Two Theories of Bitcoin

There are two primary schools of thought on what makes Bitcoin’s properties dependable, and thus what makes Bitcoin a suitable sound money. Which of these theories one believes, whether implicitly or explicitly, will inform one’s assessment of the best approach to making changes or upgrades to Bitcoin. An exploration of these two perspectives may help in understanding different points of view around issues such as the block size limit and Segregated Witness activation.

Bitcoin Immutability

The word “immutability” often comes up in descriptions of Bitcoin. In the past, the word was used to describe the fact that transactions in the block chain are effectively unchangeable. They form a ledger, which becomes increasingly definitive over time as it is secured by proof-of-work. Transactions can be added to blocks in the block chain. As the chain is extended and those transactions are buried by proof-of-work, tampering with the historical record becomes prohibitively expensive. They become an effectively immutable record for all practical purposes. Let’s call this property “ledger immutability”.

Recently, however, the word “immutability” has cropped up in a different context. This new context goes beyond describing the record of past transactions: it also purports to describe the rules determining which transactions can be added to the block chain in the future. This usage thus refers to immutability of the Bitcoin protocol, not immutability of the ledger. We will call this property of resistance to changes in bitcoin’s protocol “protocol immutability”.

Protocol Immutability and Bitcoin’s Monetary Properties

Some of Bitcoin’s protocol rules protect its sound money properties. For example, the coin issuance schedule is a protocol rule that limits how many coins miners can create in the coinbase transaction. Enforcement of this rule as new blocks are added to the chain is what caps the Bitcoin supply at the eventual 21 Million coin limit.

For this reason, many commentators welcome the property of protocol immutability, and wish to encourage and promote it. We can see examples of this in discussions of the slower than expected uptake of Segregated Witness by miners. This is cited as evidence of Bitcoin’s protocol immutability, suggesting that Bitcoin can be treated as a sort of “digital gold”.

“Depends on your point of view…. If you want a digital gold and don’t care too much about payments, segwit not activating may be a good thing. It is a strong indication of how hard it is to change Bitcoin, and may even be an indication Bitcoin will never change in a major way again — a strong confirmation of exactly what you’d want from Bitcoin.” — Matt Corallo [1]

The example above makes a predictive claim: the fact that it is difficult to enact a specific change in the Bitcoin protocol means that it will also be difficult to make other changes in the future.

But the idea of protocol immutability also arises in the form of a normative argument: the claim that changes to Bitcoin should be resisted in order to protect the property of protocol immutability. This objection occasionally arises in arguments against raising the block size limit. The claim is made that raising the block size limit would open the door to raising the 21 Million coin limit.

“Block size hard fork debate is instructive because it’s precursor to inevitable fork revising block reward that increases 21m cap.” - Jon Matonis [2]

Extreme Consensus

So what are we to make of these assertions? Before trying to determine their validity, let’s examine the underlying premises. The reasoning reveals an underlying theory about how Bitcoin’s consensus rules are determined.

We can see that they make the following assumptions:

  • The ease or difficulty of changing consensus rules is dependent on a property of Bitcoin called protocol immutability.
  • The ease or difficulty of making protocol changes is less dependent on the particulars of the specific change, and more dependent on Bitcoin’s protocol immutability.
  • The degree of protocol immutability can be influenced by the Bitcoin community. Successful resistance to one change will make it more likely that the network will reject other changes in the future.

These ideas fall into a theory known as Extreme Consensus. This theory posits that Bitcoin’s protocol immutability is created by a strong social consensus among all participants of the system. This social consensus means that everyone will run code that enforces the rules they agree on, stick with status quo, not to make any changes without overwhelming support.

Extreme Consensus represents a refinement of the idea that Bitcoin is “ruled by math”. As long as everyone runs consensus-compatible software, this adage will hold. But what is stopping someone from running software that diverges, and follows different rules? From the perspective of a computer program, Bitcoin’s rules are purely arbitrary. Thus, it follows that the community needs to come to a social consensus on which set of rules validly defines Bitcoin.

It is very important to note that this “social consensus” is separate and distinct from the technical consensus on the network. It can be very confusing if people casually mix these two different uses of the word “consensus”.

The theory is named “Extreme Consensus” because it leads to the conclusion that everyone in the community should come to virtually unanimous agreement before any non-forward-compatible protocol changes are implemented. In the Extreme Consensus view, it is very risky to make such a change if a subset of the community does not agree to go along with it. The concern is that the code the minority runs would diverge, creating the risk that Bitcoin would then fracture into incompatible networks, destroying its value.

Another concern, from this perspective, is that if the community loses vigilance and stops resisting changes, then various changes could be uncritically accepted by the network. This would make it more likely that undesirable changes could be introduced sooner or later, destroying Bitcoin’s sound money properties.

Market Consensus

In contrast to Extreme Consensus, the theory of Market Consensus offers a different understanding of how the properties of Bitcoin’s protocol are maintained or changed [3]. A basic outline of the theory of Market Consensus is as follows:

  • Bitcoin’s protocol rules are ultimately enforced by the decisions of those willing to commit economic value to them.
  • Different consensus rules are treated differently by the market depending on how they affect Bitcoin’s properties.
  • The market will favor rules that are perceived to bring value to the system. These will be rules that strengthen Bitcoin’s monetary properties.

The theory of Market Consensus posits that the choices of those who assign value to the system get translated into signals and incentives that enforce the various consensus rules on the network. People can assign value by investing or trading Bitcoins on exchanges, or by accepting them in trade as part of regular economic activity.

Different consensus rules can be advanced by running clients that support them, and signalling a commitment to enforce rules. Miners act as responsible stewards, supporting the rules they think the economic majority want. But if these indirect mechanisms fail, and the ledger effectively splits into two versions, the market can decide between them directly. If this happens, the version with the most economic backing prevails, and the losing version fades into obscurity. It is also possible that if both options bring genuinely unique value to different groups, that they may both coexist, resulting in greater overall benefit to both sides.

Through these mechanisms, rules that increase total value for all Bitcoin holders will be added or sustained if already present, whereas rules that reduce overall value will be discarded. Thus, the theory of Market Consensus suggests that if market forces are embraced, Bitcoin will develop rules leading to more valuable sound money characteristics over time.

Two Lenses

These two theories of Consensus can be viewed as two lenses through which people perceive Bitcoin and the community surrounding it. Let’s see how these two lenses shape perceptions differently around a few specific issues:

Issue 1 — Censorship and contentious debate

Since believers in Extreme Consensus view social consensus as the vital protective force that holds Bitcoin together, they view those who push for contentious changes as hostile attackers. Because of this perception, strong advocacy for contentious change is met with combative push-back, and denounced as being dangerous. This is a protective reaction against the contentious argument which is seen as hostile. In the extreme, this protective impulse can lead to censorship or social ostracism.

In the Market Consensus view, by contrast, Bitcoin’s important characteristics are upheld by informed and aware market participants. This means that vigorous debate and strong advocacy are welcomed. Faulty arguments hold little threat, as they will be weeded out by market forces over time. From this perspective, suppression of discussion is harmful since it inhibits the process by which different proposals for consensus rules can be tested by the market.

Issue 2 — Hard Forks and Soft Forks

A block chain splits into two coins when a minority enforces stricter rules than the economic and hash-rate majority of the network. This can either be a loosening of rules by the majority where a minority does not follow (hard fork), or a minority tightening rules and splitting away from the majority (soft fork). In the Extreme Consensus world view, these splits represent a failure of social consensus to preserve the protocol’s immutability. This would mean that the forces keeping the network in consensus are weak, and Bitcoin could continue fracturing into myriad incompatible networks, thereby destroying the network.

Believers in Extreme Consensus prefer to avoid hard-forking changes to the protocol if at all possible, because a non-following minority could easily split away. This would happen whether they are not following by choice, or because they are unaware or inattentive. Hard-forking change would only be considered prudent if there were virtually unanimous agreement in the community. Soft-forking change is seen as preferable. Even if they are more complex, miner-initiated soft forks keep Bitcoin on one network. Although the added complexity, and “zombiefication” of old validating nodes may not be ideal, they are far preferable to the disaster that comes from breaking the social consensus.

In the Market Consensus view, however, hard-forking changes are nothing to fear. The fact that a non-following minority can split away if they want to keep the stricter ruleset simply represents a risk that nodes have to take into account when enforcing block validity rules. If the rules add value, then that will be balanced against the risk of a chain split. Thus, in the Market Consensus view, rules that add value to the network will be difficult to remove by hard fork.

If a hard-forking change results in a separation of Bitcoin into two coins, this would simply offer a clear choice to the market. An ill-advised fork would simply die in obscurity as no-one is willing to commit value to it. Even the case of a more persistent split this is nothing to fear, as this simply means that the market sees potential value in both chains and it is a difficult process to determine what their respective values should be. Although this process may seem disruptive, in the Market Consensus view, it also brings value as the options can be clearly assessed by the market, with the most valuable one winning out. In rare cases, if two separate networks genuinely bring more overall value by serving incompatible market niches, it is possible that two chains could persist.

By contrast, through the Market Consensus lens, it is soft forks that appear more insidious. They obscure market information on the choice that is offered, and make it more difficult for the market to clearly express its preference. This talk gives good a description of the Market Consensus view on soft forks and hard forks:


This article is an attempt to describe two schools of thought on how Bitcoin consensus is formed.The two theories have been compiled by analyzing the logical implications of some common arguments.

Extreme Consensus is the theory that Bitcoin’s properties can be relied on because of protocol immutability created through strong social consensus.

Market Consensus is the theory that Bitcoin’s properties are ultimately decided by investors, and protocol rules will be added or removed based on market support.

Hopefully this analysis will be helpful in understanding different point of view, and interpreting various arguments. For example, if someone says “Bitcoin should be immutable”, do they mean ledger immutability or protocol immutability? If they say “Bitcoin operates by consensus”, do they mean social consensus, or network consensus?

In trying to understand one another better, perhaps we can also nudge our understanding closer to an accurate representation of reality.

Update 2017–04–03

Please see Elliott Olds’ article for an excellent FAQ on this topic. He uses the terms “Market Governance” and “Near-Unanimous Social Consensus Governance” in place of “Market Consensus” and “Extreme Consensus”.

Update 2017–04–04

I have published an addendum to this article here:

It is a continuation of the Two Lenses section, looking at a few more examples of some controversial issues, and how they may be interpreted differently though the lens Extreme Consensus, or through the lens of Market Consensus.





“Tablet” image courtesy of Wikimedia

“Lens” image courtesy of Philippe Antoine


Thank you to Roger Murdock and Zangelbert Bingledack who provided review and editorial feedback for this article.