Decred (DCR) is a proof-of-work (PoW) cryptocurrency that has the same coin supply as Bitcoin, but what differentiates it?
Decred is essentially “Bitcoin with governance”. Many analysts attempt to categorize coins by industries, and the Level 1 hierarchy usually has three categories: currencies, platforms and applications. Decred is a currency that aims to be a store of value and medium of exchange, while improving on some of the drawbacks of Bitcoin.
Value is ultimately given to currencies like Bitcoin and Decred due to their properties that make them “better money” than sovereign-backed fiat currencies. Money must serve three primary functions:
- Be a Store of Value (SoV): Prerequisites include immunity to theft, credibly low inflation, and low cost of conversion. Cryptocurrencies are generally considered better stores of value than let’s say gold because there is no storage cost, reduced risk of physical theft because of multi-signature hardware storage, no capital control restriction (can cross the border with $10M in BTC but not $10M in gold), divisibility, a transparent fixed supply (new gold supply is found every year) and no counterparty risk.
- Be a Medium of Exchange (MoE): Money has historically evolved into a medium of exchange after becoming a respected SoV. Purchasing power then stabilizes and the opportunity cost of exchanging the value diminishes. The ability to frictionlessly send payment, fungibility and security are precursors.
- Be a Unit of Account (UoA): When money is used as a MoE goods will then be priced in its terms, which makes it an excellent UoA. Blockchain based currencies are exceptional units of account due to the transparency and immutability of the public ledger.
The appeal to using cryptocurrencies as money instead of fiat currency is that they can be defined as what we call “Sound Money”. Many economists agree that no perfect money exists in the world, and sound money is considered “closer to perfect” in an economic sense. Sound money is fungible, scarce, secure and uncensorable.
Cryptocurrencies meet this definition by doing as little as using a blockchain and having a fixed supply. For example, 1 DCR is fungible (no difference between each unit), scarce (fixed supply and transparent monetary policy), as well as secure and censor-resistant due to its decentralized blockchain properties and consensus model.
You can see why so many crypto projects (Dash, Verge, Bitcoin, Bitcoin Cash, Litecoin, Dogecoin, etc.) are trying to solve the problem of globalized currencies. The fact that the total addressable market for these projects is ‘all of the money in the world’ definitely isn’t a deterrent either.
History of Decred
The founders of Decred were early Bitcoin developers in 2013 and they quickly saw problems with the protocol that they wanted to solve. Their group of 6 founders were writing what is called “btcsuite”, which is an implementation of bitcoin written in “Go” similar to how TCP/IP has several implementations. The idea was that multiple kinds of software would make Bitcoin stronger in the case there was a bug with one implementation, and today there are many forms including btcsuite, libbitcoin and bitcoin core. These stacks all run just as there are multiple TCP/IP stacks running the Internet.
The founders realized that the Bitcoin community was not welcoming developers who weren’t running bitcoin core, which led to them being shunned, apparently because they had dissenting interests.
Three main issues with Bitcoin were identified early on, including:
- Project Governance: Bitcoin has been suffering from governance issues for years now – this is nothing new. Early on it was apparent that miners were going to be the decision makers, and that they may not have aligned incentives with token holders. Bitcoin was clearly forkable as well. We have seen with the block size increase issues, as well as SegWit2x, that Bitcoin has a big governance problem where token holders, developers, and miners can all have clashing opinions on the best course of action to take. A small group of developers at the time were deciding what would go into bitcoin core, and these implementations needed to be carried out by the miners, so it was clear that a future development that the majority of miners didn’t agree with had the potential to get blocked.
- Funding Development: Up until 2014 Bitcoin development was entirely donation-driven, and even today there are arguments on how to align development incentives with the interests of the token holders in an environment where developers are not compensated directly for their work. There is no system in place with Bitcoin where a developer can say “I want to be paid $X for contributing Y”.
- Mining Power: Miners have the ability to do a “denial-of-service” on Bitcoin by mining empty or artificially sized (small) blocks. Miners are still compensated even if blocks have 0 transactions. Censorship risk was not as much of an issue when Decred was being formed, but nowadays there is a considerable risk that mining pools, such as Bitmain, could control over 51% of the Bitcoin hashrate – this would give them censorship power over the network. It is also unclear what will happen to Bitcoin when all 21 million blocks are mined – will transaction fees be enough for miners?
To solve these issues the Decred team set adapted a proof-of-work (PoW) / proof-of-stake (PoS) hybrid codebase and formed Decred. They noted that Bitcoin solved the distributed time stamping problem, but thought that it lacked governance, and that decision making power was not in the hands of the people who truly cared about the coin and had skin in the game.
What exactly is Decred and how is it different from Bitcoin?
Decred (DCR) stands for “decentralized credits”. The currency currently has a market capitalization of over $550M, which is a fraction of Bitcoin’s, but Decred uses a different consensus mechanism than Bitcoin. This allows the coin to fund itself, build in on-chain governance, and arguably become more secure.
Decred uses a hybrid PoW and PoS consensus model, which exploits each model’s strengths and minimizes their weaknesses. The project wants to be a “peer to peer electronic cash system”, which is the exact title of the Bitcoin whitepaper, but many analysts agree that, as of right now, Bitcoin has become digital gold instead of digital cash. I expect 99% of coins on Coin Market Cap right now to die within the next 10 years, but the Decred team claims they have built a sustainable ecosystem that will withstand the test of time.
I like Decred for the following 8 reasons:
- Developer Incentives:
An ongoing issue in crypto is how to incentivize developers. Decred’s hybrid PoS/PoW protocol puts 10% of block rewards into a project treasury fund that can be used to compensate the development team over time. In most ICOs, developers are paid adequately because the team has an abundance of funds, and that pool of money isn’t going away any time soon because it’s unnecessarily large.
The developers will be compensated regardless of the outcome of the project – and they know that… The difference here is that Decred never had an ICO and developer incentives are based on block rewards, which means the development team has an incentive to continue improving the protocol to maximize the value of those block rewards moving forward.
The team itself is one of the most decentralized teams in the industry – there is representation on every continent (except Antarctica), there is no headquarters, and team members all have non-hierarchical titles. This gives the project global reach that doesn’t stop at nation state borders.
The founding members, who are from North America, were early developers on the core Bitcoin protocol, and experience building Bitcoin is a huge advantage for a competing team. Being involved early on in Bitcoin development is what allowed the founders to identify Bitcoin problems before they were acknowledged by the greater community at large.
The strong advisory team even includes Jimmy Song, a well-known and transparent Bitcoin maximalist and smart contract platform cynic, who stated that the team has some of the most amazing developers in the industry; highlighting the fact that Decred’s developers formerly built btcd, which is one of the best commented, organized and accessible codebases for learning Bitcoin.
Hybridization of PoW and PoS realigns incentives to make a more sustainable system. In this hybrid model, 60% of block rewards go to the miners, 30% goes to voters, and 10% is reserved for the project treasury.
Decred uses a governance system they call Politeia, where token holders vote on the future of the project. The off-chain voting system acts as a proposal system. In the offline world this is like a “contracting ecosystem”, where ideas can be put forth and voted on – such as using funds for a marketing campaign, or hiring a star developer.
This system differs from other PoS protocols because there is less signalling, and consensus is actually binding on chain. Right now the 10% treasury fund has been in the hands of the founding members, and they have used the fund conservatively; acting as responsible fiduciaries for the ecosystem. The future plan is to have this money in a series of contracts, where the founders’ responsibilities will be limited. The timeline to implement these smart contracts is by the end of 2018.
Since 10% of block rewards are going into a treasury fund, Decred funds its own development and is participating in capital creation rather than capital circulation like most ICOs. While some ICOs may run out of their funds due to irresponsible spending habits, Decred’s block rewards act as continuous, small funding rounds. Decred will be funded as long as blocks are being mined. The sustainability of the funds is in the hands of token holders as voters.
Decred is resistant to the two most common attack vectors: 51% attacks and double spend attacks. 2018 has been “the year of the 51% attacks”, with Zencash, Bitcoin Gold, Verge, Litecoin Cash, and Electroneum all being victims. This highlights how cognisant smaller project need to be in terms of security. The Decred team playfully describes their PoS/PoW security system as a “2 factor authentication system for the blockchain”, because owning either the majority of hashpower or the majority of tokens aren’t enough for a nefarious actor to act maliciously – you need to have both.
For example, let’s assume you accumulate 51% of the Decred hashpower using NiceHash. You would also need to invest more money in purchasing a large number of tokens, which would increase the price of the token; causing you to pay a premium. At that point you’d probably be on the Decred rich list. You’d be shooting yourself in the foot to act nefariously because you’d subsequently tank the price of the token. The risk/reward payoff simply isn’t as appealing as it would be in PoW environment.
It’s refreshing to see a project that didn’t do a significant pre-mine or a high-profile/priced ICO. There was no pre-sale discount and there was no marketing campaign augmenting a flashy ICO. The community was built organically through this distribution method. Only 8% of tokens were pre-mined (1.68M) and these tokens were actually purchased by the founding team at 50 cents a piece. This is what the founders felt was an appropriate market rate at the time based on the development effort that was put in. All development was self-funded before this point.
Half of the pre-mined tokens were given to contributors and team members as sweat equity, while the other half were airdropped to the community. The purpose of the community airdrop was to ensure Decred would not be solely governed by the founding members, and the terms to receive tokens were as easy as proving you were a real person who was following the project in February 2016. In the end, 2700 community members were each given 282 tokens each (at today’s prices that’s worth almost $17k USD).
- Price History
I first began analyzing Decred when I saw how well it has been holding up in the 2018 bear market. The only coin that has had less of a drop from its all-time-high (ATH) in price is Binance Coin. Decred is only down 50% from its ATH, which is “good” compared to its competitors: Bitcoin (59%), Bitcoin Cash (88%), Litecoin (78%), Dash (85%), Verge 90%) and Bitcoin Gold (94%).
Its price momentum has vaulted it from the 54th largest coin based on market cap to the the 29th in 2018. Most projects in their market cap range have also benefited from the “Binance Effect”, where projects trade at a liquidity premium after being listed on high-volume exchanges, but Decred has yet to be listed on Binance or Bithumb, which could be a short term catalyst.
Speaking with the team, they couldn’t pinpoint an exact reason for sustained strength in poor market conditions, but alluded to the fact that there has been an increase in institutional (hedge fund) interest in the project this year. These institutions are seemingly beginning to admire their project structure.
A PoW community needs time to establish itself, and even though Decred is an older project than the influx of 2017 ICOs, it has needed more time to gain proof of concept. Both Placeholder and BlueYard Capital have publically disclosed their interest in the project.
- Community Strength
Community strength is often overlooked in fundamental analysis, but it’s important to touch on with Decred. The community was built much more organically than most ICOs or pre-mined projects, and the team describes their community as being “unforkable” because of their voting procedures. Many analysts agree that most coins get one “pass” on doing a fork. Forks have adverse effects on a community, but the impact of one fork can be overcome in terms of network value. In the case of Decred, Politeia and its on chain governance policy ensures that the community isn’t broken every time there is a decision that needs to be made – 75% community consensus is needed for major changes.
This is important when you compare it to other PoW communities and how adversarial they can be towards one another when there are dissenting opinions. A great case study is to look at the ongoing battle between Bitcoin and Bitcoin Cash… notice how more recent Bitcoin forks seem destined to fail?
What does the future have in store?
The team recognizes the importance of fungibility in becoming sound money, but without privacy features can tokens really be fungible? If you can trace the provenance of a coin in a good way or a bad way it distinguishes coins from one another, and therefore leads to coins not being treated equally.
For example, we will always be able to trace the provenance of the Mt. Gox coins, or the Silk Road coins without a Bitcoin privacy implementation. Without privacy, every time I make a payment using my public key, the recipient could potentially see what charities I donate to, where I shop for toilet paper, and the size of my mortgage payment. This is not just a privacy concern, but a personal safety concern as well.
The privacy realm in cryptocurrencies is extremely competitive (even more so now that Bitcoin is taking steps toward providing payment privacy), which is the reason why Decred has been reticent to expose their plans for privacy. A privacy implementation is near the top of the to-do-list on the team’s roadmap along with finalizing Politeia voting, decentralizing the control of funds, scalability optimizations, and other marketing plans.
At this point it’s unclear as to whether Decred is destined to become a top-10 project on Coin Market Cap – ultimately Gresham’s Law will prevail in the money wars. I am confident in saying that the resilience and structure of this project is unique in this industry and one that I’ll be watching closely in the coming months.
It’s a case study in how Bitcoin can be improved with on chain governance, and the long term future of Decred looks bright.
Disclaimer: The author holds Bitcoin, which is mentioned in this article.