Spending Down Trust. Bitcoin Tech Talk #257

Trust is a weird thing. We in Bitcoin preach that you should aim for trustless systems, and indeed, that’s what Bitcoin offers. It is a monetary system that’s trustless, at least as far as people go (you still have to trust deterministic code). That’s the distinguishing feature and why it’s decentralized.

At the same time, trust is also a big component of what makes civilization run. If you thought your neighbor might try to steal your stuff on a daily basis, you’d spend a lot more time, money and effort defending your property. That’s generally not a productive use of capital, as it’s really only spent to deter bad behavior, and doesn’t add new goods or services. You can see this in poorer neighborhoods, where more money is spent on iron bars and alarm systems rather than dryers or better stoves.

The sad thing is that this is a big drain on resources in places that can least afford it. Many cities in Africa have homes which have large walls and security systems. This is because there’s a distinct lack of trust which result in defense spending than in creation of new goods and services. Of course, that’s by no means the only example. Entire countries spend insane amounts of money on defense, particularly in nuclear weapons capability. This is all productive capacity that essentially gets wasted as a result of international lack of trust.

A society that’s got a lot of trust built in tends to build up civilization very quickly. As Rahim pointed out on my podcast this past week, the post-WWII build up of Europe and East Asia are the result of the high trust societies that were able to put most of their productive capacity to rebuilding instead of defense. Those were societies that were bankrupt financially, but still had a lot of capital to draw on in terms of trust.

Note that trust, particularly societal trust, is not an easy thing to build up. It usually takes hundreds of years of culture and moral identity to really form the bonds that build that trust. Trust, in other words, is hard to form, especially at the societal level.

What’s worse, much of that historical identity is being lost in most of these places and the trust level is being lowered. The trend is currently an overall reduction of trust. Governments all over the world are abusing trust in all sorts of ways. We’ve been told conflicting things about COVID the past 18 months, often from the same people. We’re finding out that our leaders have not just been embezzling and stealing, but that they’re being accused of some morally unspeakable things. Underlying all this is the power to expand the money supply, which is a direct violation of property rights of the most liquid property everyone has.

In other words, governments all over the world are testing the trust structure of their people by spending it down. The result is what we’ve been seeing all over the world: protests from people that clearly understand themselves to be outside the powerful group that controls things. This is happening both on the left and right as they realize the people in control are abusing the trust that they’ve been entrusted with.

The post-apocalyptic movies have it wrong. What causes societal degeneracy is not a deprivation of technology, but a deprivation of trust. Unfortunately, trust is very difficult to build up once the foundations are broken. Governments have unwittingly and maliciously undermined the units of that trust like families, churches and community organizations. The political usurpation of all of them have sucked dry the trust structures that have traditionally been embedded in them.

This is the part of the article where you’re probably expecting me to pitch that Bitcoin fixes this, and while I certainly believe that Bitcoin removes the need for trust in money, that’s not enough to reverse the overall trend. Trust requires deep meaningful relationships, often economic though not exclusively, between lots of actors and that’s not a short-term fix. There’s likely to be some chaos, possibly revolution, as the trust gets spent down. In other words, Bitcoin is just one part of the battle and we’re going to have to think long and hard about rebuilding societal trust if and when societal collapse happens.

Bitcoin

AJ Towns proposes a different way to do covenants. The essential idea is to have two new op codes. TAPLEAF_UPDATE_VERIFY (TLUV) is a way to update Taproot Merkle trees by trimming a leaf. In a sense, this op code lets you verify that a taproot tree is the same other than the on leaf that’s being used. Combined with another op code, IN_OUT_AMOUNT, which checks that the amounts in the input and output are essentially reduced by a specific amount, this gives some very interesting abilities. The most interesting example from his description is a huge Taproot tree where the funds can all be stored and each individual can extract their portion. Covenants definitely change things significantly and add a lot more use-cases. I thought the example AJ gave was one of the best examples of usage and perhaps a way to scale.

Summer of Code is a program sponsored by Square to get more developers into Bitcoin. They trained a lot of coders from India over the summer and is modeled after the Google Summer of Code. The ostensible reason for the program, as the post shows, is to get more developers into the Bitcoin ecosystem. This is some great content and I highly recommend developers and interested students to apply for next year.

Blockstream Green now supports single-sig. This is a wallet that’s been historically a multisig wallet, to make it hard to steal money. The architecture is to have a 2-of-2 with Blockstream as a countersigner and a locktimed single-sig to allow users full control. I’ve always thought their scheme was great, but not having single-sig was a flaw. Now that they have a hardware wallet, this makes single-sig much more logical.

Lightning 

For LN routing nodes that want to help in the liquidity in El Salvador OpenNode has published some nodes to open channels with. Given all the enthusiasm around Bitcoin Beach and companies as large as McDonalds and Starbucks using Lightning, this is a practical way for Lightning node operators to help this grow. I am still wondering how it is that these companies have integrated Lightning so quickly while the vast majority of exchanges still don’t support it.

Shinobi goes over the current issues with the LN. One problem is that there is a lot of state to store, given the cheating counterparties can do. Watchtowers are also problematic because you have to trust someone else to do justice transactions. Similarly, HTLCs are problematic because this puts an upper limit to how many can be enforced on chain. There’s much more and this article is a sobering look at LN. I think these conversations are important and gives us a look into why this stuff is so hard. Incidentally, this is also why altcoins don’t really do Lightning.

River shows the issues they're facing as they scale their LN integration. Anyone that wants to integrate Lightning should read this post in full, as they outline what customers are doing with Lightning, their technical architecture and their security design. As I mentioned above, Lightning integration has a lot of subtle issues to take into consideration, and cannot just be plugged in, at least not yet.

Paxful is beta testing LN p2p BTC trading. This will be very useful for privacy as Lightning payments don’t leave any on-chain trails. As LN goes into prime time, this will help with making face-to-face trading a lot more friendly from a user-experience standpoint. Especially in countries like Africa, where liquidity is a huge thing, I imagine adoption will be significantly faster.

Economics, Engineering, Etc.

El Salvador is going to save $400M on remittance fees being the first to declare BTC as legal tender. For certain, this is going to help the people who are receiving money from abroad, but more than that, the infrastructure is now there to trade with people all over the world. The hard thing for a lot of these countries is not trade with US per se, but with other countries. While the domestic adoption is a nice first step, the real benefits are going to be international.

Gigi explains that individual adoption happens in stages. He describes the process as starting from buying Bitcoin to ending by dropping fiat money. It sounds obvious, but the mental journey is pretty significant and as we’ll see in the next story, life-changing. His article is essentially what hyperbitcoinization looks like from an individual’s point of view.

Craig Deutsch explains how BTC has changed his life. The main thing from his testimony that I got was that there’s something magical about taking responsibility. It changes not just outlook, but lifestyle and habits. Bitcoin, being a bearer instrument that allows for self-sovereignty, ultimately makes taking responsibility a lot more attractive.

A YouGov poll shows about 27% want BTC as legal tender in the US. This is a surprisingly large number, though I’m not confident that every voter in the poll understands what legal tender actually means. The point here is that there’s a lot of good sentiment around Bitcoin and those that are for Bitcoin tend to be rabid fans. For political purposes, this is going to matter as Bitcoiners become a bigger and bigger part of the populace. We are becoming that intolerant minority.

Blockstream announced an ASIC product on the market in 2022. Their entry into the space is great as they’re already a pretty successful company. The problem in this industry has been that it’s capital intensive and it’s very easy to run out of money. Their recent acquisition of Spondoolies Tech is an example of this. Spondoolies was one of the casualties of the ASIC wars back in the 2015-16 era. The downside here is that Blockstream may have too many products and might make it hard for them to focus.

Quick Hits

MasterCard acquired a crypto company.

Ukraine made Bitcoin legal.

Belorussia is encouraging mining within its borders.

Bleskomat is a DIY Bitcoin ATM.

Events

I will be in Miami for the Oslo Freedom Forum October 3-6 and in Atlanta for TabConf on November 4-5.

The Programming Blockchain seminar is in Atlanta, GA on November 2-3. 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.

Podcasts, Etc.

On this week’s Bitcoin Fixes This, I talked to Rahim Taghizadegan about Austrian Economics. We discussed the tenets, how trust is a form of capital and his free cities project.

I read through last week’s newsletter which you can find here.

I talked to Beautiful Bastards about Bitcoin and the Kitman podcast about how Ethereum is a scam.

My panel from the Faith Driven Investor conference is up and Jake Gosselin has a nice review of the new book here:

My other books are here.

Unchained Capital is a sponsor of this newsletter. I am an advisor and proud to be a part of a company that’s enhancing security for Bitcoin holders. If you need multisig, collaborative custody or bitcoin native financial services, learn more here.

Fiat delenda est.