Ask CryptoVantage: How Does Bitcoin Operate Without a CEO?

Removing Trusted Third Parties

The reason bitcoin was invented was to be used as an electronic cash that does not rely on trusted third parties.

When using a centralized payment provider such as Visa, PayPal, or Venmo, you are trusting them as third parties. You are trusting that they will let you access your funds when you need them. You are also trusting that they are storing your funds securely. There is another area of trust when using centralized payment providers that is often overlooked: censorship.

Censorship Resistance & Decentralization

Two of bitcoin’s most important features are its resistance to censorship and its resistance to inflation. In essence, bitcoin was invented to facilitate transactions that could take place no matter what, using a pre-determined supply of bitcoin which can never be increased. It is easy to see why bitcoin cannot have a CEO – imagine how easy it would be to censor transactions or to create new bitcoins out of thin air if there were a CEO in charge of the network. If bitcoin had a CEO, it wouldn’t be able to have censorship resistance or inflation resistance, and without those two properties bitcoin would be worthless.

So why is bitcoin so resistant to censorship and inflation? While most payment systems have a centralized leader such as a CEO, bitcoin consists of a decentralized network of users, miners, developers, and businesses. All participants in the bitcoin network must agree with the rules of bitcoin – instead of a centralized leader or organization enforcing the rules, participants enforce them by running the bitcoin software. This decentralization is what enables bitcoin to be resistant to censorship and inflation.

Decentralization comes at a cost, however. Just a year after bitcoin launched, its pseudonymous inventor Satoshi Nakamoto wrote: “The nature of Bitcoin is such that once version 0.1 was released, the core design was set in stone for the rest of its lifetime”. Because of this, upgrades and bug fixes to bitcoin are difficult to coordinate and usually take years to implement.

Decision Making in Bitcoin

Most companies and organizations follow a “top down” governance structure. Think of a pyramid shape with the highest level decision makers (such as the CEO) at the very top. These leaders direct lower level managers, who in turn manage even lower level employees.

Bitcoin’s bottom up governance process flips this pyramid upside down. The “leaders” in bitcoin are the users themselves, because they are the ones who run the software enforcing the rules of bitcoin. Upgrades only happen in bitcoin when an overwhelming majority of users agree on the changes, as we recently saw with the Taproot upgrade. Once users agree on a change, developers work to bring those changes to life in bitcoin’s code. Finally, when the developers finish writing the code, they get merged into the bitcoin software.

Key Takeaways

• Bitcoin was invented to remove trusted third parties from financial transactions
• Two of bitcoin’s most important features are its censorship resistance and inflation resistances
• If bitcoin had a CEO (i.e. a trusted third party), it would no longer be resistant to either censorship or inflation
• Bitcoin only achieves resistance to censorship and inflation because of its decentralized nature
• Bitcoin users a bottom up governance process where all users must agree to changes before developers can implement them into bitcoin’s software