Thursday, September 14, 2017

The Real Bitcoin - It Is A Matter Of Trust !

As human beings we place value on our possessions, our feelings, our relationships. To measure, transfer and store this value, we invented money. However, every iteration of money through the ages, from shells to paper fiat, have depended on trust. This trust on physical items or trusted parties have been and will always be compromised and/or betrayed.

On January 3rd 2009, Satoshi Nakamoto, gifted us Bitcoin, and it turned out to be the most perfect form of money ever invented. It is completely trustless, with built in checks and balances, so that no faction can successfully capture the system.

a) The protocol pays for itself, with predictable issuance of new coins and transaction fees which miners fight to win through a brutally competitive proof of work mechanism.

b) Developers maintain and improve different implementations of the protocol with different properties that their followers find useful, which they can then profit from.

c) Users give Bitcoin its' value, build and support the infrastructure to measure, transfer and store this value.

The system is trustless and perfect, and because it is trustless, different groups invariably strive to introduce trust for their own purposes.

Protocol Capture

The first and smallest group are the developers. They are the gurus, the gatekeepers and they will attempt to make theirs the only gate through which everyone must pass. To do this they will use every means of control including persuasion, threats, misinformation and censorship. This in itself is not bad and to be expected. However if a developer group becomes too powerful and tyrannical, users and miners and other developers will bypass them.

The second group are the miners. They strive to accumulate as much mining power as possible but are constrained by the fact that if they gain too much power, Bitcoin becomes less valuable. However, before that can even happen the developers and users will curtail their power.

The system is immune to coercion from all unfriendly entities including governments.

The mechanism by which the system corrects and protects itself is the Hardfork.

Hardforks and Softforks

Softforks are an integral part of the system. It is a simple, noiseless and non consensual way to introduce changes into the protocol. However if the process is pushed too far by introducing unwanted and unacceptable changes that users reject, the system corrects itself with a Hardfork.

A hardfork presents a decision point to the users, which is all of us including miners and developers. It is a noisy process but the result is that the fork that users want to use becomes The Real Bitcoin, because it is we the users that give Bitcoin its' value.

Centralisation and Decentralisation

Every fraction seeks to introduce some level of centralisation and trust into the system from which they can profit and extract value. There has been much talk against centralisation and campaign for full de-centralisation by the very groups that surreptitiously use centralisation to push their agenda.

Total decentralisation while being the ultimate is not achievable. Good enough decentralisation to keep the system in check will do, and if the system gets out of balance it will be corrected by a Hardfork.

Proof Of Work and Proof Of Stake

It comes down to which system delivers less trust. Proof of work is totally democratic. Anyone can participate. They can choose to mine directly with their own miners or mine in the cloud, and the entry cost of cloud mining is very low indeed. This gives everybody who wishes, a chance to get access to bitcoins by purchasing it or mining for it. Over time bitcoin will be widely distributed.

Proof of Stake on the other hand favors the rich. Only the rich can afford to stake their tokens. Over time this system guarantees that wealth gets concentrated in the hands of a few. Tinkering with the Proof of Stake algorithms only seeks to make the system less subject to being gamed. It can never fix the problem of wealth distribution and concentration of power in the hands of the few.

Proof of stake also removes the third leg of the check and balance process. By removing the miners the system is rigged on the side of wealthy token holders and developers. This is a fundamental weakness that over time, will collapse the system from within.

Bitcoin is not a fraud

A fraudulent system requires trust. Unsuspecting victims are enticed to trust the system, and the fraudsters profit by breaking that trust. Bitcoin is totally trustless. You do not have to trust anybody. Not even Satoshi.

Segwit introduces trust

Bitcoin is a continuous verifiable chain of signatures. Addresses and signatures are always available for verification because a large number of participants will keep the full copy of the blockchain as their businesses depend on it.

With Segwit the signature is separated and there is no requirement for nodes to keep the chain of addresses after verification. This will result in the introduction of trusted super nodes that hold the full signature block.  These trusted super nodes can then extract fees for providing access.


Bitcoin is pseudonymous and not anonymous. This is not desirable but it is something that the authorities can live with. Some users will want transparency, some will want privacy while others will want complete anonymity. Bitcoin can be tailored to fit all users. Total anonymity from the outset will only invite regulatory pressure and slow down the process of bitcoin adoption.

The Real Bitcoin

There can only be one Bitcoin. It is the one that has the most number of users, the most developers, the strongest security, the largest infrastructure, and above all the least trust.


Thursday, September 7, 2017

Segwit1X, Segwit2X or Bitcoin Cash ? Going Forward.

23 May 2017, Barry Silbert, CEO of Digital Currency Group successfully led a consortium of business leaders, to ratify the Hong Kong agreement. This Segwit2X proposal, moved the scaling issue forward. 

The first Segwit2X block will be produced around November 16 and miners will start mining on top of this block. This will inevitably kicking off the next Bitcoin hard fork round with even more drama than the last. The scramble for hashrate will be between Bitcoin Cash, Segwit2X ans Segwit1X.

Segwit2X has 95% miners support, and should be "The Bicoin" after the fork at block 494784. Since f2pool will support Segwit1X, it will at least have15% mining support. However successfully forking a Bitcoin chain is very difficult. It has to survive the Chain Death Spiral and make it to the next 2016 blocks difficulty adjustment. In all probability Segwit1X may hardfork away, if Core can't persuade miners to abandon Segwit2X. 

Core supporters know this and so, from now until 16 November they will be campaigning hard against Segwit2x. The latest release of Core 0.15 nodes does not recognise nodes running btc1. This does not achieve much because just 2 btc1 nodes will be enough for the chain to propagate. This is a "life and death" struggle for control of the main Github repository. If Segwit2X wins it will be BTC1 and if Segwit1X wins it will be Core.

Segwit (1X or 2X)  and Bitcoin Cash - The Next Battle

The final battle for the Bitcoin brand will be between Bitcoin Cash and Bitcoin Segwit. This issue will be settled over which protocol has the better scaling solution. 

Currently the BTC blockchain can handle just under 300,000 transactions a day. In the long run, demand for blockspace is infinite, held back only by transaction fees. Bitcoin Cash and Segwit have different approaches on how to find the ideal fee equilibrium. 

Bitcoin Cash approach is for an unlimited blocksize allowing for free and low fee transactions. The approach is to allow any amount of on chain scaling now while waiting for other scaling technologies to develop and mature with demand and adoption. It is important to realise that Bitcoin Cash does not exclude second layer solutions.

Segwit on the other hand, caps the blocksize and, aims to push users towards second layer solutions immediately, with the objective of molding the BTC blockchain into a settlement layer. Second layer solutions are not yet ready for deployment and even when deployed, there will be a steep learning and adoption curve to overcome. This approach is "putting the cart before the horse".

Maximising Transactions Fee Revenue

Whether a transaction is on-chain or off-chain, it is a Bitcoin transaction. If that transaction takes place off-chain, then the fee paid to the off-chain processor is fees that would have otherwise gone to the miner. The more off-chain transactions there are, the less the miners would have earned. This is where the short term and long term scenarios of the two chains diverge.

The chain that is more useful will have more transactions, and so provide miners with the most profit. This is important in a system where the coinbase reward will be decreasing over time to be replaced by fee revenue.

Maximisation of miners revenue is key. In the short term while transaction volumes are low, Segwit wins with higher fees, but long term as transaction volume grows 100X or even 1000X the fee advantage moves to Bitcoin Cash.

Summary of Points
  1. "The Bitcoin" is just the chain that the industry selects. It is not "the longest chain" as BCH is the longer chain. It may not even be "the most work done". It will be "The BTC" that trades on the exchanges. 
  2. If Segwit2X hardforks and wins, it will be "The Bitcoin". Core will no longer be the main Github repository. It will be btc1.
  3. Most transactions are single payments. To use Lightning you must first send some Btc to the channel. This must be more expensive and complicated for simple payments eg. coffee.
  4. Micro payments channels will generate huge amounts of transactions but they will not add to miners revenue.
  5. Many projects left or were shelved when transaction fees escalated. How many of these projects will return to build on Bitcoin Cash is still to be seen? Yours was one. Another old favorite Satoshi Dice.
  6. Maximising transaction revenue is key to winning the long game and become "The Bitcoin". On this premise Bitcoin Cash has the advantage in the long run.
  7. Segwit addresses are also confusing to users and even more so for newbies. There are 4 possible Segwit address types.
  8. Segwit supporters cannot understand why miners would mine BCH if it is less profitable. Current profitability calculations is based on price at time of mining. Miners may have a different time frame to base prices. If their thinking is for BCH to replace BTC then future returns would be astronomical. 

Related Articles

Till Death Do Us Part - The Partening - Here

Chain Death Spiral - Watch In Real Time - Here

Will the real Bitcoin Please Stand Up - Here

A Tale Of Two Coins - Here

Bitcoin Cash Will Regain The Mantle To Be Bitcoin - Here

Chain Death Spiral - Here