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Why Bitcoin's Greatest Asset Could Also Spell Its Doom
Laura Shin, CONTRIBUTOR
Opinions expressed by Forbes Contributors are their own.
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The wonder of bitcoin is that the system manages to get a few groups whose interests are not aligned to interact in a way that results in an optimal outcome for all.
However, over the last two years, faced with the question of how to enable more transactions on the network, the initial uneasy equilibrium between the various groups turned first into a stalemate and more recently into a full-blown civil war.
The past few weeks have seen ever-increasing levels of drama. While it’s not worth diving into the details of each incident, one of the bigger bombshells was the bitcoin equivalent of the Republicans claiming that the real reason Nancy Pelosi opposed Trump/Ryan-care because she could secretly make $100 million extra if Obamacare remained in place. And although there was no evidence she was doing so, the mere fact it was possible meant the system needed to change. However, the bitcoin version of the Democrats claimed that their advantage was really due to efficiency — and what’s so bad about optimizing technology?
The latest salvos in this never-ending war are putting into stark relief a dirty secret that few cryptocurrency enthusiasts like to admit: This technology that promised to replace trust in financial institutions and governments with software is just as susceptible to politics and power plays as any other system.
“These dynamics [are] evidence that these are emerging quasi-political systems that are just ill-defined in terms of them having a self-consciousness of their political nature,” says Jesse Posner, a software engineer at Coinbase and former lawyer.
As the two sides engage in posturing akin to a nuclear arms race, the threat that bitcoin could split into two coins is real. Then the question becomes, which will be considered the “real” bitcoin? As venture capitalist and Angel List cofounder Naval Ravikant tweeted, “In a showdown (fork) between Miners and Developers [respectively, the “Democrats” and “Republicans” described above], the more decentralized coin will win. Bitcoin without decentralization is just fiat.”
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Because bitcoin’s most prized quality has been its decentralized nature, it is likely that, between two competing versions of bitcoin, the market will probably support the more decentralized one (leaving aside potential interfering factors, such as whether a centralized chain with greater computing power might attack the more decentralized one to make it difficult to use). But when asked how a user would determine whether power over a coin is centralized or not, Jeff Garzik, chief executive officer and cofounder of enterprise blockchain firm Bloq, says, “It’s incredibly difficult for the average user. You have to dive into the community, figure out who’s working with who, who’s mad at who — all this subjective human-relationship type stuff that doesn’t tease out into any objective metrics.” The question is whether this is true for all cryptocurrencies or just bitcoin.
As this impasse in digital gold continues to play out in competing censored Reddit forums, disparaging comments on Twitter and alleged social media troll campaigns masterminded from secret “dragon’s den” Slack channels, other, perhaps better-architected, assets could and are picking up new investors and users. Bitcoin’s percentage of the total market capitalization of all coins has dropped over four years from 90+% to about 67%, and new cryptocurrency-focused hedge funds are spreading out their investments across the space. Coinbase, one of the biggest cryptocurrency startups, based its new product on another network, Ethereum, not bitcoin, citing bitcoin’s stalemate-induced high transaction fees. And an up-and-coming project, Storj, is also switching from the bitcoin blockchain to Ethereum’s due to bitcoin’s high fees and delays. A few bitcoin-like systems with built-in mechanisms for resolving conflicts like the current impasse in bitcoin, such as Tezos, Decred and Cosmos, have launched or will be launching later this year. While it remains to be seen how well they manage divisions within the community, if they and other networks like Ethereum, whose founder is still around to lead the community (bitcoin's unknown founder left years ago), prove able to grow and not stagnate, bitcoin’s first-mover advantage could evaporate.
Why Centralization Is The Worst Type of Network Attack
One of the biggest advantages of bitcoin is its decentralized, or leaderless, quality, which is why centralization of bitcoin is the community’s greatest fear. The three main types of network attacks are confidentiality, availability and integrity, according to bitcoin developer Andrew DeSantis. Let’s say you were buying a candy bar. If someone was alerted that you had bought one and then mugged you to steal it, that would be an attack based on a breach of confidentiality. This would be like someone knowing you have bitcoin and managing to steal your bitcoin by getting ahold of your private keys or the password to your Coinbase account. If someone instead ran a truck into the store where you intended to purchase your candy bar, then that would make the candy bar unavailable and count as an attack on availability. This would be like someone engaging in a denial-of-service attack that takes down Coinbase’s servers or anything that limits access to any type of bitcoin wallet.
“But integrity is the scary one — if you bite into the candy bar and it’s been poisoned, you die,” says DeSantis. This is the fear that power over bitcoin, the supposedly decentralized, leaderless currency, could in fact become centralized or controlled by a few, and that people would use it thinking it was decentralized, not knowing it wasn’t.
It was this fear (explained in a tweet storm by DeSantis) that, a month ago, set off panic in the bitcoin world. The gist was a group of miners and developers calling themselves Bitcoin Unlimited who want to increase the cap on the size of transactions that the network can process at any given moment (as opposed to making the network more efficient to allow more transactions through under the same cap, which is 1MB) could soon begin to control the majority of the hashing power on the network. Combined with the fact that they own bitcoin.com and btc.com, the community panicked that they would be able to create a second version of bitcoin with their computing power and then convince the world that their version was the true bitcoin using these domain names. “It would be no different from the old banking system but instead of being powered by high-frequency traders in New York City, it would be powered by high energy-consuming miners in China,” DeSantis says.
Types of Centralization
While centralization is the scariest type of “attack” on bitcoin, what makes it hard to avoid is that there are several types of centralization, and shifting away from one type can lead the network closer to another.
In mining centralization, (broadly, the scenario outlined in DeSantis’s tweet storm) the entity that controlled bitcoin’s mining power could both undo and prevent transactions on the network. As Garzik says, miners “[have] an incredible amount of power over users in network, selecting which transactions are and are not going to be on the blockchain.” In general, the potential for mining centralization in bitcoin is greater than in other networks because it is easier to create specialized hardware to mine bitcoin. In contrast, a new cryptocurrency with privacy features called Zcash purposely made different technical choices to “make it more difficult to optimize hardware for it,” says its creator, Zooko Wilcox. “For now, that’s succeeded in making Zcash mining available to hobbyists or startups” — as opposed to bitcoin’s big mining companies. However, one mitigating factor to mining centralization in bitcoin is that any entity that controlled mining would likely be limited to wreaking havoc on recent transactions. And according to bitcoinity, over time, the bitcoin network has actually seen a greater number of smaller miners and less concentration. In the scenario painted in DeSantis’s tweet storm, mining centralization comes less from one miner and more from one especially large bitcoin mining manufacturer (which also runs a large mining pool) swaying other miners.
In developer centralization, the controlling developers will have an undue influence over the design of the protocol, presumably in some fashion that will benefit them. For instance, some say the core developers have become centralized to include only those who are against raising the 1MB limit and that a few of them are motivated by the fact that they work for a startup in the space, Blockstream, which is developing technology that could profit more if blocks remain small. “That’s where bitcoin is now — you have certain people proposing consensus rules that are passing through that [decentralized] developer filter, and then people who propose consensus rules that are outside that developer filter — their proposals get attacked, shot down and censored,” says Garzik, who also called Blockstream’s involvement in the core team, “the hugest conflict of interest in our industry” though he chooses to assume that their developers on the Core team aren’t acting in their company’s interest. Over the last few years, several high-profile developers who supported raising the block size (including Garzik) left bitcoin, and supporters of bigger blocks have been censored on the main bitcoin Reddit forum. They hang out at r/btc, which is nearly opposite in substance and tenor from r/bitcoin.
However, Core developer Lombrozo says developer centralization isn’t even possible in an open source project that anyone can join and that the reason developers who supported bigger blocks were driven out or left the Core team was that they didn’t amass enough support to become the dominant version of bitcoin. “Any one of these projects could have been the one that took over, but the market didn’t accept them,” he says. As for the accusations about Blockstream’s profit motive, he calls it “bullshit,” and notes that, of the three authors of the Core proposal that would make the network more efficient but keep the cap small, he says only one works for Blockstream. He and the other author cannot profit in any way from small blocks.
A third type of centralization that community members worry about is market centralization, which is starting to happen. As bitcoin remains unable to resolve the question of how to meet higher demand for transactions, fees have risen as transactions compete for the non-increasing network capacity (averaging 87 cents over the past month as opposed to 11 cents last April-May). “From a market economic standpoint, that pushes users off decentralized networks and onto centralized websites,” says Garzik, noting that companies such as Coinbase, Blockchain or 21, can mitigate those fees for users. There’s also been a backlog of transactions, making the network unusable for a project like Storj, which cited both the high fees and hours- or days-long delays in its decision to move to Ethereum. But shunting transactions off a peer-to-peer network onto company systems defeats the purpose. It makes bitcoin no different from Visa, SWIFT, Western Union or Paypal.
That’s why, with the developers in the role of game designers according to the game theory of bitcoin, their actions can have economic consequences. “[Bitcoin has] matured to the point where a technical decision has economic ramifications and picks winners and losers,” says Garzik. “Therefore a dev is getting close to a policy maker.”
However, because of the desire to keep bitcoin decentralized, the developers themselves disavow this role. When asked if the core devs are aware they are effectively policy makers, Lombrozo says, “Not at all. Actually, quite the contrary. We just propose ideas and see if the ecosystem adopts them or not.” Noting that their proposal requires 95% support before it goes into effect so the developers aren’t the decision makers, he says, “We’re trying as hard as possible to make sure as many players in the ecosystem are willing to adopt it as possible.”
Where This Is All Headed
In the game theory of bitcoin, the third group, the users, are actually in control of the game. Theoretically, they should decide between the small blocks vs. bigger blocks paths (or two additional proposals that offer different ways of achieving the same compromise), but there is no clear way for them to express a preference, short of the network splitting into different coins and the market then awarding the winner. Some people in the community have suggested futures contracts as a way to discern user sentiment, but there are questions of getting everyone to participate, how to prevent non-users from participating, the outsized influence of the wealthy, and other issues. The community is also discussing what is called a user-activated soft fork, but that would require coordinated action from the disparate community of users and so is challenging from a social perspective.
That leads to the next question: Is this type of impasse particular to bitcoin? Would things have devolved to this point if its founder was still involved or if it had a mechanism for governance within the protocol?
Emin Gun Sirer, a Cornell professor who studies distributed systems and is co-director of the Initiative for Cryptocurrencies and Contracts (an an advisor to Tezos), believes bitcoin could get past these impasses but that the actors in the system have chosen to get political. “What’s really wrong is the divergence from science into rhetoric and politics,” he says. “Had we stuck to first principles, had we evaluated system design decisions based on scientific needs, we would have a process.” Instead, Sirer, who often finds himself defending his positions against Core supporters like the people who have been censored from r/bitcoin, says, “One side has hired a gigantic noise-making machine, these trolls and shills and attack dogs. So every time you say, let’s do this better, the trolls and attack dogs come out.”
Garzik believes the reason for the impasse in bitcoin is simply that it has become so valuable (currently around $1,200 per coin). For instance, Ethereum, which has also seen major conflict but not ended up in such a drawn-out stalemate, has been able to move on not simply because its founder is still active in the project but because it’s not yet as valuable as bitcoin. “There’s always been this young adults phase of the protocol,” he says, during which early bugs are fixed and security tightened to defend against attacks. “After that phase, as it becomes larger and larger, it’s tougher and tougher to make system-wide changes, and that’s where bitcoin is right now.”
However, he does think new networks will learn from bitcoin’s mistakes to make a better system. While there’s a lot of buzz around upcoming networks like Tezos and Cosmos that have governance mechanisms built-in — a system for promoting changes to the network and having token holders vote on which they’d like to incorporate — it remains to be seen whether this feature has its own unintended negative consequences, such as unpredictability for developers who want to build on the system, or power being concentrated in the hands of a few wealthy token holders. But perhaps those systems could then be improved upon.
“People are going to keep developing new systems and keep trying to get to better governance and a better maturity of the political dimension of what these things are over time. Eventually, a blockchain will emerge that has an extremely coherent political and legal system and ideology that grounds it,” says Posner, the former lawyer and current Coinbase software engineer.
In the meantime, Sirer says, “The popcorn will be amazing.”
