Keep Calm and Bitcoin On
By Valery Vavilov, Co-Founder of Bitfury
I grew up in Soviet Latvia and witnessed firsthand the elimination of my parent’s life savings. All of their dreams were gone when the Soviet Union and the banking systems collapsed in 1991. Then, like a nightmare, my own investment dreams were shattered in the global financial crisis of 2008. I knew as a child, and I know even more now as an adult that we, as a global technology community, can and must do better.
I wrote my first computer code when I was 8 years young. Mathematics is the language I speak and trust. Enter the emerging idea of Bitcoin. I discovered this exciting open source technology in 2010. Together with my business partner, Valery Nebesny, we realized this new way of processing and transferring assets could actually make our world a better and fairer place for people everywhere — in developed and developing countries — all through the use of math, cryptography and thoughtful programming language based on the fundamental value of trust. Fast forward 5+ years, and the world of Bitcoin has advanced beyond our wildest expectations and continues to be a dynamic innovative ecosystem that is evolving every day.
Needless to say, it was disappointing to see Mike Hearn, a prominent contributor to the Bitcoin developer community, recently offer a lengthy blog post stating that the industry was dead and that bitcoin was a failed experiment. Perhaps the road for Hearn has come to an end, but for me and my many colleagues and fellow Bitcoin Blockchain experts, it is safe to say that we are just beginning down this incredible road and we see a promising future.
While Mike is entitled to his own opinion, of course, I thought I would take a moment to address a few of his points with my views. I will caveat that much of what is happening in the Bitcoin space is highly technical and fairly difficult for those who have not immersed themselves in the math and science of late to fully understand.
With that, let me lay out a few facts:
FACT 1: Bitcoin Is Not an Electronic Payments System Like PayPal
Many Bitcoin newcomers view the network as yet another electronic system for instant payments, like PayPal or Visa. Right here we have a very substantial difference in opinion. Bitcoin was never designed to confirm instant payments and believing that is its function is a mistake.
As Nick Szabo, the renowned author of smart contracts wrote:
“Visa and PayPal already exist, and within national borders they do what they do quite well. It’s silly to try to turn Bitcoin into yet another Visa and PayPal.”
I believe, based on the way the system was designed and developed by Satoshi, that it would be disingenuous to expect instant transaction confirmation from the Bitcoin network — it is simply not wired that way. No increase of the block size limit could help make instant Bitcoin transaction confirmation a reality.
Does this mean that Bitcoin cannot be used for instant payments? Not at all. You simply need an additional system operating on top of the Bitcoin Blockchain (with the Blockchain acting as a settlement layer). These systems already exist in custodial wallet services and Bitcoin exchanges. But the larger point is that the potential of Bitcoin is so much greater and transformative than simply hoping it can compete with PayPal.
FACT 2: Bitcoin Is Not and Should Not Be Free to Use
While the Bitcoin network dramatically lowers the cost of transactions, the reality is that the Bitcoin Blockchain is not free to use. The Blockchain is secured with an enormous amount of computing power, and transaction fees are an important incentive to keep contributing that power.
As the Bitcoin network continues to evolve, transaction fees need to grow in order to maintain a high level of security within and for the network. As BitFury has outlined in our white paper on Bitcoin security incentives, the transaction fee market is currently actively developing. The percentage of transactions satisfying a market-based fee margin has grown from 22% in March 2015 to nearly 40% in October 2015.
Just like with instant payments, expensive on-chain Bitcoin transactions do not mean that one cannot use Bitcoin for cheap value transfer. Overlay networks, such as Lightning and sidechains, can successfully deal with this challenge while in-service ledgers already do.
FACT 3: Bitcoin Transaction Processing Is Not Presently Clogged
There is no observable evidence that Bitcoin transaction processing is presently clogged. Key statistics gathered by Statoshi for the past few months show the pool of unconfirmed transactions has held relatively steady at about 10,000 transactions — a significant decrease from over 75,000 unconfirmed transactions during “the stress test” performed in September 2015. Most of these transactions, according to CoinTape pay zero or near-zero transaction fees.
For Bitcoin wallets with proper fee estimation logic, the clogging challenge simply does not exist. According to web-based fee estimation services, such as CoinTape, as of January, 2016, the optimal transaction fee for an average transaction is less than 0.1 USD — quite small for most use cases. The issue we do face is with “free riders” — applications with a business model relying on non-existent Bitcoin transaction fees.
FACT 4: Miners Embrace Bitcoin’s Popularity
Bitcoin miners and transaction processors such as BitFury, are likely the biggest supporters of the Bitcoin ecosystem and any suggestion otherwise is simply ridiculous. Bitcoin miners invest enormous amounts of money and efforts into developing and maintaining bitcoin mining hardware. As the Scaling Bitcoin conferences have shown, miners are generally in support of cautious increases of the block size limit — just not abrupt increases — because such sudden change could undermine the foundation of the Bitcoin network. BitFury has detailed these points in our white paper.
FACT 5: Bitcoin Mining Is Decentralized
Most existing mining pools are public. This means that they consist of tens of thousands of independent users who are free to join or leave the pool at any time. Private mining pools are frequently operated by firms that publicly sell mining equipment, including BitFury.
Even if there were merely ten entities controlling Bitcoin mining (which there are not), this would still not be a threat. There are many Bitcoin nodes not controlled by miners, which would act as a barrier against rogue miners’ misbehavior. However, a rapidly rising block size could put most of these nodes out of work because they would simply have to switch off due to a lack appropriate hardware to perform transaction processing), paving the road to the real centralization (see [The Decentralist Perspective]).
FACT 6: Mass Rule is Not Appropriate for Bitcoin
The pipe dream of some in the Bitcoin community is to govern the system by having ordinary users vote for changes by adopting the corresponding full node software. This approach is not only impractical, it is also not desirable. Most ordinary Bitcoin users do not own a full node and ironically, if they did, it is quite possible they could not afford its maintenance after a hypothetical abrupt block size increase. Users of Bitcoin should most certainly have a say in the direction of this technology, but in order to appropriately and continuously secure the Blockchain, it is responsible for all of us who are knowledgeable about the science to take a leadership role where and when it is necessary.
FACT 7: Bitcoin XT Would Not Have Solved Bitcoin’s Challenges
Bitcoin XT was considered by some a remedy for perceived problems with the Bitcoin ecosystem. However, upon closer inspection, XT leaves at least some of these challenges, and the reality is that XT would not have made transaction confirmation immediate and would not have reduced the risk of double-spending for unconfirmed transactions.
· XT would not have eliminated transaction fees — it would have merely delayed the development of the fee market. (The perspective of having no fees forever is much worse; as the block reward steadily diminishes, the security of the network would eventually take a nosedive.)
· XT would have done nothing about the “mining centralization” problem. In fact, it would have made things worse by pushing small mining pools out of business.
· XT would not have helped decentralization and would have made things worse by elevating the requirements to maintain a full Bitcoin node.
· XT code updates would not have differed from Bitcoin Core in the expressive means of its users — all voting rounds would still need to be introduced into the code by developers.
Bitcoin XT and its predecessor — Bitcoin improvement proposal (BIP) 101 — were not supported by the Bitcoin community simply because they contained too many controversial features in the areas where each mistake could cost the most in terms of Bitcoin value. These proposals were hard forks, meaning that their implementation could break Bitcoin as a system for value transfer ().
I believe in Bitcoin. I believe in the Blockchain. I know that the vast potential is just being realized. We wish Mr. Hearn all the best as he commences his work with our friends at R3CEV. It is important that we respect various input but simultaneously resist the temptation to give Mr. Hearn’s voice too much weight.
Bitcoin is not an instant payment network and not a fancy replacement for PayPal or Visa. It is first and foremost a decentralized system, which sacrifices speed in favor of security. A key feature provided by decentralization is permissionless entry for users and developers — and it is thanks to this component that Bitcoin has grown into much more than a currency and has become a platform for Blockchain innovations.
Most importantly, Bitcoin is a new world created for anyone — especially for someone like me — who didn’t grow up in a world where “trusted emissary” was a reality and the idea of “asset security” was something other people in other parts of the world enjoyed.
I believe in Bitcoin because I believe in democracy and I believe in open societies. And as Winston Churchill once said: “Democracy is the worst form of Government, except for all the others.” Open source projects are not perfect, but they unite the best and most innovative thinkers, and I am honored to be a part of this mission.