What BCH teaches us about Decentralization. Bitcoin Tech Talk Issue #176

BCH was created back in 2017 initially as a way to permanantly split in case UASF gained traction. Despite the New York Agreement activation of Segwit on the network, they decided to split anyway and created the first hard fork of Bitcoin. As the code had to be created quickly, there wasn’t much in the way of decentralization in the hard fork.

The tradeoff that BCH made was that of increasing block size and getting rid of segwit for decentralization. After 2.5 years, it’s clear that tradeoff was a mistake. The centralization has resulted in one split that resulted in BSV with another one that looks imminent.

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If you haven’t been paying attention to the drama, the current controversy in BCH is called the Infrastructure Funding Plan, or IFP for short. It started with a post by Jiang Zhouer of btc.top who along with Haipo Yang (ViaBTC), Jihan Wu and Roger Ver proposed a plan where 12.5% of the block reward for 6 months would go to the BCH developers. Much of the community was upset by this, including Peter Rizun, who made his BCH client, Bitcoin Unlimited not accept the tax. The miners responded with changes from the initial proposal by reducing the tax to 5%, using a BIP9-like activation scheme using 66% of miners needing to signal and naming the projects that would receive the funds (Bitcoin ABC, BCHD and Electron Cash). In response to community outrage, Roger Ver seems to have switched sides.

As with the last disagreement that led to a split, this one looks like a fundamental difference in the direction of the coin. Bitcoin ABC, Amaury Sechet’s software, has already implemented the IFP into their client. Bitcoin Unlimited explicitly rejects blocks implementing the IFP. Ftrader, a developer for Bitcoin ABC has forked Bitcoin ABC and changed it to remove the IFP. As it stands, the clients will fork permanently 10 blocks after the IFP comes into play in May. This means that there will be two BCH coins about a month after their halving. We have a slow moving car crash happening over the next 3 months.

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So what are the lessons to be learned here? First, miners don’t control anything. We know from 2x that miners are more beholden to economic reality than anything else. Any exertion of control costs the miners money and given the small margins, this is not something most miners consider worthwhile. Second, the community matters. BCHers were sold on a lie that miners decide the chain and not any individuals. They are now coming to the realization that the community, or the users who hold the coins, should get to decide and that means running their own node. Third, once decentralization is given up, anything goes. Taxes are on the table. New inflation is on the table. Forceful redistribution is on the table. You cannot take “good centralization” and avoid “bad centralization”. The bad comes with the good and the bad is quite bad while the good is marginal at best.

Bitcoin

Multisig security for Bitcoin removes single-points of failure for those that want to hold their own keys. In this post by Unchained Capital, they go over the benefits of multisig and promise a series of posts that will explore this idea thoroughly. I know I’m looking forward to this to get better security over my coins.

Zane Popock has written on looking at Bitcoin from a different perspective: that of a communications medium. It explores Bitcoin from the perspective of information theory as it is not really a commodity in the physical sense. This is a good example of why the metaphysical nature of Bitcoin does not lend itself to easy categorization.

There’s an interesting parallel between bi-metalism and Bitcoin which Larry White talks about in this article. Bi-metalism was a progressive platform issue to inflate money by forcing everyone to use it at the behest of government, Bitcoin is a voluntary movement to stop inflating so much.

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Jeremy Rubin continues to push for OP_CHECKTEMPLATEVERIFY, this time with research! The simulations show that there’s less block space used and confirm more transactions. I haven’t run the simulations myself, but research of this kind is exactly what I like to see.

Applications for the Chaincode Residency for summer 2020 are now open! This is an amazing program that’s churned out a lot of core developers. If you’re a developer that wants to contribute to Bitcoin, applying to this program is a must!

Han has written a nice guide to Bitcoin investing using retirement accounts here. He goes through 3 options including a self-directed IRA, Bitcoin index funds and a Bitcoin IRA custodian. If you have retirement accounts and want to invest that money in Bitcoin, this may be a good place to start.

Lightning

Rusty Russell has proposed an elegant messaging protocol using the lightning network. The main improvement over the previous messaging protocol (whatsat) is that it doesn’t need a round trip with the message encoded in a hash-time-locked-contract (HTLC) in order to use. The motivation for this protocol is to implement an offers protocol so negotiations can happen via the Lightning network itself, but it’s more generally useful for messaging as the messages are encrypted and the intermediaries know little to nothing about the messages and endpoints involved.

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One concern that ZmnSCPxj expressed is that using the same lightning path over and over for messaging may reveal a lot about the location of the endpoints to the intermediaries. He suggested a circular route using a pre-determined reply-path to not leak that information. He also expresses in the same reply a desire for a TOR-based messaging system as an alternative.

Rusty replied with agreement on using some sort of circular routing was desirable and argued that TOR-based messaging systems are not really happening whereas Lightning message was. There are additional replies about the technical problems with a reply path and ideas to make that work.

Overall, this looks like an excellent way to enhance the functionality of the Lightning network and gives more impetus for running lightning nodes.

Economics, Engineering, Etc.

Coinmetrics has published an interesting analysis of the different networks and the wealth distribution on each. This may be saying something about the role of whales in the economy of each. Not surprisingly, Bitcoin is the most well-distributed in that it has 11% of its supply being held by whales (defined as addresses that hold more than 1/1000 of the total supply), whereas XRP has 85% and XLM 95%. The artificial supply restriction on coins like XLM and XRP probably has a strong manipulative effect on price and these whales essentially act as central banks for these coins.

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Trezor has published an article on the economic effects of the halving. This article specifically rejects the Stock-to-flow (S2F) model for Bitcoin pricing and argues essentially for the efficient market hypothesis (EMH). Though I respect Trezor and what they’ve done for hardware in the Bitcoin community, I came away unconvinced by the arguments presented in the article.

Liberty Blitzkreig has written an amazing article on how the current system of debt works. Essentially, debt is used to enslave poorer people while the rich use debt to lever up and get even richer. The article summarizes how the Cantillon Effect works in the current fiat system. Often the first step to getting people to understand Bitcoin is to show them how the current system is broken. This article is a great resource for that.

Jameson Lopp has written about home defense. As Bitcoin gets to be more valuable, securing not just your keys, but also your home becomes a larger consideration. As they say, an ounce of prevention is better than a pound of cure. Worth reading if you care about the most obvious security you need to have.

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bZx, a defi product on Ethereum, has been exploited twice in a week, resulting in about a million dollars of loss. They’ve stopped the “decentralized” service, as it were. The details are still being worked out, but essentially, some enterprising smart contract lawyers managed to make that money by flash-crashing a thin market and taking advantage of the rules of “flash loans” as they are called. Not a surprise that an unaudited, complex smart contract could be taken advantage like this. Contracts like this are very vulnerable and this has been clear since the days of the DAO. The attack surface on complexity tends to be very large and this is a great example of why such products tend to be so vulnerable. I spoke about some of this on Tone’s Daily Brief.

Ethereum’s ENS service, which lets users register names that can then be used to transact with, leaks a lot of data. Essentially, near everyone that’s registered a .eth address can easily get doxxed just from the publicly available Ethereum blockchain data. Centralized services tend to reduce privacy over time, unfortunately and Ethereum is definitely a centralized service.

Podcasts and Plans

I had a wonderful time at Unconfiscatable this past week.

I moderated a developer panel with Adam Back, Jack Mallers and Peter Todd. We talked about Taproot, Lightning, Sidechains, Confidential Transactions and more. We touched on a lot of topics and if you’re interested in how the protocol will move forward, this is one to watch.

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Second, I participated in the last panel of the day, which was about why altcoins will die. This was going through why and how altcoins have vulnerabilities due to centralization.

I also talked about Taproot and did a readthrough of AJ’s excellent response to the concerns from an anonymous group. If you’re interested in the technical choices made in Taproot and their motivation, this one would be a good one to watch.

Lastly, I read through BIP-178, or extended WIF from Karl-Johan Alm. It was an idea about encoding the wallet import format for private keys which didn’t get implemented, but was good to learn why it wasn’t.

My next event is Bitcoin 2020 and the Programming Blockchain seminar right before that.

Fiat delenda est.