People will always work around the Bitcoin system - a practical problem faced by Bitcoin practitioners due to the block size issue

Posted by Steve Sokolowski on November 16, 2016 at 10:00 AM

As I predicted before the first Republican nominating debate last August, Donald Trump will be elected president. This is not because of Comey's lack of accountability or how Hillary ran her campaign, but because the rulers have completely lost touch with what the average person on the street wants and believes. This is not just a US problem, we will see this problem again when Le Pen is elected president of France and Merkel loses support in Germany. It's not that the rulers are deliberately ignoring public opinion, the fact is that they have no idea what the average person wants.

On the other hand, while Trump is likely to expand executive power for himself, he will actually have little ability to influence people’s daily lives. The ability of people or governments to impose their will on others is declining.

Consider that for most of human history, the huge gap between urban and rural areas made it difficult for rulers to keep people out of their regional control. In the 20th century, technological advances made state power much stronger. Now the military could launch missiles across oceans, and citizens could drive across vast distances in a few days. Government control reached its peak in the 1980s, when every home had a television, but the information transmission system was one-way. It was easy for rulers to pass information and authoritative projects, but it was costly for ordinary people to widely share their opinions.

It was no accident that the Soviet Union collapsed when the Internet arrived. Now, technology gives people tremendous power to influence the world. Anyone can post a live video and promote a massive protest against police violence. People can use cryptocurrency to buy drugs or anything else they want to get around money laundering regulations. In five years, anyone will be able to buy a CRISPR editing kit and develop a virus more deadly than any that currently exists. In fifteen years, anyone will be able to kill large numbers of people with remotely mounted nanomachines without any action. Governments would do well to build defenses against these things. Whether or not those defenses are built, they will no longer have any greater ability to wage war than ordinary people.

Trump’s supporters want him to follow through on his promises, but Trump can’t control the forces he promised to fight. If Trump does enforce any of these regulations, ordinary people will continue to conduct their business the way they want around Trump’s regulations.

In the Bitcoin world, a similar dynamic is at work. The people in charge (Core developers) are very much in favor of the status quo. Those who want to see some block size increase tend to favor SegWit, which won’t solve the block size problem. Gregory Maxwell, Peter Todd, and the rest are convinced that what they’re doing is the best thing for everyone using Bitcoin. Unfortunately, the Core developers don’t understand how the average person uses Bitcoin. Not only that, they don’t understand it for the same reason that politicians don’t understand their constituents – they get caught up in the frothy news feed that’s being fed to them on social media and partisan TV networks. They never take the time to get the other side of the story. (Or, in Bitcoin’s case, the other side is blocked so people don’t see it at all.)

As our business leans towards supporting Ethereum and X11 mining in February, we have begun purchasing computer equipment so that we can set up additional servers to host websites during the Thanksgiving and Christmas holidays. Most of our purchase orders are from retailers that accept Bitcoin, like SSDs purchased from Newegg. We earn Bitcoin as profit, so this business is a classic example of a "closed loop" system that many Bitcoin supporters advocate. They believe that once people get paid in Bitcoin, the Bitcoin economy will explode because there will be no reason to use dollars anymore.

This closed-loop economy is still blindly subjective. When we examine payments, we see that it costs us almost 25 cents to complete a transaction with Bitcoin on Newegg. Many purchases cost around $10. When Chris bought an SSD for the server, they spent around $50. Even for a relatively expensive SSD, the Bitcoin transaction fee adds 0.5% to the cost of the product. With a 3% margin, this means that if we use Bitcoin to pay for business expenses and an average of $50 worth of personal items, such as the copy of Final Fantasy XV that Chris is reordering this week, one-sixth of our profit will be lost to Bitcoin transaction fees.

To reduce losses due to transaction fees, we have a policy of paying in USD, regardless of whether the site accepts Bitcoin or not. We send large batches of currency to GDAX at regular intervals, sell 2 or 3 Bitcoins immediately, and then buy everything we need with USD. This process obviously reduces overhead and increases profits.

In fact, I think we can further reduce costs for customers by programming a complex routing with the Coinbase Bitcoin exchange, rather than paying customers 100 outputs in one transaction, which normally costs $2. One of the tasks I have planned is to send money to Coinbase with one output, and then use their API to issue 100 outputs to Coinbase. Coinbase's policy is to pay transaction fees, so what we are doing in this case is sending money around to people who need it. However, if fees continue to grow to $3, we can save customers $1k/yr, so it is more profitable for me to spend a weekend doing this than to add new features to advance the field.

These are all examples of Core decision makers creating externalities for the crypto business. Just as people now work primarily around government, business now works primarily around Core. Some readers may notice that I am writing more frequently on altcoin topics now, but not as frequently in general. This is because it doesn’t matter what Core does, but if they continue on this path, people like me will only move forward around them.

If the Bitcoin network goes back to the days where it takes 18 hours to confirm a transaction, we will raise the payment limit to $50 and change the software to start keeping our reserves in Ethereum. On the other hand, if the block size increases, then I will start storing all my profits in Bitcoin instead of selling them and using them for payments. In the end, it doesn't matter, Core can't force the change on me or anyone else, so we personally won't suffer this misfortune.

The same influence works in both the real world and Bitcoin, and in both cases, the only ones truly affected are those who rule. In the real world, people can vote for new leaders, which means that not engaging with those who belong to the old system means losing “power”. In the cryptocurrency world, users don’t vote – but lose touch with the Core developers, miners and people who invest in Bitcoin have seen their profits dwindle as people like us avoid the system’s transaction fees by providing continuous selling pressure.

The end result is a game of musical chairs, with out-of-touch leaders jockeying for positions of less and less influence. In both cases, ordinary people will continue to work around the system, just as they always have. High tariffs? We will simply do business in a different sector, or leave the country entirely and set up shop somewhere with lower tariffs. High transaction fees? We simply move to another sector or exit the system entirely and use dollars instead.

I suspect that larger businesses than us have implemented solutions to resolve the block size dispute due to the limitations imposed by Core's incompetence. Perhaps the slow progress and reduced investment can be explained by resources being diverted to implementing solutions rather than improving the technology. More and more of these economic solutions are coming online every day, while users of the crypto-economy continue to reallocate resources, develop altcoins, use dollars, and figure out other ways to grow and prosper despite being in the dark about management.