized. In contrast, corporate secession (splitting off a part of a company) is rare due to the ease of individual employee exit.

Forking and Secession in Blockchains:
Blockchains allow forking, but it comes with risks and challenges, such as network effects and infrastructure issues. Nevertheless, forking is possible, enabling the creation of new protocols or versions of existing ones.

DAOs vs. Blockchains:
DAOs (Decentralized Autonomous Organizations) rely on blockchains, making them dependent entities. In contrast to blockchains, DAOs cannot change their rules unilaterally due to the existence of a single source of truth provided by the underlying blockchain.

Truth and Subjectivity in Blockchains:
Truth in blockchains is subjective, as users can reject blocks that violate the rules they personally enforce, even if those blocks are part of the longest chain. The validity of blocks is determined by individual users, leading to a subjective notion of truth.

Governance in DAOs:
DAO governance often involves voting, where shares held by members determine their voting power. This voting mechanism resembles the governance structures of corporations, where shareholders have decision-making authority.

Voting Incentives:
Voting in DAOs and corporations is often not incentive compatible. Rational irrationality and rational ignorance lead individuals to have minimal incentive to learn about issues due to the small impact of their individual vote. Centralized entities, like corporations and countries, have actors with larger stakes who have more incentive to learn and participate.

51% Attacks:
51% attacks occur when a majority of shareholders in a DAO decide to move all assets to a new DAO, expropriating the minority shareholders. This is particularly concerning when DAO assets are primarily social capital and goodwill, as there is a risk of a grim trigger scenario where the value of the DAO is destroyed.

Voter Bribery:
Voter bribery is another problem in voting systems. Individuals with low incentives to vote correctly may be swayed by small bribes. This can lead to outcomes that are not in the best interest of the majority.

DAO Splitting:
Subjective-ocracy: A DAO holds assets defined by itself and can fork on the chain in the event of a serious disagreement. DAO Splitting Protocol: Allows a DAO to split proportionally if a certain percentage (e.g., 60%) wants to go one way and the rest feel it’s an expropriation attempt. Non-fungible Assets: Difficult to split fairly due to varying relationships and values. Probabilistic Distribution: Randomly assigns relationships with other addresses, leading to risk and requiring secure random number generation. Cut and Choose Protocols: A person cuts and the other chooses, incentivizing the cutter to make a fair split. Distribution might not be perfectly fair, especially for uneven values. Cut and Choose Plus Compensation Payments: Negotiated compensation for imbalances in the split. Bilateral monopoly problem can lead to inefficiency and lost economic value.

Futarchy:
General Principle: Pick a measurable objective function and have conditional prediction markets on the outcome if the action is taken or not. Common Objective: Share price for a DAO with shares.

How Futarchy Works:
Futarchy is a governance system that uses conditional prediction markets to make decisions. It involves creating “Yes” and “No” shares and ethers, which are then traded against each other. The decision with the higher conditional share price is implemented.

Challenges of Futarchy:
Futarchy is vulnerable to manipulation, especially when the decision only slightly affects the share price. Counter-trading against manipulation is difficult and risky, as it requires collateral and exposes traders to unrelated price fluctuations.

Solutions to Futarchy’s Challenges:
Using futarchy only for big decisions that significantly impact the share price. Betting on the logarithm of the price instead of the price directly, limiting the amount of capital needed for safe shorting.

Futarchy as a Backstop against Voting:
Futarchy can be used as a backstop against voting decisions that the minority disagrees with. If the majority attempts to manipulate the market to push up the price of “Yes” shares, it creates a price floor that allows the minority to cash out gracefully.

Futarchy in DAOs:
DAOs have interesting governance options not available to blockchains. Implementing futarchy in DAOs requires a base asset to make markets against. Proof-of-work blockchains can use difficulty futures, while proof-of-stake blockchains can use shelling dollars.

Existing DAO Governance Mechanisms:
Voting and minor voting are already incorporated into DAO governance. Blockchain splitting, known as hard forks, is also a common practice in blockchain governance.

Prediction Markets for Solving Bitcoin Block Size Debate:
Paul Stewart proposed using prediction markets to determine whether Core or Classic would lead to a higher Bitcoin price. The idea gained little traction due to various reasons. Some believe the software was not ready, while others argue that using prediction markets for blockchain protocols is untested and risky. Cynical interpretations suggest both sides lacked confidence in their public claims, secretly believing their camp was less harmful to the price.

Base Layer Systems and Dependency on External Factors:
Incorporating prediction markets into base layer systems may introduce dependencies on external factors, such as US dollars, leading to centralization risks.

The Need for Evolving and Iterative Protocols:
People recognize the importance of evolving protocols to improve over time.

Challenges in Agreeing on Evolution Methods:
There are various mechanisms for evolving protocols, leading to disagreements on which is better.

Trial and Error Approach:
Trying out different mechanisms and political mechanisms is crucial to understanding their effectiveness.

Crypto-Political Science:
Crypto-political science involves not only incentives but also community dynamics, social contracts, and agreed-upon terms. Distinguishing easy-to-change and hard-to-change protocol aspects is essential.

Soft Forks vs. Hard Forks:
Vitalik discusses the ongoing debate in the Bitcoin community regarding the superiority of soft forks over hard forks. He acknowledges the possibility of implementing demurrage through a soft fork, which would increase the supply beyond 21 million. However, he recognizes the strong opposition to such a move due to its violation of Bitcoin’s social contract, which dictates a fixed supply.

Social Contracts in Cryptocurrency:
Vitalik highlights the significance of social contracts in shaping the values and characteristics of cryptocurrencies. He raises the question of whether different protocols have different social contracts associated with them. The Bitcoin disputes are analyzed from the perspective of hard forks potentially being driven by a desire to modify the social contract, rather than technical considerations.

Hard Forks and Social Contracts:
Vitalik suggests that hard forks can be seen as a modification of the social contract towards one that is more amenable to future hard forks. This perspective provides a novel angle on the Bitcoin disputes, emphasizing the role of social contracts in shaping the evolution of cryptocurrencies.

DAOs: From Utopian Ideal to Real-World Implementation:
Vitalik reflects on the transition of DAOs from theoretical concepts to practical applications with the advent of Ethereum. He emphasizes the need to examine the security vulnerabilities associated with DAOs as they become more prevalent in the real world. The shift from abstract discussions to real-world analysis marks a significant step in the evolution of DAOs.