Jeff Garzik and Gavin Andresen: Bitcoin economics is shifting

Editor’s note: The original author is Bitcoin core developers Jeff Garzik and Gavin Andresen. This article is about the recent Bitcoin system expansion roadmap. The original title is Bitcoin is Being Hot-Wired for Settlement, which roughly means that Bitcoin’s development has deviated from the direction. The following views only represent the original author’s personal views and do not represent the official position of BLOQ, MIT or any other organization or group.

The expansion roadmap proposed by the Bitcoin development community does have some good points, and it can enable the Bitcoin system to accommodate more transactions, but the roadmap does not frankly tell Bitcoin users about its key shortcomings. In summary, the most relevant aspects of the entire roadmap to Bitcoin users are:

Bitcoin is moving to a new economic policy that may result in higher fees.

The Bitcoin Core blocksize has not changed, and there has been no compromise on this issue (roadmap). We face rising transaction volumes (which have doubled over the past year), and if blocksize remains stuck at 1M, which will lead to higher fees, Bitcoin economics will change significantly, and we will face increased political risk by embracing an accidentally created economic policy tool.

Change by design

High fees and a reshaping of the entire fee market, which will affect all Bitcoin users, are only indirectly mentioned in paragraph 18 of the roadmap:

“These proposals help […] stop miners from subtly subverting the fee market, and ultimately funds will be safe.”

In the middle of paragraph 4, another BIP from the same developer (Pieter Wuille):

“It is healthy for the fee market to evolve and the ecosystem to evolve in a way that is able to handle blockspace competition. [...] However, such a change should be driven by the evolution of the technology and not by fear of changing economics.”

Notably, developers believe it is necessary to switch Bitcoin to a different economic system that would allow for “healthy” competition in block space.

In an optimal, transparent, open-source environment, a Bitcoin Improvement Proposal (BIP) would have been created that covered a change that would transform Bitcoin’s economics into a “healthy fee market.” This should have been analyzed through the lens of technical, economic, hard-fork risk, etc. But this did not happen.

There will also be a related BIP that will describe the basic requirements of RAM, CPU processing, storage, and network upload bandwidth for full nodes based on experiments (not simulations) on the planet-lab.org platform. This will help determine how many nodes are needed in number to broadcast information quickly and maintain Bitcoin's decentralized global consensus characteristics at a given block size.

How Satoshi Nakamoto avoided the “visible hand”

The size of the Bitcoin core block is kept at 1M. Satoshi Nakamoto added this 1M consensus limit in 2010 and deliberately set the above free market fees. This artificial maximum limit behavior can effectively combat network DoS and increase the cost of attack.

Satoshi Nakamoto also described the update process in 2010.

As the average block size approaches the 1M limit, the game theory situation changes, and this artificial 1M limit becomes a visible hand in the market. Competition occurs not only in block space, but also in consensus among developers. Under this new economic system, the ability to freeze or move the 1M cap will create a system where people (not the direct free market) will wield too much power.

Whether intentionally or by design, Satoshi succeeded in pushing the visible hand into the future by creating a free market that could function by setting a block limit that also served as a DoS limit for many years, exponentially increasing the cost of an attack.

The block size debate ultimately comes down to competitive economics and system survival theory. One theory is that a free market can have a range of block sizes and does not need a hard limit. Another theory is that the block size needs a hard limit to force the free market. The delay on the core block size issue has caused (the community) to move from the former to the latter, which will be uncharted territory for Bitcoin.

A System-wide Upgrade To Avoid A System-wide Upgrade

This also led to confusion among Bitcoin users and the market: from 2010 to the Montreal Bitcoin Scaling Workshop, the Bitcoin Core block size seemed to increase. However, at the Hong Kong Bitcoin Scaling Workshop, the roadmap suddenly changed direction and turned to Segregated Witness (SW).

Segregated Witness avoids a hard fork of the ecosystem through ecosystem-wide upgrades, including Bitcoin transactions, blocks, addresses, scripts, full nodes, miners, wallets, browsers, libraries, and APIs. Based on current usage, if all components of the ecosystem are upgraded (segregated witness), the transaction data size that a block can accommodate will be 1.6M.

The introduction of Segregated Witness required a significant software overhaul that simply maintains current functionality to handle increased transaction volumes. Segregated Witness complicates the Bitcoin economy by separating “blocks” into a basket of two economic sources (core blocks and extension blocks), each requiring unique economic incentives and (heavily intertwined) subsets of operations.

In contrast, increasing the core block size is compatible with existing Bitcoin software: some wallets will still work seamlessly with little to no changes. The block size increase will require minimal changes to wallets, databases, libraries, etc. The biggest hurdle is the hard fork itself.

One of the stated goals of the Scaling Bitcoin conference was to sort out the messy core block size debate into an orderly decision-making process. This did not happen. In retrospect, the Scaling Bitcoin conference delayed the block size decision while transaction fees and block space pressures continued to increase. The consensus measurement of the core block size from the Scaling Bitcoin conference was useful, and 2M seemed to have the most consensus.

Choose to skip the difficult questions until it is too late

The entire roadmap skips short-term issues:

1. When is the cost too high?

2. What is the process of changing the core block size?

3. Why do we need high fees in the early stages of Bitcoin?

Rather than an automated software system, a fixed-size core block puts the tools of economic policy in the hands of people who make subjective decisions about creating “healthy” fee levels, such as what miners’ earnings should look like and what the fees associated with bitcoin transactions should be.

Users may be concerned that this roadmap and new economic direction around Bitcoin will transform Bitcoin from a P2P cash payment network into a settlement system for unfinished technologies such as sidechains or payment channels. As the RootStock whitepaper states:

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

Perhaps this is inevitable. However, in the short term, we have a disappointing situation where consensus on one side of the developer chain is disconnected from the demands of some users, businesses, exchanges, and miners for a larger block size. This will completely reshape the way Bitcoin is approaching a conflict of philosophical and economic interests. As this article points out, inaction is changing Bitcoin, setting it on a new path.

Future Directions

Bitcoin is not an academic science project. Delaying the hard problems that will lead to tangible market changes, few people will enjoy the pause and are willing to wait for a new payment layer to be built on top of Bitcoin's primary settlement layer. Fixed at 1M, there is a risk that users will flee the core blockchain and force them to centralized platforms.

A better path forward would include clear, short-term guidance on core block size decisions, and clear discussions with users about the risks and possible negative impacts of staying at 1M blocks.

The formal decision on the core block size and validation cost is the top priority. The positive outcome of the Scaling Bitcoin conference was a 2M consensus, assuming some validation DoS is resolved, then Segregated Witness can be implemented in parallel, which is a simple change, or it will alleviate the economic problems mentioned above.

Finally, to eliminate long-term moral hazard, the core blocksize limit should be dynamic, allowing the software to escape human control.

Bitcoin needs a roadmap that balances the needs of all those who have helped the entire ecosystem grow over the past six years.

—Jeff Garzik and Gavin Andresen

Original article: https://medium.com/@jgarzik/bitcoin-is-being-hot-wired-for-settlement-a5beb1df223a#.45fjrmhgn
By Jeff Garzik and Gavin Andresen
Compiled by: Satuoxi
Source (translation): Babbitt Information (http://www.8btc.com/bitcoin-economics-are-changing)