This post will discuss the Bitcoin drama and its three acts or broad adoption phases, the first act of currency speculation, second act as platform ledger for bartered exchange of goods and services, and third act in conjunction with smart contracts as a platform for exchange of assets and property… This post will be highly concentrated on the current scaling debate and seeming stagnation and deadlock within Bitcoin and between the Segregated Witness and Bitcoin Unlimited proposals in providing the most successful scaling solution for the limitations of the Bitcoin core software… I will also discuss game theory and the incentives and penalties that operate in this decentralized governance by consensus that is the essence of Bitcoin, of decentralized and direct democracy and invisible hand very much in the tradition of Austrian Economics and free market economic incentive structures, that will bring the Bitcoin community to the most prudent and correct scaling solution… This is an interesting and very exciting time in the development and evolution of this decentralized governance experiment, and the beginning of the end of Act One and transition into Act Two…

The Enduring Success Of Bitcoin

To begin this post I will spend some words discussing how far we have come and the quite stunning success, whether you are Bitcoin’s biggest supporter or biggest detractor, you cannot argue with the facts… Since two thousand and nine, Bitcoin has gone from a zero market cap to approaching a twenty billion ($20,000,000,000) dollar market cap, and an unit of its currency (bitcoins) has gone from zero reaching an all time high price of around thirteen hundred dollars, which when you think about it is pretty astounding… It has accumulated this market cap and currency value solely off its own back and by its multi faceted utility in many (and increasing) real world applications, and due to its intrinsically scarce rate of issue and with a transparent and permanent twenty one million (21,000,000) maximum cap of issue… The mind bending utilities of Bitcoin and its electronic internet protocol converge on, compete with, and is currently disrupting the “traditional” and monopolized “services” of banking and finance, national and international governance structures, accounting, law, law enforcement, bureaucracy, securities and financial regulation, everywhere you look Bitcoin is stalking and threatening the status quo and enslaving matrix of the human population, threatening the disintermediation of a vast and sprawling class of controllers, enforcers, parasites and middlemen that bilk and pillage the productive population of their property rights and hard work… The greater the success of Bitcoin the more it can and will impinge upon the Elites pass times and pleasures, War (and the Military and Surveillance Industrial Complexes), Welfare (both corporate and the enslavement of the civilian underclass), its propaganda matrix of Governmental Educational Institutions (schools, universities) and corporate propaganda (Television, Mainstream Media and Print), so make no mistake about it Bitcoin is a huge threat to the Elites who rule and manipulate our world, and why you would not expect anything less than for them to pull every stunt imaginable to discredit and destroy Bitcoin which we are and increasingly will see going forward, and why the enduring success of Bitcoin will never be an easy and comfortable ride, it cannot ever be comfortable…

The ongoing success and longevity of Bitcoin can solely be awarded to its sprawling and diverse community, from the creators and early geniuses and pioneers, Satoshi, Hal Finney and others, to the exponentially increasing mining power (and software and hardware industries that underpin it) that has secured and made security attacks on the network exponentially harder and more consuming while processing the transactions and maintaining the distributed ledger that has matured these last eight years, to the Bitcoin core team that has developed and guided the core protocol software, patching bugs, improving the code, developing and testing improvements and scaling solutions, to the user base that has acknowledged the promise and has and is using Bitcoin as a store of value, unit of account and medium of exchange outside of the crumbling banking and governance systems on five continents, America (North and South), Europe, Africa, The East (China in particular) and Australia… Bitcoin only succeeds and continues to flourish because of its underpinnings, and as its underpinnings expand then so to will its market cap and currency value in a closed loop system of deflation and increasing purchasing power of its members, so all members of the Bitcoin community contribute to its success and none to its detriment, indeed outside of the perpetual short term dilemmas and ongoing hype and distraction of periodic “crises” that somehow never amount to much at all, Bitcoin and all its component members and community is dependent on the ongoing success of Bitcoin, so eventually solutions to our ongoing problems must be found…

The First Act Of Bitcoin – Currency Speculation

Bitcoin has never had any monopoly privilege and so has had to fight for every inch of its life and existence… When it was released in 2009 it had no practical utility and therefore had no value, bitcoins (when they did trade, i.e when someone bothered to buy them) traded at near zero for a long time, were difficult to store and secure as there was barely any software infrastructure to do this, and why many are lost or forgotten forever out of circulation… As Bitcoin to Fiat exchanges slowly developed (Mt Gox was an early pioneer if you remember) miners could sell their bitcoins into the open market so that more and more users could buy bitcoins, which distributed bitcoin ownership between more users who could then either hold bitcoins (and take them out of circulation) or spend them into circulation for others to take out of circulation… As Bitcoin started to mature and attracted more users then naturally (due to the scarcity of bitcoins) the market value of Bitcoin and the value of an unit of its currency (bitcoins) increased… This increasing value gave an increased value to Bitcoin mining and incentivized the investment in mining hardware and development to further grow the mining industry and secure the network, which in turn attracted more users and further scale the community while decentralizing ownership… The first application of the distributed ledger was naturally its currency, but with few merchants willing to accept bitcoin in exchange, then currency speculation was (and still is) more about its utility as a store of value than as medium of exchange…

Bitcoin – Digital Gold

The first and most critical stage of Bitcoin’s evolution in my opinion was the utility as a store of value, that is a sovereign and independent ledger and currency outside of government and banking control, regulation and manipulation, and in that context is why I constantly refer to Bitcoin as digital gold… Like an ounce of physical gold secures you against a meltdown in the purchasing power of infinite Fiat currencies, so one digital bitcoin secures you against a meltdown in the purchasing power of infinite Fiat currencies, due to the inherent scarcity of both commodities which in fact is the derivation of both their values in the first place… You cannot print gold and you cannot print bitcoins either, you can only mine them and that takes an incredible amount of investment and infrastructure to do profitably, so gold and bitcoin miners are regulated by a scarcity that doesn’t exist in the printing presses of central and high street banks that can and do print currency at will and hand out to financiers and corporations at zero cost, so in my opinion gold and bitcoin will always at some level have value just by their nature… The only place that the Fiat system can regulate and manipulate the price of gold and bitcoin is at its connections to them, in other words the current hegemony unlimited central bank fiat currencies enjoy is due to monopoly legal tender privilege as the enforced medium of exchange and enforced in payment of debts and taxes to fund insolvent governments the world over, and so for now gold and bitcoin must dance to the fiat currency tune, but banks and governments can only regulate gold and bitcoin at the margins, those of fiat currency to gold and bitcoin exchanges… As gold has always historically been money then it has always been the kryptonite of the central bank fiat currency system and why central banks must regulate and manipulate gold to fiat exchanges, which it has successfully done up to now by centralizing price discovery in a few “regulated” exchanges such as the COMEX and LBMA, that by building a vast monstrosity of paper ponzi derivatives to disconnect the underlying physical scarcity has been able to cap the price of gold and therefore maintain CONfidence in the cratering value of fiat currencies… Bitcoin on the other hand has not been as easy to regulate and manipulate because it only eight years old, and central banks and governments in the most part still have not a clue of what it is or its potential power, however the recent attempt by the Chinese government to regulate Yuan to Bitcoin exchanges does show that governments and banks are starting to wake up to Bitcoin, and so I expect the attempted regulation of Bitcoin exchanges worldwide to continue…

So in my opinion gold and bitcoin are very similar investments, they are both currency speculations on the ongoing devaluation of fiat currencies, and as scarce currencies speculations on the future increasing purchasing power of gold and bitcoin as stores of value and wealth… In the minds of gold and bitcoin bugs they are buying cheap now to be able to spend later, they liquidate fiat to take out of circulation gold (and silver) ounces and bitcoins reducing the liquidity of remaining stocks and flows in the hope and expectance of being able to spend these currencies in the future when the amount of consumption and stuff they will be able to buy will be multiples higher… And in my opinion during and in the aftermath of the mathematical inevitability and certainty of fiat currency devaluation and eventual collapse, then gold (and silver) and Bitcoin will form the physical and digital layers of the future financial system, with gold acting as the physical backbone and Bitcoin acting as the digital scaling and exchange layer for us to have the right and proper price discovery and to really find how scarce gold and silver are when exchanging on an unmanipulated and distributed ledger and currency system…

Digital Gold’s Killer App – From Store Of Value To Medium Of Exchange

The drawback of gold in history as I see it is its practical limitations not as scarce, eternal, and intrinsically deflationary store of value, but as easily divisible and price sensitive medium of exchange in economies of increasing complexity and division of labour, and so for chunks of history gold has worked subordinate to credit and banking ledgers… While gold bugs will argue that it was the divisibility and uniform consistency of precious metals that made them a superior form of money in the first place, they are only easily divisible in a certain context… It is true that metals can be easily melted down, subdivided and struck into smaller coins, this however needs infrastructure, a smithy, a gold and silver smith, a raging fire and hammers and moulds and stamping apparatus, etc, etc, which is why I contend that banking if not originated then flourished in late medieval Europe due to the invention of the double-entry bookkeeping ledger and derivative paper currency… The origin of banking therefore allowed gold as unparalleled store of value to be stored in vaults while banks and their ledgers scaled gold as medium of exchange by substituting paper tickets, as paper currencies were far easier and cheaper subdivided into units of account and circulated amongst the exchanging population… As long as the banker engaged in Full Reserve Banking then the paper substitute derivatives conserved the full purchasing power of the underlying stores of value… However the only thing we do know from history is that bankers once their paper monies are established and trusted by the exchanging population will inevitably abuse this trust by engaging in Fractional Reserve Banking, that is printing more paper tickets than there is precious metals in the bank in reserve that allowed them to enrich themselves in both currency and property creating a myriad of evil and impoverishing side effects, such as societal inequality, the funding of wars, creating the boom and bust business cycle and becoming incestuously entwined in politics, power and tyranny… In fact today’s central bank fiat currencies following the closing of the Gold Window in 1971 are merely infinite and unbacked paper (and increasingly digital) currencies that have forgotten their roots and origins, and for that mere reason are destined to fail once trust in this system evaporates with the purchasing power of currency… Banking today, because of the invention of Blockchain and Bitcoin are effectively obsolete, they just haven’t figured it out yet…

The major advantage that Bitcoin as digital gold has over physical gold and the banking system, is that it does both… Bitcoin both scales the concept of gold as a store of value and scales the concept of banking as ledger and medium of exchange and unit of account, it transcends physical restraints and constraints due to its digital and ethereal nature, and it can do it this on a planetary wide scale global in nature with its only constraint being limited by local electrical and internet infrastructure and connectivity, Bitcoin can be subdivided to eight decimal places (0.00000001 btc) which allows a simply mind numbing level of price discovery and sensitivity without any servicing costs as this subdivision is encoded in the protocol, and most astonishingly of all it does all the above without the use of any counterparties or middlemen, which is why it obsoletes banking and central banking as we will increasingly see going forward… Bitcoin and blockchain technology I have argued throughout my posts is a major step forward for humanity and for liberty, and even though I consider this technology the biggest invention in human history, it is also the biggest financial innovation of the last five hundred years since the double-entry bookkeeping ledger and the invention of modern banking…

Bitcoin Is Dying – Long Live The Blockchain

Despite the unarguable eight year success of Bitcoin for its increasing user base and community, despite its advancing disruption of the legacy status quo financial and legal system, despite the soaring amount of interfaces and software being developed to increase the utility and scaling in many diverse real world applications, if you have been in Bitcoin for any meaningful period of time whatsoever you will have heard the screeching and moaning of naysayers and critics, Bitcoin is a ponzi scheme, Bitcoin cannot scale, Bitcoin will never work, Bitcoin has too many fundamental flaws, Bitcoin will soon be superseded by superior blockchains, Bitcoin will be co-opted and destroy itslef, bla, bla, bla… Bitcoin has died so many times it has its own obituary website, and to date Bitcoin has officially died a hundred and twenty six times… All the naysayers and doom merchants have been proven wrong time after time after time, and why the current scaling drama and distraction that has brought out the latest wave of government and altcoin trolls and shills in decrying the impending of death of Bitcoin yet again, almost as if these people never learn, eh?!

All that said, Bitcoin as a decentralized open source experiment and collaborative democracy is far from perfect, and this applies to its mining community, its user community, its core community, and its public relations community… As Bitcoin grows then so does its community, its diversity, and because of this very fact the less centralized and the less the flexibility of its component members, and so the more entrenched and conservative the Bitcoin core ledger software and code will become the more the Bitcoin protocol will ossify and the less changes will be able to be made to the underlying workings of the ledger… So we are close to a stagnation in Bitcoin’s core software that has given rise to the latest panic and apocryphal drivel, over the never ending block size debate…

The Block Size “Problem”

To briefly and simplistically sum up the block size, it is the limit that was placed by Satoshi on ledger blocks confirmed every ten minutes by the miners and which contain the transactions, measured in bytes, as in kilobytes, and the limit was set at One Megabyte… So it should be clear that only a certain amount of transactions and kilobytes can be confirmed by the miners every ten minutes on a one megabyte block, and I hope this makes it crystal clear that there is an intrinsic limit in the Bitcoin protocol that directly effects upon the amount of transactions that Bitcoin can handle… This means that only a certain amount of transactions can be completed every ten minutes on the blockchain, and so at busy times there has been a backlog of transactions in the mempool (think of it as the waiting room where transactions wait to be put into blocks and confirmed on the blockchain) and so many users have faced disrupted payments and mental stress because the transactions aren’t going through, and given rise to a new industry of altcoin shills decrying the death of Bitcoin and the coming hegemony of their superior blockchain, and brought out the “experts” in the mainstream and alternative media to once again declare Bitcoin dying and dead…

Transaction Fees

However there is another element that needs to be added to the transactions quagmire, and that is transaction competition… Even though the mempool is a large waiting room for transactions, that doesn’t necessarily mean that there is a set queue and that every transaction is confirmed in the order it was entered by its user, and this is because of transaction fees… Transaction fees I assume was Satoshi’s long term solution for recompensing the miners for continuing to provide the security and transaction processing after the twenty one million currency cap of Bitcoin had been exhausted (approximately the year 2140 from memory), and so when you send bitcoin transactions you must also pay a fee to the miners… This fee is variable and competitive and naturally the higher the fee (a fraction of a bitcoin, e.g 0.0002 btc) the faster the miners will confirm your transaction in a block, and the lower your fee the slower it may be confirmed… So you can if you want jump the queue by a larger transaction fee, and thus we have the seen the explosion in fees the last few months and the explosion of the usual naysayers and rivals who laud their own lower transaction fee blockchains, however here I want to give some context and background to this recent increase in backlog and the increase in fees…

At this time one year ago exactly, Bitcoin was trading at four hundred dollars, at my time of writing Bitcoin is around twelve hundred dollars and a few weeks ago was at thirteen hundred dollars, so Bitcoin has increased the purchasing power of anyone who has saved a bitcoin this last year three to four hundred percent! As a transaction fee is a fraction of a bitcoin and Bitcoin has increased a few hundred percent so the fees priced in fiat (Dollars, Pounds, Euros, Yen, Yuan) have exploded… I feel extremely sorry for some high profile Bitcoiners that are lamenting the explosive rise in transaction fees while the value of their hundreds of thousands of bitcoins have increased by hundreds of millions in fiat money, and they would be screeching all the more if Bitcoin were to double from here and fees would a reach a dollar or more each, priced in the cratering purchasing power of central bank toilet paper money, my heart bleeds… While I acknowledge that high transaction fees are a pain and can lead to stagnation in adoption of some aspects, look at the big picture and really think how many test cases Bitcoin still has… For one example in China Bitcoin has become one valuable method for citizens to evade capital controls and get their money outside the devaluing Yuan and has been a big factor in the price rise of Bitcoin the last year, and to transfer a thousand, ten thousand, a hundred thousand dollars worth of Chinese yuan might cost you a dollar or even two dollars, so do you think the rise in fees worries the typical Chinese citizen that much? Do you think international remittances that can save maybe ten per cent by paying a one dollar Bitcoin fee to move wealth outside of the extortionate and pillaging internal wire charges of the SWIFT interbank system or money transmitters such as Western Union and Moneygram really worries some of the poorest people on earth when trying to move their money between borders? Bitcoin is still invaluable for these type of utilities and with increasing insane and visibly collapsing nation states and financial systems, to say that Bitcoin is useless without low transaction fees is the height of ignorance and stupidity…

If I were to look at Bitcoin today especially as regards the recent transaction backlog and increase in transaction fees, then outside of all the doom and gloom of the latest death for Bitcoin, what is all this palaver really telling me? It tells me only this: that the increase in transaction fees is a side effect of the increased transactions on the Blockchain, and that a record amount of users are willing to pay “extortionate” fees to move their wealth around the blockchain (and the world), so in this respect Bitcoin is simply becoming a victim of its own success so to speak… As the near record market cap and bitcoin price also attests, Bitcoin has never been stronger or popular to the thousands and hundreds of thousands of users that are now using it in record numbers… The explosion in both transactions and fees is simply highlighting and signaling to Bitcoin that it has never been more useful as a store of value and is now also increasingly a medium for exchange…

Where the increase in transaction fees does start to marginalize and stagnate adoption is as a means for sending small transactions or micro transactions, one example being buying a cup of coffee for four dollars would currently incur a transaction fee of about a dollar which clearly adds a hefty percentage of twenty percent to your cup of coffee, although how prevalent and how much of Bitcoin’s ecosystem is small transactions and purchases to begin with, I do not know… I have also noticed a marked decrease in my bitcoin tips for my writing the last few months and again I can understand why, if someone sends a dollar tip with another dollar to the miners for the transaction then tipping effectively costs double, and would be a large percentage of a tip up to ten dollars, so I sincerely agree that high transaction fees are an increasing “problem” and the higher Bitcoin’s market cap goes and the higher the value of bitcoins, the higher these fees will go and the less usable Bitcoin will become for smaller purchases, so I would hope that all of the Bitcoin community on either side of the scaling divide will agree on this, is that we need to scale Bitcoin, which brings us to the scaling debate and proposed solutions…

Bitcoin Scaling Debate – Bitcoin Unlimited Vs Segregated Witness (SegWit)

After a long but needed preamble, we can now discuss the proposed solutions to the inherent limitation within the Bitcoin protocol, that of the block size… This scaling debate to put it very simplistically is a debate between an on chain scaling solution (Bitcoin Unlimited) and an off chain scaling solution (SegWit), that must seem to outsiders and newbies like an intractable deadlock and fight for the soul of Bitcoin itself, however by using logical deduction and game theory we can come to some pretty definite insights and conclusions on how this scaling debate will eventually play out…

Bitcoin Unlimited – On Chain Scaling By Hard Fork

Bitcoin Unlimited’s proposed scaling solution is by increasing the block size itself and so this solution requires a hard coded change to Bitcoin’s core protocol… This is a highly contentious issue within the Bitcoin community and especially within core development as the experts and so-called experts on protocol upgrades and changes, as a hard fork is a hard coded alteration to the protocol software that is not backwards compatible, and is considered by many highly dangerous… Backwards compatibility is simply put a compatibility with previous version of the software, for example a Microsoft Word 2008 that would be compatible and work on a previous iteration of Word and Windows, like 2005 or 2000, say… So Bitcoin Unlimited once forked would no longer be compatible with the previous versions of the Bitcoin Core software and community, and would effectively be a new protocol all of itself… Bitcoin Unlimited has come to prominence with a few high profile evangelists and a small core team and small but vociferous faction of the Bitcoin community that have increasingly been given oxygen and support in signaling and activation by the Bitcoin mining community, as the new enlarged block size would increase the amount of transactions per ten minute block, and in this way would be the solution to the backlog of transactions and increasing transaction fees… I will get to why the miners are supportive of this on chain solution (if you haven’t already been able to figure out) after discussing the off chain solution…

Segregated Witness (SegWit) – Off Chain Scaling By Soft Fork

SegWit is the Bitcoin Core development team’s proposed scaling solution by systemic on chain tweak and for paving the road for further off chain scaling solutions, and this would be activated by a soft fork and therefore would be backwards compatible and would basically be a standard Core upgrade, and although not completely without risk has some very interesting effects and certainly increases the flexibility of what can be done with the solidifying and ossifying Bitcoin protocol in general… For those interested in a more detailed SegWit analysis this is a really great and relatively easy to understand primer, and even though it is a year and old and presenter Amanda Johnson has since converted into a Dash promoter and evangelist, this is the best video I have come across on SegWit… For a brief and very potted version of Segwit, it involves the identifying and segregating of the Block signatures (that sign the transaction) that can take up to about seventy five percent of a block’s capacity, and therefore in of itself this is a big upgrade for the block size in effect while not actually increasing the block size to do it, which is pretty neat… Segregating the witness (signature) was initially developed by core developer Pieter Wuille as a fix for transaction malleability which has been somewhat of an achilles’ heel for Bitcoin in the past that allowed spamming and jamming the network, denial of service attacks, and had been blamed (or scapegoated depending on your view) for hacking and loss of funds at Bitcoin exchanges (Mt Gox being the most famous example), in short transaction malleability is a pain in the arse and weakens the security of Bitcoin in general, so it will be a substantial upgrade to core operability… In the past it has been assumed that SegWit would have to be implemented by hard fork however by upgrading version scripts (another tweak developed by core contributor Luke Dash Jr) it can be activated by soft fork and would allow the far easier and more flexible soft forking of the protocol going forward, so this upgrade allows a lot more to be done within the intrinsic limitations of Bitcoin… This more flexible protocol allows numerous further improvements such as security, privacy and anonymizing features that we will increasingly require going forward as Bitcoin and its users will be subject to surveillance, censorship attempts and crackdowns by the dying and dangerous insolvent state and banking apparatus worldwide… But perhaps the most important aspect of SegWit is that it significanly enables off chain scaling layers that can scale near zero cost transactions through projects such as the Lightening Network and sure to be many others, that will allow Bitcoin to leave Act I (currency speculation) and transition into Act II (barter ledger) and scale small, micro, and every day transactions…

SegWit Vs Bitcoin Unlimited – Development Team And Current Status

SegWit is the proposal put forward by the Bitcoin Core team and the team (although with changing members) that has brought us this far over the last eight years, from virtually zero to a twenty billion dollar market cap, that has worked tirelessly on protocol improvements and solutions to the intrinsic and inherent limitations of the Bitcoin Core protocol, so I hope we can all agree that the core team has already scaled Bitcoin in a big way… Core members and contributors include some of the best and most disruptive of innovators in computer technology and especially in regards to the development and scaling of the internet (for a good who’s who I picked up these off Twitter H/T @TuurDemeester)…

The Segregated Witness proposal has been long developed and extensively tested on independent testnets for bugs, flaws and weaknesses, and is currently awaiting activation on the Bitcoin network, which requires seventy five percent of the miners to signal for and therefore activate Segwit and then a further ninety five percent of the miners to enforce the upgrade which means Segwit becomes Bitcoin Law, so the only thing holding back activation is Bitcoin’s mining community, which we will get to soon enough…

Bitcoin Unlimited as far as I can see has one early Bitcoin adopter cheerleading a small but vociferous sub-set of the Bitcoin developer and user community and increasingly being fed upon out in the community at large (and media) by the mining community that is promoting (by signaling) the activation of the Bitcoin Unlimited core software, that we don’t really know what it contains or if it has been extensively tested, and the meltdowns of BU core nodes due to buggy code in just the last few embarrassing weeks would suggest it hasn’t been extensively tested, so already as a Bitcoin investor or community member you should be very worried… Bitcoin Unlimited also requires the miners to activate a hard fork (as opposed to SegWit and a soft fork) that again should be ringing alarm bells if you are invested in Bitcoin as this is a highly risky alteration, and at the heart of Bitcoin to boot, the blocks that create the chain, which also makes you wonder why exactly there are so many miners behind this radical proposal considering how conservative the miner community has been in the past over protocol changes and upgrades?

So at the heart of this developer spat and split over the future direction of Bitcoin that has been given an increasing platform and legitimacy by the mining community, is conservatism versus progressivism, SegWit being a conservative but substantial upgrade in Bitcoin’s existing block size by segregating the signature or witness and using subtle little coding and scripting tricks to enhance the flexibility and scalability of on chain transactions while also paving the road for the off chain transaction layers that will scale Bitcoin and its user cases market cap and currency value far higher, and Bitcoin Unlimited a radical and progressive hard fork within the workings of the core protocol that underpins the whole of the community and the last eight years of blood sweat and tears in scaling this amazing decentralized monetary experiment to a twenty billion dollar small cap that has all the potential and promise to destroy the control matrix that the Elites have the rest of us enslaved in! On some levels, this might be the biggest decision in human history to get wrong! The Bitcoin Core team I think understand this and therefore understand Bitcoin far better than the revolutionary Bitcoin Unlimited team, and they also understand the limitations of Bitcoin far better, what can and cannot be done with the protocol, and why they understand far better and are implementing as best they can for Bitcoin by looking to move the risk and innovation off the Bitcoin chain where there are no such limitations and so any and every financial instrument that can be created, subordinate to and anchored by the underlying security and immutability of an increasingly hardening backbone, and this method of scaling is far safer and more judicious than BU’s vastly more radical proposal for on chain scaling solution which I contend is dangerous and bordering on the insane… Whatever the community’s view, the decision of which scaling solution comes down to the mining community, so it is only fitting that we take some time to discuss the miners and their motives in this raucous debate…

The Miners – The Bitcoin Kingmaker?

According to this website, Bitcoin Unlimited is leading the miners support with 34.6% with SegWit garnering 29.9%, so things are pretty close overall, with 60-70% of mining power needed to activate BU (apparently) and 95% required to activate Segwit, it would seem that Bitcoin’s mining community holds the future and fate of Bitcoin in its hands…

So why do the miners currently favour an on chain solution over an off chain solution? The answer in my opinion is the chain itself and the transaction fees that this chain produces, and to be clear here I am not all in a tizzy and rabid at the mouth at the self serving behaviour of the miners because they are simply working in their own interests and this is human nature after all… And in defence of the mining community, it is they that had to continue to mine bitcoins to pay the bills after Bitcoin’s epic meltdown in 2013 and the doldrums currency bear market of nearly two years of 2014 and 2015, it is also the miners that had to transition overnight last year after the Bitcoin Halvening when their bitcoin reward was halved overnight from 25 to 12.5 bitcoins per block and ten minutes, so the miners have had to ride out some bad times and are now deservedly enjoying some of the good times, the price of Bitcoin has near doubled since the halving and the increased purchasing power has started to scale more transactions as Bitcoin users have enjoyed higher prices to spend and distribute bitcoins between more and more users and the transaction fees that the miners have collected radically increasing in both volume and in purchasing power (in fiat currency terms), so it is in the miner community’s interest for the good times to go on for as long as possible and I understand why they are reticent to activate SegWit and why they also seem so hot for BU… The BU on chain scaling solution will allow the miner community the ongoing influence and power (and the centralization and moral hazard that entails) over the Bitcoin community, while the SegWit off chain scaling means disintermediating to a certain extent the miners (and their fees) by scaling the Bitcoin community beyond the limitations of the blockchain… So I would describe this as a kind of a Mexican Standoff between the mining community and the Bitcoin Core community, the miners using Bitcoin Unlimited as their proxy for flexing its muscles and influence within Bitcoin… It would seem that the miners have the upper hand… And that would be completely incorrect…

The Ultimate Kingmaker – The Bitcoin Community (Software Nodes)

The workings of the Bitcoin consensus and proof of work protocol is distributed between the community in two main ways, that of the nodes that run the core software and it is they who validate the network and transactions, while the miners provide the security for the network by contributing the mining power (the proof of work), and both must operate in conjunction… We have discussed the miners but we have yet to discuss the nodes… A node is anyone who is connected to and validating the network, for example for the first time in three years I have started running a Bitcoin node by running the Bitcoin Core wallet software, and as wikipedia elaborates further, “The network requires minimal structure to share transactions. An ad hoc decentralized network of volunteers is sufficient. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will. Upon reconnection, a node downloads and verifies new blocks from other nodes to complete its local copy of the blockchain.” So anyone can (and does) contribute to Bitcoin by running a node, and citing this source the current node count is around 6500 nodes of which Bitcoin Core comprises 5,900 with around 3,000 signaling Segwit (Core version 0.13.1 and later) and Bitcoin Unlimited 800, so Bitcoin Core is being signaled implicitly by nearly 90% and explicitly by 50% of Bitcoin users and community members while Bitcoin Unlimited is signaled by 12%, that gives you a pretty good insight into where the Bitcoin community is entrusting their bitcoins and wealth, and for Bitcoin Unlimited to truly hard fork the network they would require all of Bitcoin’s user community to upgrade to the BU core software and node, and from the increasing wrath and fury of a majority of the community toward the BU faction, the chances of this happening are exactly zero… Bitcoiners are conservative (whether they understand this or not) and running the Bitcoin Core software and network that has served so well the last eight years and this is them simply voting for the status quo and sticking to what they know, so what appeared to be the slight mining leverage that BU had over Segwit is in fact user leverage by nearly 90% of the network running Bitcoin Core software… Now that we know where the TRUE power lies, we can at last predict what happens next…

Bitcoin Unlimited – Not A Hard Fork But New Altcoin

At the end of the day the miners can signal for BU activation and the BU community can make all the noise they want, but they just haven’t the support of the wider user base and community, and so they are effectively powerless… If the 60% to 70% of the miners were to signal for BU activation and they executed a so-called hard fork of the Bitcoin Network (that would not be backward compatible with Bitcoin Core software and nearly 90% of the network), then 12% of Bitcoin’s community (and nodes) would fork off and create a new altchain and altcoin and would have 60% to 70% of Bitcoin’s mining power to back it (in theory)… My thinking here has only been further validated by the statements of major Bitcoin exchanges in the last week that they will list Bitcoin Unlimited as a new and distinct blockchain and coin (BTU) but with no backwards compatibility to Bitcoin and its enormous network effect of hardware, software, interfaces and all the applications that it has taken the Bitcoin community to painstakingly and slowly build up these last few years, BU would have no scale to work from whatever with an increased block size and would be the ultimate irony for the proposal that proclaims Bitcoin’s scaling death spiral… While BU forking off would be very bad news for Bitcoin’s market cap and purchasing power and losing that mining capacity in the short term (in theory), however this would also be disastrous for the miners putting in jeopardy the value of the bitcoins they mine and their transaction fees, their whole supply chain structure, hardware investment and development, in short the miners would be committing effective suicide, and that combined with the current rise and peak in interest, scrutiny and pressure on the BU proposal (and its buggy and untested code) more of BU’s faults and problems will come to light and I think it will soon discredit itself, and for that reason I predict that Bitcoin Unlimited will follow the paths of previous proposed Bitcoin forks in Bitcoin XT and Bitcoin Classic in fading into obscurity with the dying down of the hype and hysteria that has engulfed Bitcoin yet again recently…

Back To The Mexican Standoff – Sans Bitcoin Unlimited

Having effectively ruled Bitcoin Unlimited out as a serious proposal we are back to the Mexican Standoff, however with the miners having spent their political capital and leverage with the Bitcoin community, the SegWit activation is still on the table and the mining community will have become significantly weaker and now also drawing the emnity of the whole of the Bitcoin community after the BU diversion… Where before the Standoff was basically between the Bitcoin Core team and the miners, now it is the whole of Bitcoin more or less against the miners, and already with nine tenths of the community impicitly backing SegWit then I suspect the pressure will become too much for the miners… And to be sure SegWit’s activation and enforcement will need 95% of the miners on board for the Core protocol upgrade, so this would have to be a full scale capitulation and climb down by the miners and so the stand off may continue for a few more months while the ire of the rest of Bitcoin community will rise and rise until one of two things happen… Either the miners decide wholesale to activate SegWit (and the explosion in value of Bitcoin and explosion in fees in the aftermath), or if they continue their defiance of the rest of the network the community will come together to exercise the game theoretical endgame and nuclear option…

Bitcoin Community’s Ace In The Hole – User Activated Soft Fork (UASF)

If the miners continue their stubbornes and intransigence then the nuclear option so to speak is an UASF and bypass the miner activation by getting the Bitcoin nodes to run the software incorporating SegWit, thereby paving to scale off chain without the backing of the mining community… While the miners may cry foul and threaten to pull their mining power or leave Bitcoin altogether there remains for the miners the substantial incentive of what I would expect be a significant bitcoin price relief rally on the final solution of this particular scaling debate, and increased transaction volume (and fees) as the higher Bitcoin grows the higher purchasing power to spend on transactions as currency velocity accelerates and bitcoin ownership distributes among more and more users decentralizing the community further… However I think an user activated soft fork is also unlikely as the miners in the wake of the coming meltdown of Bitcoin Unlimited will activate SegWit out of choice after realizing that what is the Bitcoin community at large wants, will also be very good for them long term… What the miners seem to have missed in this increasing power struggle with the Bitcoin Core team over the future of scaling solutions is that off chain scaling decentralizes power away from the Core team as well as the miners, so nobody loses and potentially everyone gains by de-politicising the Bitcoin blockchain and distributing power and control further away from the underpinnings, and to build the applications needed to scale the inherent limitations of the bitcoin protocol, off the chain and therefore increasing security by decentralizing the risk from the chain itself… As I have explained this is the natural evolution of Bitcoin’s as it attracts more mining power, more core developers and more users, the more people have a voice within Bitcoin (and vote by running nodes) and the more the noise in the space and so inevitably it gets harder to agree on anything, which is why every block size debate within Bitcoin has gotten more noisy, nasty and long drawn out, but this I believe will be the last major debate before the scaling solution that will move the vast majority of the innovation and disruption off chain… In short, Bitcoin becomes more of a court than a bank, with the banking and payment systems and payment layers built on top…

Further Thoughts On The Decentralization Of Bitcoin Mining

A lot has been made in light of the latest spat about Bitcoin’s mining community, their centralization (in China especially) and has even been speculated that the Chinese Government may be about to try and commandeer Bitcoin through the centralized nature of China’s mining community and pools and that centralization will spell the end of Bitcoin once more, however as we move forward I expect mining power to decentralize, and to describe how it will likely play out I will borrow extensively from this great (and I believe correct) analysis by Andreas Antonopoulos…

At the beginning Bitcoin mining was based on the simple premise that by contributing proof of work (mining) to the blockchain you would be rewarded with bitcoins and a voice within the community and so Bitcoin could be simply mined off a standard laptop (CPU – Central Processing Unit), then as Bitcoin developed in order to gain more hashing power mining evolved into specialist hardware (GPU – Graphics Processing Unit) and a one hundred times gain in processing power, that then escalated to FPGA’s (Field Programmable Gate Arrays) which further escalated into ASIC’s (Application Specific Integrated Circuits) with specific hardware devices costing thousands and hundreds of thousands of dollars dedicated to the incentives of mining bitcoins and making money from doing so… However as should be clear not everyone can afford this sort of gear and so ASICS were a specialized industry requiring factories and plant and a lot of capital to set up and run, so only a select few could do this predictably resulting in centralization as more bitcoins to fewer big miners would lead to more bitcoins for fewer bigger miners and further centralization… As the power of ASICS has exponentially become more powerful in line with Moore’s Law, it has for now hit the wall at 16 nanometers, that effectively means that this is peak technology and processing for mining chips possibly for a while, so the centralization is essentially frozen and this stagnation in processing power will lead to a shift in incentives away from industrial (and centralized) mining and toward consumer (and decentralized) mining devices… Another way to think about this is that the miners have reached peak innovation in terms of processing power and with the near doubling of Bitcoin’s price in the last six months (and the value of both rewards and transaction fees) the centralized mining industry is now increasingly becoming a target and I would suggest mostly in China, as lest we forget the Communist Party rules and where property although nominally private is still considered public and could be taken down or taken over by the Party at anytime… A centralized mining industry and plants are also highly vulnerable to natural disasters and possible shortages (electricity shortages would be devastating) and so putting all your eggs in one basket can lead to you losing everything, so eventually I believe the mining industry will morph from pure mining processors to creators of mining processor devices for consumers, thereby decentralizing bitcoin mining first to the more commercial but smaller scale miners and eventually to the consumer level, potentially millions and billions of users with specialized mining chips running in household appliances, on laptops and smartphones, really anything that consumes electrical power can be used to mine bitcoin, and this would also bring Bitcoin mining closer to Satoshi’s vision of the average Bitcoin user also being a small scale bitcoin miner contributing to the network that they also validate… Bitcoin mining centralization was a phase that we had to go through to exponentially increase network security and this has happened for the last eight years, now we sit atop a plateau before Bitcoin’s mining industry decentralizes towards the consumer and really back to the roots, toward the individual miner…

SegWit Activation And The End Of Currency Speculation (Act I)

After all the hype and division and distraction regarding the scaling debate, SegWit in my opinion will be activated one way or another, and so Bitcoin will begin to scale toward the next layer of the decentralized financial system, that will lead to a surge in market cap and purchasing power leading to more users, more interest in general, and more investment in the space, and so Bitcoin and its community will get bigger more distributed and more diverse, and will in my opinion end the currency speculation phase and Act I of the near ten year Bitcoin drama… The bigger the market cap, purchasing power and community of Bitcoin, the less volatile it becomes as volume and velocity of transactions and currency increase and as the scaling layers develop allowing everyday and micro transactions to develop, then Bitcoin can expand from secure store of value to a mainstream medium of exchange…

The Second Act Of Bitcoin – Barter Ledger And Medium Of Exchange

As you can clearly see from the doubling in the purchasing power of bitcoin in the last six months it has been a tremendous store of value for the increasing global population fleeing from fiat debasement, and as you can also see the rise in Bitcoin’s purchasing power has lead to an increase in transactions (and fees) as those that have saved the last year and longer, liquidate a very nice windfall in terms of the amount of stuff they can spend with those bitcoins, so Bitcoin as a closed loop ecosystem of deflation over time becomes more self funding with more existing savers spending more with new savers, so distributing the ownership of bitcoins reducing inequality and increasing the user base and community, and this is of benefit to everyone involved in Bitcoin as the miners get to cash in in both the value of the bitcoins they mine and fees from transactions, the investor and developer community with higher purchasing power become increasingly self funding and independent from their parallel lives and careers in a defunct democratic bureaucracy, and the same for all the bitcoin users and their lives in general… This success and increasing utility of Bitcoin in disintermediating the bankrupt and crumbling facade of central banking and national governments worldwide will continue to pressure scaling solutions, and because of the fractious and noisy nature of the Bitcoin’s proof of work consensus algorithm the harder it will be to get consensus agreement to on chain upgrades, which means in my opinion we will increasingly have to look to off chain developments and scaling solutions…

To give a potential scale of where Bitcoin could scale to in the long term as medium of exchange and barter ledger, I will use a thought experiment that I have used previously many times in past posts, that of the annual gross domestic product of the human population which is equivalent to seventy trillion dollars ($70,000,000,000,000)… This seventy trillion dollars in human wealth creation when exchanged in today’s near 200 central bank national currencies results in inflationary loss of purchasing power, diminishing standards of living amid record wealth inequality between rich and poor, reduction in liberty and property rights, and increased taxation and regulation, not a lot of bang for your buck when you think about it… Now substitute all the world’s insolvent fiat currencies for Bitcoin, and exchange that seventy trillion notional dollars through the maximum cap of the bitcoin currency, and you will get a value per bitcoin of $3,333,333,333, or a third of a million dollars each which means that if you had accumulated just one bitcoin during that year you would be a multi millionaire… This gives you a glimpse of just how much changing the currency can change the world, and to elaborate a little further I will calculate five years of annual Gross Domestic Product in dollars for comparison…

Year 1 – Bitcoin Market Cap = $70 Trillion, Price Per Bitcoin = $3,333,333.33

Year 2 – Bitcoin Market Cap = $140 Trillion, Price Per Bitcoin = $6,666,666.66 – Purchasing power doubles in one year

Year 3 – Bitcoin Market Cap = $210 Trillion, Price Per Bitcoin = $9,999,999.99 – Purchasing power increases by one third in one year

Year 4 – Bitcoin Market Cap = $280 Trillion, Price Per Bitcoin = $13,333,333.3 – Purchasing power increases by one third in one year

Year 5 – Bitcoin Market Cap = $350 Trillion, Price Per Bitcoin = $16,666,666.6 – Purchasing power increases by twenty five percent in one year.

The Third Act Of Bitcoin – Property Deeds And Smart Contracting

The Third Act of Bitcoin will extend the barter ledger from exchange of goods and services to exchange of property, by a combination of property deeds uploaded to the blockchain and exchanged for bitcoins by use of smart contracts and further scaling layers… The major items of private property that in life need to be exchanged, like a land title, or a real estate title, or a car or automobile title, today are registered with government agencies for taxation and regulation purposes, however in the aftermath of centralized governments this registration will be need to be done by decentralized methods… A local lawyer would formulate and formally register the title deed or take an existing property deed, scan a digital copy to the Bitcoin Blockchain giving the physical property a permanent and immutable record of digital ownership, and for the subsequent exchange of this deed when buying or selling property the deed is entered into a smart contract with the bitcoins in payment, upon agreement between buyer and seller the smart contract would then execute with the exchange of property and currency on the blockchain… As opposed to the crushing real estate taxes and regulation compliance demanded by today’s government for the simple and voluntary exchange of private property, a smart contract may cost you a few pounds or dollars, and the bitcoin transaction may cost about a pound or dollar, further highlighting that while current transaction fees for small purchases may stagnate on the Bitcoin blockchain, the transactions of high value pieces of property would cost peanuts to transfer and save the equivalent of thousands or tens of thousands of pounds or dollars in taxes and other fees forced upon buyers and sellers today… To scale the value of one bitcoin when exchanged throughout the private property of however many billions of people that live on earth, the value of one Bitcoin would be in the billions and trillions, as the near unimaginable amount of physical property could only be divided by a maximum cap of twenty one million bitcoins…

Conclusion

The Bitcoin space is a noisy one with myriad heated disagreement and distractions and to most it may seem like Bitcoin is perpetually stagnating as other more nimble blockchains start to threaten it, and we will have to wait for the future and posterity to bear out the success of the Bitcoin consensus algorithm or not… Just last summer I remember the absolute debacle of the DAO on the Ethereum blockchain (which lost millions in user funds, which Bitcoin has never done) and then I watched Ether’s Caesar commandeer and hard fork Ethereum splitting into two chains to remedy the problems created by a centralized, progressive and reckless development team, and at that time I questioned the longevity of these far more centrally governed and top down blockchains… Bitcoin has no Caesar or King (since Satoshi left the project and hasn’t been back as far as we know) and so in essence is a far more conservative a consensus mechanism that can make Bitcoin look antiquated and already obsolete as a governance structure, but this is a marathon not a sprint and I argue that this will be to its advantage and longevity in the long run… For major (and increasingly minor) upgrades to be made to the protocol then consensus must be sought from all of Bitcoin’s community, from the specialist parties and factions of the core developer community and the mining community, but the ultimate consensus within Bitcoin lies with its mainstream user base and the nodes they run that validate the network, and unless you can get the support of the community then you will not get your way, whatever you think Bitcoin’s best interests… On this basis the so-called Bitcoin Unlimited hard fork would rather be forking off a new altcoin called Bitcoin Unlimited and why any hard fork from now on would require the consensus of the whole of the community for it to pass… This decentralized consensus governance method is what Bitcoin in my opinion is all about, why Bitcoin will continue to spit out and make fools of anyone who thinks he or she is bigger than Bitcoin even those whose influence and power as spokesmen and messiahs in the space, anyone who declares himself king is doomed to failure… This is also why I believe in Bitcoin’s longevity long term, as the user base, and core developers and mining power increases, these factions all have a stake and influence in guiding Bitcoin and therefore outside of short term spats and turbulence, in the long term, all have the incentive for collaborating on the project that makes them richer and less dependent on a visibly dying legacy world of incestuous and degenerately corrupt banks, governments and corporations… Bitcoin at its essence is the present and the future of the voluntary society and economy and as Bitcoin and its user base and community grows the more the voluntary society will threaten the violent and coercive society we are currently imprisoned in that gets more bizzare and surreal by the day, and why we need and increasingly will need Bitcoin going forward… 2017 is set to be another exciting year…

Addendum – Litecoin As Bitcoin Scaling Layer

I have increasingly become bullish on Litecoin in the last few months as the intensity of the Bitcoin scaling debate has risen, and there are some compelling reasons why I believe Litecoin is seriously undervalued and can be used to scale at least part of Bitcoin’s medium of exchange and small transaction limitations… Litecoin has been described by its creator Charlie Lee as silver to Bitcoin’s gold, with faster transaction confirmation times (2.5 minutes as opposed to 10 minutes) and four times the block capacity of Bitcoin for increased transaction at lower fees… Litecoin is a proof of work blockchain like Bitcoin, and also like Bitcoin is currently awaiting Segwit Activation and is close to garnering the required mining support… I expect Segwit to be activated sooner on Litecoin than Bitcoin and this could be a real boon to the price and would serve as a test case for Bitcoin to gauge its benefits while also putting increasing pressure on the Bitcoin miners by Bitcoin’s community to follow Litecoin’s lead, so I am bullish on Litecoin in the next couple of years and why I think it may well be the coin to watch in 2017… If Bitcoin were then to follow Litecoin in activating, then both could potentially be connected by Lighting Networks and other off chain networks, and I will leave it to Charlie to elaborate on this, from his recent post, “Think of it being two highways: Today, Bitcoin is packed full of cars and Litecoin is empty. Even with Bitcoin packed, the cars are not coming to use the Litecoin highway today because it’s not connected and it’s inconvenient (centralized exchanges and slow on-chain transfers) to go across. LN [Lighning Network] will build bridges over the highways. But a side benefit is that these bridges will connect both highways together. Maybe the bridges on Bitcoin are enough such that cars will still stay on the Bitcoin highway. My bet is that the convenience and the cheaper tolls on Litecoin highway will convince cars to cross over and use Litecoin. But we won’t know until both are built.”

While I’m very much a Bitcoin maximalist, that does not mean I am blind to Bitcoin’s limitations, and to be clear here Bitcoin cannot service everyone in everyway at least not yet, and why many of the blockchains and currencies that Bitcoin has spawned will come in handy in scaling aspects that Bitcoin cannot currently fulfill and Litecoin could certainly help scale low cost transactions, like Ethereum could scale smart contracts, and this need not be forever either, as the off chain scaling layers over time could develop to implement and eventually relegate other blockchains utilities, however in the short term I think Bitcoin will benefit greatly from having other blockchains lift some of the heavy work that will be needed to scale over the next decade, and so I look at the crypto currency space as a diverse ecosystem that encompasses more than just Bitcoin and allowing a symbiosis between blockchains, Bitcoin for example is the whale that dwarfs and will continue to dwarf all others as it is by far the most secure blockchain with the biggest community of miners developers and users and acts as a shield these other blockchains allowing them to innovate and accumulate their own unique user base and community while travelling in the slipstream of the Bitcoin whale in terms of exposure and trickle down effect, while Bitcoin benefits from all the innovation and experimentation that different blockchains are working on and developing, and with further future scaling improvements be able to pick and choose the best bits of innovation and implement them on the Bitcoin blockchain, so the whole ecosystem while competing is also collaborating which is to the benefit of all involved… This is why I think of the crypto space as a game between currencies, and in this game different currencies will rise to prominence at different times and providing value for all the things that Bitcoin cannot do as well, so to conclude like Gold has been throughout history the monetary store of value par excellence, Bitcoin in the crypto sphere is and in my opinion as long as it survives will always be the daddy as by far the most secure and diverse and mainstream user base, but that does not necessarily make it the best medium of exchange and so a blockchain like Litecoin may become more of a day to day payment means (and the developer talent needed to build the software applications and interfaces) and like silver has done for most of recorded history… This means you can transact in silver (litecoins) and save in gold (bitcoins), and balance, because the age of monopoly fiat currencies and coercion is ending, and the age of voluntary currency competition is upon us…

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