To Bitcoin, To Not Bitcoin…WTF is Bitcoin?

The draining nature of this question in picture form.

What is Bitcoin? I’m writing this because, in my opinion(and I doubt anyone will disagree), it seems the community is hotly divided both over the technical ramifications of trade offs and the security model of the network we have to further define. It is even more so divided over the philosophical/existential question of “what is Bitcoin?” I’m going to try to start by breaking my reasoning on this down from the most abstract and existential, and move towards the more concrete, in what I hope will be something to at least make my point of view understood even if others do not believe it is genuine or rational. If at the beginning this seems patronizing or overly simplistic, I’m sorry, but I am writing this so that even someone who just heard about Bitcoin today will hopefully be able to understand my position and why I arrived there.

At its most abstract, Bitcoin is economic value in a digital form. Its not a digital cash, or a settlement network, it is just digital value. It did what computers did for information for value: removed all the costs and overheads that come along with existing in meatspace(short the infrastructure for the internet of course). Thats it. Now first, obviously in this case information is an entirely different beast than economic value. It being replicable doesn’t really destroy its usefulness(unless you are trying to sell software or digital media when people can just steal it for free). Information is still as useful, really I would argue more useful, with the barriers of creating it are almost effectively removed. Economic value on the other hand, completely loses its usefulness when you can replicate it for nothing. When the barriers to creating it are effectively non-existent, then that form of economic value loses its inherent value. Why accept it from you in trade for something when I can just make it myself? Now obviously Bitcoin is not the first case of digital value in human history, but it is the first case of digital value that does not rely on a centralized and static trusted party to keep track of who owns what. That is why we are all here.

Digitizing information, while one of the biggest achievements in human history, is relatively simple and straightforward compared to the attempts at digitizing value in the relatively recent past. So long as you have a format or language for it that all the devices exchanging information can understand, problem solved. That is simply not the case when it comes to economic value. You need a single authoritative ledger to ensure that tokens representing value are not being duplicated and spent multiple times. This is the unique differentiator of Bitcoin versus Paypal, or a bank’s network: with Bitcoin no single party or individual is in unilateral control of the ledger, everyone is. Having a central authority in control of the ledger has previously been the only way to make digital value work, the one concession(and a huge one in the context of a complex system)required to build a functional system. In order to do this, Bitcoin had to bootstrap an economically incentivized peer to peer network, one that has evolved and diverged pretty significantly from the original design(organically, not because of nefarious influence). Bitcoin’s accomplishment is digital value not reliant on a central authority to validate and enforce rules. In order to accomplish that the network is absolutely required to exist and function properly both technically and within its incentive structure. This is a non-negotiable pre-requisite in order for Bitcoin to maintain its inherent value.

When the network first came online, every single client acted as a wallet, competed in the competition to mint new blocks, and kept a complete copy of the blockchain. Even Satoshi himself recognized that this would not last forever. And it didn’t. Things quickly diversified into nodes concentrating on mining, those that only kept the record of the blockchain, and those that only transacted. This has, and continues to alter the incentive structure of the network. Instead of every client enforcing consensus through keeping the entire blockchain, competing to enforce their consensus rules through minting blocks, and holding economic weight, players in the network have specialized to the point where most participants only perform one or two of these things.

• Miners enforce their consensus rules through the minting of blocks, and running the necessary nodes which will dictate what consensus rules their blocks are built within. They also hold large amounts of bitcoin, and are therefore an economic influence. Their chief influence however, is trading the massive hashing power to the network in exchange for their subsidy reward and fees. Without the rest of the ecosystem valuing the tokens they produce, i.e. running with the same consensus rules, the reward for their contribution(their hashing power for security), is worthless.
• People who run nodes are generally those who have holdings, or businesses who represent or manage large holdings. They enforce their consensus through their participation in validating blocks miners produce against their consensus rules in representation of their holdings. If a miner were to violate the consensus rules these nodes operate, it would be ignored, and they would lose income to miners that operated within these nodes consensus. Their chief influence is the economic weight they represent by running nodes, it gives users leverage to devalue miners income derived from their hashing power by selling their coins. This allows the users to act as a check against miners unilaterally deciding consensus rules on their own. But only inso far as nodes represent coins. A node run by someone with 1 BTC does not have as much influence as a node run by someone who has 1000 BTC. The node run by the person with 1000 BTC will obviously have a much bigger influence on the network if its owner sold their coins.
• Users who simply transact, and in no way enforce consensus rules. These people do not run nodes, and must simply trust that nodes and miners are being honest. These people have no influence on consensus except to the degree they can negatively affect the price by selling, which would devalue miner income and devalue the holdings of those running nodes.

It is obvious looking at history and the present that the natural course of progression for Bitcoin has been the specialization of roles that participants in the network fulfill. It is simply not practical at this point for every single network participant to fulfill all roles required to makeup the Bitcoin network. Currently you mine or you don’t, and you run a full node and fully validate miners or you don’t. That is the degree to which participating in validation and enforcing consensus on the network exists as a spectrum. But being able to validate as a network participant is what keeps things decentralized and allows participants to keep each other in check, and where Bitcoin’s inherent value comes from. This situation creates a conundrum. The costs of running a node have to increase in order to allow more throughput for the network, but the ability to validate is a core tenant of what makes Bitcoin valuable.

Now here is where many might stop reading if they haven’t already, and take this as political advocacy as opposed to a purely technical position arrived at by merit. I really hope you continue reading, but if not, sorry my straddling the line of politics and science is off putting or condescending.

Some are too ingrained in old ways of thinking.

Scaling does not equal higher throughput. Raising the blocksize is neither necessary right now, nor a good idea. Bitcoin is literally held together by its incentive structure, which has evolved and changed based on the technical realities since its creation. Half of the things that changed these incentive structures were not even foreseen, GPU mining, ASIC mining, the creation of mining pools. Bitcoin is a constantly evolving living thing that at the end of the day reflects the health of its incentive structure through the composite actions of many radically different individuals. Tinkering with that incentive structure, which is what keeps this machine made up of many diverse individuals running in sync, is something that should be approached with the utmost caution and careful study. It should be deliberated on, examined, and approached through technical analysis. Not politics. Not fear mongering. Not subjective opinions on how things should be priced.

There is a clear path forward right now. Segregated Witness will solve malleability, allow further exploration of the scripting system, and increases throughput by moving signatures to an external structure outside of the “block” as bitcoin clients see it. This also in future opens the door to modularizing validation into more of a spectrum. FIBRE and Compact blocks will allow the network to build out more diverse and less centrally controlled relay networks for miners to be able to mine with the lowest possible orphan rates, not forcing them to settle for the unpredictability an the organic peer to peer network to initially relay blocks. As a kicker it is designed so multiple networks can be compatible and inter operate. Schnorr signatures will reduce the signature size, limiting the extra data outside of blocks clients have to handle, and allow much more interesting and complicated things to be done with multi-party signatures due to the lower size. Lightning Network at the end of this will allow a secondary layer transaction network to increase the throughput potential for Bitcoin enormously. This should steadily increase throughput, while minimizing the increase in costs to nodes, and most importantly, having as small of an influence in changing the incentive balance as possible. Then we can move on and start radical experimentation in safe environments like sidechains.

I started writing this before the Ethereum hardfork, but seeing as I am finishing it now, I want to say this. Every Bitcoiner take a good hard long look at what is happening right now with Ethereum and Ethereum Classic. Replay attacks. Economic attacks. Threats of 51% attack. The two chains surviving at all. And a discrepancy in the hash power split between the two leaving the potential of a selfish mining attack going on right now.

Does anyone who seriously wants Bitcoin to succeed, want to see any of what is going on with Ethereum happen to Bitcoin?