What started as a single transaction from Satoshi to Hal Finney, has evolved into a complex system of industrial-scale miners, sophisticated meta-protocols like the Lightning Network and Fedimint, and a full embrace of institutional investors with record inflows into various newly approved spot ETFs.
Bitcoin has come a tremendously long way, and with that comes a somewhat earned sense of optimism for those who have invested their time, money, and enthusiasm.
Unfortunately, this optimism and sense of “inevitability” that I wrote about previously has contributed to a culture of complacency. This is demonstrated by the narrative that Bitcoin's early protocol ossification is acceptable or even desirable, which is underscored by the implicit assumption that the biggest risks facing Bitcoin now are potential changes and Trojans to the protocol.
This belief is categorically wrong.
The biggest risk facing Bitcoin is the certain future it will have if it in fact effectively “fossilizes” today: certain regulatory control, a partially unlimited reserve supply, and controlled and monitored transactions.
Old news
If this sounds extreme, you haven't been paying attention. The problems facing Bitcoin that lead to this inevitable outcome are not new at all. In fact, Hal Finney touched on this 14 years ago:
“In fact, there is a very good reason why Bitcoin-backed banks exist, issuing their own digital cash, which can be exchanged for Bitcoins. Bitcoin itself cannot scale such that every financial transaction in the world is broadcast to everyone and included in the blockchain…
Bitcoin-backed banks will solve these problems…
Most Bitcoin transactions will take place between banks for net transfer settlement. Bitcoin transactions by private individuals will also be rare…well, as Bitcoin-based purchases are today.”
From the beginning, many of Bitcoin's early adopters clearly understood its limitations and implications. What has changed since then? Not mathematics.
Even with the accelerator network, an innovation Hal Finney wasn't around to see, the upper limit on how many regular users Bitcoin could have on board in its current state is optimistically 100 million. This number does not impact the ease of use/user experience at all, which is an inherent challenge for the accelerator network due to the very new way it operates compared to any other financial system.
In the white paper on the accelerator network itself, authors Joseph Bohn and Thaddeus Dryja explain that this network alone is not a silver bullet that enables global expansion:
“If all transactions using Bitcoin were conducted within a network of micropayment channels, to enable 7 billion people to create two channels per year with unlimited transactions within the channel, it would require blocks of 133MB (assuming 500 bytes per transaction and 52,560 blocks per year).”
The resulting cap on users who can leverage Bitcoin today in a self-sovereign way without the use of a trusted third party presents an obvious problem. Especially if we assume that adoption and use will continue to grow.
Seif El-Din Ammous wrote “The Bitcoin Standard,” a book that received a lot of fanfare because it made the compelling economic case for Bitcoin being the ultimate manifestation of “hard money.” He argues that the Bitcoin standard will outperform the current fiat money system thanks to its tight supply. Likewise, in 2014, Pierre Rochard promoted the idea of a “speculative attack,” arguing that the adoption of the Bitcoin monetary unit would occur first gradually, and then very quickly.
In our projections for the future, we will assume that both lines of thinking are correct, and that demand for Bitcoin, the monetary unit, will attract an increasing amount of savings as its network effects will only accelerate its widespread global adoption.
However, this “hyper-Bitcoin” scenario represents an impossible challenge to the current limitations of both the underlying Bitcoin protocol and the accelerator network. What will it mean then when hundreds of millions, and then billions, flee to the fixed supply trust of Bitcoin as the mainstream Bitcoin community believes they will?
Simply put, if they can't Granted To use the underlying protocol or even the accelerated network (no need to even discuss usability or user experience here, that's a separate big challenge) due to difficult scalability constraints, They will have to use central and custodial service providers. Even if they don't want to.
There's no beating around the bush or wishing it away.
If you accept the premise that Bitcoin is a superior currency, and also understand the practical limitations of the protocol today, then this is the certain outcome that Bitcoin is currently on track to reach.
Gold standard 2.0
It's a fair question to ask why this might be a problem at all. Hal Finney certainly doesn't seem to be indicating that in his aforementioned post.
Returning to the Bitcoin standard, Amos devotes a significant amount of the book's opening chapters to discussing the history of the gold standard, its strengths, and, most importantly, its weaknesses. More importantly, he identified a weakness: gold was too expensive to secure and difficult to transact in large quantities.
As a result, paper money technology was first used as convenient IOUs for gold, which were stored in central locations specialized in the task of guarding and transporting large quantities of gold as needed. Over time as technology improved and trade became more global, these central custodians continued to grow, until eventually they were all taken over by states through regulatory authority and later by outright fiat, completely cutting off new paper money from backing. Basic gold.
When forecasting the future of Bitcoin in its current state, we can see very similar results unfolding. There may be no problem with cost storage of Bitcoin using private keys and mnemonic phrases, but in our hyper-Bitcoin scenario, the ability to treatment With Bitcoin self-custodial, it quickly evaporates for all but institutions and the wealthy who can afford the fees, even when using Lightning.
The consequences are largely the same as they were under the gold standard. Platforms like Coinbase or Cashapp will take center stage, since transactions within their custodial platforms have no marginal cost as they are only tracked in a central database. Cross-platform payments can also be bundled between these platforms using Lightning Channels or cross-chain payments at a very low cost. The result is a landscape not very different from the gold standard situation of the early twentieth century, in which most supplies were owned by large custodian institutions that states could trivially influence, coerce, and seize.
Returning to the question of the biggest threat to Bitcoin: In this future, there is no need to attack the core layer if the only entities that can actually use it are large, well-known entities and they will lose everything.
To be sure, there are fundamental differences from the original gold standard in reality. Transactions are natively digital, reserves can be proven, and supply is completely transparent are notable improvements over the gold standard. However, none of these differences affect our self-custody dilemma in any way. To the extent that Bitcoin is viewed as a censorship-resistant currency, once the vast majority of it is owned by trusted third parties, there is nothing stopping countries from aggressively enforcing transaction monitoring, asset seizures, and capital controls. There is also nothing preventing them from enabling or even encouraging fractional reserve policies in the interests of prudent economic management.
Most importantly, if these actions occur, the vast majority of users will not have the ability to opt out by withdrawing funds into their own custody.
It's not all bad. In this scenario, the value of Bitcoin, the monetary unit, is still rising by leaps and bounds. Whoever has impressed me so much with their interest will likely benefit greatly financially in this future.
But is this it?
Is the vision of Bitcoin as an essential tool for resisting censorship and the separation of money and state dead?
If we continue to deny, or worse encourage, the current path, there is no doubt that it is. But it doesn't have to be so.
Misplaced fear
Fortunately, there is no prevailing reason or argument why the Bitcoin network has actually become fossilized. It remains up to the core community to continue to drive research, discussion, and proposals to further improve the underlying protocol to increase the scale and ease of use of solutions like the Accelerator Network, as well as enable entirely new potential architectures like the Ark Protocol, advanced state chains, and more.
However, it is important to acknowledge how we got to this point where “ossification” became important My guidance Narrative, not purely descriptive An idea of the final state of the widely adopted Bitcoin protocol. Such a prescription is necessarily rooted in the assumption that Bitcoin's biggest attack vector comes from future code changes.
This line of thinking is not unfounded. It is true that protocol changes can serve as an attack vector. After all, we've already seen this same attack happen before with Segwit2X when a consortium of large Bitcoin institutions and miners coordinated a unilateral hard fork of the Bitcoin protocol to increase the core block size in 2017.
However, we must also admit that Segwit2x failed miserably. Worse still, the futility of the attack was evident before its eventual collapse because it completely misjudged the dynamics involved in introducing changes to the distributed peer-to-peer protocol.
The participation of many individuals and companies involved in Segwit2X has suffered permanent reputational damage in many cases, making it not only a failed effort, but an expensive one as well. For any enterprising attacker looking to compromise Bitcoin forever, it would be abundantly clear that trying to replicate this approach or any variation of it is a fool's errand.
A much easier and cheaper approach, with a much higher probability of success, is to invest in slowing down the already difficult work of building consensus to introduce useful extensions to the Bitcoin protocol, ensuring that the experiment in both sound and censorship-resistant money ultimately turns out to be the perfect solution. A victim of her own success. Whether you believe this is actively happening today or not, the actions to take are identical.
So what now?
Ultimately, where we are now and what we must do is not much different from when Hull made his observation in 2009: We must continue to critically examine the limitations of the Bitcoin protocol and ecosystem, and move forward as a community to address these shortcomings.
Fortunately, a number of developments and research proposals have been made to increase scalability that do not require larger block sizes. Bitcoin core contributor James O'Byrne released a blog post last year that contains a sober technical analysis of Bitcoin's instant scalability prospects and gives good context for some of these proposals, and recently Mutiny wallet developer Ben Carman took a critical look at the issues surrounding the accelerator network. More specifically.
There has never ceased to be a powerful signal amidst all the noise, and the best we can do is make an individual effort to identify and amplify it, while actively countering productive counter-narratives that do not contribute to the meaningful improvement of Bitcoin.
In doing so, perhaps we can find a way to extend the peer-to-peer vision of real sovereign money to every person on the planet.
We may still fall short, and there are absolutely no guarantees.
But it's worth a try.
This is a guest post by Ariel Deschapel. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
