It is important to know what danger you are getting yourself into. I hear that bitcoin is safest of all cryptocurrencies. The truth can not be further away.
This is something I discovered back in 2018 when I really started being serious about the cryptocurrencies and blockchains. Every time I tell someone in the crypto space my conclusion that bitcoin will die, usually argument starts. Other side tryies to explain to me how I am wrong about it, and no one succeeded so far.
Bitcoin is considered safest cryptocurrency of all, and it is the cryptocurrency every trader is looking up to in order to determine if other cryptocurrencies should be bought or sold.
So it is not strange to me that people are extremely biased about bitcoin, but if they don’t think it is going to certain death, they don’t understand the principles behind Bitcoin. For beginning, Satoshi envisioned the Bitcoin as „Peer to peer electronis cash“ which is the subheadline of the Bitcoin whitepaper. Today people treat the Bitcoin as investment, or digital gold that is good to hold and do nothing else with it. Exatly that is the reason why bitcoin is heading towards self-destruction, and that is what this blog post is about.
I feel obligated to tell everyone whom I meet in the crypto space about this, and as I said, strongly people repels. How is this even possible?!
Short answer: Because the Bitcoin is designed to thrive or die.
I am not going into the ideological debate IF what Satoshi described in whitepaper should be the only real Bitcoin, or that have to be iterated. The fact that Satoshi made the Bitcoin in certain way (that was not changed) has implications… which doesen’t necessarily impact the protocol at the moment. But will in the future, because that’s how algoritm is ticking.
Decentralization and security aspect
Here is the thing… the more mining entities there are, the more decentralized the network is, and consequently, the more safer it is. Why is it more safe with higher decentralization, is because it is harder for someone to gather more power than everyone else combined.
What I see where people go with wrong conclusions of the previous statement, is that more hashing power = more decentralization.
For decentralization it doesn’t matter what hashing power is. If hashing power is growing, but there are few mining entities (who are increasing hashing power by plugging in more mining computers), the network is becoming LESS decentralized (or more centralized) and because of that LESS secure.
To illustrate this, let’s imagine there are only 10 miners of the protocol, and each is mining at 1 TH/s (TeraHash per second). That’s total of 10 TH/s. But 1 miner doubles its mining output to 2 TH/s, that’s now overall 11 TH/s mining the protocol.
This situation IS making overall network more secure because now some new – 11th entity alone needs to come with more than 11 TH/s to make mining monopoly and dictate the rules. Increasing hashing forever is not making it more secure forever. BUT the miner which has now 2 TH/s needs only 7.1 more TH/s of mining power to achieve the same thing (because all other would have 9 TH/s and this one which increased would have 2 TH/s from before and 7.1 TH/s new = 9.1 TH/s). 9.1 > 9
Because 9.1 TH/s will find faster „key“ that is needed for another block to be generated than the 9 TH/s. This described is so-called 51% attack.
But the reality is actually much worse than this!
To understand why, we need to use some game theory. Game theory is driven by cause and effect relationship where we assume that certain effect will take place because something caused it in interhuman relationships (also we can assume that someone will make causal event if that will bring him some benefit).
For example if you take a lollipop away from a kid, that kid will become sad and upset and will probably start to cry loudly, maybe even kick you. If you want to take a more grasp on the concept, there is one simple free game I strongly recommend you to try https://ncase.me/trust/
Game theory comes into place with Bitcoin mining because some miner is changing status quo, and it is impacting the dynamics way earlier than in case when he is suddenly outmining everyone else. This can not happen at large scale overnight, it needs to come gradually.
Since each block is providing certain reward to miner who „unlocked it,“ if 10 miners have 10% chance to mine it each, on average they will be receiving 10% of the block reward over long time frame.
But if 1 miner doubles the hashing (mining) power, he is consequently getting more rewards, and all others are getting less.
Why would he do this, there are many reasons, like optimized mining operations.
If you would try to turn on 10 Bitcoin mining machines (ASICs) in your house, the noise would become unbarable since 1 is loud like a vacuum cleaner. There is also a heat output issue from these mining machines (Chip gets warm close to 100C or 220F). If you would try to put 30 mining machines in your house, house would stay without electric power because electric instalations are not made to handle that much consuption.
Now imagine this guy made few huge halls with fans for ventilation on Iceland where is low outside temperature, and close to renewable termal electricity plant (or maybe he owns that electric plant too). Now his capacity is much stronger, and electricity much cheaper. It would be foolish not to use the situation for making profit.
What average miner notices is that he is not profitable as before, so he decides not to buy the new, more efficient ASIC mining machine that just came out and cost $20k piece. This allows more efficient miner to gain even bigger advantage by getting these and spreading mining operation which are investors happy to finance, which consequently puts even more pressure on all other miners.
Additional game theory danger
In previous example I illustrated how 1 mining entity can take control alone over the Bitcoin protocol, but what happens if someone wants to join him?
Let’s stick to the same hypothetical scenario: 10 miners, 9 have 1 Th/s and 10th miner has 2 Th/s. 10th Miner needs to add additional 7.1 Th/s overnight to have more than everyone else.
Everyone else = 9 Th/s
1 „evil“ miner 2 Th/s
2 + 7.1 = 9.1 > 9
But what if 1 of the rest sees what this one “evil” is doing, or is friend with that 1 “evil.” This guy sees that he is not profitable any more so he needs to turn off some older mining machines and sent them to a junkyard. Or… he can keep them all on and mine with a minus, which means he would get less bitcoins than they would worth. He is doing that because he has a deal with the 1 “evil” miner and he wants piece for himself.
Now 1 “evil” miner has 2 Th/s and 1 from the rest is adding 1 Th/s so they mine together and split everything they mine according to their participation (that’s how mining pools work). Because 1 “evil” miner is contributing double than the other miner, he is getting double the amount of bitcoins.
Let’s see now how math works:
10 miners, 8 have 1 Th/s; and 9th and 10th miner combined have 3 Th/s.
Now it is 8 vs 3, and the “evil” camp needs to add just 5.1 Th/s overnight to have more than the rest.
The rest 8
The “evil” camp 3+5.1 = 8.1
8.1 > 8
Do you see what happened in this case? They are adding less mining power, and need to overcome less mining power.
Competition works differently with Bitcoin
Make no mistake by taking competition for granted, because competition does not work here like people used to.
The economist to which I’m most closely aligned in my thinking around markets and economies is Joseph Schumpeter who thought that competition isn’t about the number of players in a market, but rather how easily new firms could enter the market and displace existing firms. That is what is messed up with Bitcoin. Here is illustration of what I mean.
Imagine that there are two islands are known for a cool treat – kiwi popsicles. On the eastern island there are ten firms producing it; on the western island only two large firms.
Traditional economics tells us that the eastern island is more competitive than the western island. But let’s take a closer look:
On the eastern island, the government issues licenses for a certain number of firms to produce a preset number of kiwi popsicles. Each firm goes through a lengthy and costly application process, taking up to several years to complete. There are also lengthy and expensive regulatory reports that have to be filed with the government every year, adding even more costs, and the government prohibits any foreign kiwi popsicles from being imported to the island.
The result of these protections is that the firms able to obtain a license for Kiwi popsicles are able to charge higher prices.
Meanwhile on the western island, no restrictions are placed on the number of firms or the importing of kiwi popsicles so new firms are able to easily enter the market and compete with the existing two firms.
This openness to competition forces the two existing firms to keep prices low and to innovate with new products – including different flavors and services like home delivery – in order to stay ahead of any would-be competitors.
Instead of worrying about the number of existing firms and their market, Schumpeter realized we should worry about barriers that prevent or limit new firms and entrepreneurs from entering a market, and innovating and competing.
How all this translates to Bitcoin?
New miners can not easily enter the market for competing with bitcoin, although that was the goal of Satoshi Nakamoto. And if we end up with few biggest and strongest players in the mining space, that can be lethal for Bitcoin.
The reason is that transaction fees are not growing, and halving is acting like a ticking bomb.
Now on top of this issue with competition, bitcoin halving is happening every around 4 years. No one can predict precisely because Bitcoin blockchain does not know what time it is, but it knows that after certain amount of mined blocks (it’s programmed), the algorithm reward for each block will get halved. Each block is mined on average every 10 minutes, and there is auto adjustment for the mining difficulty around every 2 weeks (again, because after certain amount of mined blocks in the blockchain).
Bitcoin halving means that the Bitcoin algorithm is halving emission of new bitcoins per mined bitcoin block.
first we had that number of bitcoins are increasing, and inflation is decreasing, but now we have that bitcoins are decreasing and transactions are increasing. Because it is logical and easier to track this way, what is going up and what is going down in contrast.
With what will we reward miners in the future? Because bitcoin inflation is decreasing with time, we will have only 21 million bitcoins, and inflation looks something like this:
From beginning when bitcoin is started inflation is high, and it is dropping through halving. It looks like this, and it will end up with zero.
At the same time, transaction fees increase with time, because more people are using the network. From the beginning no one is using the bitcoin, because no one knows about bitcoin. As time passes more and more people use it, and the idea is that transaction fees should compensate for the decrease in the block reward.
Because at the end of the day, miners have to be rewarded. Eventually block subsidy will be zero, and in future there will only stay transaction fees as reward for miners.
Here is the diagram that shows what I am talking about:
If you are going to remember anything from this, remember next picture because that’s the key to understanding the whole point:
Satoshi envisioned a future where Bitcoin will scale and grow transactions over time. At some point, in this crossroad section where you see black dot, is where Bitcoin would become self-sustaining, meaning that it would be able to exist without algorithm reward to miners. That is simply because fees from transactions would replace algorithm reward which are subsidy for miners.
But if transactions don’t grow, then then miners will stop mining simply because it will not be profitable any more to mine. The fact today is, that transactions on Bitcoin peaked in 2017 already and can’t grow any more. The reason it can’t grow transaction output is because it has 1MB block size, which is very limited space in which transactions are written down. That was more than enough in the beginning, and it is success on its own to have full blocks, but as adoption is growing, so is need for more transactions.
We can conclude that technical capability is preventing further Bitcoin’s adoption. Here is the graph that shows number of Bitcoin’s daily transactions over time.
The time is running out for Bitcoin to grow fees. Transactions are only important because of fee that are going with transaction, which is paycheck for the miners which makes Bitcoin safe and secure. Only way in which fees can grow now is in fiat denominated value, in Bitcoins it will stay the same. For that to happen, Bitcoin’s price needs to grow in future, and as a result transactions will be more expensive for end users, which will make Bitcoin very expensive and inaccessible for usage. This would lead to even less transactions.
But increasing price of Bitcoin is helping it on the other side, because release schedule of new Bitcoins are predetermined, and with higher price of Bitcoin, miners are receiving more fiat denominated value as reward. But the bad news is that this reward is getting lower over time.
Not only that time is not working for Bitcoin, but it is working against it because of this halving mechanism, which means that reward for miners are getting halved in Bitcoin every 4 years. That means that in order for miners to continue receiving same amount of reward denominated in fiat value (which is important because they need to pay electricity), Bitcoin’s price needs to increase double every 4 years.
Why Bitcoin has halving mechanism?
That is how Satoshi made it.
Why Satoshi made Bitcoin this way? Because of security.
When bitcoin was launched, I said earlier that no one knew about bitcoin, so no one used bitcoin. Then what would stop some miner to buy few new PCs and misuse the bitcoin to his own benefit?
That is why decentralization is so important – to have many miners minig bitcoin at the same time so that no miner can have majority (of hashing power). Because when someone has majority of hashrate, he can do whatever he wants with Bitcoin protocol.
This is a chicken and the egg problem: Why would miners spend resources and mine something that is new, unproven, has no value (Bitcoin was not traded for first 2 years)?
In the beginning, no one would be incentivized to mine Bitcoin. That’s why Satoshi implemented this coin inflation mechanism. That is a subsidy to mining. Coin inflation was how Bitcoin offset the costs of securing the network.
The earlier you start mining bitcoin, the more bitcoins you receive. As time passes, less and less bitcoin is released to miners from the bitcoin algorithm. First mining blocks contained 50 bitcoins as reward from miners.
The first reward era lasted for 210k blocks (as all reward eras do) which is equal to around 4 years. When the first bitcoin reward era ended, there were 50.00000006% of all bitcoins that could ever be created in circulation supply.
Few miners and easy to get 50 bitcoins per block (block from blockchain)… every 10 minutes!
And yet, Satoshi was the only one mining bitcoin in the beginning. That is how Satoshi Nakamoto mined around 1 million bitcoins for himself.
These bitocoins never moved, Satoshi never sold any bitcoin he mined. This is what he wrote on June 21st 2010: “Lost coins only make everyone else’s coins worth slightly more. Think of it as a donation to everyone.”
After the second reward era finished, there were 75.00000008% of all bitcoins that could ever be created in circulation supply… which represents 50% added bitcoins on top of all mined during previous reward era.
After the second reward era finished, there were 87.50000010% of all bitcoins that could ever be created in circulation supply… which represents 50% added bitcoins on top of all mined during previous reward era. 16.66666667% added bitcoins on top of all mined during all previous reward eras.
What happens next should be now easier for you to track. Here is the full chart showing this:
|Block||Reward Era||BTC/block||Start BTC||BTC Added||End BTC||BTC Increase||End BTC % of Limit|
These bitcoin halvings happen around every 4 years. Here are exact dates when each reward era started and ended:
|1st reward era||2009-01-03 – 2012-11-28||0 – 210000|
|2nd reward era||2012-11-28 – 2016-07-09||210000 – 420000|
|3rd reward era||2016-07-09 – 2020-05-11||420000 – 630000|
|4th reward era||2020-05-11 –||630000 – 840000|
Bitcoin halvings are AROUND 4 years because they can not be precisely determined because of another thing, and that is difficulty adjustment.
Mining difficulty adjustments are made by comparing the standard time it should take to find 2,016 blocks of transactions on the Bitcoin network to the time it took to find the last 2,016 blocks.
If each block is exactly 10 minutes, 2016 blocks is 20,160 minutes, which is exactly 14 days. But we know that it is not exactly 10 minutes but exactly 10 minutes on average, so this cycle can be little more or little less than 14 days.
Bitcoin algorithm calculates the total time it takes to mine the last 2,016 blocks. If cycle of 2016 blocks took 10% longer to mine, algorithm will lower mining difficulty by 10% for the next cycle of 2016 blocks so that block reward should be again around 10 minutes per block.
The upper limit for each difficulty epoch is a +300% change, while the lower is a -75% alteration. This is set to prevent abrupt changes in mining difficulty during next adjustment.
You have noticed that i used hashing power in Th/s. That is because each ASIC machine has different hashing power.
Here is the list of most powerful ASIC machines for SHA-256 Algorithm that bitcoin has (you can mine bitcoin using only this algorithm):
The proccess of mining is what makes Bitcoin decentralized. Decentralization is what gives Bitcoin security.
But in the beginning, when Satoshi envisioned mining as a way to solve decentralization by solving byzantine generals problem (it’s an illustrative example of game theory describing the issue of decentralization), he was not thinking in terms of hashing power. He was thinking in terms of hardware units – Central Processor Units (CPUs).
Why CPUs? Because every computer needs to have one, and since majority of households had some computer at home, and computed had CPU, that was perfect way to go. Everyone could mine bitcoin if they had computer connected to the Internet, cost would be just electricity, hardware was already in place. That setup would enable very high level of decentralization.
In original Bitcoin whitepaper published by Satoshi Nakamoto, he even compares decentralization between one-cpu-one-vote and one-ip-address-one-vote, then chooses former because of the reason that someone would be able to allocate more than one IP. IP address is address that each hardware device receives upon connecting to the internet, that’s how computers identify themselves when communicating over the internet.
I do not know about you, but for me even the fact that Satoshi considered IP address as a mean to decentralization goes against hashing power as main factor in the process of bitcoin mining.
Now, why is this “how decentralization will be achieved” argument important when we see that bitcoin can be mined and is mined successfully with counting hashing power? Afterall it is the easiest and fairest this way because not every CPU is at same power, and same efficiency. CPU made this year will run circles around CPU made 5 years ago.
Well, it will turn out that bitcoin mining will become very profitable, but only for elites – professional miners who are getting into mining with huge capital. This is because GPU / FPGA / ASIC mining was not the possibility at the time of publishing this paper. When Bitcoin was created in 2009, SHA256d (algorithm that Bitcoin is using for mining) ASICs did not exist. Even GPU mining software did not exist because mining was a completely new thing.
In the beginning Satoshi’s vision was well implemented because even CPU in laptop would be able to mine with profitability. But as bitcoin’s price were increasing, so the battle among miners became more fierceful. Soon an intelligent first year undergraduate could port SHA256 from C to Verilog, and that simple software enabled more powerful mining with GPUs (graphic processor units) or simply graphic cards.
Then someone figured out to use FPGA which stands for Field Programmable Gate Array, and you can think of FPGA as a bunch of LEGO bricks (yes, those building blocks). You can build almost anything with them and most importantly it is entirely up to you. In this case, the building blocks are digital circuits. The FPGA mining card, for example VCU-1525, could run certain algorithms 6–20x faster than GPU while consuming the same amount of power!
As you know, when getting lots of money is in stake, people are quite inventive, so some pc hardware factory started making ASICs at the end of 2013. ASIC is self-explanatory: Application Specific Integrated Circuits. Basically these are computers designed to do only 1 thing and to be very good at it: to mine bitcoins. Because you can’t do anything other with ASICs except mine bitcoin, it is more riskier buying this because old you can still put in PC CPU or GPU that is not good any more for mining, and use it for tasks that are needed for casual computer use.
ASICs in particular require a big enough up-front investment that you need economies of scale. You need a building especially made with mining on mind, because you need non-stop venting of that room, you need to prevent dust from entering the building, and it is so loud to be in that building (because each of these ASICs have spinning fans that are loud as vacuum cleaner) that you need to wear some sound blocking earplugs. That building needs to be near stable and cheap electricity source, some miners even build their own green electricity power plants!
And that’s what is destroying bitcoin’s decentralization – mining competition, and survival of the fittest.
All this would not be possible if mining would be accessible for everyone with computer as Satoshi envisioned. Let’s see now how all this works together, descriptive.
If only my cpu is mining bitcoin, only I am making the network secure, and I decide what will the rules be, how they will change and when. In the beginning, Satoshi was this entity, and only he was mining. He mined around 1.1 million bitcoins, but don’t worry, if Satoshi wantet do dump them he would already do. That is why he wrote: „Lost coins only make everyone else’s coins worth slightly more. Think of it as a donation to everyone.“
But if you join mining with your cpu which is less powerful than mine, I still decide what will be, but network is more secure from the third party attack who is not me or you. Why? Because third miner would have to mine with at least 2 CPUs that are at least powerful as mine is.
What many don’t understand is that if I put 1000 cpus to mine on the Bitcoin network, and you add 800 cpus to mine bitcoin, it is still same level of centralization as if I am mining with 1 stronger CPU and you are mining with 1 weaker CPU because it’s still 2 entities mining. 2 entities are controlling 100% of what happens with bitcoin.
This scenario is only more secure from the point of view of the third party miner because he would need 1801 CPU alone mining Bitcoin. Since I control majority of hashing power, the network is at equally high risk as when I am mining with 1 stronger CPU because I can do whatever I want with it. But it is not same if 3rd party needs 3 CPUs or 1801 CPU to gain majority of mining power.
Little on price
If third party buy output – bitcoin, from me, it is establishing the price.
If only ONE person has all bitcoins, it is worthless really. If 1 person has 80% of bitcoins, and it did by buying bitcoins from millions of others, that means that others do not have it. That means smaller network size, and smaller value… but way higher price. Because that is how people traded it, and last traded price is the price discovery mechanism. What you see as the price of bitcoin is the last trade which happened second ago.
Although price exploded value went down because if 1 person has 100% and makes it worthless, then 80% to own it makes it slightly better. If less people have it, that means that it has less adoption.
Now you can say that it has same amount of value because you can do with it the same things as before, nothing changed. You can still use it as SOV (store of value), you can still transact and send it… but the question is, why others do not own it then? And what will person with 80% of bitcoins do with them? YES they ARE storing value, but if someone wants to convert that value into other medium of exchange like $usd cash, he will not be able to. If market would be established, he would be able to some extent, because he would be crashing the price down as he would be selling, and big question is if those who sold it would buy back cheaper later on.
Imagine if some founder with 30% of stake in publicly traded company would dump his shares in a single day, it will not be likely that there would be that amount of buyers at that moment to buy all what he wants to sell.
Now this is bringing us to the vision that Satoshi Nakamoto had. His idea was to make new monetary system and fix the fiat currencies. His idea was to bought bitcoin with fiat currency never be sold again for the fiat currency. If you are asking yourself why, I told you already that his idea was to make new monetary system, which would have its own economy. Just like fiat currencies have.
Once received bitcoin, should be by design, spent on purchasing goods and services. Then earn or buy or mine new bitcoins, and spend again. Like a parallel monetary system with its own economy. Now earned bitcoins are still primarilly used to be cashed out in fiat currency, in order to finance mining operations – pay electricity, asic machines, employees taking care of all that, building rental or mortgage payment.
The point was never not to trade 1 btc to $1 million or $1 billion or whatever number you want to put it. Wealth is held by the status quo and you don’t disrupt the status quo by using their metric of success. The point is to make $1 million per btc obsolete idea and not important, to make it irrelevant.
This is where greedy people who are trading “altcoins” for more bitcoins are mistaken. This is where bitcoin as SOV is a wrong philosophy. This is why buying bitcoin because it will be more expensive tomorrow is wrong philosophy. This is why unit of exchange the important aspect, not store of value. HODLing is wrong philosophy. But this is what people are doing, this is how people fucked up bitcoin, and this is why bitcoin will die. Block reward from algorithm was there to subsidize the security aspect until it becomes self-sustaining from the transaction fees from the economy that it created, or better took on itself from the fiat world economy.
I agree that quality of money is SOV, but if you exclude Medium Of Exchange from bitcoin, and use it only as SOV in a way where you only HODL, and you call HODL the USAGE, the USE CASE on its own, that is not making any VALUE, but it is making PRICE. This is the most interesting aspect of bitcoin to people – it’s price (which is wrong in the first place, and I explained earlier why). There were numerous polls on Twitter about this during hard fork debate, what is most important, and always price won. Increasing price won over Validating your own TX’s, Low fees to transfer, level of decentralization, Quick transaction times and so on.
And when subsidize run out, and it is designed to run out, it will be THE END of bitcoin. Miners will destroy bitcoin, or let me rephrase it – CENTRALIZATION will destroy bitcoin.
It is not helping that the hardware that powers Bitcoin is produced by a handful of companies who also control mining pools.
Scaling bitcoin and how greed won
How did we get to Store Of Value vs Medium Of Exchange debate afterall? I think there are few factors which are all coming from trivialized understanding of bitcoin.
People know and understand the gold, the gold market (Store of Value) is estimated at $7 trillion, and it is easy to see how Bitcoin can take piece of that cake, maybe even outperform gold as SOV. But what people do not know and do not understand is that the currency market (Medium of Exchange) is over $100 trillion.
People bought bitcoin to sell it at higher price, and just hodl it in the meantime.
They picked up the decentralzation element – „no one can take it from you, and if there is a war, you can easilly escape the warzone area and bring your wealth with you which no one will notice – bitcoin.“
They picked up the mining method, and I think this is maybe the crucial because mining was described as mining a gold – you are digging gold, but not everything you dig is golden nugget, there are lots of dirt you need to go through in order to get to the tiny amount of gold. That’s why they see the bitcoin as digital gold. And what is gold? It is proven Store Of Value.
They picked up the scarcity element – „there will be only 21 million bitcoins ever created“ which was enough. Some called themselves short term investor, mid term investor, long term investor… but this is not what you may be think about, because their long term is sometimes few months. This is indeed long term from the perspective of dominant players on the market: traders.
Some traded it (but on cex ofc) and large amount of volatility in 2017 attracted lots of FOREX traders to bitcoin, to whom bitcoin was medium of exchange because all they did with it was to exchange it to other cryptocurencies. This is really dumb ofc, because MOE would mean exchanging bitcoins for goods and services.
What was the goal of bitcoin traders? They called themselves names – daytrader, swing trader, momentum trader, technical analasys trader etc. Their goal was to ammas as much as possible bitcoins. They were looking at every other cryptocurrency as altcoins – alternative coins to bitcoin. But because there is only one and trully original, bitcoin, it should always be the winner with highest market cap.
And you know how it is during bull market mania in crypto, everyone is super heated up, and they are really believing in all this while price is uptrending. But as soon as the market turns, they start abandoning the ship one by one. This video sums it up pretty nicely:
So imagine in that heated environment, which it was in 2017, in the middle of it, bitcoin was about to evolve, and its evolution was on the crossroads. The disagreement was about how it should scale further. And it can’t be everything for everyone.
One side wanted bitcoin to be a cheap, fast global currency, and the other side wanted it to be digital gold/store of value. The majority picked the second.
My personal view why this happened was because it is easier that way. All they have to do is just to push the narrative that bitcoin is better gold, and all you have to do is just hodl it, not doing anything with it. Not even transacting. Just because you have it, you are using it. Which is oxymoron if you ask me. How can not using be using?!
Eventually SOE and MOE will converge into one, in the long term. The question is chicken and egg problem: Is it needed first to become MOE or SOE?
And bitcoiners get this culture. They know that if they collectively preech and lead narrative in one direction, newcommers will just adopt that culture of HODLing Bitcoin as SOV, which will have as end result their bags more valuable.
And so then when bitcoin is the only SOV, it has no competition in other blockchains which can do more better faster cheaper etc. all at once at the same time.
And then there are other group of people who view Bitcoin as Satoshi saw it – Peer to peer electronic cash. And Bitcoin should grow transactions in volume.
Segwit was proposed, and both sides supported it. It is just batching many transactions and sending them in groups instead one by one, and thus saving space in the blocks, and transactions are going through faster. Block size of Bitcoin is very limited, 1MB. Can it be more, sure, just nodes need to democratically vote for increase. It can be 2MB, or 100MB, or 1000MB and so on.
That increase of block size is what core developers do not support. Other side proposed doubling Bitccoin block size to 2MB per Block. This was Bitcoin could support 2x transactions output. Instead, core supported scaling bitcoin differently – by adding another layer on top of Bitcoin, which is called Lightning Network.
The main issue with Lightning Network is that it is free to use. Yes it can do at a scale larger volume of bitcoin transactions, but you need only to pay once for opening the Lightning Network chanel. Once it is opened, you can send unlimited amount of Bitcoins for free forever through that channel.
Imagine this like a store which wants to accept Bitcoins. You can buy something and pay transaction fee for sent Bitcoins, or you can pay same amount for opening the Lightning Network channel once, and then use that whenever you want to buy something with Bitcoin.
So why stubbornly refusing to have both you may ask? And 2MB block size and Lightning Network? Well I already explained: By philosophy of majority of Bitcoiners, Bitcoin can’t afford itself to go the onchain scaling route (by making the Bitcoin blockchain itself capable to support more transactions), because then suddenly it’s competing with many other blockchains. Only thing that other blockchains don’t have, except maybe Ethereum is SOV aspect. You are not buying coffee with gold, and you should not use Bitcoin for buying coffee as well. Maybe if you open Lightning Network channel with the coffee shop. And this is adding more friction in the adoption, and Lightning Network is starting from zero because it needs to be adopted separately from Bitcoin.
Ok so where is the problem? 2MB block size, who cares?
Well the other side cares, and there is really important reason why and that is: Bitcoin was largely designed by Satoshi Nakamoto on the premise that economic forces and self interest would help govern the security of the network. And Bitcoin’s price is a function of faith and network security, given the large amount of computing power that goes into it.
The security of the Bitcoin network comes from the computational hash power that the miners bring. This is driven by the price of Bitcoin — higher the price, more hashing power. High prices are in turn driven by market demand. Market demand is driven by PR & media and the long term narrative that Bitcoin is the first and only true cryptocurrency which is a long term store of value.
In essence, bitcoin miners are mining bitcoin because it’s profitable for them. In the beginning, no one would be incentivized to mine Bitcoin. That’s why Satoshi implemented this coin inflation mechanism. That is a subsidy to mining. Coin inflation was how Bitcoin offset the costs of securing the network.
Soungs familiar? Well it should be, because I said exactly that already earlier in this post. Sorry for repeating myself, but this is most important part. If transaction fees are not replacing falling subsidy of the Bitcoin’s algorthitm, eventually there will no miners left. More precisely, it is opening huge window of opportunity for malicios miner to attack Bitcoin and extract billions of dollar from people betting on the Bitcoin being safest and most reliable cryptocurrency out there, gold 2.0.
So other side is insisting on scaling the Bitcoin by increasing block size which would allow Bitcoin to have double amount of transactions and double transaction fees. And now because of that, they are suddenly bad bodys who want to destroy bitcoin because some weird and harmful philosophy that majority, and probably you adopted. Which reminds me of the monkeys in the article I wrote about contrarian thinking.
And how this story ends?
It doesn’t. That’s why Bitcoin hard forked in 2017 and from de facto Bitcoin came copy paste of it called Bitcoin Cash with modifications in the direction of scaling Bitcoin transactions. It is not the first and last time that something like this happened to Bitcoin, there are many copies of Bitcoin already out there. Tell me now about how Bitcoin is scarce with capped number of coins, ha!
The issue with Bitcoin Cash is that no one really cares about it, same like no one cares about other Bitcoins out there. This is btw trick statement. I used it to see how you are still wired on the wrong way, because no one should really care about any cryptocurrency. They are here to be used. Do you care about electricity, or plumming? If you stay without it I bet you would care, but otherwise there is no room for feeling.
So the reason that Bitcoin Cash split off was because they challenged Bitcoin Core’s philosophy around Bitcoin, not their technical ability. This doesn’t mean that Bitcoin Core is wrong, Bitcoin Core is making the right decisions technically, that align with the philosophy that they have.
Afterall, the whole cryptocurrency space is one giant experiment, made of many smaller experiments. Crypto is about innovation, about exploring uncharted territories.
Market did not accept Bitcoin Cash, it has much greater capabilities than Bitcoin, but blocks are not even closely full like Bitcoin’s are. Imagine two buses, one have 10 seats and 10 people are in it, and other bux has 80 seats and 2 people are in it. First bus is original Bitcoin, the other one is Bitcoin Cash.
This does not mean that Bitcoin Cash failed, or that their philosophy is defeated. Market is not good indicator at what is successful and what is not in the crypto space because they don’t know what they are doing. Actually I would say that majority of the crypto projects doesn’t know what they are doing also. Only time will tell which one was right. I am just saying that in this setup, Bitcoin as it is, is destined to die. Because of that Bitcoin is riskiest cryptocurrency out there because it will surely die, all others (if not dead already) will maybe die. I am speaking about technical death here – you can’t send or receive Bitcoins.
Bitcoin vs Bitcoin Cash comparison:
The current Bitcoin is the longest proof of work chain, as defined by Satoshi in the white paper. This chain is what is traded under the ticker symbol BTC. The Core development team is an open source project, to which anyone can contribute and participate in.
The Core developers have the following philosophy around Bitcoin:
The ability to run a full node is important and that ability needs to be within reach of individuals. Therefore, growing the size of the blockchain by having lots of microtransactions will result in the blockchain becoming too big and expensive for the average individual to be able to run a node and validate their own transactions.
In order to be government resistant, Bitcoin needs to be difficult to change and so there is a process for submitting proposals and consensus changes are not meant to be debated in any more meaningful way by Core, than by the rest of the community that engages with them. Nobody can make a change unless there is a broad consensus from users/nodes.
Bitcoin’s security is maintained by ensuring that miners can earn enough money from mining rewards, but the belief is that the new coins being issued every block are a form of inflation and so when these coins run out (in 2140), a fee market needs to exist to ensure that there are enough transactions to mine at a fee, to keep mining profitable and ensuring that the chain is secure.
Nodes/Users are what matters and miners are simply paid coins to mine Bitcoins and transactions. They do not set and cannot change the rules. Soft forks (User Activated Soft Forks) is now a proven grassroots mechanism to upgrade the Bitcoin protocol, without requiring miner support.
Bitcoin needs layer 2 networks such as Lightning, in order to scale as that removes the dependency on increasing the block size in layer 1, and increasing the block size will lead to higher levels of centralization than is optimally desired for censorship resistance, etc. The idea behind layer 2 scaling is that transactions are handled outside the 1mb block space, which means the 1mb block space functions as a settlement layer, while layer 2 handles transactions.
Bitcoin Cash is a fork that occured before Segwit was activated on Bitcoin, on 1 August 2017.
Activating Segwit through a soft fork/UASF represented a technical change to Bitcoin that was not enforced through the traditional mechanisms (a hard fork). For a number of supporters of Bitcoin, who believed that the Core development team had not steered Bitcoin in the right direction. Segwit represented an unacceptable technical change to Bitcoin and so, they took a small percentage of hashpower with them (around 10%) and created a fork of the original pre-Segwit activation codebase, called Bitcoin Cash.
Many false narratives have arisen around Bitcoin Cash and who is ultimately behind it. In reality, there have been many teams that rose up to challenge the Core development team’s implementation of Bitcoin over the years (Bitcoin Classic, Bitcoin Unlimited, Bitcoin ABC, etc). In the end, it seems they united under one banner and created Bitcoin Cash, including Gavin Andresen, who was the principal Bitcoin Core developer that Satoshi handed the reigns of Bitcoin over to when he left. Gavin had been an advocate for bigger blocks for years but was never able to get it implemented within Bitcoin.
At the time of the fork in August 2017, the fundamental changes were:
An increase in the block size to 8mb (from 1mb) and no Segwit activation.
Changes to the difficulty adjustment algorithm (DAA), due to it having a minority of hashpower — which required an emergency difficulty adjustment (EDA). This was changed again via a Bitcoin Cash hard fork in November 2017 and the DAA is more stable. The max limit of 21m coins was not changed, however Bitcoin Cash miners mined 100k more coins in the interim period until the new DAA kicked in. This also means that halving day for Bitcoin Cash will be sooner than Bitcoin by nearly 2 months.
RBF (Replace by fee) was removed from Bitcoin Cash.
The Bitcoin Cash developers have the following philosophy around Bitcoin Cash:
Not everyone in the world should or will run a node and therefore making it economical to do so is not actually practical. Decentralization to the nth degree is a nice idea but they believe Bitcoin is a small world network. The tradeoff is that not everyone in the world will be able to run a node and so the question really is: How important is that level of centralization to trusting that the network as a whole can function? On Bitcoin, there are around 10,000 listening nodes today (so possibly 10x in terms of validating nodes), and probably over 30m people using Bitcoin worldwide, but it’s still unlikely that average users will want to run a node and would be comfortable trusting larger third parties.
Bitcoin was arguably designed to scale at layer 1, due to increases in computing capacity every 18 months, as per Moore’s Law. Brian Armstrong from Coinbase wrote about this a year ago. Bitcoin Cash intends to scale by increasing the block size, and not creating a layer 2 solution.
Nodes without mining power have no ability to contribute to the consensus mechanism of Bitcoin, so they are disregarded. The original white paper did not differentiate between the two, because it was never envisioned that you would have a node running without mining at the same time. Bitcoin Cash is using Nakamoto Consensus to determine consensus rule changes.
As per the original Bitcoin.org website — Satoshi said that a fee market should maybe exist, once the coins had been fully exhausted. There is no need to build a fee market today, as there is 120 years to plan for it. Keep transactions cheap and fast and ensure that there is global adoption first and foremost.
Anyone can submit changes to the network from any one of the multiple implementations/clients running Bitcoin Cash. If miners vote to adopt the change, a hard fork will occur and the network will continue to function using this consensus mechanism.
When will Bitcoin die?
I am not giving it more than another 12 more years to live.
In 4 years block reward will be 50% lower.
In 8 years block reward will be 75% lower.
And this loop will continue until that famous year 2140. My question is, will Bitcoin be alive in 2140? Will it be alive in 8 years?
Block rewards end around year 2140, but 99.0% of coins will be mined by 2030 and 99.8% by 2040. On May 2032 (in less than 10 years) bitcoin block reward will be less than 1 bitcoin, now it is 6,25. At year 2040 it will be 0.2 btc per block… and people are worrying about what will happen when all runs out in 2140 😂
They can increase block size and scale transactions. Yes they can, and they could, but they refused. And the thing with Bitcoin is that it is harder to change it as it is becoming bigger (in terms of nodes and miners). We can say that this is by Satoshi’s design, not a bug but a feature. But is it a feature when you keep the design for peer to peer electronic cash, and you treat it like peer to peer electronic gold? I say no.
They can increase number of bitcoins that is coming from algorithm as reward to miners. Yes they can, but then that will not be Bitcoin any more. Bitcoin would hard fork and generate version where there will be over 21 million Bitcoins, maybe even infinite amount of Bitcoins, who knows? Community will split like it did in 2017.
I say to my crypto friends who say that „bitcoin just works:“ If I am in the bus and I see how it is going to fall off the cliff and get destroyed, I would jump off. I would call everyone else to jump off the bus because everyone will die who stays in it. Bitcoiners would still be inviting others because it is just working.
So Bitcoin bus is just going… what will happen I do not know for sure, no one know the future, but please make educated decision how will you treat the bus which is going toward self-destriction. You have responsibility not just for yourself, but to people you are in contact with. Maybe some of them you brought to crypto space. Send them this article because the chances are that they are not aware of the fundamental danger that lies within Bitcoin.
The name of the game that is being played with bitcoin is the greater fool. Or what I prefer later fool. I am not betting that someone after me will discover what I know about bitcoin.