On Governance (The Nick Szabo Video)

The video is a direct answer to Nick Szabo, prompted by Twitter confusion over whether Cardano's governance is centralized, and a tribute to Szabo's 1996 paper Smart Contracts: Building Blocks for Digital Markets that made him the OG of smart contracts.

Every blockchain transaction deals with identity, value, and governance, implicit or explicit, and Bitcoin supports only one type of each in a push only system.

Bitcoin's social contract is the honey badger that does not care, and the more resilient a system is against an adversary, the more trust it earns.

A transaction's first property is the value it represents, spanning commodities, securities like STOs, non-fungible tokens, and utility tokens, which can even combine, such as an NFT with a fractional security stake in a Pokemon card.

Value can move by push, by pull like a credit card subscription, or by contingent transaction, such as a donation that only settles once the recipient signs a deed.

The second property, identity, ranges from decentralized identifiers and addresses to hard coded quorums of pre-selected actors in permissioned chains, while Bitcoin's pseudonymous addresses sit on a spectrum that collapses to fully public once linked to a real name.

Metadata is the story around a transaction: the same value and identity but different metadata, a three hundred dollar withdrawal at noon by a restaurant versus two a.m. by a brothel, changes its entire legal reading, which is why Bitcoin deliberately limits metadata to OP_RETURN.

The fourth property, contractual relationships, is the field Nick Szabo pioneered and inspired Ethereum's deterministic and non-deterministic contract models, and a transaction's purpose, whether donation, gift, purchase, or service contract, defines what its sender is owed.

The fifth property, regulation, nests a transaction's contract, metadata, identities, and value within one or more jurisdictions, which can sometimes contradict each other.

Bitcoin's scripting language, based on Forth, is technically Turing complete but too limited for complex contracts or oracle feeds, a multi-asset gap that Colored Coins and Mastercoin first tried to fill before Ethereum took over most token issuance.

Governance can be simple and self-governing like Bitcoin, or complex, illustrated by neighbors on ten thousand acre plots needing no HOA versus fifty thousand people in a dense city needing heavy regulation.

Good governance requires flexibility and adaptability, built on a system's values, philosophy, and social contract, something even Bitcoin has through its fixed monetary policy.

Complex systems make protocols fat and demand constant maintenance, but every change made without consent damages trust, the exact bind third generation cryptocurrencies hit when they try to add peer to peer lending, complex identity, zero knowledge crypto, rich metadata, and sophisticated contracts all at once.

Scaling to millions or billions of users means billions of individual opinions on regulation, geography, and design, making a system's social contract far dicier to maintain.

Bitcoin's philosophy holds that as users and value grow, its rate of change slows because there is no coordination mechanism beyond core developers and miners, leaving the protocol stable but static, a feature if it never wants new smart contract, sidechain, or consensus models, and a bug if it does.

Cardano's founding goal was different: build an on-chain government that needs an update system, a consent driven process, and meaningful participation, one that stays universal enough to change even the social contract, philosophy, and values themselves given enough participation over time.

The Hard Fork Combinator creates a growing superset of features with each era, from Byron through Shelley to Goguen, keeping backward compatibility while adding new capabilities.

IOG also had to invent decentralized software updates, publishing the work through PRIViLEDGE, a Horizon 2020 European Union project run alongside IBM and Guardtime.

Decentralizing the update system needs the rest of the governance stack in place first, since naively letting any ADA holder vote raises questions of genuine consent and adequate participation thresholds.

Project Catalyst's treasury grants already incentivize over ten thousand participants, with engagement tracked as a key performance indicator toward meaningful participation, and it will eventually cover all system parameters and Cardano Improvement Proposals, with full decentralization expected this year or next.

Cardano must keep scaling its rate of change rather than slow down the way Bitcoin does, or a fourth generation protocol will eat its lunch.

Under proof of work, holders have no real say since miners and developers sit outside the ownership system and could even be co-opted into a goldfinger attack to slow or destroy the currency, while infrastructure players like exchanges and wallet providers add further power by choosing which fork to support, as when Bitcoin split into Bitcoin and Bitcoin Cash.

Even large holders like Michael Saylor and Elon Musk have no real governance say under proof of work, while proof of stake lets operators act only with the blessing of holders through delegation.

If Catalyst works as intended, developers end up financed by the network itself rather than outside interests, though safeguards are still needed so exchanges cannot vote or stake on their holders' behalf.

Beyond ADA itself, Cardano is researching separate governance tokens weighted toward contribution, a proof of merit model inspired by Gitcoin and open source funding, shifting influence from plutocracy toward meritocracy.

Holders will eventually be able to delegate their votes to trusted experts, creating a kind of crypto congressman or senator who represents large pooled value without personally controlling it.

Unlike Bitcoin, which is not self aware of its own design, IOG's formal methods write specifications, model check them, and certify code as correct by construction, a process expensive enough to make sense mainly for aerospace, medical, and cryptographic software meant to last decades.

Within ten to twenty years, Hoskinson expects a cryptocurrency fully aware of its own design, where the update system upgrades on-chain blueprints instead of clients like Daedalus and Yoroi, versioning the protocol itself from Cardano one to Cardano two.

Clients would become self certifying, producing proofs that they follow the on-chain blueprint so voting happens on the canonical protocol design while clients are free to diverge elsewhere, starting with proof carrying code for dApps, where a wrong protocol can lose people's money, before it reaches the core system.

Bitcoin's core developer community works like an invitation only club, whereas Cardano wants the reference client's source code hashed or validated on chain so updates require consent rather than insider access.

Hoskinson hopes to integrate git-like access control using Atala PRISM by Cardano 2025, storing the reference client's source on chain with blueprints written in certifiable languages like Agda or Idris.

Infrastructure decentralization is already underway through DeFi and peer to peer exchanges, while operator decentralization comes from economic incentives that reward more stake pool operators than Bitcoin's mining concentration allows.

Bitcoin's own naive, stable but static choice, fixing value, identity, metadata, and contracts while ignoring regulation, has still carried it to trillions in value, which Hoskinson credits as good work.

Cardano currently runs its Hard Fork Combinator update system in federated mode while it builds the social dynamics needed to decentralize it, on top of an operator layer already built on consent.

The community already holds a social contract expecting Genesis, Hydra, smart contracts, and multi asset support, with Cardano 2025 setting a new contract for the next round of features.

Catalyst decentralizes participation, DeFi decentralizes infrastructure, and blueprint certification through formal methods will decentralize development, letting any developer's client carry the same trust and security as IOG's own.

Embracing this much complexity is why Cardano needed over a hundred research papers and takes so long to fully grasp, since complexity demands flexibility without trust decay.

Hoskinson closes by inviting Szabo's response in any form, blog, video, or tweet, calling him an OG who has earned the right to a video anytime, one of the patron saints of the church of Satoshi.

He believes these formal methods ideas could eventually help Bitcoin too if it ever chooses to evolve, and closes by recommending Szabo's writings to viewers, crediting Cardano's existence to his influence.