The artificial block size limit

“Zero marginal costs”
I think it’s mostly transactional fees, you know. I mean, in something that should have marginal cost of zero for moving value from one account to another. It has a marginal cost of zero.
When you increase the cost of that artificially, people react rationally and they use it less. And I think — imagine if you had an email system where you have to pay for each email versus one where you don’t pay for it, it’s quite clear which one will win. — Wences Casares, Bitcoin Quarterly Update Call — Needham & Co, November 15th 2016.

There’s a permeating sense of entitlement amongst certain Bitcoin entrepreneurs that leads them to try to make the Bitcoin network liable for the profitability of their business models.

Many companies are built on the premise that they can provide competitive financial services by piggybacking off the most open and secure blockchain available. Unfortunately, they often ignore the tradeoffs they chose to make when adopting this solution and too often display an arrogance that is unbecoming from people who owe their entire business to a protocol largely supported by others.

If Bitcoin is the equivalent of TCP/IP for money (no, not “NCSA Mosaic or Netscape Navigator’’, Jeremy), how come a whole lot of us are seemingly lacking the humility to recognize what a laborious process it was to bring a “free” and “open” internet to the everyone?

Short trip down memory lane…

It took email more than a decade to become an accessible alternative for people worldwide to communicate. Early Internet users were charged per-minutes on a dial-up basis. After 8 years of comparable organic growth, how has the cost of using the Bitcoin network fared and what are the implications for the future? To answer this we ought to take a step backward and consider what constituency supports the network infrastructure and enables the services built on top of it.

Originally, users had only one option to participate in the network: run the Satoshi client. While all of them were indeed rewarded for their work, it was, by all accounts, not a profitable activity given the cost incurred in terms of computer resource and electricity as well as the relatively worthless nominal value of bitcoins back then. Along the way came web wallets, thin clients and most importantly: pooled mining. The introduction of this new, more efficient, mining structure essentially fractured the initial topography of the network forever and would carry significant consequences going forward.

Eric Lombrozo — Validation costs and incentives

Indeed, the “one-CPU-one-vote” function of Proof-Of-Work would, from there on out, be relegated to specialized actors who could or would want to keep up with the eventual arms race that mining would become.

Economies of scale inevitably took over and the ensuing division of labor results in a heterogeneous network. Mining pools have taken over control of the transaction ordering which creates a new burden of trust for validating nodes to shoulder.

As we speak, five pools, in a single country, are responsible for about 60% of the network hashrate. More recently we have learned or, to be correct, it has been exposed publicly that we should not be trusting these numbers. Pooled mining and the pseudonymous nature of the participants makes it trivial to mask the distribution of hashing power.

In fact, the hyper-competitive context invites some of these pools to band together to further improve their efficiency and get an edge on the competition. This behavior has been empirically observed and is often achieved by skipping transaction validation which compounds the security risks.

This scenario has concentrated the attack surface of the network around a specific group of participants: pool operators. While most of them are unarguably heavily invested in Bitcoin, they find themselves open to outside influences that may try to leverage their position to advance their own political agendas.

If “mining oligarchs” become a reality, they should run code that other participants can audit, using secure hardware that implements remote attestation. Hal Finney’s RPOW relied completely on remote attestation but most secure is a combination of remote attestation and the Byzantine agreement of Bitcoin (and of course crypto for those attributes where that stronger form of security is possible). — Nick Szabo, 2011.

Full validation, while operating under different security assumptions than Hal Finney’s RPOW cited above, is the only check users have available today to fully audit the work of the miners.

Bitcoin Core developer Peter Todd often argues that users pay miners to remain decentralized. While it’s not clear to what extent we have succeeded at that, the state of the network indicates we should also accept the costs of validating nodes staying decentralized or else we risk losing the ability to offset the effects of a more centralized mining environment.

The cost of doing business

Artificial internet prices

A lot of analysis has been done to try to evaluate how to properly assess the decentralization of the network, more specifically of its validating peers. While the number of listening nodes on the network is the most popular proxy, it fails at producing an objective picture. In my opinion, the most comprehensive evaluation comes from Paul Sztorc’s “Measuring Decentralization”. Coincidentally, it also concludes that the cost of the option to run a node (CONOP), is the most actionable indicator.

Today, an entire generation of million of users depend on another minuscule fraction of the participants in the ecosystem validating that everyone’s transactions are being ordered and added to the blockchain under the agreed upon consensus rules. Traditional payment service businesses have stitched themselves on top of Bitcoin in an attempt to externalize their operation costs to the network, irrespective of the fact that the latter is a public good provided by voluntary participants. This dynamic is more commonly known as the free-loader problem

Bitcoin users might get increasingly tyrannical about limiting the size of the chain so it’s easy for lots of users and small devices. — Satoshi Nakamoto, 2010.

After failing repeatedly to convince users to adopt various hard fork proposals aimed at increasing the block size, political lobbyists have turned to pool operators. They champion a consensus-incompatible implementation that dispossesses peers from control over the resource requirements to participate in the Bitcoin network.

By using their influence to promote design changes that increase the cost of validating nodes through coercion, they are effectively attempting to tax peers in order to continue subsidizing their business models.

If users give up on their ability to coordinate through a fixed block size limit, they invite transaction providers to further increase the load externalized to the network until diversity is lost and validating services become specialized and prohibitive.

For the many reasons explained above, it should be clear to everyone that the current block size limit is hardly artificial. It is, rather, a conscious, voluntary, decision by network participants everywhere to preserve the trust minimization feature of Bitcoin. Much like with the internet, we need to bear the costs of an infrastructure still in its infancy. Better security models will come along and a more efficient, multi-stage scaling infrastructure will be put in place that will deal with exponential growth intelligently, in accordance with the resource constraints of a decentralized network.

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