During summer 2016, many thought the bitcoin scalability debate was over. Blockstream won, said a miner. Coinbase, after spending more than a year vocally asking for increased capacity, threw in the towel and hedged with ETH. Circle, seeing the changed environment, announced, very suddenly and unexpectately, that they were ending bitcoin purchasing.
At the Blockchain Money Conference in London during Autumn 2016 a panel host said the matter had now been resolved, but Roger Ver, one of the earliest bitcoin adopters and the first angel investor in a bitcoin company, stated that the only reason why it appears to be settled is because a draconian policy of censorship has been instituted in many communication channels.
Then, segwit, a controversial proposal to upgrade the protocol which Jeff Garzik, a core developer for now some six years, has criticized for fundamentally changing bitcoin’s economics, unexpectedly stalled at around 25%.
Few thought segwit would stall. For months now Lightning developers have been waiting for it to be released, with suggestions that the protocol is ready to go as soon as segwit is activated. Many appeared to take it for granted that it would do so, but it hasn’t. Why?
“We, Americans, are arrogant,” McAfee told me when I asked him some quick questions following his presentation at the Blockchain Money Conference, further suggesting that miners want a maxblocksize increase, but developers are not providing it.
While segwit has stalled, Bitcoin Unlimited has quietly gained further adoption. A considerable recent increase in difficulty coincides with the entrance of a new miner, BTC.TOP. They appear to be mining on BU, the fourth new miner to do so, following ViaBTC, GBMiners and bitcoin.com. In combination, they are nearing 20%.
At the same time, the Bitcoin Core client suddenly finds itself with few friends. BTCC, which has a commercial relationship with Blockstream through Liquid, a product that aims to provide the exchange with facilities on-chain transactions used to perform perfectly well, such as zero confirmation transactions, has been and remains a strong supporter. Bitfury’s support has been more lackluster, but they have quickly adopted segwit. Both pools have considerably fallen in hashrate. While they used to control around 15% each, BTCC now has just 5.8% and Bitfury has dropped to 8.9%.
The three biggest pools have 40% of the network. F2Pool has indicated strong displeasure with the way bitcoin development is progressing to the point where they even mine Bitcoin Classic with a small amount of their hashrate. BW signals for 8MB blocks, clearly suggesting they want a maxblocksize increase. HaoBTC, once a strong supporter of the Bitcoin Core client, seems to have changed their mind as they are not mining segwit.
After talks that Bitmain has two decision makers, Jihan Wu and Micree Zhan, the latter tweeted on the 17th of January to ask everyone to run Bitcoin Classic – which now is as good as indistinguishable from Bitcoin Unlimited as it has largely adopted its approach – further linking to the bitcoin classic page where binaries can be downloaded.
It appears, therefore, that rather than a stalemate miners have made a clear decision. They seem to have fully rejected segwit. They appear to strongly require a maxblocksize increase and the newer miners seem to clearly prefer Bitcoin Unlimited.
Bitcoin mining is a brutal game. The tale of the full horse carriage where some fall from the roof while others rise is intensified by bitcoin’s zero sum environment where the rules are clear for all to see. Innovation is constantly required, an astute eye for any inefficiency is an absolute necessity, bankruptcy is only one mistake away.
The elegance, the complexity, the balancing of incentives, it is all a work of beauty. Those who can see any advantage, however small, and have the intellect to implement it, quickly rise. Those less able are mercilessly thrown out. There is no morality here, within legal bounds of course, just pure, utterly competitive, greedy self-interest.
This process has driven out many amateurs who squandered their resources either naively or carelessly. Mighty companies, such as GHash, which once controlled more than 50% of the network and led Peter Todd to publicly announce he sold 50% of his bitcoins and naively state that “the economic incentives behind Bitcoin are probably very flawed,” is no longer on the chart. BTC Guild, which too once briefly controlled more than 50% before GHash, announced its closure last year. KNCMiners, which used to operate huge farms, declared bankruptcy.
Miners do not have the luxuries afforded to developers who can just sell their bitcoins and move on to other projects. Unlike miners, developers have nothing at stake except for perhaps career progression or just genuine interest. There is no real process which ensures the best developers rise to the top, best so defined as the most able, the hardest working and those who can clearly see in an objective way how to improve the bitcoin network. There is no real process to prevent the worst developers from participating either. There is no real process regarding the granting or withdrawing of commit rights, it so being done arbitrarily based on the subjective opinion of the maintainer. In short, there is no competition, nor anything to incentivize developers to work efficiently and intelligently towards improving the network.
With mining, it’s the opposite. Any mistake is harshly punished. Any efficiency gain or intelligent behavior is greatly rewarded. It is this system which makes bitcoin, bitcoin. It is this unique process which guarantees the upholding of everything we consider green and pleasant in this digital currency. It is the mining incentives that makes them the guardians of the currency, the armed soldiers outside of the gated iron vaults.
After four conferences, signed agreements behind closed doors, delays upon delays, current established miners face a real threat of going the way of Ghash or KNCminers because some, after gaining experience while working for established miners, are leaving in displeasure and establishing their own mining business. While some others, such as ViaBTC’s founder, find themselves compelled to leave Tencent, China’s Facebook, to join the bitcoin mining network.
Whether for intellectual reasons or selfish reasons, it appears that current miners have left an opening which is ruthlessly being exploited to gain 20% of the network’s massive reward with smarter and more agile entrepreneurs quickly grabbing the opportunities offered.
That’s bitcoin in action. Contrary to whatever some may say and however much they may wish it to be otherwise, bitcoin, on a factual manner, does not operate on a social consensus but on an objective analysis of each participant, including businesses and investors, of what is best for them, which necessarily includes at a 51% level what is best for the network.
That is, the network assumes that miners, who are the ones most ruthlessly punished and rewarded, so demanding the highest level of intellect and great capital risk, are alone to be trusted with making the right decision because of the system’s incentives. A system which drives out bad decisions, whether due to coercion or stupidity, as that creates inefficiency and untaken opportunity. New players, seeing the advantages, quickly enter the permissionless network as the rewards are immense. Older players, in turn, find themselves facing bankruptcy as the bitcoin network is a zero sum game. One miner’s gain is at the expense of the other. One miner’s mistake is to the benefit of others.
In this way, the system ensures that bitcoin operates not just without central control, but also in a manner that cannot be hijacked and, more importantly, in a manner that objectively can be said to be in the best interest of the currency and its participants.
The problem is that established miners are threatened on two fronts, from new miners who are eating their lunch and the public threat of Luke-Jr, a Blockstream “Open Hash Contractor,” according to the company’s team page, who has stated, presumably with the backing of Blockstream, that he may fork bitcoin by changing its proof of work if miners increase maxblocksize.
A PoW fork has long been suggested as a potential solution to possible circumstances where somehow someone or an entity manages to force or corrupt 51% of miners and compels them to act against the network. Whether this is actually in any way probable at a significant level and how long it would last, considering the inefficiencies it would create thus the great opportunities for entrepreneurs to enter the network, we do not know. In the now eight years history of bitcoin, it has never happened at a more than mere trivial level and for a very brief period of time.
If it did happen, then a fundamental assumption of bitcoin’s operation would be broken. We would have to move from trusting the incentives and elegance of the system which compels miners to operate in an objectively best way to that of trusting the miners themselves.
The only way this could currently happen is if China decides to nationalize miners, but that is highly unlikely for the same reason that most consider it highly unlikely someone would spend one billion dollars to gain 51% of the network to then attack it rather than mine for reward.
For China to nationalize miners they would have to consider the current $16 billion market. It would tank. Many would lose a lot of money, some, tragically, their lives. There would be international uproar and it would probably even become a global political matter at a fairly high level. Closer to China’s home, the many employees who find a decent job in mining facilities, probably aware that the action would send them out of work, would strike. Their families would join. Other bitcoiners would join. An outright revolt would be seriously risked.
On a technical level, we do not really know how much is even mined within China itself. There are facilities in Mongolia for example. There are many miners across the world who direct their facilities to Chinese mining pools and would probably instantly switch.
Nonetheless, let us assume that, although it is extremely unlikely, someone or some entity somehow does gain 51% and misuses their hashrate at any significant level or at any significant length of time. Investors can and probably would “fire” the miners by simply changing the proof of work mechanism, thus making their equipment obsolete and the exercise useless.
Although a PoW fork can be done at any time by anyone, persuading current businesses and investors to switch would be a very difficult if at all possible task unless there is some absolutely technical reason which is utterly uncontroversial to the point where even miners agree, as I think they would if the Chinese government nationalized their facilities for example.
Otherwise, if it is merely due to the opinion of some, or, more concretely, if miners find such action appalling, it is completely improbable we’ll ever see a day where a PoW fork would be adopted by the current network to the point where it in effect becomes the primary network because it would amount to the destruction of bitcoin, its very concept and a complete betrayal.
Investors would know that the new network would never become secure because no one would risk millions to just be sent to bankruptcy for no good reason. They would also know that by valuing the new coin far higher they are in effect also completely undermining the very foundations of the currency. A contradiction which logically leads one to conclude it would never come to pass.
Of course, a new mere opinion based PoW forkcoin would still have some value, but hardly more than a dollar or two. Nonetheless, if the new coin has the support of Blockstream, which in turn has the support of r/bitcoin, it would cause plenty of confusion and some short-term pain, burning a lot of bitcoin’s current value. Moreover, the situation for bitcoin would be far worse than with ETH as there the community, including developers and miners, was largely united as were the communication channels. In bitcoin, even the communication channels are split.
Yet, that is exactly what Luke-Jr, presumably with the backing of Blockstream, has threatened in an opportunistic abuse of a MAD like concept which is never intended to be actually used but in the most extreme and utterly improbable circumstances.
Whether he or Blockstream would actually follow through with creating a new coin by changing proof of work based on his or his company’s nothing at stake personal opinion of the outcome of a long and thorough debate is highly doubtful. Firstly, Blockstream would be fully aware such coin would be valued far less and achieve only the burning of much value. Secondly, such act would clearly indicate to any would be investor that the BlockstreamCoin is centralized and run by developers, most employed by the company, who wish to order the miners. Thus, is in no way trustless. Nor would the government see it as trustless, which means they would probably accordingly regulate Blockstream or perhaps close it down completely.
Nonetheless, the threat appears to have been sufficient to prevent established miners from choosing a different client which increases transaction capacity after thorough consideration and debate that has now lasted for almost two years. They, therefore, seem to be choosing to neither upgrade nor adopt BU.
As Blockstream might perhaps like further upgrades to the network, whether through a softfork or hardfork, to implement their private blockchains sidechain technology, miner’s current refusal to upgrade and potential future refusals to upgrade basically leads to a game of waiting to see whether bitcoin or Blockstream would fold first.
For new miners entering the scene, the considerations appear to be different. They are clearly convinced that BU is the best approach as shown by their hashpower actions, and so being convinced seem to be calling Blockstream bluff.
This new dynamic suggests that with Bitcoin Unlimited now nearing 20%, potentially further increasing as the new miners exploit inefficiencies and grab all opportunities, the network might not be far off from a significant threshold where other miners have little choice, but to join. As it would all be gradual, with the process probably taking months, by the time it all happens all businesses would be on the new client. At that point, a PoW forkcoin would be considered as no different than one of many new coins with little, if anything at all, to offer, save for centralized control on the hands of developers who have nothing at stake in the system but their reputation, and sometimes, not even that.
Will it happen? If it does the bitcoin network would have proven that its incentives are highly robust and its nature is in fact truly decentralized with no person or entity having full say over its direction. Investors would probably see that the incentives do actually work, even during the most testing times, thus would place greater trust on the elegance of Nakamoto’s invention. Some, around 20%, would not be happy and, although doubtful since they would harm their own holdings (many speculate most of the support for ETC came from bitcoiners trying to damage the currency), they nonetheless might even opportunistically create a new coin to briefly profit from its short term super high volatility. Out of that 20%, 15% or so would probably eventually shift.
However, I have no crystal ball so cannot predict whether it will actually happen or, if it does, how exactly it will go down, but considering that miners appear to be clearly of the opinion that the maxblocksize must be increased, considering that they are opening themselves to new entrants who seem to favor BU, considering that bitcoin can wait while some other companies might not be able to, a maxblocksize increase appears, currently at least, inevitable, eventually in any event.
If and when it does happen, it would be an historical and joyous day for many. For some, it would be just further validation that Nakamoto was or is truly an Einstein level genius.
Disclaimer: The views expressed in the article are solely that of the author and do not represent those of, nor should they be attributed to CCN.
Image from Shutterstock.
Last modified: January 18, 2017 22:19 UTC