The Bitcoin economy is changing

The author of this article is Jeff Garzik and Gavin Andresen, the core developers of Bitcoin. The original title of this article is Bitcoin is Being Hot-Wired for Settlement. It is aimed at the recent expansion roadmap of the Bitcoin system. The article is to the effect that the development of Bitcoin has deviated from the direction and is being converted into a settlement system. This article is compiled by ZhenFund. The following content is only personal opinion and does not represent the official position of Bloq, MIT, ZhenFund or any other organization or group.

The proposed roadmap1 that is currently being discussed widely in the Bitcoin community has some good points, such as it does plan to accommodate more transactions. However, it fails to communicate this directly and clearly to Bitcoin users, nor does it acknowledge the drawbacks. The most relevant part of the entire roadmap summary to Bitcoin users is:

Bitcoin is preparing to adopt a new economic policy that could see higher fees.

Meanwhile, the core block size has not changed — we have not seen any compromise on this issue. Transaction volume has doubled over the past year. Given the continued growth in transaction volume, being stuck with Bitcoin’s 1M block size limit has resulted in higher fees and significant economic changes, while also carrying the increased political risk of choosing an accidentally created economic policy tool.

Changes by design

Higher transaction fees and a reshaped transaction fee market that will impact all Bitcoin users are only mentioned obliquely in paragraph 18 of the roadmap:

“These proposals will help [...] prevent miners from disrupting the transaction fee market and ultimately improve security.”

In the fourth paragraph of another BIP2 drafted by the same developer, it is mentioned:

Prominent developers believe it is necessary to change Bitcoin to a different economic system with “healthy” competition for block space. Today, in the field, this is achieved by maintaining the core block size to cope with the growth of transaction volume - a result that developers have reached consensus and have chosen to continue in the roadmap.

In an optimal, transparent, open source environment, we should have a BIP that covers the changes to the Bitcoin economy towards a "healthy transaction fee market". In this BIP, we should analyze the risks of the change from a technical, economic, hard fork, etc. perspective. But currently, no one has done this.

We should also draft another related BIP, describing all the basic requirements for a full node, including RAM, CPU processing, storage, network upload bandwidth, etc., based on experimental results on platforms like planet-lab.org rather than simulations. This will help us quantify how many nodes are needed to ensure that information propagates fast enough to maintain a decentralized global consensus on Bitcoin under a given block size.

How Satoshi Nakamoto circumvented the “visible hand”

The core block size, fixed at 1M, turns the historic DoS limit into an unexpected policy tool. Satoshi added the 1M consensus limit in 2010, and at the time he intentionally set it above the range of free market transaction fees. This artificial cap is contrary to network DoS and increases the cost of attack. Setting the limit above the range of free market fees creates a safety limit that reasonably avoids political influence.

Satoshi Nakamoto also described the update process in 2010.

As the average block size approaches the 1M limit, the game theory changes. This accidental, artificial 1M limit becomes a “visible hand” in the market. Competition occurs not only in the fight for block space, but also in the process of gaining developer consensus, because in this new economic system, the ability to freeze or remove the 1M limit has created a new system that gives people - rather than the direct effects of the free market - too much power.

Whether intentionally or not, Satoshi designed a functioning free market and pushed the control of the “visible hand” out for many years by setting a transaction fee limit far above the free market range. This limit existed for a long time as a DoS limit, increasing the cost of attack exponentially while allowing the free market equilibrium range to gradually establish itself.

The block size debate has ultimately become a contest between competing economic and systemic survival theories. One theory holds that the free market exists because of the block size and does not require a hard limit. The other theory holds that a hard limit is needed to effectively constrain the free market. The stagnation in core block size development has ultimately led the former to the latter, an area that has never been explored by Bitcoin.

A full system upgrade to avoid a full system upgrade

The above issues have caused a lot of confusion among Bitcoin users and the market: from 2010 until the "Scaling Bitcoin" Montreal workshop, discussions indicated that the core block size might increase. However, after the "Scaling Bitcoin" Hong Kong workshop, the roadmap direction changed dramatically and turned sharply to "Segregated Witness" (SW).

The role of SW is to avoid ecosystem-wide hard forks by upgrading Bitcoin transactions, blocks, addresses, scripts, full nodes, miners, wallets, browsers, libraries, and APIs. All of this is to partially relieve the pressure on the core block under the premise that users will update - based on current usage, if 100% is updated, the size can be increased to 1.6M.

The rollout of SW will require significant changes to the software to maintain current functionality as transaction volume increases. SW will complicate the Bitcoin economy by splitting a “block” into two economic resources in a group — core blocks and extension blocks. Each of these two blocks has its own unique price incentive mechanism and (substantially overlapping) set of actors.

In contrast, increasing the core block size is compatible with existing Bitcoin software; some wallets can even be seamlessly connected without any changes. In terms of the total number and scope, the changes to wallets, databases, libraries, etc. are also minimal. The real obstacle is the hard fork itself.

One of the stated goals of the Scaling Bitcoin workshop was to direct the chaotic debate about the core block size toward an orderly decision process. Unfortunately, this did not happen. In hindsight, the Scaling Bitcoin workshop actually hindered the progress of the block size decision, while transaction fee prices and block space pressure continued to rise. Scaling Bitcoin was still useful in investigating people's consensus on the core block size, and 2M seems to be the size that currently meets the most consensus.

Skip the tough questions before it’s too late

This roadmap skips the following short-term issues:

When will transaction fees become too high?

So, what is the process of changing the core block size like?

Why do we need high transaction fees at this early stage in Bitcoin’s life?

Fixed core block sizes give humans the tools to manipulate economic policy, as opposed to automated software systems. Humans — not free markets — decide based on subjective opinion what is a “healthy” level of transaction fees, how much miners should earn, and what the relative expense of Bitcoin transactions should be.

Users are concerned that this roadmap and new economic direction will tilt in the other direction: transforming Bitcoin from a P2P cash payment network to a payment system that relies on some undeveloped technology, such as sidechains or payment channels, which may drive away businesses and commercial choices that were attracted to the original Bitcoin vision of "P2P electronic cash". As the RootStock White Paper states:

“If the Bitcoin block size is not increased via a hard fork, when the next Bitcoin halving occurs, Bitcoin transaction fees may become prohibitively expensive for some applications.”

Perhaps this is inevitable. However, in the short term, the current situation is still disappointing: a small consensus of developers is out of step with the often-cited demands of users, businesses, transactions, and miners to increase the block size. This reshapes Bitcoin in a way that is full of philosophical and economic conflicts of interest. As mentioned in this article, inaction is changing Bitcoin and pushing it onto a new path of development.

The way forward

Bitcoin is not an academic science project. Stagnation on tough problems directly causes real market changes. Few people have the luxury of waiting for new payment layers to emerge beyond the settlement layer that Bitcoin-1 is developing.

Limited by the 1M size of Bitcoin blocks, there is a risk of reversing Bitcoin’s network effects, and users may be forced to exit the core blockchain due to high prices and turn to centralized platforms.

A better path forward would be to take the lead in driving decisive near-term core block size decisions, and to engage in candid conversations with users about exploring new theories of fee market economics, new theories of system survival, and the risks and potential negative consequences of getting stuck on IM limits.

Solutions to the core block size and edge cases for verification transaction fees are the top priorities that need to be addressed. One of the positive outcomes of the “Scaling Bitcoin” meeting was that a consensus was reached on 2M (the feasibility of the block size) under the premise that some verification DoS issues can be fixed. “Segregated Witness” (SW) can also be advanced simultaneously - although this change may not be easy and may not necessarily alleviate the various economic problems described above.

Finally, to eliminate long-term moral hazard, (we believe) the core block size limit should be made dynamic and managed by software rather than by humans.

Bitcoin needs a roadmap that balances the needs of everyone who has worked hard over the past six years to develop the ecosystem.

Refers to the document [bitcoin-dev] Capacityincreases for the Bitcoin system, published by Gregory Maxwell on December 7, 2015, following the "Scaling Bitcoin" seminar in Hong Kong.

Translator's note: Bitcoin Improvement Protocol refers to the document released by Pieter Wuille on GitHub Gist on July 21, 2015.

Refers to the document published by Jeff Garzik on December 16, 2015 titled [bitcoin-dev] Block size: It's economics & user preparation& moral hazard.

Source: Tencent