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