In accounting, there is a principle called “substance over form.” A deep understanding of this principle not only helps in analyzing corporate accounts but can also be applied to all aspects of our lives, helping us see through the appearance of things to understand the substance behind them.
The DAO Hack vs. Juno Proposal 16
Let’s start with an example. Suppose Alice provides services to Bob Company Limited. The contract stipulates no salary, but instead, a monthly loan of 10,000 dollars is given to Alice at zero interest, to be repaid in one hundred years. Since there is no salary, should Alice be exempt from taxes? In reality, it’s preposterous to think any government would accept this logic. Any reasonably functioning tax authority would treat this 100-year, zero-interest loan as a wage and levy the appropriate income tax. In other words, according to accounting principles, Bob Company Limited cannot book this monthly 10,000-dollar transaction as a loan. It must be classified by its substance—as a salary. This is the accounting principle of “substance over form.”
Is the newsletter’s open rate declining, finally forcing the author to resort to analyzing public company financial reports? Unfortunately, even if I wanted to, I don’t have the skills. I bring up this accounting principle because after last issue’s A Decade for Ether, A Century for Humanity: Ethereum’s 10th Anniversary, Part II was published, reader Wancat left a comment asking why I had vehemently criticized the passage of Juno’s Proposal 16 to claw back airdrops received by a whale three years ago, yet now seem to have a double standard (my words, not theirs) by defending Ethereum’s use of a hard fork to recover the stolen funds from The DAO Hack. I initially intended to reply in the comments but found my response growing too long. So, I deleted it and simply replied that I would address it in a full article this week, experimenting with this format for deeper interaction with readers.
With that prelude, my brief answer to Wancat’s question is this: while the hard fork for The DAO Hack is similar in form to Juno’s Proposal 16, their substance is vastly different. The former was about recovering a large sum of funds that a hacker obtained from the community by exploiting a vulnerability. The latter was about forcibly taking away a large airdrop from a whale that was obtained according to the rules set by the project creators—it was a tyranny of the majority. For details, please refer to The Ordeal of Democracy: A Wake-Up Call from Juno’s Proposal 16, which I won’t rehash here. The form is merely the method of execution; the substance is the crucial point. Therefore, my judgment on the two incidents is entirely different.
I must emphasize that this does not mean I believe recovering The DAO Hack funds via a hard fork was a good thing. The good thing would have been to conduct proper testing to prevent the theft in the first place. A drastic measure like a hard fork is never good; at best, it was a necessary choice, the lesser of two evils. What I commend is not the method itself, but how Ethereum handled a theft that could have brought down the entire ecosystem. It neither blindly adhered to “code is law” above all else, nor did it use a centralized method to “administer justice” (it was technically impossible anyway). Instead, it made democratic deliberation the main prerequisite, attempting to find consensus through forums, polls, and other methods.
Democratic Deliberation as the Highest Principle
Some argue that “code is law” is the supreme principle of the blockchain, and we must accept the results of program execution, which would make the very act of labeling a behavior as “theft” problematic. I also emphasize “code is law” and agree it is the guiding principle in 99.99% of cases. But no matter how flawless a system is, at best it can only push the applicability of the principle higher—say, to 99.9999%—but it can never be the sole, 100% standard. To do so would be to chain the system to its first version of code, accepting every computational result as a “feature” and no situation as a “bug,” which is clearly not feasible.
Even Bitcoin, which most strictly adheres to “code is law” with the fewest code changes, still needs to fix bugs and evolve with the times. Not to mention the eventual arrival of quantum computers. If “code is law” were the only principle, does that mean the community should do nothing and simply accept that quantum algorithms will eventually destroy the Bitcoin ecosystem? Clearly, behind “code is law,” we cannot erase the factors of society and humanity, including technological evolution, law, and morality.
Form is usually objective, but substance inevitably involves value judgments. The example at the beginning was clear-cut only because the terms were extreme, making the substance of the transaction clearly a wage. If different numbers were used, the substance could become highly controversial. The advantage of being guided by form is objectivity, free from value judgments. However, we cannot ignore the importance of discussing substance for the sake of convenience, even if it leads to debate or disputes. To borrow an old saying from TVB (from before it became “CCTVB”): “Harmony is not 100 people saying the same thing; harmony is 100 people having 100 different things to say, while still respecting each other.”
Frankly, I wrote the above with some hesitation. The hesitation isn’t about being wrong, but that explicitly stating that human factors are inevitably behind “law” can be easily misinterpreted and exploited. In a mild case, it could be used to endorse pseudo-web3 projects that are centrally controlled under the guise of decentralized governance. In a severe case, it could be used by nation-states to play the bully—using the law to control people when it suits them, and arbitrarily interpreting, amending, or enacting new laws when it doesn’t, stopping at nothing.
Unlike the physical world, in the web3 world, the “interpretation” and “enforcement” of law are handled by code, effectively preventing human intervention—this is the true meaning of “code is law.” But at the level of “legislation” and “amendment,” both nation-states and blockchains inevitably involve human participation. The key is that the process must align with the democratic spirit, with stakeholders participating in deliberations and, when necessary, fair voting.
Seeing Through Form, Focusing on Substance
Coincidentally, this week five years ago, my column in Apple Daily was titled “Stablecoin = The Value of USD + The Agility of Bitcoin.” The meaning is that the substance of a stablecoin is the US dollar, and its form is a cryptocurrency. Even though the world has changed dramatically, this understanding is sufficient to grasp the core of stablecoins. USD stablecoins have a market because the USD itself has a market. Citizens in places like Argentina, Turkey, and Russia are eager to buy it. When the USD exists in the form of a cryptocurrency—a stablecoin—it becomes much harder for local governments and banks to stop their citizens from buying and holding it. Of course, some powerful nations will still use high-tech surveillance, and they mean what they say, at least effectively restricting the masses who haven’t mastered the relevant technology to step out of their comfort zone and manage their own assets.
Similarly, the recent discussions about whether there is demand for a Hong Kong dollar stablecoin can be partially answered by the “substance over form” principle. The crux of the matter is whether there is an underlying demand for the Hong Kong dollar itself—are there people who want to convert to or park their funds in HKD but are constrained by the traditional financial system? If so, the emergence of an HKD stablecoin would unlock previously non-existent purchasing power. Form helps improve efficiency and enhance effects, but substance is the key. Even as a big believer in cryptocurrency, I do not think a sovereign currency with no inherent market demand will generate new demand simply by issuing a stablecoin.
Besides web3 governance and stablecoins, there are countless examples in daily life where form obscures substance. For instance, the form is an NFT, while the substance, originally intended to be cultural content, is in reality just speculation. The form is a mobile app, while the substance, meant to be a specific function expressed through the features of a smartphone, is in reality just an app created to follow a trend or secure a government subsidy. Or, the form is an election, which in substance should be the practice of democracy and the expression of the people’s free will, but in reality might be an elaborate, costly charade with candidates hand-picked by a central authority.
Only by seeing through the form and focusing on the substance behind things can we understand the world’s underlying logic and recognize the truth.
p.s. At last Wednesday’s offline event for Ethereum’s 10th anniversary, fifty to sixty people were in attendance. When the host, Phoebe, asked those who manage their own wallets to raise their hands, I didn’t see a single lowered hand in the room. Although I know this is just the echo chamber effect, for someone like me who has been promoting self-custody wallets for seven or eight years and is used to most people not having a web3 wallet, the sight was still stunning and left me secretly thrilled. Or perhaps “moved” is the right word; I’m not even sure myself.
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