Bitcoin has repeatedly hit new highs. What is its core value?

Author | Hasu

In his article “Bitcoin’s Existential Crisis”, Nic Carter describes Bitcoin’s inherent identity problem. Because no one has the power to give decentralized systems an identity, they rely on consensus around a set of core practical values.

You can think of these core values ​​as a consensus among all those who own Bitcoin, and I attempted to formalize them in Decoding Bitcoin’s Social Contract — but be aware that any such attempt is necessarily highly subjective.

When people disagree about what Bitcoin is or should be, it affects the real world in two different ways. First, there is an unspoken rule that the protocol will not be updated if almost all of the important stakeholders are happy with the proposal. It is impossible for any major proposal to be passed unanimously when people disagree about fundamental principles. We call this kind of protocol "protocol ossification," and most people today seem to be fine with it because: (1) Bitcoin doesn't really need to change much from here; and (2) this resistance to change is seen as a valuable property that makes it different from centralized systems of the past.

But there is also the risk that some external event occurs that requires Bitcoin to change, whether in response to an attack or bug, or because it fails to update to the market. In this case, the same governance deadlock can quickly become an existential problem as the community splits into opposing sides.

Standoff situations can go on for a while, but eventually they reach a tipping point. This is true in Bitcoin with the collision of “Bitcoin is a means of payment” vs. “store of value”, and in Ethereum with the collision of “code is law” vs. “social consensus is law”. Both sides have equally credible claims because there is no central party to “settlement” their differences. The only way these conflicts are resolved is through community consensus in a variety of ways, but in some cases a permanent community split.

Perhaps the biggest questions today are how to resolve the incentive issues that a declining block subsidy might bring, and how Bitcoin should preserve privacy in the face of increasing blockchain surveillance. Nic and I tried to illustrate the confrontation between these and other viewpoints in our article “The Vision of Bitcoin.”

As Nic puts it, "systems with more internal consistency and a more generally agreed-upon set of values ​​are more likely to persist." This suggests that the optimal social contract

(1) Have very few rules (to include as many people as possible)

(2) Despite problems with the system, the public remains highly conscious.

In today’s post, I want to go beyond what is currently out there and explore where exactly real Bitcoin users draw the line between each other in terms of core values, where their logic might reveal a potential collision, and what this all means for the future of Bitcoin.

Introduction to this survey

To explore this topic, I used a basic survey to ask my Twitter followers what they believed to be the core value of Bitcoin. The way I framed the question was to ask the opposite question - what change or event would make Bitcoin no longer Bitcoin for them? The idea here is that users would be troubled enough to sell their coins and leave the project.

All questions can be grouped into five main topics:

Censorship resistance

Third Party

Monetary inflation

Settlement guarantee

Means and Ends (more on that later)

Censorship resistance

(When your protocol is censored, is Bitcoin the same as before?)

(Is Bitcoin the same when others’ protocol levels are censored?)

The first topic I asked about was censorship resistance, which has always been a core part of Bitcoin’s social contract. And indeed, the results were as I expected. People really value censorship resistance, both for themselves and others, in ways that may seem irrational to an outside observer. After all, people don’t stop using PayPal because it removes legal arms dealers or political dissidents, nor do they stop using Twitter because it censors many conservative media organizations or politicians.

This only goes to show that Bitcoin actually has a social contract, and if censorship occurs in Bitcoin, people feel more violated than in other systems, because in other systems, people may have come to expect censorship even if they themselves are not affected.

In fact, Bitcoin is designed to make censorship very unattractive, because if one miner doesn't include your transaction, the next miner might, and therefore they'll make more money in the long run. Unless a miner (or coalition) controls more than half of the network and can't include some blocks. It can also work with less than half of the network if the attacker can credibly intimidate other miners from publicly blacklisting transactions or addresses (see "Feather Fork").

The fact that users have indicated they will not accept others being blocked is important if the counter-threat makes it unprofitable for miners to follow the Feather fork. It is also a rebuttal to the popular argument that only transaction fees, not the block subsidy, can protect Bitcoin from censorship, since attackers will also lose business from non-censoring parties.

Third Party

If censoring people using Bitcoin, there could really only be two ways. 1) Miners at the consensus layer, and 2) trusted intermediaries at the application layer.

Bitcoin is often said to remove the so-called trusted third party, but this only applies when users interact with Bitcoin directly. If most activity happens through a trusted third party, we can see the same encapsulation of a trustless base asset in a trusted wrapper, ultimately leading to a failure of the decentralization principle. For a thought experiment on why third parties are a big risk in Bitcoin, see Why Bitcoin May Not Survive Under the Bitcoin Standard.

(If L1 and any trustless L2 are unaffordable to you and the only option is to connect through traditional banks, then what is Bitcoin still Bitcoin?)

Given the weakness Bitcoiners point out, I expected tolerance for a fully centralized Bitcoin to be low. But alas, I was surprised at how many people agreed with this. Maybe they are just pragmatic, because Bitcoin can really only support so many base layer and LN transactions, and then the higher fees are not friendly to small transactions.

That being said, there are good reasons to suggest that concerns about Bitcoin centralization may be overblown, and that Bitcoin may perform better than gold because it has unique advantages. Because Bitcoin is a digital bearer asset, anyone anywhere in the world can create a new Bitcoin bank, not necessarily subject to local regulations. And why intermediaries will still be trusted, there will be more competition between them, putting customers in a better position than if regulation protected incumbents from disruption. Because Bitcoin can be transferred so easily, it will also make it easier for customers to switch between different intermediaries, further reducing exit costs.

Despite widespread skepticism toward other non-Bitcoin blockchains, Bitcoin users also seem to appreciate the benefits that blockchain brings in terms of transparency and efficiency compared to the black box of traditional banking.

(If more than 90% of tokens are tokenized in a public blockchain, is Bitcoin still Bitcoin?)

I think this trend is likely to continue as we see different trust models, from completely trustless (TBTC) to secured by a majority of hash power (Drivechain) to secured by a consortium (Liquid) to secured by a single custodian (BitGo), for users to choose from.

Monetary inflation

Asking my friends on Twitter about Bitcoin inflation always gets a lot of attention, so I thought this dislike for inflation would be reflected in the responses, but I was quite surprised by the results.

I asked about "accidental inflation" first...

(If a bug inflates the current supply by 1 million BTC, and there is no reasonable way to revert to the chain, is Bitcoin still Bitcoin?)

Secondly, there is the often-proposed artificial inflation, which can be used to pay miners if L1 fee revenue is insufficient.

(0.1% perpetual inflation, is Bitcoin still Bitcoin?)

It seems that if it is occasional inflation - even a large inflation (total supply +1m!), many people are willing to accept it, but they are far from tolerating artificial inflation.

This is worth discussing because it may seem irrational at first. At a monetary inflation rate of 0.1%, it would take 48 years to create the same 1 million BTC, yet more people would rather reject a version of Bitcoin with a little tail inflation than accept a version that has the same 1 million BTC immediately. Even though tail inflation would make Bitcoin more secure, while unexpected inflation would not!

We know that many people in Bitcoin value scarcity and the 21 million Bitcoin cap very much, but it seems that they are also pragmatic. If a bug inflates the supply, the damage is already done, and - assuming the bug is fixed - it does not necessarily make another inflation bug more likely. And if we deliberately agree to inflation, it may feel more like a betrayal of core values ​​than a mistake in execution.

One thing that always annoys me is people's fixation on monetary inflation, rather than price inflation. The first is the increase in the supply of Bitcoin, and the second is the decrease in the purchasing power of Bitcoin. The reason why this seems so short-sighted is that supply inflation ignores half of the market - the demand side of Bitcoin! Both of these reasons are aimed at meeting the demand for Bitcoin.

Here is a simple thought experiment. If only supply inflation is needed to be optimized, we can change the protocol and stop issuing more coins starting tomorrow. But the purpose of Satoshi’s issuance schedule is not simply to limit supply inflation, but to

1) Give more people the opportunity to buy or mine Bitcoin,

2) Before the block space market matures, give miners an incentive to maintain the security of the network.

Bitcoin without the block subsidy is unsafe today, and its price is likely to be shaken by this insecurity. This in itself proves that supply inflation has a positive effect on price, and thus on the purchasing power of holders. It just depends on how much the market values ​​sustainability and long-term predictability.

As a rebuttal to my own paper, I want to cite Nic's paper again, that the social contract should be as simple and consistent as possible. "We should optimize the price of Bitcoin" is how most people actually behave, but this is much more abstract and subjective than "we should have no supply inflation in Bitcoin". So, perhaps in practice, the best approach is to tend towards limiting supply inflation, rather than the less accurate and useful more objective and verifiable option of price inflation.

Settlement Guarantee

Moving on to Bitcoin’s settlement guarantees, I’m quite interested in the response we’ll get, both because I’ve had a great debate with the Bitcoin community on this topic, and because unlike inflation or censorship, settlement guarantees are something that everyone who transacts with Bitcoin can directly experience.

(If there is no reasonable time to finalize, is Bitcoin still Bitcoin?)

More than half of respondents believe that Bitcoin that takes days to settle is no longer useful. I do think this is a blow to the popular argument that miner rewards can never be too low in the future because users have to wait many blocks for settlement (proposed by Nick Szabo and others). This argument ignores that Bitcoin is in a competitive market, and while it can afford to be less efficient in exchange for greater scarcity and censorship resistance, there is a limit to how much it can go wrong.

That is, more people chose uncertain than any other question, indicating that uncertainty is high.

(If some users are occasionally attacked by double spending, is Bitcoin still Bitcoin?)

About half of the respondents consider double spend attacks to be a serious problem, which makes sense in a system that values ​​property rights above all else. But if we think about it, double spend attacks are basically like a bounced check or a reversal of a credit card transaction. If someone's credit card transaction gets bounced, does that mean the system is useless, especially since users themselves are rarely victims, only exchanges and large merchants are?

Perhaps the same logic we discussed in the context of censorship resistance applies equally here, where — unlike with credit cards — Bitcoin transactions are intended to be “final” and thus any violation feels more like an attack on the system as a whole.

Nonetheless, the other half of the respondents would continue to use Bitcoin even with the occasional double spend attack, which I think is a healthier attitude if Bitcoin users want to be absolutely safe from such attacks, then this means:

They will have to spend more on security rather than accept Bitcoin that is occasionally double-spendable. Depending on how the blockspace market develops, this view may eventually conflict with the "no inflation" view, in which case one of them will have to lose and there may be a community split. If we want to prevent this, relaxing your standards and supporting a "lesser evil" can sometimes help a lot.

Users need to be prepared to socially coordinate to reject more attackers. Doing this in an effective way requires building procedures and hierarchies (think: leadership) that make the system less socially scalable.

In summary, I think user preferences for fast and reliable settlement and preference for no monetary inflation are most likely to conflict.

Means and Ends

At the end of the questionnaire, I intentionally asked about other aspects of Bitcoin that were not tied to the core value of Bitcoin. The goal here was to see if people could identify the difference between the ends — our goals for Bitcoin as a system — and the mechanisms (the means) to achieve those ends.

(If there is no proof of work, is Bitcoin still Bitcoin?)

Perhaps the biggest surprise of the entire survey, almost more people took a stance on "Bitcoin has proof of work" than "Bitcoin has a fixed supply". As I have argued many times before, I view Bitcoin as a set of goals and shared rules, a social contract that we build software to automate. In 2008, Satoshi identified proof of work as a key piece of the puzzle. But that doesn't mean proof of work itself is one of these goals or core values ​​of Bitcoin.

Source: Interpreting Bitcoin’s Social Contract

Instead, Proof of Work is a mechanism that achieves two specific goals.

Trustless distributed time ledger

Initial distribution of coins in a fair and trustless manner

If there were any other mechanism that succeeded in achieving these goals better and stood the test of fire like PoW, or if PoW was found to have major vulnerabilities, then I would not be opposed to replacing it. But perhaps it is not surprising that the community's stance on the PoW mechanism is much stronger than any other mechanism because - as more and more PoS (Proof of Stake) networks come online, people don't want to give the enemy any reason here."

To be clear, I don’t think there’s anything to be afraid of in Bitcoin. Purely and fundamentally, Bitcoin has nothing to fear from PoS coins, but the arguments in favor of PoS (greener, no risk from China, attackers can be identified and punished) are powerful, and I think most Bitcoin players pay attention to this, at least subconsciously.

(Is Bitcoin still Bitcoin without the current 2.3MB block size limit?)

(If there is no current core development team, is Bitcoin still Bitcoin?)

As for the other two questions, everyone's answers were more in line with my expectations. Everyone agreed that the current block size limit or the current core development team itself is not a "means", but an "end" to implement the core value of Bitcoin into the technical protocol.

For example, the block size limit is to ensure that Bitcoin remains affordable for full nodes to use, who must verify the entire history of the blockchain and then stay in sync with all incoming blocks. Additionally, as the block subsidy decreases, it is also important to ensure that block space remains scarce, so that user transaction demand results in sufficient fee income for miners.

Bitcoin’s Veto-style Governance

What I really want to point out is that for every question there are a lot of people who clearly say "this is not Bitcoin to me". On the one hand, this confirms that we have indeed correctly identified the core value of Bitcoin. On the other hand, this also explains why

There is very little progress on Bitcoin’s protocol development (it’s too hard to reach consensus on anything).

It is difficult to introduce potentially dangerous changes into Bitcoin. The latter makes Bitcoin very reliable for businesses and developers to build on top of it.

Source: Twitter

Of course, the answers here don’t necessarily speak to how anyone will vote with their wallet in the end, and I suspect — more than anything else, Bitcoiners who stick with BTC in the scaling wars care about reaching consensus with as many others as possible to protect Bitcoin’s network effects.

If you’re like me, you might think that we should be discussing options like security taxes or supply inflation today to protect the long-term sustainability of Bitcoin — while holding off on them until they prove to be a problem, of course. But even if that’s not communicated anywhere, I think most people’s initial reaction to such discussions is that they see them as a slippery slope.

The idea behind a slippery slope is that a chain of events that are harmless in themselves could lead to something that is ultimately very bad, such as the slow erosion of Bitcoin’s inflation-resistant value. To prevent a slippery slope from happening, Bitcoiners created the Schelling Fence — a concept that actually does a pretty good job of explaining what we’re seeing today.

On Schelling Barriers and Social Signaling

Schelling Fences (originally coined by Scott Alexander) are credible pre-commitments that people make to defend a Schelling view - almost like a binding contract with themselves. Perhaps the best example most of us will be familiar with is not smoking your first cigarette because you don't know how it will affect you.

Going back to the inflation example, the slippery slope argument is that if we normalize the idea of ​​0.01% tail inflation today, we might eventually also accept the idea of ​​0.02% tail inflation, and so on, until Bitcoin becomes indistinguishable from money. Because we can’t trust our future selves, we commit to never even considering the idea of ​​inflation.

These pre-commitments were created as a first line of defense against negative changes to Bitcoin, but there is much more to it than that.

Users continually signal their pre-commitments to other Bitcoin users, both to verify that they are still on the right track and to reinforce shared commitments with the rest of the tribe.

In an attack or other adverse event, what matters is that everyone has "walked the talk" because they have made a pre-commitment to the values ​​they will defend and how they will defend them.

There is tremendous value in making this intangible pre-commitment tangible for newcomers. The more people who are less familiar with Bitcoin’s lore and history can trust that the existing community is wholeheartedly defending the core protocol values ​​of Bitcoin, the more secure they can be in holding and using Bitcoin.

Notes on this analysis

I would be remiss if I did not mention the several caveats inherent to any such "social science" experiment.

Analysis like the one I’m doing today is highly subjective and should not be viewed as representing the diverse views of the Bitcoin community, most of whom are not my Twitter followers.

The problem with polling current holders is that if usage does pick up, they are a minority of future users who may hold very different views on what Bitcoin should do and Schelling's fence. It's like saying that all the strong libertarian-leaning people in the world have already joined Bitcoin, so the followers who join Bitcoin tomorrow will inevitably be less and less focused on the ideology of Bitcoin's value and more focused on Bitcoin's daily use value.

While people can be allergic to intentionalism, Satoshi left us a lot of “originalist” literature on what he wanted Bitcoin’s social contract to be. Whether Bitcoin users stick with Satoshi’s plan is another matter, but the intention of its creator is at least a strong natural Schelling point.

Bitcoin is not a democracy, and the majority vote does not matter. Ultimately, most of us are here because we believe that free markets can produce better value than governments. Most of us are not smarter than the market, and ultimately we have to listen to what the market tells us. So if we do end up with a conflict of two mutually exclusive core values ​​in Bitcoin, I would imagine that the majority will continue to coexist with what the market deems most valuable (e.g. in the form of forked futures or prediction markets), and use that as their own view.