The Bitcoin Social Contract, 21 Million Coins, and the Future of Peer to Peer Cash

Something interesting happened this week in Bitcoin… something very interesting indeed. A critical bug was patched that could have nearly destroyed the network — but that isn’t even the whole story.

The events shed light on an even greater topic. What is Bitcoin and what was it supposed to be? Would it be the same had the bug activated? Is it even the same as it was a few years ago, regardless of the bug?

The Nastiest

First of all, there was a critical bug discovered that some are calling “One of Bitcoin’s Nastiest Bugs Yet”. It not only was capable of crashing nearly all the nodes on the BTC network, but it could also cause silent inflation (extra coins to be created) or cause the network to split the chain.

Sounds bad, doesn’t it?

Interestingly, the bug was discovered not by a BTC developer, but by a Bitcoin Cash developer. He wrote an account of the responsible bug disclosure here.

So much for BCH having “Mickey Mouse developers”. (A myth promoted by BTC fans). But I digress; that isn’t the point here.

Remember the DAO Hack?

Here’s a pivotal question: What would have happened had the Bitcoin bug actually minted extra coins into the system? Some postulated that the chain could be “rolled back”.

This is similar to what happened in 2016 with Ethereum’s DAO attack. The Ethereum community decided that a theft of hundreds of millions of dollars worth of ethers was worth “rolling back the chain” for.

It was controversial of course. The Ethereum (ETH) community got tons of hate because their chain was no longer seen as “immutable”. Cryptocurrencies are supposed to be immutable ledgers, right?

Bitcoin is a Social Contract

If unintended inflation happened in Bitcoin, it would be a sticky situation because the code says one thing, but “we all know” there’s only supposed to be slightly less than 21M Bitcoins, ever.

My opinion is that Bitcoin is a social contract. One of the most famous and well-known tenets is that Bitcoin has a strictly limited supply, and everyone knows what it is. 21M coins. Period. End of story.

I think that this social agreement trumps any code. Therefore, rolling back the ledger, or doing whatever we have to do (burning coins?) to bring the supply back in line is necessary and required to uphold the social contract.

The possibility of having to do this would have been unfathomable for some just a week ago. Bitcoin was supposed to be essentially free of any major bugs. The system has been running for a decade. That it is immutable was a foregone conclusion.

Turns out, there’s no such guarantee. Code has to follow the law of bugs, which says that any non-trivial code is going to have them. Thus, no cryptocurrency can ever really be immutable. Even without bugs, a ledger is only as good as that which people agree to.

Code is just a tool. Ultimately, agreement is between human beings.

Peer to Peer Cash

When we start to think about Bitcoin as a social contract, the 21M coin limit is the most obvious point of agreement. But what else? What’s the next obvious thing?

Well, obviously Bitcoin is supposed to be a new kind of money. After all, it’s a cryptocurrency. The original Bitcoin whitepaper called it a Peer to Peer Electronic Cash System.

For something to be valuable, it has to be not just scarce, but also useful. This was the original idea of Bitcoin. That you can send money to anyone, anywhere in the world, quickly, cheaply, without anyone’s permission, almost for free.

Amazingly, this idea (of Bitcoin being usable as money) has actually become controversial. This is a big part of the BTC vs. Bitcoin Cash debate.

Understanding Bitcoin Cash Fans

Bitcoin Cash, its developers, and supporters are constantly attacked by BTC fans. I think this is due to fear, because BCH is the #4 coin and has a number of advantages: much cheaper fees, growing adoption, higher capacity, etc.

And I’ll be fair and give you the disclaimer that I myself am a Bitcoin Cash wallet developer, so you’re getting my own perspective on things, but hear me out.

I didn’t just “join team BCH”. I was a Bitcoiner since 2013. We split off from BTC because a large number of us didn’t feel that BTC was continuing to uphold the social contract of being usable as money.

By keeping the 1MB maximum blocksize limit in place, Bitcoin could no longer grow to accommodate more users. It didn’t really matter how much people paid in fees for their transactions (and some paid as much as $50 per transaction in December 2017!), because 1MB is 1MB. Full stop.

So how can you be money for the world when you can’t grow the user base? You can hardly blame people for claiming that BTC is no longer Bitcoin if its turning away users.

Understanding BTC Fans

The other side of the argument (the BTC side) is that Bitcoin still wants to be money, but its just going to do that by using “second layer scaling technology” like the Lightning Network.

Their arguments are that not every transaction needs the full security of the blockchain. Only large transactions do. Smaller transactions can be done on sidechains or drivechains or payment channels. And we need to keep the blocksize small on the base layer because it helps keep Bitcoin decentralized since more people can run a node.

Why I Don’t Agree

They can make those arguments; that’s fine. They are entitled to their opinion, although I don’t agree with them.

The main reason I don’t agree is that there is simply no good way to use second layers without compromising the peer to peer nature of Bitcoin. If there was, Bitcoin would be doing it with great success and BCH wouldn’t have been necessary.

Even ignoring the fact that Lighting Network completely destroys the permissionless nature of Bitcoin, its hardly even functional. Currently, Lightning Network is barely usable even for very technical people.

Thankfully, second layers aren’t necessary because on chain scaling works.
Bitcoin Cash recently did a stress test with over 2 million transactions in a day.
And engineers are hard at work with a roadmap to allow Bitcoin Cash to be used globally as cash.

Ultimately The Market Will Decide Who Is Right

Currently, BTC is winning in the eyes of the market with a higher price, higher market cap, and more transaction volume.

However, I see a brighter future for Bitcoin Cash because of BTC’s intentional choice to limit their transaction capacity. Currently, usage of any cryptocurrency is mostly speculative. Actual trade, commerce, and economic activity is quite low.

But sooner or later this will change. As the world discovers the need for (and possibility of) having sound money and real peer to peer cash, things will shift dramatically. And the cryptocurrency that can fulfill the original social contract of Bitcoin is going to have its heyday.