Don’t Increase the Block Size for Bitcoin Transactions

Like the Avengers, Bitcoin is in the midst of a civil war. Or at least that’s how the media portrays it.

For those that are unaware, the Bitcoin protocol contains a built-in limitation: only 1 MB of transaction data can be transmitted in each “block” of transactions, which settle about every ten minutes. This blocksize cap was implemented by Satoshi Nakamoto himself, as a means of preventing a particular denial-of-service attack on the network.

As a huge fan of the Foundation for Economic Education, I still disagreed with a recent article by Roger Ver, colloquially known as “Bitcoin Jesus,” in favor of raising the blocksize cap. Let me preface this by saying that Roger Ver is an asset to the libertarian movement. His devoted advocacy for free markets and financial support for so many institutions have done tremendous good. However, when it comes to the issue of the blocksize cap, I believe Roger has let his zeal for Bitcoin take over the world to cloud his better judgement.

It’s easy to understand why raising the blocksize has such appeal, and why this position is covered favorably by large media outfits, from NPR to The New York Times. It sounds simple and straightforward: we want more transactions on the blockchain, so let’s just raise the cap, right? Thus, it feels natural that the people who are opposed to raising the blocksize are opposed to the success of Bitcoin.

Indeed, on r/btc, a Bitcoin-devoted subreddit that Ver moderates, conspiracy rumors abound that Bitcoin Core developers, several of whom work for a startup called Blockstream, are actively trying to limit Bitcoin in order to force more traffic onto their private networks. Nothing could be further from the truth; Blockstream is a merely a vehicle for financing the development of this technology, funding which was sorely needed prior to Blockstream’s creation.

Every Blockstream product is open-source software; meaning that, just like Bitcoin, the entire world is free to examine, run, and fork Blockstream’s code as they choose. Just as important, the founders of Blockstream have a deep history in the fight for internet freedom. Greg Maxwell, formerly of the Mozilla Foundation, stated:

“When I work[ed] in the [Internet Engineering Task Force] with other long-time developers of the protocols of the internet, there is almost a ubiquitous regret that we built an internet where encryption wasn’t a default and always on… I don’t want to make the same mistake with money. I think that if bitcoin were going to displace other forms of money, we need to improve privacy.”

Maxwell has gone beyond just talk. He invented CoinJoin and Confidential Transactions, two protocols that improve the privacy of Bitcoin transactions tremendously. Dr. Adam Back, meanwhile, has been involved in the cypherpunk movement for decades. Back invented Hashcash, the Proof-of-Work system that is the core component of Bitcoin (no, not the blockchain). Back is one of only six citations in Satoshi’s Bitcoin white paper. The notion that these individuals or their colleagues are trying to sabotage Bitcoin is preposterous, and anyone who advances that position should be discredited. As Andreas Antonopolous correctly noted, “One way [opponents of Bitcoin] can jam the system is by trolling, sowing dissent, assuming bad faith, and throwing a lot of negativity into the conversation.”

Rather, the position for why the blocksize cap should remain at 1 MB is subtle and requires a more in-depth understanding of how this technology works, and, more generally, how successful networks are built. I will try to explain so below.

Sex, Drugs, Rock & Roll

In his essay, Roger analogizes Bitcoin to Starbucks. According to him, the 1 MB cap is like limiting a Starbucks to twenty customers in a day. If they did that, there would be no way Starbucks would be successful. But Bitcoin is more like a Starbucks that the government is constantly trying to shut down. It only exists because it can’t be shut down.

Bitcoin is regulatory arbitrage at its finest, the monetary equivalent of what BitTorrent is to the sharing of media content. When users send Bitcoin from one person to another, instead of recording the transaction on a single server, like Paypal or any other bank, miners compete to bundle transactions into blocks. If the government regulates or shuts down any given mining operation, there will be others, somewhere in the world, willing to step up and compete for the block reward. The system thus far has created a perfect balance, with just enough decentralization to keep its independence, but just enough centralization to eliminate redundancies.

Consequently, operating a blockchain is expensive. Very expensive. In order to record a transaction across thousands of servers, some of which may be adversarial to the network, it is much more expensive than traditional finance, where only one entity like Paypal needs to operate a server, acting as a trusted, but regulated, third party.

The beauty of Bitcoin is that it can operate in conditions where other payment networks cannot work–when Wikileaks is blocked by banks, when escorts cannot use their credit cards to buy ads on Backpage, or when drugs users want their drug-du-jour off the Deep Web. Bitcoin is for the underserved–markets that cannot exist because government regulations forbade them.

Sadly, Bitcoin has been marketed for years as a free/cheap network for transactions, but this is flatly untrue. Bitcoin, as it currently stands, is poorly designed for retail, which is why payment processors like Bitpay are struggling despite millions in venture capital. Supporters of raising the Bitcoin blocksize bought into this narrative so deeply, they believe that Bitcoin must remain cheap to use. But Bitcoin’s users, the underserved, don’t care about free transactions, they care about the transaction freedom.

You Break it, You Buy It

In their mistaken zeal to keep Bitcoin cheap, Roger Ver and his supporters are pushing policies that jeopardize the health of the network.

One of the theories he outlines is that more block space leads to cheaper transactions and more users, which means more nodes (individuals running the Bitcoin software, thereby verifying the integrity of the network) and hence a more robust network. But there’s little evidence that Bitcoin’s users are concerned about the cost of using the network.

Again, these are the underserved; they’ve come to Bitcoin because their needs aren’t met by the status quo, and they aren’t swayed by a high cost of transaction. Second, there’s no evidence that these new users will actually run fully verifying nodes. More likely, they’ll run a lightweight wallet, like Mycelium or Breadwallet, that allow the user to transact but does not contribute to the network’s security.

Roger goes into detail about how increased storage, bandwidth, and CPU power will mitigate the cost of increased blocks. Yet none of this matters. When blocks of transactions are packaged by miners, they must be relayed across the network. Therefore, what matters in the race between miners to discover the next block and win the 25 Bitcoin block reward is the latency, i.e. how long the block takes to propagate.

Moore’s law, Nielsen’s law, and other phenomenon of advances in computing and networking power affect all miners equally, so Roger’s point is irrelevant. On the other hand, if the latency increases (which it would invariably do if we start producing 2, 8 or 20 MB blocks), the miners will begin producing more “orphan blocks,” i.e. blocks of transactions that are wasted because another block produced by another miner spreads across the network first. Thus, larger blocks encourage miners to further centralize in order to reduce their propagation time, seeing as centralized miners can share new blocks amongst their partners first before sending it to the entire network.

Raising the block size would also require implementing a “hard fork.” Because the Bitcoin network requires consensus on each block added to the blockchain, everyone must run software that adheres to the same core parameters. Raising the blocksize breaks those parameters, hence everyone must upgrade at once, or else be kicked off the network. Imagine if everyone in the world had to upgrade to the newest version of Windows at the exact moment it’s released, or else their computer would not be able to communicate with any of those running the new version. It would be chaos.

A hard fork has not been tried in Bitcoin for a very long time, and for good reason; as the network has grown, the difficulty of pulling it off has commensurately grown. Thus, Core developers prefer “soft forks:” upgrades that don’t break core parameters, and allow individuals to upgrade at their leisure, while still allowing them to participate. This is the cautious, and in my opinion, correct, approach to implementing upgrades.

Planes, Trains, and Automobiles

The previous two sections might sound pessimistic; like Bitcoin is only destined to be used by prostitutes, drug dealers, and scofflaws. Thanks to the work of folks in Bitcoin Core, these dynamics are about to change. Bitcoin will soon transcend the blockchain.

Rather than Ver’s Starbucks, a more appropriate analogy for why the blocksize shouldn’t be continually raised is to imagine someone being told to get from Los Angeles to New York in one day. The raise-the-blocksize crowd believes in a brute force method to this problem: speed up and drive at 200 mph. But a genuine scaling solution requires better technology. Instead of driving faster, you’d hop on a plane. And instead of bloating the blockchain, you’d build the Lightning Network.

Explaining in detail how the Lightning Network works is beyond the purview of this article (I highly encourage interested parties to read Aaron van Wirdum’s excellent 3 part series). To make a long story short, the Lightning Network is a second technology layer built on top of Bitcoin. It works kind of like a bar tab. Most bars allow you to open a tab with your credit card, buy as many beers as you want, and only settle the final amount at the end of the night.

Similarly, in Bitcoin, you can open a “payment channel” with another individual, transact back and forth as many times as you’d like (so long as you don’t exceed the capacity of the channel), and then close the channel at the end. The only two transactions committed to the blockchain are those opening and closing it.

Yet here’s the kicker: imagine if your friend also has a tab open with the same bartender, and you could pay your friend by adding to your bar tab and subtracting the equivalent amount from his. All of this is instantaneous, cryptographically verifiable, theft-proof, private (since transactions are known only between connected parties, and not seen on the public blockchain), can occur across an unlimited number of “bartender” intermediaries, and avoids using the expensive, slow confirmation process of the blockchain until final settlement.

Virtually anyone can act as an intermediary with little more than a residential internet connection, incentivized by collecting small fees. This isn’t science fiction–there are already three separate teams working on implementations right now. Raising the block size is an inferior scaling solution, expanding capacity by just a factor of two, eight, etc., while risking decentralization. However, Lightning Network can scale Bitcoin to thousands or millions of transactions per second and reach everyone in the world, with no such tradeoff.

Dammit, I’m a Doctor, Not a Cryptographer

It’s important to approach Bitcoin with humility. The Bitcoin developers are experienced programmers and cryptographers, and they’re most certainly not ignorant of economics. They have spent years studying every line of the source code, developing new features, and understanding the economic ramifications of those changes. As much as you think you know about Bitcoin, these guys know and have considered more. You can have an hours-long conversation with someone like Peter Todd or Eric Lombrozo on things like UTXOs, Merkle Trees, Block Headers, or other dense topics.

Telling this select group of developers on why the blocksize should be raised is like lecturing Tom Brady on how to throw a football. And the vast majority of them side with Core–that the safe choice is to keep the block size at 1 MB and instead work on more advanced scaling mechanisms, rather than kick the can down the road. Raising the blocksize from 1 to 2 MB solves nothing and simply extends a subsidy, when in reality users should be bearing more of the costs of operating the network as the block reward halves this month. Big blockers are in some mistaken pursuit to keep Bitcoin transactions cheap, but cheap is not what Bitcoin’s real users are looking for.

Critics of this viewpoint say that we don’t want Core experts running a monetary system, like the Federal Reserve’s army of economists. This comparison is disingenuous at best. The Fed makes quasi-economic/political decisions that affect everyone, regardless of whether or not they choose to participate. Bitcoin is a voluntary software program, and if you don’t like their policies, there is no shortage of altcoins you’re welcome to use.

As libertarians, we believe in markets as the way to test ideas and products, not politics. Well, the market has tested Roger Ver’s ideas over and over again. Supporters of increasing the blocksize launched Bitcoin XT, which failed to gain adoption. Then, once their most prominent supporter departed Bitcoin in a whiny ragequit, they launched Bitcoin Unlimited, which also failed to gain adoption. And after that, they launched Bitcoin Classic, and…. well, you guessed it; it failed to gain adoption.

So Roger and his allies have resorted to acting like politicians, relentlessly pushing the same talking points we’ve heard over and over again. But when it comes to people’s money, it’s harder to fool them than in the voting booth. Bitcoin, much as the internet itself, will be built in layers, not by recklessly increasing the strain on the blockchain. Bitcoin developers, owners, and miners know that raising the block size is a poor, blunt method of scaling, and that we instead need new layers like the Lightning Network. If Roger Ver wants to scale Bitcoin so that every Starbucks in the world uses it, this is where he should focus his efforts.

Bitcoin will change the world; I’m sure of that. However, revolutions take decades. But when it happens, the revolution will be decentralized.

~ Many thanks to Chris DeRose of the Bitcoin Uncensored podcast for his technical input

Bitcoin, Currency Competition