Bitcoiners need a guillotine
As the Scottish economist and philosopher David Hume noted in: A treatise on human natureWe don't know anything about what He is True can tell us what Should To be true and we know nothing about what Should To be true can tell us what He is TRUE. The realm of objective truth and moral truth are completely separate. Hume called this I sought problem His argument that descriptive and normative logic should be separated is known as Hume's guillotine.
Hume's guillotine It is a philosophical code – a basic rule for thinking about the world. It is a way of separating two lines of thought that become tangled when they intertwine. An argument in which one side argues about what is true and the other side argues about what ought to be true is useless. These people talk to each other.
Most importantly, the guillotine is a tool to reduce bias in our thinking. If our hopes are left unchecked, they can distort our beliefs, leading us to assume that what is true is good (naturalistic fallacy) and that what is good is true (wishful thinking). In the Bitcoin industry, there are many who share their beliefs about what Bitcoin is He should It distorts their understanding of what Bitcoin is He is. They need to study the guillotine.
Decentralization will never be cheap
One harsh but simple truth is that true decentralization is too expensive to be widespread. If you believe in the value of decentralization, it's easy to see why you would want it to be globally available. But if you understand how decentralization works, it's also easy to see why it would never be possible. The mathematics simply does not allow for this.
Decentralization is – By definition – More expensive than the central alternative. To be decentralized, networks need more copies of the network log (blue squares) and more connections between nodes (red arrows). It is fundamentally cheaper and easier to coordinate a centralized network. Depending on the purpose of the network, decentralization may be worth paying for – but it will never be the cheapest option.
The cost of running the network is divided between users and validators. Networks can either limit activity on the network (making transactions expensive because they are rare) or they can demand more work from validators (leading to centralization of the network). Bitcoin keeps the cost of network validation low by limiting block size – but this also by definition means that transaction space is limited. Transaction fees on Bitcoin are expensive Who designed it?.
Adding more capacity to the network won't make it cheaper for individual users, anyway. This is because Bitcoin transaction fees are not set by the network, but rather by users' willingness to outbid each other in the block space auction. You can't lower transaction fees by increasing capacity because increasing capacity doesn't change anyone's willingness to pay. Users do not decide whether to pay for a transaction based on how complete the blocks are, they decide based on how high the fees are.
Larger blocks might be good news for miners (because there will be room for more paying customers) but it won't change much for users – transaction fees will be about the same. The fancy economic term for this counterintuitive result is Jevons' paradox.
The invention of new Layer2 technology won't make transactions on Bitcoin cheaper either. Technology like Lightning, Liquid, Fedimint, and Ark are expanding the power and flexibility of what Bitcoin transactions can do — but making transactions more meaningful doesn't make them cheaper, it makes them more valuable. More ways to use Bitcoin transactions means more demand for the limited block space available. We should expect Layer 2 to conduct L1 Bitcoin transactions More expensiveAnd not the cheapest.
This is good, because Bitcoin is not supposed to be cheap. It's supposed to be free.
Free as in freedom
The lure of cheap decentralized transactions is strong. It has been the heart of the block wars and is the central value proposition of most altcoin networks today. It is also the driving force behind the widespread but misplaced belief that the Lightning Network will allow Bitcoin to scale with global adoption. The truth is more nuanced: lightning lowers the cost of using Bitcoin. This is not the same thing as making Bitcoin cheap to use.
The truth is that Lightning channels require Bitcoin transactions and Bitcoin transactions will inevitably be expensive. Bitcoin confirms approximately 0.4 million transactions per day. That's approximately one transaction/person every 55 years, assuming no one is born or dies while waiting. It's hard to predict the long-term price of a Bitcoin transaction, but it's not hard to predict that it will be rare: either because most people can't afford it or because most people don't want it in the first place.
There are proposals to make managing channels cheaper (e.g. channel factories) but since each proposal is ultimately based on some underlying on-chain transaction, each channel will need to be bought/rented in some way from someone who can afford the original transaction. Anthony Townes has done some interesting analysis and estimates that there is room for approximately 50,000 entities to transact directly across the chain. Everyone else will need to hire janitorial services from one of those on-chain entities. You can use a copy of this spreadsheet to modify assumptions and run your own estimates.
Even if we completely ignore opening/closing costs, the maintenance of the canals themselves is not free. Users need to be online to receive payments/supervise their peers for misbehavior. They need to either achieve the perfect balance between their sent/received payments or periodically pay a liquidity provider to rebalance their channels. Importantly, any Bitcoin used to create Lightning channel capacity is necessarily online and not stored in a cold storage location.
The marginal cost of individual Lightning transactions is very small, but the total cost of creating, using, and maintaining a Lightning channel is actually very high — because it is denominated in Bitcoin and because Bitcoin is the rarest resource in history. Telling retail users to open up Lightning channels for cheap transactions is like telling them to launch their own satellites to get cheaper mobile internet.
To be clear, I'm a believer in the value of the accelerator network – I don't think it will provide banking services to the unbanked. A faster network makes Bitcoin transactions more robust, not cheaper. Payment channels will only make sense for people who make enough payments to justify paying to streamline them. For most people, owning a single UTXO on-chain would be a huge luxury. I am not trying to defend this result as good. It simply is. It is located on the other side of Hume's guillotine.
Bitcoin is for saving, not spending
The sheer size and continued growth of the stablecoin market is evidence that there is a lot of demand for low-cost, disintermediate retail payments. But bitcoin is not a panacea – just because low-cost payments are useful doesn't mean bitcoin is a useful way to make low-cost payments. Bitcoin was not designed to be cheap, it was designed to be durable. These are not the same goals and will probably not be achieved with the same system.
Even in a world where Bitcoin transactions were more or less free, we should do it Still We expect stablecoins to dominate payments. Why would anyone who thinks Bitcoin is valuable want to spend it? Why should anyone who doesn't think Bitcoin is valuable spend it? Bitcoin is emergency money, not convenience money. No one should spend it on coffee.
Decentralized networks don't make good retail payment tools – they're expensive, slow, and unforgiving. Using Bitcoin to make a retail purchase is like driving to the mall in an M4 Sherman tank. It probably is amazing, But it is not practical – and will never be normal.
This is a guest post by Knifefight. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
