Scarcity >> Scaling. Bitcoin Tech Talk #248
Elon Musk recently stated that on-chain scaling would be what would separate Dogecoin from its competitors, as if it’s a smart engineering choice. On-chain scaling is something that’s been talked about for years and the raison d'être for many altcoins. After all, they reason, Bitcoin only has 1 MB blocks, so a 10MB block should be worth ten times as much, right?
This is the ridiculous reasoning behind many altcoins whose underlying belief is that the value of Bitcoin is limited by the transaction capacity. As the past 10 years have shown, however, that doesn’t seem to be the case. Further, the failure of projects like Bitcoin Cash and Feathercoin, which have far more transaction throughput shows that it’s not just transaction capacity that matters.
Yet there is this persistent idea that scaling on-chain is a goal worthy of pursuing. The way that’s done is by centralizing some aspect, whether it’s development, or making it much more difficult for users to run their own nodes or whatever. Decentralization, however, is the thing that makes Bitcoin valuable, so centralizing is hardly the right tradeoff.
The reason Bitcoin has been so robust against challengers over the past 10 years is because it has better credibility than other coins. Specifically, Bitcoin has had long-term credible scarcity. This scarcity is at the heart of what makes Bitcoin valuable as it’s extremely unlikely that the supply of Bitcoin will change. The 21 million limit, once fully understood, is what makes people want Bitcoin in the first place. A fixed supply and increasing demand is what causes the price to go up.
Value is not easily stored specifically because it’s relative. When stored in a commodity, more of that commodity may be produced and dilute the value. This is why scarcity is so important for store-of-value.
Which brings us back to decentralization. That is the secret sauce that gives Bitcoin so much more long-term credibility in its scarcity than anything else. Centralized things will eventually have at the center someone who’s willing to change the rules and expand the supply. Even if you have a Fed chairman who promotes a tight monetary policy now, there will eventually come one who will promote a loose monetary policy. Same is true of any centralized entity. At some point, things will change.
Decentralization is our protection against things changing. We want the rules to stay the same so we can have certainty going forward. The minute we discover that rules are open to being revoked is the minute we should run away. That is why centralization is giving away the store and not a good tradeoff.
The sad reality of altcoins is that they not only add feature X, but also centralization, making everything in their coin open to change. In other words, they might have feature X but they don’t have long-term credible scarcity.
Jeremy Rubin has a post on how OP_CAT can essentially quantum-proof Bitcoin! The argument is a bit technical, but the essence of it is that it is ECDSA that would break with a quantum computer. Hash pre-images, however are safe and using OP_CAT, we can do something called Lamport signatures, which is a hash-based signature technique. The only thing about this particular type of signature is that it’s a bit long (think a thousand bytes). That said, it’s nice to know that we can add quantum proofing if we get OP_CAT into Bitcoin.
Another blog post by Jeremy looks at what gets signed in the SIGHASH_ANYPREVOUT (aka APO) proposal (aka BIP118). This is one of the trickiest parts to coding anything Bitcoin-related is figuring out the hash that was signed and Jeremy does a good job of showing how APO interacts with the current set of possible SIGHASH options. There are some nice benefits of APO to Lightning and allows the implementation of Eltoo, which can be seen here.
Joshua Chretien has a good analysis and explanation of the difficulty drop from last weekend. This is a good combination of what’s happening geo-politically, what the actual protocol says and how it’s likely to resolve. There’s a lot of misinformation about the difficulty adjustment, and this article should help in dispelling a lot of those myths.
Ryan Gentry proposes a BIP process for Lightning called BLIPs. The BIP process has been controversial and Matt Corallo thinks that it’s failed, but I still think there’s merit in making inter-operable standards. In LN, this is even more necessary as there are many way to do the same thing. I hope LN wallets/vendors/devs can cooperate on this.
Roy Scheinfeld of Breez argues that Lightning is way more fungible than on-chain Bitcoin. I can’t believe I didn’t think of this before, but this is obviously true. When receiving lightning payments, everything gets encrypted, so getting paid doesn’t let you know where it came from. Maybe a lot of these privacy concerns can be solved on the LN layer than trying to do so on the base layer.
The biggest channel we’ve ever seen is now open between ACINQ and OpenNode. The channel has a capacity of 10 BTC, which is over $300k as of this writing. Both are LN companies who are working on infrastructure, so this large channel makes sense. We’re seeing the equivalent of a large bridge getting built with a lot of traffic capacity. LN infrastructure continues to build.
Economics, Engineering, Etc.
Alex Gladstein explores the meaning of the 4th of July and the banking system’s betrayal of the ideals of the nation. He interviews Isaiah Jackson, author of Bitcoin and Black America to show how the monetary system is a primary means of oppression of the black community. He also interviews Faisal from Iraq to show the consequences of US’s foreign policy that’s largely driven by the petrodollar. It’s sobering to be reminded that the US is far from living up to its ideals, but I found the piece hopeful, because there is an alternative in Bitcoin.
Jameson Lopp redefines FU money in light of Bitcoin. As he explains, the current problem with having lots of money is that it brings along with it a whole host of problems, as summed up in the phrase, “Mo Money, Mo Problems.” He argues that Bitcoin fixes this because a lot of those problems go away because there’s no seizure or ability of a central controller to screw you over. Because of the stronger property rights around Bitcoin, FU money is much more achievable.
Jordan Bush writes a clever parable to think about the energy. Unfortunately, the energy zealots lose sight of helping people and instead want to push their own agenda. I’ve argued before that most people don’t understand energy at all and are being manipulated so this was a great way to frame the issue in human terms. Does it help people is the real question.
Casa reports about a frightening attack aimed at a Bitcoin holder. Apparently, the Bitcoin holder was drugged and his phone hijacked during a Tinder date. We can expect more attacks like this will be attempted in the future as Bitcoin increases in value. Someone please make a well-vetted dating app for Bitcoiners!
Tomer Strolight proves that Bitcoin is better money than anything else we’ve ever seen. This is a premise-premise-conclusion style argument, more suited to a philosophy class than the general public, but if you like logic and first principles thinking, the argument is great. Worth showing to people who say they’re rational, at least.
As ETH moves to PoS, miners seem to be planning to not play nice.
An outdated hydro-electric power plant is finding it more profitable to just mine Bitcoin than try to sell the electricity on the market.
Bitcoin is our hope to separate money and state.
Fed Chair and Coinbase CEO apparently met.
I will be at The Bitcoin Standard conference on August 12-14 in Ensenada, Mexico and BitBlockBoom in Dallas, TX on August 26-29.
The Programming Blockchain seminar is in Mexico on August 10-11. This is a 2-day seminar for programmers to learn about Bitcoin. You can apply here. I also have a few scholarships available for those that can’t afford it.
I was on vacation and skipped recording a podcast this week, but I’ll be back with another episode this coming week. I did read through last week’s newsletter here, though.
Here is the new book:
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Fiat delenda est.