BSV Series: Part II

Disclosure: At the time of publication, Unbounded Capital held all major implementations of bitcoin: BTC, BCH, and BSV. Today, Unbounded Capital only holds BSV. The author of this essay series is not a financial advisor and this is not financial advice. Do not invest in speculative assets with money you cannot afford to lose.

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Unbounded Thoughts

11 min readMay 21, 2019

If you are arriving at this essay without first reading part I, some necessary context will be lost. The following links to each individual essay, several of which build off their predecessor.

“Where” is the problem?: BTC, Small Blocks, and Lightning Network

What is the dominant crypto currency contrarian consensus? If you trace the archetypal life cycle from crypto newcomer to an “experienced veteran” (someone with 12 or more months in crypto) you often see a trajectory like this: buys BTC, buys ETH, sells both for alt-coins with BTC and ETH pairs, consolidates back into mostly high market cap coins, liquidates most coins for BTC and begins to identify as a “maximalist.”

This is a common progression for a reason. Image this crypto newcomer. BTC is their obvious first buy upon learning about crypto currency. It has the greatest name recognition and track record. It has the most fiat on-ramps (exchanges where they can purchase it with USD). Perhaps most importantly, it has the most elegant and understandable design and story. After purchasing BTC and learning more about blockchain technology, it seems prudent to diversify. Ethereum is BTC’s close second on the aforementioned criteria for name recognition, longevity, and on-ramps, with a presumably divergent (and financially uncorrelated) goal, so it makes sense as the follow up purchase. Once they have these top two crypto assets and a case of decentralization fever, it’s easy to over-extend and buy some less prominent, small cap, long-shot alt coins hoping to locate “the next” BTC or ETH. Over time, statistically speaking, this will not end well. When they come to this realization, they sell for things that appear safer with larger market caps and active communities. Then, when they learn about the relatively thin order books, downward price volatility, complexity, attack surface of all non BTC assets, and the pain this inflicts on their portfolio and mental health, they pledge allegiance, return to their original coin, and become a maximalist. Having completed the crypto currency hero’s journey, they return home with wisdom, confidence, and, most significantly, an identity: a bitcoin maximalist. They are then welcomed back home by the previous returned heroes from the bitcoin community, many of the most respected crypto “thought leaders” and industry experts (more on these categories later) among them.

Identifying the component parts of the expert-approved identity of a BTC maximalist is helpful in understanding crypto currency’s contrarian consensus. BTC maximalists have “learned the hard way” about the weaknesses inherent to most blockchain projects. These include resource inefficiency, technical complexity, large attack surfaces, and poor (often unusable) user interfaces. Although betting on high risk, small cap crypto coins might reward the desire to gamble, these practical weaknesses often limit their usability to exclusively their speculative nature. If the coins can’t do anything and any prolonged stretch of gambling on them leaves you rekt (liquidated, broke), then you may as well return to the top coin, BTC. While BTC still suffers the costs of redundancy and resource inefficiency, its apparent uselessness is reframed as a positive via the popular conceptual analogy of “digital gold”. The logic goes: It’s simply a store of value, it doesn’t need to do anything other than increase adoption and appreciate in value. It’s proclivity for non-use encourages holding which puts upward pressure on its price. Add to this the fact that most of the ostensibly smartest people in the space have settled on it as the crème de la crème of crypto. Siding with “the smartest people in the space” feels reassuring. These people often overtly encourage others not to use or sell BTC because it’s too valuable and scoff at the idea that it would be used for nominal transactions.

Due in part to this good company a BTC maximalist is joining, they often won’t feel the need to deeply examine their justifications beyond those previously mentioned blurbs, most of these tracing back towards some version of “it’s digital gold, a settlement layer”. In so doing, some of the weaknesses of BTC are reframed as hidden strengths and those remaining problems are described as temporary, only 18 months away from being resolved by some secondary method in order to refrain from disturbing the simplicity of the blockchain’s base layer. Although the average crypto currency enthusiast is (like us) ostensibly a free thinker, they likely won’t mind this subtle appeal to consensus since they are among fellow contrarians. This all sounds great and superficially makes logical sense, but with the potential for undeserved contrarian consensus on our minds, let’s examine these problems and proposed solutions more deeply.

The Bitcoin Scaling Debate

The consensus BTC narrative of digital gold implicitly makes some fundamental claims without overtly announcing it. If BTC is a digital store of value, the goal is to increase the adoption of the finite good and, in so doing, increase its price. Since it is strictly limited in amount, this price movement will serve as an advertisement for others to “get theirs while it’s cheap” which will continue driving the price up in a positive feedback loop of value capture by the hardest money on market. This notion is often discredited at face value as a Ponzi scheme, but the case for this argument isn’t any more self evidently condemning of BTC than it would be used against gold, which trades at a premium orders of magnitude higher than its commodity value for use in electronics and other goods. Because of the precedent of physical gold, the “digital gold” narrative is acceptable, but the case for the superiority of its new, unproven digital counterpart needs to be made. Why switch from trustworthy old shiny gold, for volatile new digital gold?

A primary selling point for the improvement of BTC over gold is its transportability as a digitally native asset and its lack of need of trusted custodians to facilitate it. Since BTC can safely live in large quantities stored in zeros and ones on inexpensive but secure computers, the need for large, guarded banks with vaults is diminished. Once one can physically own their value in BTC and send it over internet protocols, they can easily transport it to people regardless of their physical distance, whereas with gold they would either need to cumbersomely move the bulky metal itself or move representative IOUs that require trust in the middleman that issues them. Does this work at scale assuming BTC becomes a “digital gold” not only in function but also in market value and thus transaction volume? While the trusted custodians issuing IOUs for gold bring the downside of counterparty risk, they also provide the upside of unbounded transport scalability to potentially infinite owners of gold since it can effectively scale as fast as information can move on the internet with their assistance.

Once transportability is solved, the game for scaling gold requires educating and convincing more people to buy it. Physically allowing them to do this and “use” (hold) their gold is no technical problem so long as they are comfortable using a trusted custodian. In the absence of such custodians with BTC, are we technically able to increase adoption (result: upward price pressure) without fundamentally harming its usability (result: downward price pressure)? At the very least, the former must outweigh the latter. What we have seen from the recent history of fluctuation in BTC adoption is that as use of the blockchain increases, transaction fees have increased as well, going from virtually free (a former selling point) to as high as $50 per transaction at peak volumes in 2017. The defenders of BTC status quo argue that secondary “layer two” scaling solutions will be able to alleviate this fee inducing bottleneck, but others disagree arguing these solutions to be technically impractical without reverting back to the need for trusted middlemen and custodians, ultimately diminishing the initial value proposition of BTC over gold. Alas, we have the origins of the scaling debate and the next scale transformation smaller on the fractal contrarian consensus thesis.

The primary sides of the scaling debate are segregated into two camps: big blockers and small blockers. Their disagreements are many, but for the sake of this argument we can boil them down into three questions:

What does it mean to “use” bitcoin?
How do we get more people to use bitcoin?
What are the implicit trade offs being made to facilitate this?

The crypto consensus small blocker, BTC maximalists are implicitly answering these first two questions in the following way: 1) using bitcoin is holding bitcoin to appreciate and grow your value, and 2) we get more people to be able to buy and transfer bitcoin by increasing awareness and user friendly interfaces for buying. While transaction fees will increase on chain as adoption increases, scaling on lightning network and other layer two scaling solutions will alleviate this over time. This is a temporary problem in a new technology.

The big blockers disagree, arguing that using bitcoin means 1) transacting in it as an alternate medium of exchange to fiat currency, and 2) we get more people to use it by increasing possible use cases which requires growing the size of the blocks to keep fees low. This position includes a criticism of existing layer two scaling solutions as a cure more harmful than the disease, arguing that lightning network is both technically infeasible and solving a fundamentally unnecessary problem created by the small block ethos in the first place. Thus, implicit in the big blocker point of view is the assumption that all transacting should take place “on chain.”

Lightning Network

This brings us to the essential third question: what are the implicit trade offs being made to facilitate each method of scaling? Both small blocker and big blockers agree that one of bitcoin’s primary strengths is decentralization. But how they define decentralization and value various versions of decentralization differs. The small block BTC proponent will likely value the decentralization of full nodes and mining. So long as people are able to run their own node and store an entire version of the blockchain, they will be able to “not trust, but verify” their transactions. It is for this reason that small blockers want the blocks small. If the blocks remain small computationally, the blockchain will be able to be easily stored by average home users. If blocksize remains small but the number of users and transactions grows over time, then the fees needed to buy your way into each block will increase. For BTC, this isn’t a bug, but a feature as the fees will pay the miners who are securing the blockchain in the first place. To allow for the existence of low fee transactions in this future of high volume BTC use, the small blockers have begun developing a secondary layer called the lightning network which sets up payment channels between individuals similar to bar tabs. So long as the payment you want to make to the merchant has a path between individuals on the network, the payment can go through. Imagine a friend buying you a drink at a bar on his tab. He now owes the bar $5, and you owe him $5. Lightning network aims to develop a similar network that will function trustlessly such that you won’t have to know the individuals through which you are routing, so long as a path exists. In the optimistic end state of BTC for small blockers, bitcoin will remain similar to its origin in being both cheap and fast while maintaining a small and steadily growing blockchain size.

Big blockers think this is unlikely and unnecessary. While they often make their case by simply attacking lightning network’s viability (if it isn’t successful then what is BTC’s plan B to remain cheap and fast and thus superior to gold?) the fundamental disagreement is really that they don’t see the value in that type of decentralization. For big blockers, it isn’t necessary to run your own full node and validate each transaction on your own, and certainly not at the cost of increasing transactions’ fees and decreasing their speed. There are other methods of computationally lightweight verification (SPV) laid out at bitcoin’s origin along with the base protocol that can accomplish this trustless verification without the added costs. Sacrificing the ability to use bitcoin as money (what they see as its primary intended use rather than just a store of value like gold) would be too high a cost. The decentralization of full nodes and miners is in the service of bitcoin’s usability as money to achieve effective censorship resistant, free, and instant transactions rather than being a good in and of itself.

Another disagreement relevant to the lightning network debate is centered around the expectations of future technological progress. A fundamental argument from the small blockers who do defend the use of bitcoin for transactions outside of its digital gold store of value use case, contend that at scale transaction propagation time around the network will be too slow to allow for mass adoption without the need for secondary scaling. Big blockers disagree, contending that as improvements to computer storage and network bandwidth continue to grow, the concern over scaling will resolve itself. If Moore’s law allows the exponential rate of innovation from recent history to continue, the bitcoin blockchain will be able to technically grow as quickly as use cases do. In addition, they note that if lightning network and other secondary scaling solutions prove valuable, they too will be able to implement it on their larger block version of bitcoin and it will function better than on the small block BTC for the same reasons that it is useful in the first place. The additional space on the big block bitcoin blockchain will decrease fees for on-boarding new bitcoin users both with and without a successful lightning network.

These unresolved differences ultimately resulted in the forking of the bitcoin blockchain in 2017, leaving all bitcoin holders with equal amounts (more on this in part III) of small block BTC a big block BCH. Crypto currency contrarian consensus holds that small blocks and their store of value ethos is the best path forward. As with the “vote with you dollars” results of crypto currency vs gold, BTC’s market cap is orders of magnitude (~2200% larger at the time of writing) larger than BCH and other large block alternatives. Beyond the differences in vision mentioned above, the big block contrarians’ disagreements are quite technical. This has an exclusionary effect on the discussion as most observers find themselves unable to understand and form their own opinion, and as a result trust the strong consensus of their community. While the technical nature of the debate can be alienating, it is fruitful to make the effort. For the sake of brevity in this essay series we will outsource most of that discussion. Other people in the community have had this debate and done so competently in relatively digestible ways. Some of our favorite examples are the following:

Big Blocks vs Small Blocks

Roger Ver debate/discussion with Charlie Lee

Critique of Lightning Network Viability

Peter Rizun on the What Bitcoin Did podcast

Continue on to part III