Excerpts of Hijacking Bitcoin by Roger Ver

Bitcoin Jesus showed me the light

May 12, 2024

Roger Ver known as “Bitcoin Jesus” recently launched his book “Hijacking Bitcoin”. Surprisingly few weeks later the government arrested him.

In this book, Ver has made an argument that BTC (the orange coin), the one we consider to be Bitcoin, is in fact fake Bitcoin. He says that the Elites have captured Bitcoin and subverted Satoshi’s original revolution. Instead of being a peer-to-peer currency which would have ended Banker’s hold on civilization, the Elites have morphed Bitcoin into boring “digital gold”.

Just last month, I made a puzzling discovery about Bitcoin (BTC). Compared to regular transactions, storing digital data like images and text on the BTC blockchain gets a 75% discount. This left me confused. If keeping block sizes small is so crucially important, why are they wasting that valuable space on data instead of transactions?

That led me to discovering this book and I am so glad that I did! Here is a summary of the key points from the book:

Bitcoin was originally designed by Satoshi Nakamoto to be peer-to-peer electronic cash with low fees, fast transactions, and the ability to scale to global adoption. This required larger blocks as usage grew.
Around 2014-2017, a small group of developers (the Bitcoin Core developers) took over the Bitcoin project and fundamentally changed its design and vision, capping the block size at 1MB.
This caused fees to skyrocket, payments to become unreliable, and pushed users to custodial wallets and planned second layer solutions like the Lightning Network. Bitcoin Core essentially hijacked Bitcoin to be a settlement layer rather than cash.
Censorship on major Bitcoin discussion forums, social media attacks, and propaganda were used to promote the small block philosophy and marginalize supporters of Satoshi's original big block scaling roadmap.
Multiple attempts to increase the block size were blocked by the Core developers and their supporters. Alternative implementations were attacked.
In 2017, big block supporters hard forked to create Bitcoin Cash (BCH) to continue Satoshi's original vision and roadmap of scaling Bitcoin on-chain.
Bitcoin Cash enables low fees, reliable payments, and aims to be a global peer-to-peer cash system as Bitcoin was meant to be. It is the continuation of the original Bitcoin project.
Roger argues that Bitcoin Cash, not Bitcoin Core (BTC), is the "real" Bitcoin as intended by Satoshi Nakamoto. Misinformation has allowed BTC to retain the Bitcoin brand and price.
The book makes the case that Bitcoin was "hijacked" by the Core developers to benefit their business models at the expense of Bitcoin's original purpose, design and vision as laid out by Satoshi. Bitcoin Cash aims to correct this and fulfill Bitcoin's original promise.

In this post I will simply share the excerpts of this book but keep an eye out for my next post. My thoughts about Bitcoin have evolved since going down this rabbit-hole and in my next email I will explain them in greater detail.

Here are all of my highlights from the book Hijacking Bitcoin by Roger Ver.

# Introduction

The reason that Bitcoin is no longer used as digital cash has nothing to do with the underlying technology. It’s because a group of software developers took over the project, decided to change its design, and intentionally limited its functionality—whether due to incompetence, sabotage, or a mixture of both. The takeover happened from roughly 2014-2017, and it ultimately resulted in the network splitting in two and the cryptocurrency industry fracturing into a thousand pieces. The original design still exists and remains extremely promising, but it no longer trades under the ticker symbol “BTC.”

It has become apparent that hardly anybody knows the story of Bitcoin’s takeover. The main discussion platforms online have been heavily censored for years and carefully control the information that people receive. Bitcoin Maximalists—the loud voices that insist all projects other than BTC are scams—also help to discourage critical investigation, mostly by bullying people on social media. Anybody that questions their narrative is instantly mocked, and this has proven to be an effective tactic for silencing dissent. Since nobody speaks up, newcomers have almost no chance of hearing about Bitcoin’s real history and design. This book provides that information.

# 1 Altered Vision

The early Bitcoin community was filled with eccentric people and unusual ideas. Like many others, I was particularly drawn to Bitcoin because of my political and philosophical ideals. I greatly value human freedom and believe individuals should have maximum control over their own lives. The more power any government has, the less power individuals have, and I knew from my study of economics and history that central banks’ control over the money supply gives an enormous amount of power to governments. So, Bitcoin was naturally appealing to me, as it was designed to operate without a central, governing authority. People do not have to ask permission to use it.

The entire purpose of Bitcoin is undermined by the mass usage of custodial wallets, because total control is given to a third party that can censor, track, and even confiscate coins—no different than an account balance at Venmo. Fraud also becomes easier. For example, when the FTX exchange collapsed in 2022, more than a billion dollars of customer funds instantly vanished.

Fast forward to today. Despite being a household name, Bitcoin has not yet taken over the world. In fact, there’s a grim truth beyond the headlines and price charts: the actual usage of Bitcoin has declined since 2018, and many businesses have dropped it entirely as a payment option. On multiple occasions, the network has buckled and become almost unusable with huge transaction fees and unreliable payments. In times of network congestion, the average fee can reach more than $50 and transactions can take days or even weeks to process.

High fees, unreliable payments, custodial wallets, and less usage in commerce—by other metrics than price, Bitcoin has not landed on the moon; it hasn’t even left orbit. So what happened?

The Official Story

The conventional explanation for these negative trends is that Bitcoin fell victim to its own success. As it gained in popularity, the network ran out of capacity. Inherent technological limitations caused the fees to skyrocket, payments to become unreliable, merchants to leave, and the industry to move towards custodial wallets. In response to these problems, the narrative surrounding Bitcoin has shifted towards being “digital gold” and a “store of value” instead of a digital currency. If Bitcoin is not supposed to be used in everyday commerce, then it does not matter whether it functions as a payment system.

Despite how often these ideas are repeated in the press and among popular commentators, they are completely incorrect. The real story is much more dramatic. Bitcoin was built for massive scale and did not run into inherent technological limitations. Instead, the project was taken over by a small group of software developers who redesigned the whole system. They intentionally limited its capacity and functionality, and they openly advocate for high fees and a backlog of transactions—the antithesis of the original design.

The Workaround The original, scalable design of Bitcoin still exists, but it’s not traded on cryptocurrency exchanges under the ticker symbol BTC. It’s called “Bitcoin Cash” and is traded as BCH. For years, the industry was thwarted by the BTC developers, until 2017, when a new network was created to preserve the original vision of Bitcoin as digital cash with low fees, fast transactions, and without the need for custodial wallets. The BCH network is far less well-known than BTC, but it has already scaled its throughput capacity to more than thirty times BTC’s, with plans to scale exponentially into the future.

The events leading to the creation of Bitcoin Cash were contentious and have since been named the “Bitcoin Civil War,” and to this day, the BTC and BCH communities are often hostile towards each other. If you only follow Bitcoin casually, you will have exclusively heard the BTC side of the story; this book tells the other side, and it is filled with historical details, excerpts, and quotes from other early adopters who shared the same vision for Bitcoin as digital cash.

To distinguish between the different networks and groups, it’s helpful to establish clear terminology. The BTC network is often referred to as “Bitcoin Core,” while the BCH network is often referred to as “Bitcoin Cash.” So, those are the terms used hereafter. The word “Bitcoin” by itself refers to the underlying technology that is used on both networks. Both Bitcoin Core and Bitcoin Cash use Bitcoin technology and share the exact same transaction history until their split in August 2017. The Bitcoin Core developers decided to pivot from the original design, while the Bitcoin Cash developers have stuck with it.

Avoiding Hazards

If this technology really is revolutionary, then it threatens the power of existing financial and political establishments. But on the current trajectory, if nothing changes, those institutions will assimilate cryptocurrencies and neutralize them. If Bitcoin is going to make the world a freer place, our window of opportunity is closing. The industry is approaching two failure scenarios. The first would be total capture by existing financial and regulatory systems. Mass adoption of custodial wallets makes this possible, as transactions are easily tracked and controlled, and governments can force companies into compliance without difficulty.

The other failure scenario would be people simply giving up and abandoning the vision of inflation-proof digital cash altogether. I have seen many talented minds and competent businessmen prematurely conclude that Bitcoin cannot scale because of Bitcoin Core’s failure. This disillusionment can be avoided if people realize that the original Bitcoin technology still exists, works well, and can scale to handle global adoption. Bitcoin Core simply pivoted from this design.

# 2 Bitcoin Basics

Bitcoin Basics The world is inundated with bad information about Bitcoin, largely due to the power of social media. Honest investigation is discouraged online, and if a curious mind asks the wrong questions or expresses the wrong opinions, he can expect a wave of angry commenters attacking his intelligence, his reputation, or even his business. Bitcoin Maximalists—those who assert that BTC is the only legitimate cryptocurrency—are notorious for employing this tactic. They will blast out a list of reasons why any alternative project like BCH is a scam, insist the debate has already been settled, and question the sanity of anybody who disagrees. Most people do not have the time to investigate these claims, nor do they want to be targeted by online trolls, so they end up accepting the standard narrative.

The Blockchain Bitcoin revolves around “blockchain” technology. The blockchain is simply a public ledger that keeps track of all Bitcoin balances, and it gets updated with new transactions approximately every ten minutes. These new transactions are packaged into “blocks” which are then “chained” together, one after the other, forming the “blockchain.” The blockchain is unique because it’s not maintained by a centralized authority. There’s no single agency that processes all the transactions or determines the entries of the ledger. Instead, it’s maintained and updated by a decentralized network of computers around the world, giving it no central point of control or failure.

Blocks themselves are central to understanding the different philosophies in Bitcoin, which can roughly be split into two camps: “big-blockers” and “small-blockers.” Big-blockers, as the name implies, want big blocks. The larger the blocks, the larger the transaction throughput of the network, and the more resources it takes to process each block. Small-blockers want to keep blocks small enough so that anybody can process them. We will cover this difference in more detail later.

Miners

Not just anybody can add blocks to the blockchain. This job is exclusive to miners. Miners update the ledger by bundling transactions together into a block and then adding a special proof. This proof is a solution to a math puzzle which is so difficult, it takes substantial computer power to figure out. All over the world, there are warehouses filled with specialized machines dedicated to solving these puzzles. Each one of these machines requires electricity, which means it costs money to be a Bitcoin miner!

Miners are financially rewarded for their services with two mechanisms: transaction fees and a block reward. Transaction fees are simply what users pay to get their transactions added to a block. The block reward is how new Bitcoins are minted. Every time a miner adds a block to the chain, he’s given a small number of new Bitcoins. This reward is cut in half roughly every four years. In the earliest days, miners received 50 new bitcoins per block, but at the time of writing, the block reward is down to 6.25 coins. Eventually, the reward will be negligible, which will leave transaction fees as the only source of revenue for miners.

Big-blockers see miners as performing an essential service in the Bitcoin industry by protecting the network from attacks, maintaining the ledger, and processing all transactions. Miners frequently invest millions or even tens of millions of dollars to upgrade to more powerful equipment. In 2018, the company Bitmain announced plans to build the largest mining facility in the world in Texas and estimated their total investment to be more than $500 million.1 Bitcoin mining has high investment and maintenance costs. Because of this, most big-blockers think that miners should have the greatest say in the development of Bitcoin. Depending on the success of the coin they are mining, their capital investment could be entirely lost or generate a substantial return. So, they have a strong incentive to ensure Bitcoin remains useful and valuable.

Small-blockers tend to have a more skeptical or even hostile view towards miners. Because miners are the only ones that can add blocks to the network, they have substantial power and could become a systemic threat if mining becomes too centralized. If only a few major players dominate the market, that could make Bitcoin itself too centralized. Large mining facilities also introduce a political risk into the system. If governments decide to attack, regulate, or control the biggest miners, they might be able to disrupt or control Bitcoin. The role of miners is a central disagreement that led to the Bitcoin Cash split.

Full Nodes

Fortunately, if you want to use Bitcoin, you don’t have to be a miner or run heavy-duty software. Regular users can access the network in easier ways. Satoshi Nakamoto described a method for Simplified Payment Verification (SPV) that allows users to send, receive, and validate their own transactions with minimal effort. For most of Bitcoin’s history, the majority of wallets used either SPV or other similar methods for accessing the blockchain. This trend is reversing in BTC due to the proliferation of custodial wallets, but it remains the norm in BCH.

There’s another option for accessing the Bitcoin network that takes more effort. Some users run “full node” software which downloads the entire blockchain and validates every single transaction that has ever taken place. The entire BTC blockchain contains around 800 million transactions and is currently around 450 gigabytes in size. For users running full node software for the first time, it can take several hours to sync up with the rest of the network. Furthermore, if a full node ever disconnects from the network, they have to download and validate all the latest blocks in order to use Bitcoin again. That’s why SPV was such an important invention. It takes virtually no time or effort to use, and yet it still offers excellent security. SPV allows you to validate your own transactions, while full nodes allow you to validate all transactions on the blockchain.

Arguably the biggest difference between the big-block and small-block philosophies is about the role of full nodes. Big-blockers think that the vast majority of activity on the network should be between miners and lightweight wallets that use SPV or similar technology. They think full nodes are only useful in special cases where you need to validate many people’s transactions in a short period of time, for example if you’re running a cryptocurrency exchange or payment processor. Since the network gives no financial compensation to full node operators—and since most people have no need to validate strangers’ transactions—regular users do not have an incentive to run such heavy-duty software. Satoshi was unequivocally a big-blocker, and as he put it, “The design supports letting users just be users.”

Small-blockers, by contrast, think that full nodes are essential to the network. They think that users should run their own nodes, which is why having small blocks is essential, since the cost of running a node increases with the size of the blocks. In fact, the primary reason that small-blockers have claimed Bitcoin cannot scale is because big blocks are more expensive for node operators. Instead of concluding that regular users are not supposed to run full nodes, they concluded that Bitcoin cannot scale. From my perspective, this is one of the greatest confusions about Bitcoin and it will be analyzed in depth.

A great deal has been made of Satoshi Nakamoto’s original vision for Bitcoin. Supporters of it, like myself and other early adopters, thought that he designed a brilliant system that proved it worked in the real world. Because of this success, we did not see any reason to fundamentally change it. Critics of the original vision thought Satoshi was wrong in some key areas and wanted to change the protocol accordingly. The Bitcoin Core developers were such critics, despite their eventual governance over the project.

Bitcoin Maximalists often compare adherence to the original vision to a kind of blind faith, where any deviations from the founding ideas are not tolerated. But this is a weak criticism. The desire to stick with Satoshi’s design is far from dogmatic. Bitcoin is a complex system, with many moving parts. In addition to the software and computer network, it’s an entire economic system that requires an economic analysis in order to understand. When you look at the software components in addition to the economic components, it becomes clear that Bitcoin is finely-tuned and should not be tampered with lightly.

Instead of scaling Bitcoin by increasing the size of the blocks to allow for more transaction throughput, the Core developers decided that Bitcoin should scale by using multiple layers instead. According to them, the first layer should be composed of “on-chain” transactions, on which additional layers are built. These additional layers would be “off-chain,” meaning the transactions would not be recorded on the blockchain, thereby avoiding the need to scale the base layer. The much-hyped “Lightning Network” is one of these second layers, but it has a host of fundamental issues that are discussed in detail in Chapter 9. One substantial problem is that it requires on-chain transactions in order to use. To simply connect to the Lightning Network, you have to make at least one transaction on the base layer, which might cost a hundred dollars if BTC is experiencing high usage. Despite this being a critical flaw, there is no proposed solution.

Bitcoin Core is betting everything on the viability of these additional layers. They inverted the original system to make base layer transactions slow and expensive, but they have not produced a satisfactory alternative that provides simple, reliable payments. The current version of the Lightning Network is neither reliable nor secure (which is why the most popular Lightning wallets are now custodial). So, any hope for BTC being the freedom-enhancing money of the future relies entirely on technology that has not yet been created.

Satoshi was not perfect, but as the upcoming chapters will explain, his ideas are compelling, well thought out, and deserve an honest examination. His design does not require the complexity of additional layers, though it is still compatible with them. Instead of blindly following any individual, group of developers, or ticker symbol, try to judge the ideas on their own merits. Listen to how Satoshi designed Bitcoin, listen to the Core developers, and make up your own mind.

The differences between the original design and Bitcoin Core’s new design can be captured with five critical ideas:

- Bitcoin was designed to be digital cash used to make payments over the internet.

- Bitcoin was designed to have extremely low transaction fees.

- Bitcoin was designed to scale with blocksize increases.

- Bitcoin was not designed for the average user to run his own node.

- Bitcoin’s economic design is as important as its software design.

Each of these points is central to the original vision for Bitcoin that was shared by Satoshi and other early pioneers. But today, the prevailing narrative disagrees with almost every point. If you listen to commentators from network television to popular podcasts, you might believe that:

- Bitcoin was designed to be a store of value, even if it doesn’t work as a medium of exchange.

- Bitcoin is supposed to have high transaction fees.

- Bitcoin does not scale with blocksize increases.

- Bitcoin’s security depends on regular users running their own nodes.

- Bitcoin’s economic design was broken and needed to be fixed by software engineers.

All of these are incorrect. Even if you like the changes that Bitcoin Core has made, the historical record is clear that they radically differ from the original design.

# 3 Digital Cash for Payments

It is a testament to the effectiveness of the Bitcoin Core narrative that there’s now disagreement and confusion about the very purpose of Bitcoin. Instead of being recognized as a payment system for everyday commerce, Bitcoin is almost exclusively spoken about as a “store of value” whose utility does not depend on it being used as cash. You can hear this claim repeated everywhere, even by academics. The description for the popular book The Bitcoin Standard reads: Bitcoin’s real competitive edge might just be as a store of value and network for final settlement of large payments—a digital form of gold with a built-in settlement infrastructure.1 I used to like the digital gold analogy until it got turned on its head. We used to say that Bitcoin is like digital gold because it’s a currency that cannot be inflated by a central bank, and since it’s digital, it can be sent anywhere in the world instantly at almost no cost. But that is not what people mean by “digital gold” anymore. Instead, they invoke that analogy to make the opposite point—that Bitcoin is like gold because it’s expensive to transact and not commonly used as a medium of exchange. Instead of being related to gold’s monetary strengths, Bitcoin gets related to gold’s monetary weaknesses.

Some Bitcoin Core proponents have taken this argument even further. Instead of merely claiming that Bitcoin makes a better store of value than it does a payment system, they claim that Bitcoin was intentionally designed as a store of value and not as a medium of exchange. According to Dan Held, the Director of Business Development at Kraken: [T]hose pushing the ‘Bitcoin was first made for payments’ narrative insist on cherry-picking sentences from the white paper and forum posts to champion their perspective… Bitcoin was purpose-built to first be a Store of Value.2 While this brazen claim might gain social media likes and praise from cryptocurrency commentators, it does not stand up well against the facts. The historical record is clear that Bitcoin was designed for everyday payments.

In Satoshi’s Words What evidence do we have that Bitcoin was purpose-built to be a payment system? Well, everything that its creator wrote on the subject. In addition to the seminal whitepaper that introduced Bitcoin to the world, we have hundreds of online forum posts and more than fifty public email correspondences from Satoshi. They paint a clear vision for the technology. Let’s start with the whitepaper, released in 2008, which presented and defined Bitcoin for the very first time. I recommend reading the entire whitepaper online. It is well-written, and many of the key concepts can be understood without technical knowledge. We will analyze the first few sections, starting with the title: Bitcoin: A Peer-to-Peer Electronic Cash System Satoshi could have called it an “electronic store of value” if that’s what he intended, but instead he called it an electronic cash system. Next, the very first sentence of the abstract reads: A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.3 “Online payments” are literally mentioned in the first sentence of the paper introducing Bitcoin to the world. After the abstract, the introduction begins: Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model… In the first two sentences of the introduction, Satoshi mentions “commerce on the internet,” “electronic payments,” and “transactions.” He continues: Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for nonreversible services. With the possibility of reversal, the need for trust spreads... These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.

In other words, existing online payment methods have high transaction costs due to the inherent trust required in the system. Credit cards, PayPal, and so forth, all depend on companies with expensive dispute resolution mechanisms. These costs make “small casual transactions” effectively impossible over the internet. By contrast, physical cash payments do not require trust in third parties, but there is no way to use physical cash online. Enter Bitcoin: What is needed is an electronic payment system based on cryptographic proof instead of of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers.

In other words, Bitcoin is like cash because the transacting parties can exchange directly with each other without going through a middleman. In the first few paragraphs, the whitepaper makes it clear that Bitcoin is about “commerce,” “transactions,” “payments,” “merchants,” “buyers,” and “sellers.” There is no mention of a “store of value” in the entire whitepaper.

After reviewing all of Satoshi’s writings, I can confidently state that Bitcoin was not purpose-built to first be a store of value. It was built for payments… Satoshi mentioned payments more than four times more frequently than store of value… This evidence might be sufficient for you to disregard the claim “Bitcoin was purpose-built to first be a Store of Value.” I can’t see anyone honestly looking at Satoshi’s words and really believing he didn’t build this for payments.4 It’s not just the whitepaper that makes it clear Bitcoin is about payments. Satoshi was equally clear in the online forums: Bitcoin is practical for smaller transactions than are practical with existing payment methods. Small enough to include what you might call the top of the micropayment range.5 Micropayments Just how small are “micropayments?” There is no universal definition, but in this context, they are transactions less than a single US dollar. Gavin Andresen, the developer that Satoshi chose as his successor, shared similar thoughts: I still think the bitcoin network is the wrong solution for sub-US-penny payments. But I see no reason why it can’t continue to work well for small-amount (between a US $1 and $0.01) payments.6 Bitcoin used to be considered practical for transactions in the range of a couple of cents to a couple of dollars. But since the transaction fees have risen, it’s often impossible to send a transaction that small, since the fees end up larger than the actual balance being sent. If a Bitcoin address doesn’t have enough funds to pay the miner fee, it effectively can’t be used. Satoshi elaborates on micropayments: While I don’t think Bitcoin is practical for smaller micropayments right now, it will eventually be as storage and bandwidth costs continue to fall. If Bitcoin catches on on a big scale, it may already be the case by that time. Another way they can become more practical is if I implement client-only mode and the number of network nodes consolidates into a smaller number of professional server farms. Whatever size micropayments you need will eventually be practical. I think in 5 or 10 years, the bandwidth and storage will seem trivial.7 This quote is interesting for two reasons. First, Satoshi imagines Bitcoin eventually being used for “whatever size micropayments you need,” and second, he predicts the network infrastructure will be consolidated into “professional server farms,” which is especially relevant to the debate about bigger blocks

Satoshi and others talked about creating interfaces for online merchants,12 tools for physical merchants, point-of-sale transactions, use-cases where the customer is uneasy about using a credit card, keeping small amounts of Bitcoin on mobile devices for incidental expenses,16 and so on. There is no doubt that Satoshi designed Bitcoin to be used for payments, even those as small as a few cents. In fact, the original 0.1.0 version of the software contained unfinished code for a peer-to-peer marketplace and even the basic framework for virtual poker.

The broader Bitcoin industry, too, was building on the assumption that Bitcoin was a fast, cheap, reliable payment system for the internet. Successful companies like BitPay, the largest Bitcoin payment processor in the world, had their entire business model challenged by unreasonably high fees.

Brian Armstrong, the CEO of Coinbase, also shared the same vision for Bitcoin as digital cash for the world, and in a 2017 interview, he explained why BTC’s failure to scale “broke his heart.”

The reason why I got really passionate about Bitcoin and digital currency is that I want the world to have an open financial system… where all payments are fast, cheap, instant, and global… And Bitcoin ended up not scaling to be that.18 He goes on to explain that other projects like Bitcoin Cash are more likely to accomplish this goal: I believe you could actually operate [the Bitcoin network], even at VISA scale, for maybe two to three orders of magnitude less than VISA is charging today. So it could be something on the order of one cent, or less, to send every payment in the world…

I remember the online community would frequently compare Bitcoin with Western Union to highlight its superiority as a payment system. One of the most popular early infographics (pictured below) placed a Western Union ad beside an equivalent ad for Bitcoin. The Western Union ad read, “Send warm wishes today. For only $5, you can send up to $50 for pickup within the U.S. Moving money for better.” While the Bitcoin ad read, “Send warm wishes 24/7. For only $0.01, you can send up to any amount for pickup anywhere. Moving money far better.”

The Bitcoin.org website also marketed the advantages of using Bitcoin for everyday commerce. An archived version from 2010 stated that, “Bitcoin transactions are practically free, whereas credit cards and online payment systems typically cost 1-5% per transaction plus various other merchant fees up to hundreds of dollars.”19 Even as late as 2015, the website advertised “Zero or low processing fees” and “Instant peer-to-peer transactions.”20 To pretend that Bitcoin was never created for everyday payments is a brazen attempt to rewrite history. Any person of integrity who was involved before 2014 will attest that the original plan was for a low-cost, digital cash system. The people who thought Bitcoin should be an expensive, exclusive store of value were in the extreme minority.

# 4 Store of Value vs. Medium of Exchange

Store of Value vs. Medium of Exchange [T]he real advantage of Bitcoin lies in it being a reliable long-term store of value… not from its ability to offer ubiquitous or cheap transactions.1 —Saifedean Ammous, The Bitcoin Standard It is surprising that so many people have uncritically accepted the idea that Bitcoin will store value even if it doesn’t work as digital cash. The exact opposite is more likely to be true: if Bitcoin can prove itself as a superior currency over a long period of time, the market might accept it as a store of value. But it will take years of demonstrated utility and stability before that happens. Calling any existing cryptocurrency a “reliable long-term store of value” is premature, considering the wild price fluctuations that are a regular occurrence. The fact that BTC has greatly appreciated in price over the past ten years does not mean it is a store of value.

Don’t Touch It

Saifedean Ammous has one of the most extreme versions of “digital gold maximalism” out there. He envisions a future in which regular people don’t even touch the blockchain, and on-chain transactions are reserved for high-value transfers only. In The Bitcoin Standard, he writes: Bitcoin can be seen as the new emerging reserve currency for online transactions, where the online equivalent of banks will issue Bitcoin-backed tokens to users while keeping their hoard of Bitcoins in cold storage...2 And in an online discussion, he writes: Bitcoin on-chain payments aren’t for the merchant; they’re for central banks. You can have all the world’s payment networks built on top of Bitcoin, only settling on chain. BTC is like central bank gold under a gold standard.3 This sentiment is echoed by popular Bitcoin commentator Tuur Demeester: At full maturity, using the Bitcoin blockchain will be as rare and specialized as chartering an oil tanker.4 These ideas are now discussed as if they have been the dominant vision since the beginning. But compared to the original design, they are wild and unnecessary. I certainly never signed up for this version of Bitcoin, nor did the countless other entrepreneurs I worked with in the early days. In fact, a central part of the beauty of Bitcoin is precisely that the blockchain is accessible to everybody and not exclusive to bankers. Like so many other public personalities who speak with confidence about Bitcoin, Ammous and Demeester merely assume that additional layers will solve BTC’s usability problems without any issue. Yet, when you actually look at second-layer technologies, their viability remains uncertain, especially if the base layer does not scale. These problems are generally not recognized by BTC enthusiasts, who instead believe that engineers will fix everything in the future, despite their poor track record so far.

Furthermore, a future of “Bitcoin-backed tokens” is a guarantee that arbitrary inflation will continue plaguing those of us who are not central bankers. History demonstrates that currencies inevitably lose their backing over time, and if people are forced to trade promises-of-Bitcoin instead of actual Bitcoin, it’s only a matter of time before the promises are inflated far beyond the actual supply of Bitcoin. Second layers only make this inflation easier to conduct.

Narrative Shift Within the Bitcoin community, the narrative started shifting from digital cash to a store of value over a period of several years. Even as late as 2016, the majority of Bitcoiners were still promoting the technology as an online currency—or as they liked to call it, “magic internet money”—which is why there would be celebrations whenever a new company announced that they were accepting it for payment. With each additional merchant accepting it, Bitcoin gained more credibility and utility. But after the fee spike in late 2017, rather than admit there was a problem, the most influential BTC proponents cleverly started to change the narrative—since if Bitcoin is only a store of value, then high fees don’t matter after all. In recent years, people have even been encouraged not to spend their coins in commerce, because BTC is for buying and holding indefinitely. My cynical take on the “buy, hold and never use” narrative is that it’s a great way to pump the price by creating artificial scarcity. If enough people are convinced that they can get rich by buying and holding an asset with a finite supply, extreme price increases are the inevitable result.

In my judgment, the only hope that cryptocurrency has to become a real store of value is to have real-world utility. A cryptocurrency must be more useful than legacy systems, and high transaction fees immediately damage the usefulness of any coin. If BTC were the only cryptocurrency available, then perhaps it could still work as a store of value, but since the market has superior options to choose from, it seems unlikely that the slowest, most expensive, and least scalable cryptocurrency will end up being chosen as a reliable long-term store of value. For example, Bitcoin Cash has virtually all the properties of Bitcoin Core, except you can actually use it as digital cash. In the long run, the market will eventually figure out that they are paying extremely high fees on BTC for no good reason, since the same product can be offered at a fraction of the cost.

Why does anything have value in the first place?

Money is a bit more complex as an economic phenomenon than cattle or real estate. In order to understand it, we have to grasp one more concept: the difference between direct and indirect exchange. Imagine a situation where a farmer raises chickens, and he lives next door to a tailor that produces shirts. If the farmer wants a shirt, and the tailor wants a couple of chickens, they can engage in the simplest kind of economic exchange called “direct exchange” or “barter,” which happens when the farmer trades his chickens directly for the tailor’s shirt. Barter tends to be clunky and inefficient, since it requires both parties to specifically want the item that the other person is trading. If instead of a shirt, the farmer wanted shoes, the exchange would not happen.

In contrast to barter, “indirect exchange” happens when the goods traded are not the final goods desired. So, the farmer might trade his chickens for some gasoline, not because he wants the gasoline, but because he can trade it to the tailor for the shirt he desires. In that situation, we would call the gasoline a “medium of exchange”—an intermediate step between the farmer and the final goods he desires.

Mediums of exchange are amazing. They enable huge networks of people to trade and collaborate without having to know each other, speak the same language, or share the same preferences. The most popular medium of exchange in an economy is money, and it essentially allows any product to be traded for any other. A farmer can turn his chickens into a Lamborghini if he first sells enough of them for money.

Money also makes an excellent store of value. The Austrian School of Economics provides the best explanation why. According to Ludwig von Mises: The functions of money as a transmitter of value through time and space may also be directly traced back to its function as medium of exchange.5 Murray Rothbard also comes to the same conclusion: Many textbooks say that money has several functions: a medium of exchange, unit of account, or “measure of values,” a “store of value,” etc. But it should be clear that all of these functions are simply corollaries of the one great function: the medium of exchange.6 In other words, it’s precisely because money is the commonly used medium of exchange that it stores value. So, if Bitcoin is supposed to be money, then to claim it can store value without being a medium of exchange is to put the cart before the horse.

It’s helpful to think of “storing value” as making a prediction. You’re trying to guess which goods will be valued in the future. If something is useful to people—like real estate—it’s more likely to be valued. If something is already being used as a medium of exchange—like paper currency—that’s a great sign that it will continue to be valued in the future. It’s not a guarantee, since we see cases of paper currency being ruined by central banks inflating their money supply, but it’s still a strong signal.

If people are less confident that something will be used as a medium of exchange in the future, they are less likely to use it as a store of value. Imagine that you are living on an island on which seashells are commonly used as a medium of exchange. One day, you hear on the radio that a groundbreaking new study shows that seashells are dangerous to hold and can cause cancer. You would expect far fewer people to accept those seashells as a medium of exchange, which means they are going to become a worse store of value. Even if the study was wrong and the seashells don’t cause cancer, mere public belief that they might is sufficient to change a functioning money into something worthless. The Bitcoin Core network failures of 2017 and 2021—and subsequent anti-adoption from companies dropping it as a payment option—gave reasons to doubt that BTC can work as a medium of exchange, which makes it less likely to become a real store of value in the future.

Money and Value While all money stores value, not all stores of value are money. Cattle and real estate are often considered stores of value without being money because they have other, non-monetary uses. This raises a key question: is Bitcoin like money that stores value because it’s used as a medium of exchange, or is Bitcoin like cattle and real estate, which store value for non-monetary reasons? In 2010, Satoshi discussed this subject in the forums, where people were debating how Bitcoin could gain value and why. He stated:

As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties: - boring grey in colour - not a good conductor of electricity - not particularly strong, but not ductile or easily malleable either - not useful for any practical or ornamental purpose and one special, magical property: - can be transported over a communications channel If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it.

This is a great quote for a few reasons. First of all, in this context, Satoshi is using the term “intrinsic value” to mean non-monetary use value. Gold and silver, for example, make great mediums of exchange and can also be used in industry. Tobacco and salt, other historical mediums of exchange, can be consumed directly. Bitcoin does have some non-monetary value, which will be explained shortly, but Satoshi’s thought experiment shows that even if Bitcoin had zero non-monetary uses, the mere fact that it is scarce and can be sent over a communications channel—i.e. the transaction costs are extremely low—could be sufficient to give it value because of “its potential usefulness for exchange.” In other words, Satoshi thought Bitcoin might be able to bootstrap its own value by people recognizing that it could make an excellent medium of exchange. That makes Bitcoin a rather unique invention. It is a purpose-built payment system which uses a currency that was designed to have better monetary properties than any existing money.

Other Uses At first glance, it doesn’t look like Bitcoin can do anything other than be sent to somebody else. But it does have other uses. The Bitcoin blockchain is an online, public ledger that is maintained by a decentralized network of computers, and Bitcoin transactions control the entries on that ledger. This functionality can be used for various non-monetary purposes. For example, the blockchain can be used to store valuable data, though it’s significantly more expensive than other methods for data storage. There are new social media companies that use this feature to create uncensorable platforms on the blockchain.

Thinking that Bitcoin qualifies as a “store of value” because of its non-monetary properties is like thinking US Dollar bills are a store of value because they can be used as kindling or toilet paper. Though that utility does exist, it’s tiny when compared to the value of being a secure, international, frictionless medium of exchange. Satoshi understood that the transmissibility of Bitcoin was a central feature that gave it value. Yet, that feature was intentionally destroyed by the Bitcoin Core developers, giving BTC almost no unique value proposition when compared to other cryptocurrencies. Not only do other coins have lower fees, they also have superior non-monetary functionality.

Given the subjective nature of value, it is conceivably possible that the market could choose BTC as a store of value. But it’s also conceivable that the market could choose smelly old gym socks as a store of value. Possible, but unlikely. It seems more reasonable to think that the cryptocurrency with the best chance of becoming a store of value needs to maximize all its positive properties and minimize its negative properties. Having clunky and expensive transactions is not a desirable feature of any store of value or medium of exchange.

Imagine a cryptocurrency with all the properties of BTC, except in addition, it allowed instant, nearly free transactions for the entire world and was a purpose-built medium of exchange for the twenty-first century. Its utility would be orders of magnitude greater than one without this functionality. That was the original plan for Bitcoin, and it remains the plan for Bitcoin Cash and other cryptocurrencies.

# 5 The Blocksize Limit

A single technical parameter allowed the Bitcoin Core developers to turn Bitcoin into a different project: the “blocksize limit.” The blocksize limit is simply the maximum size of blocks allowed on the network. Remember, transactions get bundled into blocks, so the more transactions, the larger the blocks. This makes the blocksize limit effectively a maximum throughput limit for Bitcoin. Bitcoin Core used a tiny blocksize limit to artificially throttle the capacity of the network to a fraction of its potential.

The blocksize limit was not supposed to be an important parameter, and the limit was not meant to be reached. It was supposed to stay far above the size of the average block. The blocks were never meant to be full, except in extreme circumstances.

Extra Space Needed A full block means that there are more transactions trying to be processed than can fit into a single block, which immediately causes fees to spike and a backlog to develop. A BTC block can currently hold 2,000-3,000 transactions and is produced every ten minutes. If 18,000 people try to make a single transaction within a ten-minute period, the network must take at least six blocks to process them all. That’s one hour to process every transaction in the queue if nobody else uses it during that time. If 150,000 people try to use Bitcoin at one time, it would require at least fifty blocks to process everything. That’s more than eight hours of waiting.

Delayed processing is not the only problem during network congestion. When blocks become full, fees start rising. A higher fee does not guarantee that your transaction will be processed quickly; it only allows you to cut in line in front of other transactions.

Bitcoin is often analogized to email for its ability to instantly connect people over the internet. Imagine if email couldn’t handle 150,000 people using it and took eight hours to send and receive messages. That would certainly be considered an embarrassing design flaw. Yet, in the middle of these network failures, transactions could be stuck for days, or even an entire week at the peaks. This is why the blocksize limit was supposed to stay far above the demand for transactions, as a distant technical limitation that wouldn’t affect the functionality of the system. Bitcoin would scale with usage and the limit would either be increased or removed altogether.

Allowing the blocks to grow naturally would have kept Bitcoin as a digital cash system with low-fee transactions and universal access to the blockchain. But the Core developers wanted to turn Bitcoin into a settlement system for high-value transfers, so they refused to increase the blocksize limit. The only reason that fees spiked to astronomical levels and the network became unreliable was because the blocks were too small to handle demand.

Countless early developers, businesses, and enthusiasts knew that the blocksize limit needed to be raised. They knew that full blocks would cause a terrible user experience and could see that the blocks were becoming fuller as Bitcoin grew in popularity. Yet, despite endless arguments and pleas from the industry, the Core developers refused to increase the limit. They have still not meaningfully increased maximum transaction throughput from 2010 levels. A single picture on your smartphone is bigger than an entire BTC block, sometimes significantly so depending on the quality of the image. This was ultimately the reason why the cryptocurrency industry fractured and Bitcoin Cash was created.

Hearn left Google to work on Bitcoin. While at Google, he spent three years as a capacity planner for Google Maps—one of the most popular websites in the world. So, he was deeply familiar with network capacity issues. Like Satoshi and Andresen, Hearn was a big-blocker who didn’t think Bitcoin had any inherent scaling problems.

When Bitcoin was originally coded, there was no explicit limit on the size of blocks that could be produced. That changed in 2010, when Satoshi added a blocksize limit to prevent a potential denial-of-service attack while Bitcoin was young. In his blog, Gavin Andresen explained the reasons for the initial limit: … [T]he limits were added to prevent a ‘poisonous block’ network denial-of-service attack. We have to worry about denial-of-service attacks if they are inexpensive to the attacker… The attack the limit is meant to prevent is much more expensive today… On July 15th [2010], about eleven thousand bitcoin were traded at an average price of about three cents each. The block reward was 50 BTC back then, so miners could sell a block’s worth of coin for about $1.50.

That gives a rough idea of how much it would cost an attacker to produce a ‘poisonous block’ to disrupt the network – a dollar or two. Lots of people are willing to spend a dollar or two “for the lulz” – they enjoy causing trouble, and are willing to spend either lots of time or a modest amount of money to cause trouble.5 The initial limit was set to one megabyte, allowing for a theoretical limit of seven transactions per second. In practice, the real limit is around three to four transactions per second, corresponding to 2,000-3,000 on-chain transactions per block—far above the actual usage of the network in those days. The plan was to simply increase the limit or eliminate it entirely. Andresen noted in the forums: The plan from the beginning was to support huge blocks. The 1MB hard limit was always a temporary denial-of-service prevention measure.6 Ray Dillinger, another early Bitcoin pioneer, said the same thing: I’m the guy who went over the blockchain stuff in Satoshi’s first cut of the bitcoin code. Satoshi didn’t have a 1MB limit in it. The limit was originally Hal Finney’s idea. Both Satoshi and I objected that it wouldn’t scale at 1MB. Hal was concerned about a potential DoS attack though, and after discussion, Satoshi agreed… But all 3 of us agreed that 1MB had to be temporary because it would never scale. 7 Satoshi, Hal, and Ray being in unanimous agreement is particularly interesting since Hal Finney is often seen as a proponent of small blocks. But even he agreed the 1MB limit had to be temporary. Yet, to this day, the Bitcoin Core developers have refused to meaningfully increase the blocksize limit beyond the initial level set in 2010, despite the massive improvements in software, hardware, and networking technology. Virtually all the biggest companies in the industry tried, on multiple occasions, to increase the limit, but the Core developers refused, even after publicly agreeing to an increase. Instead, they changed the metric of blocksize into “block weight” and claim the new limit is 4MB, but this is mostly an accounting trick and does not correspond to a quadrupling of throughput capacity.

Inverted Design The simple reason the Core developers refused to increase the limit is because they wanted to change Bitcoin’s design. The sooner the blocks became full, the sooner the transaction fees would rise, which they viewed as desirable. Jorge Timón, a Core developer, stated, “I agree that hitting the limit wouldn’t be bad, but actually good for a young and immature market like bitcoin fees.”8 While Greg Maxwell stated bluntly, “There is nothing wrong with full blocks… Full blocks is the natural state of the system.”9 To appreciate just how radical these ideas are, contrast them with the ideas you would have encountered in the early days of Bitcoin, when the Visa network was often used as a comparison for transaction throughput. All the way back in 2009, Satoshi was asked about Bitcoin’s ability

Inverted Design

The simple reason the Core developers refused to increase the limit is because they wanted to change Bitcoin’s design. The sooner the blocks became full, the sooner the transaction fees would rise, which they viewed as desirable. Jorge Timón, a Core developer, stated, “I agree that hitting the limit wouldn’t be bad, but actually good for a young and immature market like bitcoin fees.”8 While Greg Maxwell stated bluntly, “There is nothing wrong with full blocks… Full blocks is the natural state of the system.”9 To appreciate just how radical these ideas are, contrast them with the ideas you would have encountered in the early days of Bitcoin, when the Visa network was often used as a comparison for transaction throughput. All the way back in 2009, Satoshi was asked about Bitcoin’s ability to scale and said:

The existing Visa credit card network processes about 15 million Internet purchases per day worldwide. Bitcoin can already scale much larger than that with existing hardware for a fraction of the cost. It never really hits a scale ceiling.10 This was the common understanding for years. Though today we would call it part of “Satoshi’s vision,” it was nearly everybody’s vision back then. For example, if you were researching Bitcoin in 2013, you would likely have come across its Wiki page. This is what the section on “scalability” had to say: The core Bitcoin network can scale to much higher transaction rates than are seen today, assuming that nodes in the network are primarily running on high end servers rather than desktops. Bitcoin was designed to support lightweight clients that only process small parts of the block chain… A configuration in which the vast majority of users sync lightweight clients to more powerful backbone nodes is capable of scaling to millions of users and tens of thousands of transactions per second… Today the Bitcoin network is restricted to a sustained rate of 7 tps by some artificial limits. These were put in place to stop people from ballooning the size of the block chain before the network and community was ready for it. Once those limits are lifted, the maximum transaction rate will go up significantly… At very high transaction rates each block can be over half a gigabyte in size.11 This was common knowledge. Everybody understood that the system was designed to scale with larger blocks, and it wasn’t even controversial.

In 2013, Visa was handling, on average, around 2,000 transactions per second. To get 2,000 transactions per second on Bitcoin, the blocks would have to be roughly 500MB, which is an entirely manageable amount. Today’s cell phones can easily record and upload HD videos that are gigabytes in size—that is, multiple times the size of a Bitcoin block that contains over a million transactions. Scaling to that level requires more than simply increasing the maximum blocksize, but there are no fundamental reasons why it can’t happen. In fact, Bitcoin Cash has already successfully had multiple 32MB blocks, and a recent offshoot of Bitcoin Cash, Bitcoin SV, has even mined a 2GB block. These networks have not broken. Satoshi had a simple, final answer to questions about blocksize: It would be nice to keep the [blockchain] files small as long as we can. The eventual solution will be to not care how big it gets.13 High Fees and Slow Transactions Why would the Bitcoin Core developers want high fees? To the early Bitcoin enthusiast, or even to the average person, it sounds like an obviously bad idea. But actually, high fees are the inevitable outcome of the small-block philosophy. To understand why, we have to analyze the system more closely. As explained in Chapter 2, miners get paid in two ways. They receive transaction fees and the block reward. Since the block reward diminishes over time, the only source of revenue will eventually be transaction fees. And since the Bitcoin Core developers want small blocks, the only way for miners to make money in their system is with extremely high transaction fees. Bitcoin cannot work without miners being paid, and if they can only process 3,000 transactions per block, fees need to be hundreds or thousands of dollars per transaction to maintain security. Core developer Jorge Timón spoke openly about this problem: Bitcoin needs a competitive fee market in the long run to sustain [proof of work] once the subsidies are gone. I am very happy that we have it now….14 Pieter Wuille, another Core developer, said: My personal opinion is that we—as a community—should indeed let a fee market develop, and rather sooner than later.15 They euphemistically call the backlog of high fee transactions a “fee market,” where users outbid each other for the tiny amount of space inside blocks. This bizarre and unnecessary security model is why the Core developers celebrate and encourage high fees and a backlog of transactions. Greg Maxwell claimed: Fee pressure is an intentional part of the system design and to the best of the current understanding essential for the system’s long term survial [sic]. So, uh, yes. It’s good

And when fees rose to $25 in December 2017, Maxwell infamously responded: Personally, I’m pulling out the champaign [sic] that market behaviour is indeed producing activity levels that can pay for security without inflation, and also producing fee paying backlogs needed to stabilize consensus progress as the subsidy declines.17 Of course, Satoshi Nakamoto did not design Bitcoin this way. Miners were expected to recoup their costs by processing a high volume of low-fee transactions with big blocks. In the forums, Satoshi was asked about the long-term revenue model for miners. He explained: In a few decades when the reward gets too small, the transaction fee will become the main compensation for [miners]. I’m sure that in 20 years there will either be very large transaction volume or no volume.18 Notice, he did not say “in 20 years, there will either be a large transaction volume or a small volume with extremely high transaction fees.” That would have sounded dubious to anybody with common sense. He predicted either high volume or none at all.

By artificially limiting the blocksize, the Bitcoin Core developers found a way to completely change the dynamics of the system. Not only did the user experience change from “nearly instant and free transactions” to “expensive and unreliable transactions,” the underlying economic model was radically changed as well. BTC is gambling on the idea that future users will be willing to pay hundreds or thousands of dollars per on-chain transaction, despite having superior alternatives. Otherwise, miners will have to shut down most of their equipment because they won’t generate a profit.

Given this, it’s no exaggeration to say that BTC was hijacked, and the original design was replaced with a new, speculative one. This is why Vitalik Buterin, the co-founder of Ethereum, publicly said: I consider BCH a legitimate contender for the bitcoin name. I consider bitcoin’s *failure* to raise block sizes to keep fees reasonable to be a large (non-consensual) change to the “original plan”, morally tantamount to a hard fork.19 Bitcoin Core’s failure to increase the blocksize limit was not merely academic. It had real-world consequences for the businesses building on Bitcoin or merely accepting it for payment. After the 2017 fee spike, the Bitcoin industry experienced anti-adoption for the first time. When the popular gaming platform Steam announced they were no longer accepting Bitcoin, they publicly shared their reasons why20: As of today, Steam will no longer support Bitcoin as a payment method on our platform due to high fees and volatility in the value of Bitcoin…[T]ransaction fees that are charged to the customer by the Bitcoin network have skyrocketed this year, topping out at close to $20 a transaction last week (compared to roughly $0.20 when we initially enabled Bitcoin)…

BTC supporters have a few standard responses to these criticisms. If they are unaware that high fees are part of the intentional redesign of Bitcoin, they often like to say, “Fees aren’t really a problem. Look, at this very moment, fees are low!” But this is a weak argument. At any given moment, the fees might be low on BTC, but only because the network has little traffic. If more people use it, then congestion will build quickly, and the fees will spike again. It’s like automobile traffic. Just because the roads are empty at 3am doesn’t mean that Los Angeles has solved their traffic problems. If the BTC blocks are not full, then fees will be low, but if blocks are full and activity increases, then the fees will inevitably rise to extreme levels.

What About Second Layers?

The other attempt to rescue the small-block philosophy involves an appeal to secondary layers, since if most transactions are off-chain, then perhaps the fees can be low on the secondary layers. While it does make sense to build multiple layers in Bitcoin, in order to work correctly, the base layer must be scalable. If the base layer can only process seven transactions per second, it’s not even close to being robust enough to build additional layers on top. Second layers still have to interact with the base layer, so high fees remain a fundamental problem. For example, the Lightning Network still requires occasional on-chain transactions to use, and those fees have to be paid by someone. Right now, many popular wallets are subsidizing these costs for their users, but if $50+ fees are the norm, that model is simply not sustainable.

If the Bitcoin Core developers had simply increased the blocksize limit to a reasonable level, I am confident that many competing cryptocurrency projects simply wouldn’t exist, the industry would have remained unified around one coin, and BTC would have continued to be the premier digital cash system for the internet. Instead, the Bitcoin Core developers pivoted to a settlement system with high fees and unreliable transactions, leaving a void for digital cash that has not yet been filled.

# 6 Notorious Nodes

All the objections to big blocks revolve around one core idea: as the blocksize increases, the cost to run a full node also increases. The more expensive it is to run a node, the fewer people will run them, and the more centralized the network will become. Therefore, by keeping blocks small, more people can run nodes, which keeps the network decentralized. Core developer Wladimir van der Laan stated it clearly in 2015: I understand the advantages of scaling, I do not doubt a block size increase will *work* Although there may be unforseen [sic] issues, I’m confident they’ll be resolved. However, it may well make Bitcoin less useful for what sets it apart from other systems in the first place: the possibility for people to run their own “bank” without special investment in connectivity and computing hardware.1 There are several problems with this idea. Most fundamentally, the idea that users need to run their own full nodes in order to “run their own bank” is incorrect. Bitcoin was designed so that regular people don’t have to run their own full nodes. They can use lighter software. Remember, a full node downloads a copy of the entire blockchain and validates every single transaction on the network. This is unnecessary for almost everybody. Satoshi designed Bitcoin with Simplified Payment Verification (SPV) in mind, which allows users to verify their own transactions with a tiny amount of data. Using SPV, you cannot verify a stranger’s transactions, nor can you verify every transaction ever made, but most people have no reason to do that. Satoshi was not foolish enough to design a cash system where every user had to download and verify the entire world’s transactions. There’s no way such a system could scale.

Second, the fact that the costs of validation increase with the size of blocks is not a problem. Satoshi could not have been clearer when he wrote: The current system where every user is a network node is not the intended configuration for large scale. That would be like every Usenet user [running] their own NNTP server. The design supports letting users just be users. The more burden it is to run a node, the fewer nodes there will be. Those few nodes will be big server farms. The rest will be client nodes that only do transactions and don’t generate.2 And also when he stated: Only people trying to create new coins would need to run network nodes. At first, most users would run network nodes, but as the network grows beyond a certain point, it would be left more and more to specialists with server farms of specialized hardware.3 Satoshi was so clear about this that it’s impossible to misinterpret. His idea made perfect sense. In every industry, businesses tend to specialize in what they do best. Maintaining Bitcoin’s network is no different. Satoshi envisioned “big server farms” at the center of the network, with regular users connecting to them. It’s fine to dislike this idea, but it’s how Bitcoin was designed. It’s analogous to email. Technically, it’s possible for anybody to set up their own email server and connect to the global email network. But why would you? It’s difficult to set up and maintain, and the vast majority of people have no reason to do so. So in most cases, we leave it to the specialists.

Alan Reiner, who created the popular Armory wallet, said in 2015: The goals of “a global transaction network” and “everyone must be able to run a full node with their $200 dell laptop” are not compatible. We need to accept that a global transaction system cannot be fully/constantly audited by everyone and their mother.4 Even supporters of Bitcoin Core have admitted that their perspective on nodes is quite different from the original one. “Theymos” is the pseudonym of the owner of the most popular discussion platforms for Bitcoin—who later played a central role in the censorship of big-blockers—but even he admitted: Satoshi definitely intended to increase the hard max block size… I believe that Satoshi expected most people to use some sort of lightweight node, with only companies and true enthusiasts being full nodes. Mike Hearn’s view is similar to Satoshi’s view

The Full Node Religion

Let’s delve deeper into the reasons why small-blockers think full nodes are so important. The Bitcoin Wiki page has an entry on full nodes that explains their philosophy well. This long excerpt is a great summary: Full nodes form the backbone of the network. If everyone used lightweight nodes, Bitcoin could not exist… Lightweight nodes do whatever the majority of mining power says. Therefore, if most of the miners got together to increase their block reward, for example, lightweight nodes would blindly go along with it. If this ever happened, the network would split such that lightweight nodes and full nodes would end up on separate networks, using separate currencies… If all businesses and many users are using full nodes, then this network split is not a critical problem because users of lightweight clients will quickly notice that they can’t send or receive bitcoins to/from most of the people who they usually do business with, and so they’ll stop using Bitcoin until the evil miners are overcome… However, if almost everyone on the network is using lightweight nodes in this situation, then everyone would continue being able to transact with each other, and so Bitcoin could very well end up “hijacked” by evil miners. In practice, miners are unlikely to attempt anything like the above scenario as long as full nodes are prevalent because they would lose a lot of money.

But the incentives completely change if everyone uses lightweight nodes. In that case, miners definitely do have an incentive to change Bitcoin’s rules in their favor. It is only reasonably secure to use a lightweight node because most of the Bitcoin economy uses full nodes. Therefore, it is critical for Bitcoin’s survival that the great majority of the Bitcoin economy be backed by full nodes, not lightweight nodes.7 These ideas have become the orthodoxy. Anybody trying to figure out Bitcoin today might not even know that this article is heavily biased towards a small-block perspective that the creator of Bitcoin himself would have disagreed with. There are two central points being made here:

Miners have an incentive to “hijack” Bitcoin by changing the rules in their favor; for example, increasing the block reward.

Miners are prevented from arbitrarily changing the rules because full nodes do not “blindly follow” the majority mining power.

Both of these claims are false. First, miners do not have an incentive to arbitrarily change the rules of Bitcoin. At first glance, it might seem like miners could profit from creating new coins out of thin air. However, this overlooks the reason why Bitcoins have value in the first place. Value is not intrinsic; it comes from a complex web of beliefs that people have about the entire Bitcoin network. If the miners decided to produce a billion new Bitcoins for themselves, they would destroy the underlying trust in the system, which would destroy the value of each Bitcoin. They might have a billion more Bitcoins, but each one would be worthless. Mike Hearn understood this dynamic: Rational miners shouldn’t want to undermine the validity of their own wealth. Doing things that significantly reduce the utility of the system is self-defeating even over the medium term because it’d lead people to just give up on the system in disgust and sell their coins, driving down the price. I think it’s fair to say that being unable to buy basic things like food or drinks in person would reduce the utility of Bitcoin for a lot of people.8 Hearn understood that miners are not a threat to the system. If anything, miners are least incentivized to break Bitcoin, since their only revenue comes from transaction fees and the block reward, both of which are denominated in Bitcoins that must be sold on the market.

The second major claim of the Wiki article is that full nodes can somehow prevent the rules of the network from changing. They cannot. Remember, full nodes cannot add blocks to the chain. They can only verify whether blocks and transactions are valid. Imagine that a new bug is discovered in the protocol that breaks Bitcoin in an important way and the software has to be upgraded in a short period of time. The miners will upgrade immediately, since their profits depend on the network running. But what would happen if everyone else running full nodes didn’t upgrade? Would the miners be prevented from upgrading altogether? Not at all. Miners would continue on just fine adding blocks to the chain, and the full nodes would simply split themselves off the main network and onto their own new network. If their new network had no miners, they could not even add new blocks to their chain, and no transactions could be processed. If anything, this is a reason to use lightweight wallets, since you don’t run the risk of being forked off from the main network.

These ideas have become the orthodoxy. Anybody trying to figure out Bitcoin today might not even know that this article is heavily biased towards a small-block perspective that the creator of Bitcoin himself would have disagreed with. There are two central points being made here:

- Miners have an incentive to “hijack” Bitcoin by changing the rules in their favor; for example, increasing the block reward.

- Miners are prevented from arbitrarily changing the rules because full nodes do not “blindly follow” the majority mining power.

Full nodes do not have any direct power to restrict miners from changing the rules. But it’s correct to say they have indirect power to notify people that the rules have changed. According to the Wiki article, what prevents “evil miners” from changing the rules is that they know full nodes would catch them, and once the world learned about their evil deeds, the value of the whole system would be destroyed. So, the watchful eye of the full nodes keeps the miners in check. There’s a superficial sense in which this is true. Miners are indeed incentivized not to change the rules of Bitcoin arbitrarily because it would destroy the value of their coin. However, it doesn’t require a large network of full nodes to notify people that the rules have changed. It only requires a single honest miner, or even a single honest node. Any one person can prove to the world that a particular block or transaction is invalid according to the old rules. Even if 100% of the miners were in collusion, a single full node could still demonstrate that the rules changed. That means any single miner, business, cryptocurrency exchange, researcher, or payment processor could prove that the rules changed. Therefore, it’s essentially guaranteed that everybody would find out.

However, it would be an oversimplification to say that full nodes literally have no power, since not all nodes are created equal. Some full node operators are relevant economic actors. If the hobbyist running a node in his basement gets forked off the network, it doesn’t matter. But if a large business or cryptocurrency exchange gets forked off, it does matter, and the value of the coin could be damaged. So, miners have a strong incentive to ensure that relevant economic actors support any proposed changes they want and the software has to be upgraded in a short period of time. The miners will upgrade immediately, since their profits depend on the network running. But what would happen if everyone else running full nodes didn’t upgrade? Would the miners be prevented from upgrading altogether? Not at all. Miners would continue on just fine adding blocks to the chain, and the full nodes would simply split themselves off the main network and onto their own new network. If their new network had no miners, they could not even add new blocks to their chain, and no transactions could be processed. If anything, this is a reason to use lightweight wallets, since you don’t run the risk of being forked off from the main network.

Honest and Dishonest Miners It would also be an oversimplification to say that miners could never pose a risk to the integrity of Bitcoin. There is one clear scenario in which the actions of miners could be damaging. As explained in the whitepaper, Bitcoin requires that the majority of mining power—also called “hashrate”—is honest, meaning that it’s not deliberately trying to destroy the system. Honest miners seek profit by maximizing the utility of the coin and growing the size of the network. Dishonest or malicious miners, on the other hand, pose a different kind of threat. Bitcoin was specifically designed to operate even among dishonest miners, but only if they constitute the minority. If the majority of hashrate became dishonest, then Bitcoin would indeed run into problems. For example, if a hostile government took control of the majority of hashrate, Bitcoin could be disrupted. But even in such a scenario, full nodes offer no protection. Since they cannot add blocks to the chain nor control the behavior of miners, they would simply be forked off the main network. No matter how hard a full node tries, it just does not have the power to save a network with a majority of dishonest miners.

The fact that Bitcoin requires the majority of hashrate to be honest is not a unique design flaw. All proof-of-work blockchains have the same vulnerability. The real defense against dishonest miners is economic. It’s the cost of mining. The more expensive it becomes to mine, the higher the costs to any bad actors trying to gain a majority of the hashrate. Therefore, the more successful Bitcoin becomes, the higher its overall level of security. Governments are generally the only ones that pose a real threat of gaining a majority of malicious hashrate, since they do not have to operate by the constraints of profit and loss. If a well-funded state actor tried to break Bitcoin in this way, the network would face a real challenge, regardless of how many full nodes there are.

# 7 The Real Cost of Big Blocks

Excessive concern about the cost of big blocks looks irrational when you run the numbers. It does not take more than back-of-the-envelope calculations to see that Bitcoin can scale far beyond 1MB blocks without substantially increasing costs. In fact, given the steep downward trajectory of the relevant costs involved, even at massive scale they would not be prohibitive for home users, even though Satoshi did not expect regular users to run their own nodes.

To have basic full node capability, the two major costs involved are data storage and bandwidth, both of which have plummeted for decades along with the costs of technology generally.

For Bitcoin to process the 100 billion transactions that Visa processes, each block would need to be around 800 megabytes, meaning every ten minutes, each Bitcoin node would need to add 800 megabytes of data. In a year, each Bitcoin node would add around 42 terabytes of data... to its blockchain.2 This is correct. If Bitcoin processes roughly four transactions per second per MB block, then 800MB blocks equals around 3,200 transactions per second or a hundred billion transactions per year. Anybody familiar with computers will know that 800MB every 10 minutes is a surprisingly low number, considering that it enables Visa-level throughput. Yet, Ammous comes to the opposite conclusion: Such a number is completely outside the realm of possible processing power of commercially available computers now or in the foreseeable future.3 I do not know where Ammous got his information, but he is apparently unfamiliar with the costs of technology. Even at massive throughput levels, neither storage nor bandwidth costs would be significant for running a basic full node.

Storage Costs

Let’s start with the most basic calculations and then show how to reduce costs even further. In September 2023, a quick search for 8TB hard drives on Newegg.com shows its first result as a Seagate Barracuda drive selling for $119.994—that’s $15 per TB. If Bitcoin uses 42TB per year, that’s $630, or $52.50 a month. If we want to include the cost of a consumer-grade, 6-bay NAS device to connect the drives together, that currently runs around $670.5 Added together, that’s a minuscule $1,300 per year—just over a hundred dollars a month—for storing 100,000,000,000 transactions.

Even though these costs are already low, the actual storage costs are even lower because of the clever way Bitcoin was designed. Put simply, full nodes do not need to store the entire transaction history. In fact, all they technically need is the running list of addresses with non-zero balances in them—called the “Unspent Transaction Output” set, or UTXO set. You can think of the UTXO set as the list of active cash balances without their corresponding histories. This makes the size of the UTXO set a tiny fraction of the historical record of all transactions. The record can be “pruned” away, where old, irrelevant information is discarded. Bitcoin miners often already run with a pruned blockchain. However, if a full node does want the historical record for some reason, it can easily keep as many months or years as it desires. Instead of storing all records going back to 2009, it could store just the last year’s worth. So, instead of 42TB per year, it might only store 42TB in total, effectively turning the annual costs of storage into a one-time expense.

A full node running at Visa levels and keeping the entire blockchain history would still only incur minor storage costs with consumer-grade hardware. These calculations do not even consider the inevitable reduced costs of technology in the future. Computer storage has a consistent record of massive price reductions over the past 70 years.

When Satoshi released Bitcoin at the beginning of 2009, computer storage cost roughly $0.10 per gigabyte. Since then, prices have come down more than 85% and are currently less than $0.015 per gigabyte.7 Contrary to Ammous’ claim that 800MB blocks would produce enough data to be “outside the realm of possible processing power of commercially available computers,” the real storage costs would be affordable for consumers and minimal for most businesses.* Bandwidth Costs Storage costs are not a realistic concern. So, if there is any merit to the small block philosophy, it must be that bandwidth costs would be prohibitively expensive with big blocks. The Bitcoin Standard reads: [A] node that can add 42 terabytes of data every year would require a very expensive computer, and the network bandwidth required to process all of these transactions every day would be an enormous cost that would be clearly unworkably complicated and expensive for a distributed network to maintain.8 Once again, Ammous makes confident pronouncements about the costs of technology, yet apparently without doing basic research on the topic. Satoshi himself addressed this concern all the way back in 2008, before he even released any code. He said: The bandwidth might not be as prohibitive as you think. A typical transaction would be about 400 bytes… Each transaction has to be broadcast twice, so let’s say 1KB per transaction. Visa processed 37 billion transactions in FY2008, or an average of 100 million transactions per day. That many transactions would take 100GB of bandwidth, or the size of 12 DVD or 2 HD quality movies, or about $18 worth of bandwidth at current prices.

If the network were to get that big, it would take several years, and by then, sending 2 HD movies over the Internet would probably not seem like a big deal.9 It’s worth noting a couple of things from this quote. First, Satoshi gave an estimate of $18 per day—more than $6,500 per year—to demonstrate how low the costs of bandwidth could be at scale, again revealing that he did not expect regular users to run their own nodes. $18 per day is not an excessive amount, but it is enough to dissuade casual users who do not have a way to recover these costs. Miners would have no issues, however. If each of the hypothesized 100 million transactions had a $0.01 fee, that would result in $1 million per day split among miners, or roughly $41,500 per hour, more than enough to recover their costs for bandwidth.

Second, when Satoshi wrote that email in 2008, the average US cost of bandwidth was $9 for each megabit per second of data. Ten years later, it fell by a colossal 92% to $0.76.10 The cost of bandwidth varies across the world, but the trend is down everywhere, and there’s every indication this will continue. AT&T is charging American customers only $80 per month for one-gigabit service and $110 per month for two-gigabit.11 People already using fiber optic internet might not even see their bandwidth costs increase at all.

To understand just how small these numbers are today, consider the data used by Netflix. Streaming an HD video from Netflix takes around 3GB of data per hour, and streaming a 4K video takes around 7GB per hour.12 If we take Satoshi’s estimates for 100GB per day, that works out to roughly 4GB per hour—around 43% less than the hourly bandwidth used when streaming 4K videos from Netflix. While it’s true that not everyone in the world is currently able to stream 4K videos to their home, the point is that the costs are exponentially decreasing everywhere, and in the developed world they have reached a level where full node operators might not see their bandwidth costs increase at all. Undoubtedly, some nodes would not be able to handle the increased costs, but the capacity of the Bitcoin network should not be limited by those with the weakest internet connection. If Bitcoin only requires a gigabit-level internet connection in order to run a full node that can process Visa-level transaction throughput, the barrier to entry is not is not too high.

# 8 The Right Incentives

The Right Incentives I think most people see all the digital signatures and peer-to-peer networking technology but miss that much of the brilliance of Bitcoin is how the incentives are designed.1 —Gavin Andresen, 2011 Bitcoin is not merely a software project or a computer network. It is an enormous, complex system that millions of people around the world participate in. To understand it, we have to examine more than just its software. Some critical features of Bitcoin are not coded at all; they are built into its incentive structure. Users, miners, and businesses are all incentivized to use Bitcoin in a way that benefits themselves and the whole network at the same time. This economic coordination can be harder to see, but it’s just as important as any other technical detail.

Why Run a Full Node?

Big-blockers and small-blockers disagree about the role of full nodes on the network, and this reflects a difference in thinking about incentives. In the small-block philosophy, full nodes are supposed to play a critical role, despite a lack of clear incentive. Regular users are encouraged to run their own nodes, downloading and validating the entire blockchain just to use Bitcoin, even though it’s a burden. When running a node for the first time, it can take hours or even days to sync up with the rest of the network, and it also takes up hundreds of gigabytes worth of disk space. For this reason, full nodes are generally not run on smartphones, making BTC much less convenient to use. Users are not rewarded for running this software; they simply gain the ability to validate blocks of other people’s transactions.

While this might sound like a great idea to a group of software engineers, it’s not a realistic expectation for the rest of the world to follow. Most people will never run a full node because they have no reason to. It’s too great a burden with too little a reward. If Bitcoin was designed so that regular people were forced to run their own nodes for the security of the network, it would be a critical design flaw.

Compare this to Satoshi’s SPV design, which allows wallets to be downloaded and synced instantly. You can use a BCH wallet on your smartphone as easily as any other app. BTC proponents like to claim that SPV has some theoretical security problems, but there have been no documented cases of users losing money because of it. It has a long, successful track record, and the most popular BTC wallet apps are actually using SPV or similar technology, or they are custodial wallets. Satoshi understood that heavy-duty infrastructure maintenance needed to be performed by people who are paid for their work—the miners, not everyday users.

Another example of economic misunderstanding was Bitcoin Core trying to protect the smallest nodes from getting kicked off the network. The developers had multiple opportunities to increase the blocksize limit, but they didn’t want to risk kicking any nodes off the network, no matter how small. In fact, there’s a whole movement of BTC supporters putting full nodes onto Raspberry Pis—computers so small that they cost about $30. So it’s no surprise that BTC can’t scale; every transaction on the network can still be processed with extraordinarily cheap equipment! From the perspective of scaling, the Core developers did the worst possible thing. They throttled the capacity of the network to the capacity of the smallest players and did not understand that it’s perfectly healthy to have the smallest nodes kicked off the network as it grows. As Satoshi said, nodes will professionalize into “big server farms.” That’s what natural economic growth would look like.

The central planning tendency of the Core developers

Just like a free economy works better than a centrally-planned one, a free Bitcoin works better than a centrally-planned one. Bitcoin Core has been the central planning board for Bitcoin on many issues, whether it’s imagining they know the “correct” blocksize, the “correct” level of transaction fees, or the “correct” number of nodes on the network. This is why Gavin Andresen said: Central planning is why I would like to eliminate the hard, upper blocksize limit entirely, and let the network decide “how big is too big.4 In economic terms, the blocksize limit in BTC is a centrally-planned supply shortage. The demand for larger blocks is there, but miners are restricted from producing them because of an arbitrary limitation written into the software. BTC users are then forced to compete in an artificial “fee market” to get their transaction processed. The same thing happens in housing markets when central planners prevent new construction from being built. It causes a supply shortage and prices skyrocket. The basic economic principles of supply and demand apply to both the housing market and the cryptocurrency market. If left alone, miners will produce the best size block to meet demand.

Trusting Incentives, not Individuals

The final part of Bitcoin’s economic design that is commonly misunderstood is the role of trust. Just like the concept of “digital gold” has been taken too literally, the concept of “trustlessness” is also taken too literally. When Satoshi said that Bitcoin didn’t require “trusted third parties,” he did not mean that no trust in any humans whatsoever was required. Bitcoin is economic in nature, which makes it social in nature, which means it still requires some trust in humans. For example, a BTC enthusiast might run his own node, verify every transaction on the blockchain, and think he’s operating without trusting anybody. But he’s mistaken. He is actually trusting many people that he’s never met. He trusts that the developers of his operating system did their jobs correctly. He trusts that the CPU manufacturers did their jobs correctly. He trusts that every single company involved in the production of his computer did not bug his hardware. He trusts that his ISP is connecting him to the internet in a secure way. He’s essentially trusting thousands of people all over the world, though he’s not trusting them individually. Instead, he’s trusting the system of economic incentives that coordinates all of them to produce high-quality hardware and software.

# 9 The Lightning Network

The Lightning Network Even the most vocal Bitcoin Maximalists will admit that, in the long run, there needs to be a way to make Bitcoin usable as money in everyday commerce. But they do not want the base layer to provide that functionality. Instead, they want regular payments to be conducted on secondary layers like the Lightning Network. Small-blockers have been arguing that the blocksize limit does not need to be raised because the Lightning Network solves Bitcoin’s scaling problems—they made this argument years before Lightning even existed. Despite the hype, the reality of the Lightning Network is grim. It has several critical design flaws that make it insecure, cumbersome, and unlikely to ever gain mainstream adoption. Each attempt at solving Lightning’s problems has created new layers of complexity that come with new sets of problems—a terrible sign from the perspective of software development.

Here’s a basic overview of the Lightning Network’s design. The technology is based around “payment channels,” which is essentially a running balance between two parties. Say Alice opens a payment channel with Bob and funds it with $10. The initial balance would be $10 for Alice and $0 for Bob. If she sends him a $3 transaction, the new balance would be $7 for Alice and $3 for Bob. Bob could send her back $1, and the new balance would be $8 for Alice and $2 for Bob. None of these transactions are recorded on the blockchain; their nodes keep track of the tally separately, off the chain. At any point, either party can close the channel, which then distributes the final balances to both people with an on-chain transaction.

Payment channels are a neat technology that has been worked on since the beginning, even by Satoshi himself. However, they were not being worked on as a scaling solution. Instead, they were being designed for tiny micropayments and high-velocity two-way transactions, which are used in special circumstances like machine-to-machine payments. Payment channels are great for micropayments because they allow tiny amounts to be sent back and forth between parties without incurring on-chain transaction fees.

The Lightning Network is an attempt to link payment channels together to create a secondary layer that can route everyday Bitcoin payments. So, if Alice wants to send money to Charlie, but she does not have a payment channel with him directly, she can route her payment through Bob, who does have a channel open with Charlie. For this service, Bob gets a tiny transaction fee. Ideally, the payments on Lightning would be instant, have extremely low fees, and could scale Bitcoin without having to increase the blocksize limit since most of the transactions are happening off-chain. Unfortunately, Lightning does not work well in practice because it has several system-breaking design flaws.

On-Chain Transactions

The most fundamental problem with the Lightning Network is that it requires on-chain transactions in order to use. Opening and closing a payment channel requires making on-chain transactions, and it is recommended to open multiple channels at the same time. These channels are not permanent; they require ongoing maintenance and are supposed to be refreshed annually. The requirement for on-chain transactions creates two critical problems:

Users must pay on-chain transaction fees just to open or close channels. If the base layer is being used as a settlement system between banks, these fees could cost hundreds or thousands of dollars just to connect to the Lightning Network.

Since onboarding to the Lightning Network requires on-chain transactions, it is mathematically impossible to onboard large numbers of people with 1MB blocks.

Problem (1) is straightforward, but it’s often hidden from regular users. The most popular Lightning wallets are either custodial—which means users’ funds are controlled by a company—or the wallet will commonly subsidize the on-chain transaction costs. Both situations are undesirable. Custodial Lightning eliminates all the benefits of using Bitcoin in the first place, and it’s only possible for companies to subsidize on-chain transaction fees while they are low. If fees are consistently above $50 or $100, there is no way companies will continue subsidizing them. The Lightning Network does not avoid the pain of having high layer-one fees.

Problem (2) is also straightforward and has been recognized since the Lightning whitepaper was written. With extremely limited block space, even if every BTC transaction was solely used for opening a payment channel, there is not enough space to onboard more than a few thousand people per block. Paul Sztorc, a notable BTC supporter and developer, wrote an article breaking down the numbers in more detail. He concluded that even if 90% of the block space is dedicated to opening channels, only around 66 million people can be onboarded per year—that means it would take around 120 years to onboard the world to the Lightning network. He concludes: In other words, each year we’d only onboard 0.82% of the world.

Worse: if channels last merely one year, then by Jan 1 2025, we will need to re-onboard the people who joined on Jan 1 2024. In that world, only 0.82% of Earth’s population, max, can be bona fide Bitcoin users (at any one time).

Monetary network effects are very strong – you need to use the money that other people are using. So a 0.82% ceiling is not viable.

Joseph Poon wrote in the Lightning whitepaper: If all transactions using Bitcoin were conducted inside a network of micropayment channels, to enable 7 billion people to make two channels per year with unlimited transactions inside the channel, it would require 133 MB blocks (presuming 500 bytes per transaction and 52560 blocks per year).2 This is the author of the whitepaper explaining that the Lightning Network at global scale would still require 133MB blocks! Unlike today’s small-blockers, he then notes that 133MB blocks are still a feasible size: Current generation desktop computers will be able to run a full node with old blocks pruned out on 2TB of storage.

The Lightning Network requires multiple on-chain transactions in order to use. Therefore, a 1MB, 2MB, or even 10MB blocksize limit would make it impossible to be a real scaling solution. Regular users are not going to be eager to spend $50 or $100 to open a payment channel, but even if they were, the BTC blocksize limit is simply too small to accommodate mass usage.

The Lightning Network requires users to run their own nodes.

The requirement to run your own node is difficult enough for everyday users because the nodes require ongoing monitoring and maintenance. But there’s an additional requirement that makes it crippling: each node has to remain online or they risk losing funds.

The way Lightning is designed, while a payment channel is open, both parties have a history of all the previous states the channel has been in—an individual record for when Alice had $10 and Bob had $0, then when Alice had $7 and Bob had $3, etc. When a channel closes, the “final” balance is broadcast by whichever party is closing the channel. However, instead of broadcasting the most recent balances, they can broadcast previous states of the channel, which allows Alice to potentially steal from Bob. Imagine that their last transaction resulted in a balance of $1 for Alice and $9 for Bob. If Alice closes the channel, instead of broadcasting the latest balance, she can broadcast an earlier state with an old balance, like when she had $10 and Bob had $0. If Bob does not catch her, then Alice will end up stealing a total of $9.

The Lightning Network tries to solve this problem by making it risky to publish old channel states. If Bob catches Alice within a two-week timeframe, he can broadcast a newer state, demonstrating that Alice published an old one. If this happens, all the funds in the channel go to Bob. This is supposed to provide an incentive to not cheat, but it’s a weak one. If Alice already has a low or zero balance on the channel, she does not have much to lose by trying to steal. Also, in order to catch somebody, a node is required to be connected to the internet. If Bob’s node goes offline, he cannot tell that Alice is stealing from him, and he can lose funds. This is why some Lightning proponents have suggested having a battery backup for nodes.

Lightning developers have tried to fix this problem by creating “Watchtowers,” which are third parties that watch over the channel to make sure nobody is cheating, even if one node goes offline. This new system adds another layer of complexity, and it requires watchtowers to be trustworthy and competent, otherwise users can lose their funds. The problem of trust is simply pushed back one more step—i.e. the watchtowers need their own watchtowers

In addition to the security risk, offline nodes cannot even accept payments, nor can they route payments for other people. Lightning requires both parties to be online at the same time, and the sender cannot send any arbitrary amount of Bitcoin to the recipient. The recipient must generate a specific invoice for the sender to fill—hence, the requirement to be online.

The requirement to be online is also a security risk because it means the users’ Bitcoin keys are held in a so-called “hot wallet,” meaning it’s connected to the internet. Standard security in Bitcoin has always been to keep the majority of your coins in offline “cold storage,” while only keeping small amounts in wallets that are connected to the internet. Hackers are far more likely to succeed when targeting hot wallets, which the entire Lightning Network is composed of. The only way to get coins from the Lightning Network into offline cold storage is by making an on-chain transaction.

Liquidity and Routing Problems Routing payments through the Lightning Network is another serious problem. Every payment needs to find a definite path from sender to receiver. If Alice wants to pay Donald but does not have a channel open with him directly, she has to find a route to him through other channels. She might have to send her payment through Bob first, who then sends it to Charlie, because Charlie has a channel open with Donald. If Donald is not well-connected enough with the network—if he does not have enough payment channels open with other well-connected parties—the software will not be able to find a path to him and the payment will fail.

But merely finding a route is not sufficient. Each channel along the path also needs to have sufficient liquidity within it for the payment to go through. If Alice wants to send a $100 payment to Donald that routes through Bob and Charlie, but the channel between Bob and Charlie has only $50 of liquidity in it, the payment cannot go through. In practice, this results in frequent payment failures, especially for large-value transactions.

To understand payment channels better, the best analogy is that of beads moving along a string. A channel is like a string connecting two people, and the beads are its liquidity. Let’s say Alice opens a channel with Bob and puts 50 beads on the string. To pay for coffee, she moves five beads from her side over to Bob’s. Then, to pay for a pack of gum, Bob moves one back to Alice. When the payment channel closes, assuming neither person is trying to steal from the other, Alice and Bob will receive the correct distribution of beads based on their final location.

If there are not enough beads to process a payment, the network runs into liquidity problems. If Alice and Bob’s channel only has 50 beads on it, it’s impossible for them to route any payments that are larger than 50 beads—there’s simply not enough beads to move. Compounding problems even further, to make a payment on the Lightning Network, a route must be found from Alice to Donald where every hop has sufficient liquidity, and these balances are constantly in flux. Every time a payment is routed through Bob’s channel, its available liquidity changes. Therefore, not only are payment channels constantly opening and closing on the network, but their respective balances are also changing too. Imagine billions of people using this system, each having multiple payment channels open with constantly changing balances. The simple task of routing becomes an extremely complex one, which might even be impossible to solve without widespread centralization of the network

Mesh routing is an unsolved problem in computer science, especially when you have adversaries in the network… I’m considering the Lightning Network a dead end... It is not going to gain adoption. It is going to remain a toy that will be tinkered with and eventually left by the wayside.4

From a usability perspective, the best possible outcome for Lightning would be to have totally custodial wallets connected to the largest exchanges. But of course, that kind of defeats the purpose of Bitcoin in the first place.

Brekken is correct. If the Lightning Network is going to have any chance of success among the general public, it will require massive centralization into a “hub and spoke” network and widespread use of custodial wallets.

Hub and Spoke Model

Centralization is the one reliable way to lessen the severity of the problems with the Lightning Network. Custodial wallets eliminate the burden to run your own node and be online all the time. Routing is easier if everybody connects to the same giant hubs that have enough connectivity and liquidity to service millions of people—if everybody opens a channel with PayPal, then the chances of finding a route are high. Big companies will not merely participate in the Bitcoin economy, users will be forced to rely on them to have basic payment functionality, and just like with custodial wallets, they can be easily censored and cut off from the rest of the network.

The centralization of the Lightning Network is inevitable and has been predicted for years.

Crucially, this is not a distributed peer-to-peer network, where nodes connect directly to each other. With on-chain payments, Alice has a direct connection to Donald. With Lightning, Alice must go through Bob and Charlie first. The largest nodes become essential to the smooth functioning of the entire network, and these huge nodes will have the power to censor. They will be hosted by companies that are easy to regulate. And when they are taken offline for whatever reason—due to failure, regulation, or simple maintenance—the connectivity of the network will be seriously damaged. Everyday users can be completely severed from the network if their link to a central hub goes down. Alice might not find any route to Donald without being forced to go through the equivalent of PayPal.

A group of academic researchers wrote about these risks in a 2020 paper entitled “Lightning Network: a second path towards centralisation of the Bitcoin economy.”5 They wrote: [T]he BLN [“Bitcoin Lightning Network”] is becoming an increasingly centralised network, more and more compatible with a core-periphery structure.

Liquidity problems also add to these centralization pressures, along with the requirement to use a wallet that is always connected to the internet. Most people will not be willing to lock up thousands of dollars in their payment channels, especially because of the increased risk of being constantly online. This means large payments will inevitably be forced to route through large, corporate payment hubs that have sufficient liquidity and technical skills to ward off hackers.

The inevitable centralization of the Lightning Network is ironic, considering the mad crusade the Core developers took to avoid centralization by overhauling Satoshi’s original design. Not only is Lightning infinitely more complex, clunky, and less reliable than on-chain transactions, the network will end up being orders of magnitude more expensive for every user because the on-chain payments required to use it will cost hundreds or even thousands of dollars. And if a user ever gets banned from a central payment hub, they will be forced to make additional on-chain transactions to maintain connectivity to the rest of the network. If these transactions cost thousands of dollars each, then getting banned from the hubs will prevent most people from using Bitcoin at all.

With Satoshi’s design, the network can be disrupted by an expensive 51% attack. With the Lightning Network, the cost of disruption will plummet. Governments or malicious actors can simply target the largest payment channels. If they can knock out a handful of critical hubs at once, then the network will become virtually unusable. Hashrate is not required.

A False Promise

The viability of BTC now relies on the development of secondary layers. If the secondary layers cannot deliver cheap, reliable payments, then BTC has no way of scaling—at least not without admitting spectacular failure and raising the blocksize limit, or by total centralization with custodial wallets. The way the technology currently stands, the Lightning Network will not be a serious solution to the problem of high on-chain fees, and it will not enable regular people to use BTC in commerce. Payment channels are a neat technology, but they are not a scaling solution. They might be helpful for micropayments, as Satoshi thought, but not for everyday transactions. Perhaps some future technology will be developed which would rescue BTC, but for now, the original design working on BCH remains the best system for fast, cheap, peer-to-peer payments online. The simplicity and elegance of the system are unmatched; fees remain low; there are no requirements to run your own node; payment hubs are not necessary, and there’s nothing preventing secondary layers from being built on top of BCH.

Over the course of several years, BTC changed from the best payment system on the internet to a slow, expensive, unreliable one. Satoshi’s brilliant design was discarded for the promise of a future technology which has not lived up to its hype. This failure has both innocent and malicious interpretations. Bitcoin’s story might simply be an example of bad project management, but given the disruptive power of this technology, it looks more likely that Bitcoin was sabotaged by its enemies.

# 10 Keys to the Code

Bitcoin is often spoken about as if it exists beyond the reach of human influence, as incorruptible as the laws of physics. The network is supposedly too large and decentralized for any group to control, no matter how powerful. According to The Bitcoin Standard: Bitcoin’s value is not reliant on anything physical anywhere in the world and thus can never be completely impeded, destroyed, or confiscated by any of the physical forces of the political or criminal worlds. The significance of this invention for the political realities of the twenty-first century is that, for the first time since the emergence of the modern state, individuals have a clear technical solution to escaping the financial clout of the governments they live under.1 This is a beautiful concept, and I truly wish Bitcoin worked this way, but unfortunately, history demonstrates otherwise. Bitcoin is very much a human project and is not immune from individual and institutional corruption. Social and political factors are overwhelmingly important and have been since the beginning

Confiscation has already become easy due to the trend towards custodial wallets. It happens all the time. Because the blockchain is public, governments can mark particular coins as suspicious and track them throughout the ledger. If the coins arrive at a centralized cryptocurrency exchange, as they usually do, the exchanges will freeze the corresponding accounts and notify the authorities. The coins in question can then be seized with a few clicks.

The financial freedom that Bitcoin does provide is maximized with non-custodial wallets. Though not perfect, the ability to track and confiscate coins is greatly reduced when regular users can access the blockchain for themselves at little cost and do not have to use centralized wallets or exchanges—analogous to using physical cash. Physical cash transactions are far harder to control than electronic transactions that go through banks or payment processors like PayPal, which is one reason why governments around the world want to move away from physical cash and towards digital currencies they control. That’s why peer-to-peer digital cash is such a revolutionary concept; it keeps more power in the hands of regular people while giving them the convenience of electronic money.

Like the concepts of “digital gold” and “store of value,” the famed “decentralization” of Bitcoin is more of a marketing slogan than a reality. In fact, one of the central stories of Bitcoin is how a small group hijacked the project despite the objections of most of the network. One group has consistently demonstrated they have more power and influence than any other: the software developers. The people that maintain and update Bitcoin’s code are the people with the most influence over the network. For most cryptocurrency projects, not just Bitcoin, developers call the shots. And notably, software developers don’t finance themselves. They have to get paid somehow. Therefore, the real power dynamics within a cryptocurrency project are determined by how its software developers make decisions and get paid. The history of BTC is a cautionary tale of what happens when the incentives of developers become misaligned with the rest of the network.

We heard that Bitcoin is decentralized. Well, Bitcoin is controlled by a few core software developers—fewer than ten—and they can make changes to the software, and then that software is implemented by mining pools, and there are just a few of them. So in all of these spaces, there are definitely people—often very few people—pulling the strings.

Changing the code on your computer doesn’t change the code that everybody else is running. If you modify the wrong parts, like the blocksize limit, you will get instantly forked off the network. The “official” software that everybody downloads—that approximately 99% of the industry uses—is controlled by a handful of people who hold the keys to the code. They ultimately determine what gets added, subtracted, and modified for everybody else.

Once it became clear that the Core developers were refusing to increase the blocksize limit, the industry tried to upgrade to other implementations, on multiple occasions. But each time, these alternatives were attacked along with the businesses that supported them. Everything from denial-of-service attacks to fake app reviews, mass censorship, and social media smear campaigns were used to discourage people from using alternatives to Bitcoin Core—which is why their software is run by approximately 99% of nodes in BTC today and the people who want big blocks use alternative coins like Bitcoin Cash. The failure to decentralize software development resulted in a project totally dominated by a single group that maintains a single code repository on Github.

# 11 The Four Eras

I realized we all had a much bigger problem: the systemic risk to bitcoin if Bitcoin Core was the only team working on bitcoin.

The core team contains some very high IQ people, but there are some things which I find very concerning about them as a team after spending some time with them last weekend… They prefer ‘perfect’ solutions to ‘good enough’. And if no perfect solution exists they seem ok with inaction, even if that puts bitcoin at risk. They seem to have a strong belief that bitcoin will not be able to scale long term, and any block size increase is a slippery slope to a future that they are unwilling to allow.

Even though core says they are ok with a hard fork to 2MB, they refuse to prioritize it… They view themselves as the central planners of the network, and protectors of the people. They seem ok with watching bitcoin fail, as long as they don’t compromise on their principles… In my opinion, perhaps the biggest risk in bitcoin right now is, ironically, one of the things that has helped it the most in the past: the bitcoin core developers.

The new narrative started to solidify with books like The Bitcoin Standard, which, despite making blunders on several critical concepts, has enjoyed widespread popularity. The same ideas have been uniformly repeated on all the most important discussion channels, making the small-block philosophy the only perspective that newcomers encounter when learning about Bitcoin. The original vision of big blocks and universal access to the blockchain was successfully demonized and its history obfuscated.

The culture is obsessively focused on the price of BTC, regardless of its underlying utility or usage. Every event, no matter how significant, gets judged based on its potential effect on price, rather than its potential to improve human freedom or wellbeing. For example, when the El Salvador government announced that BTC was going to become an official currency, there was almost no mention of the fact that their government was setting up purely custodial wallets for their citizens—meaning, the government will be able to track and censor transactions made through their app, freeze accounts, or easily confiscate coins if they decide to. State integration is great from the perspective of price appreciation and hype, but it’s unclear whether the average El Salvador citizen will benefit at all.

# 12 Warning Signs

Warning Signs It would be naive to think that a project as world-changing as Bitcoin would go unnoticed forever. International financial powers, whether public or private, have a lot to lose if cryptocurrencies succeed and remain outside their influence. Despite the optimism and unity within the Bitcoin community during the early days, there were signs early on that things were not idyllic or free from internal disruption. I remember as early as 2011, when the price shot up to $30, the main discussion forum Bitcointalk.org was flooded with spam, with bots suddenly posting endless threads of gibberish, making it impossible to use that forum to communicate. Somebody was paying attention and wanted to disrupt information flows, though it’s not clear who.

Digital cash needs to have instant transactions. It’s unrealistic to imagine any successful cryptocurrency being used as cash if its transactions take more than a few seconds to process. By design, Bitcoin allowed for instant transactions from the beginning, and I used them every day in my business and when evangelizing about Bitcoin. But despite the obvious importance of this feature, some Core developers decided that instant transactions were “too risky” and intentionally broke Bitcoin’s functionality to discourage them.

As explained in Chapter 2, Bitcoin transactions get bundled into blocks by miners. Each block builds on the one before it, adding more security with each additional block

What about transactions that have been created but have not yet been added to a block? These are called “zero-confirmation” transactions, or “zero-conf” for short. Zero-conf transactions take only seconds to send and receive, though they are inherently less secure. Less-than-perfect security is not a difficult concept to grasp, nor is it a unique idea to any entrepreneur, but some developers apparently thought it was unacceptable

Miners and nodes keep a running list of zero-conf transactions that are waiting to be added into a block. The first-seen rule says that whenever there are two conflicting transactions, whichever one was seen first wins. So, in our previous example, after sending the $150 to Alice, the Bitcoin network would already know about this transaction and simply reject the attempt to double spend it with Bob.

The first-seen rule was not mandatory or enforced at the protocol level. It was a simple, sensible policy for miners and nodes to abide by, since it allowed for instant transactions. However, it also allowed for elaborate theoretical schemes to defraud merchants, say, by collaborating with corrupt miners. Despite there being social and economic incentives which discourage this corruption, and despite the ability of entrepreneurs to manage these risks as they already do with other payment methods, some developers thought that any theoretical insecurity was a design flaw that needed to be fixed at the code level. So, they came up with the idea of an undo button.

The Undo Button Instead of the first-seen rule, Peter Todd proposed the “replace-by-fee” (RBF) patch, which said that when two conflicting transactions are seen, the one with the higher fee wins. So, after sending Alice the $150 transaction with a $40 fee, we could walk into Bob’s store, spend the same $150 with a $50 fee, and the network would accept the second transaction as valid. Such a policy makes double spending easy, effectively breaking the reliability of zero-conf—which was the explicit goal of Todd.

It’s worth walking through the logic of Todd’s argument. He starts with the supposed problem of users getting their transactions stuck, which was only an issue for transactions with extremely low or zero fees. Though ironically, stuck transactions did become a real issue when the blocks became full and fees spiked in 2017. When users’ transactions were stuck, sometimes for days or even weeks, RBF was indeed used to “unstick” those transactions. So with small blocks, high fees, and unreliable transactions, RBF starts to make more sense.

Then he gets to the real point: in his mind, zero-conf transactions aren’t safe enough, and uninformed users just don’t realize it. So, to prevent people from getting attached to zero-conf transactions, RBF would break their functionality once and for all—because, in his words, if the miners decided to implement something like RBF, zero-conf would break anyway. In other words, Bitcoin’s instant payment functionality needed to be broken by developers at the software level, so that miners wouldn’t end up breaking it in the future.

Zero-conf transactions are especially important for brick-and-mortar payments. Given that only a tiny percentage of customers try to steal from businesses in-person, some merchants might simply accept the risk of double-spends themselves. Traditional options for mitigating the risk of fraud or theft still work. If they already have security systems in place, for example, they might be able to get footage of the criminal.

Sheer Propaganda Despite the controversy surrounding RBF, if you try to research it today, you will undoubtedly encounter misleading information. On the Bitcoin Core website, there is a Q&A section on RBF. One question reads: Was the opt-in RBF pull request controversial?

Not in the slightest. After extensive informal discussion stemming back months, the PR was opened on October 22nd [2015]. It was subsequently discussed in at least four Bitcoin development weekly meetings… In the PR discussion, 19 people commented, including people working on at least three different wallet brands, and 14 people explicitly [agreed with] the change, including at least one person who had been very outspoken in the past against full RBF. No clearly negative feedback was provided in the PR, or elsewhere that we are aware of, while the PR was open.12 This section is carefully worded so the casual reader walks away thinking RBF was not controversial. Notice the question is about the “pull request” (PR), not the overall concept of RBF—that is, if you only look at the comment section for that particular action on Github, the majority of people on that thread agreed with it. But that’s only because an enormous amount of debate simply took place in other venues. The dates involved are also misleading. They claim the informal discussion stretched back “months” from the end of 2015, but as the Bitcointalk.org forum thread demonstrates, RBF was being hotly debated as early as 2013.

The Q&A says, “No clearly negative feedback was provided in the PR, or elsewhere that we are aware of, while the PR was open.” (My emphasis.) But the pull request was opened in October 2015! Mike Hearn wrote an extensive dissenting article on his own website criticizing replace-by-fee in March 2015,13 seven months prior.

John Dillon” is the pseudonym of an unknown person who paid Peter Todd, a Core developer, to produce a video promoting the restriction of Bitcoin’s throughput to seven transactions per second. He offered a bounty to develop replace-by-fee, which was intended to “break zero-conf security now”—that is, to break the functionality of instant transactions. Gavin Andresen publicly speculated that Dillon had an ulterior motive to destroy Bitcoin, and later it turns out, in leaked emails, that Dillon claimed to be in a high position within an intelligence agency. (But not to worry, because he also claimed to have a change of heart and really wanted Bitcoin to succeed!) All of this happened around the most revolutionary financial invention in history, which directly challenges established governmental, financial, and banking powers around the world. Readers can come to their own conclusions, but in my mind, by late 2013, Bitcoin had already been targeted for capture.

# 13 Blocking the Stream

Blockstream is Founded Blockstream would end up being the most influential company in Bitcoin’s history. Its co-founders were Adam Back, Gregory Maxwell, Pieter Wuille, Matt Corallo, Mark Friedenbach, Jorge Timón, Austin Hill, Jonathan Wilkins, Francesca Hall, and Alex Fowler. Unlike the Bitcoin Foundation, Blockstream was founded as a for-profit company—a fact that made other Bitcoiners immediately curious about their business model.

Blockstream was successful in creating a revenue-producing business, but it turned out to be a serious conflict of interest. Instead of building out the base infrastructure, it crippled the base infrastructure and now offers paid solutions to the problems it created

When Blockstream was initially formed and raised their first round of fundraising, I initially thought it was a good sign that more investors were discovering Bitcoin. But as time went on—and it was revealed that their biggest investors came from the establishment banking industry—I became more skeptical, along with countless other Bitcoiners. Now, in hindsight, I consider the founding of Blockstream the beginning of the Civil War era. Shortly after its formation, the culture shifted, disagreements turned hostile, and the most radical small-block position—which hardly anybody had taken seriously—became more vocal and aggressive. Blockstream engineers started to insist that Bitcoin could not scale the way it was originally designed, while censorship began in the online forums. The passivity of the lead developer Van der Laan, who wanted to avoid conflict, started to be exploited in favor of the status quo. The Core developers became adamant that “consensus” was needed among them in order to raise the blocksize limit, effectively giving them a complete veto over scaling the protocol.

Why would a group of developers form a company to take over a project and then prevent it from scaling? The answer turns out to be simple: their business model depends on Bitcoin not scaling its base layer. The less Bitcoin can do, the more Blockstream can do for a fee.

The Business Model

Blockstream raised suspicions soon after it was founded and has been the subject of innumerable conspiracy theories, some more plausible than others. For years, people have speculated that the bizarre behavior of the Core developers is best explained by a conflict of interest—if either Blockstream or their investors profit by throttling Bitcoin. But today, we no longer have to speculate, because they speak openly about it. In a Forbes interview, CEO Adam Back shared one part of their monetization strategy, saying, “Blockstream plans to sell sidechains to enterprises, charging a fixed monthly fee, taking transaction fees and even selling hardware.”8 What are “sidechains”? The company’s whitepaper explains the general idea: We propose a new technology, pegged sidechains, which enables bitcoins and other ledger assets to be transferred between multiple blockchains. This gives users access to new and innovative cryptocurrency systems using the assets they already own. By reusing Bitcoin’s currency, these systems can more easily interoperate with each other and with Bitcoin, avoiding the liquidity shortages and market fluctuations associated with new currencies. Since sidechains are separate systems, technical and economic innovation is not hindered.9

In other words, sidechains are an attempt to link different blockchains together by connecting entries on one ledger with entries on another. It’s a neat idea, and in theory it could allow for more creative experimentation. Different rules and networks could operate on different ledgers but remain interoperable with Bitcoin. This is why sidechains have been proposed as an alternative method for scaling Bitcoin, since different projects can still be pegged to the Bitcoin blockchain without being directly built on top of it.

Blockstream has released their version of a sidechain called the “Liquid Network,” but it works very differently. The Liquid Network is a “federated” sidechain, which is better understood as a centralized sidechain or even an altcoin. The basic security of their network requires trust in a small, hand-selected group they call the Liquid Federation.

Why would somebody choose to swap their BTC for Liquid tokens? One reason is quite simple: the fees on BTC are too high! Adam Back, the CEO of Blockstream, has brazenly advertised his Liquid Network as a solution to the problem of high fees on the main network.

To be clear, this is the CEO of Blockstream—the company that employed a majority of the most powerful Bitcoin Core developers during its most critical time period—directing people to his proprietary blockchain to “be part of the solution” to high fees and network congestion. Meanwhile, the BTC network only has poor performance because the Bitcoin Core developers refused to increase the blocksize limit in the first place. The conflict of interest is enormous. It certainly looks like Blockstream is selling a paid solution to problems they caused, and it’s not even clear whether the Liquid Network would have a reason to exist if Bitcoin had big blocks.

Considering that the narrative surrounding Bitcoin is that it’s disruptive to the established financial industry, there is some irony in the fact that Blockstream is integrating with banks to help them issue digital dollars. In addition, they are even starting to integrate directly with governments and help them with fundraising. In El Salvador, Blockstream has helped to create a “Bitcoin Bond” to help the state raise a billion dollars, paying out an annual dividend to holders. Both the Bitcoin Bond and Avit Tokens will be built on the Liquid Network, diverting even more traffic from BTC to Blockstream’s sidechain.15 The conflict of interest between Bitcoin Core developers and Blockstream is easy to see. With such perverted incentives, it’s no surprise that Satoshi’s vision of cheap, peer-to-peer transactions on the base layer was abandoned; big blocks would kill their business model. By contrast, on Bitcoin Cash, anybody can create tokens and transact them on-chain with minimal fees. Sidechains and custodial wallets are not needed to scale, since the base layer can handle a much higher transaction throughput. Though, if desired, sidechains and custodial wallets still work with big blocks and would perform better.

Conspicuous Fundraising

The details of Blockstream’s multiple rounds of fundraising have not helped their image nor quelled the conspiracy theories surrounding the company. To date, they have raised around $300 million from investors. Nearly a third of a billion dollars is a substantial amount for any company to raise, but especially for one working on open-source software.

In early 2016, eyebrows were raised when Blockstream completed a $55 million round of Series A funding.16 One of the primary investors was a venture capital firm called AXA Strategic Ventures, a branch of the French multi-national firm AXA—the eleventh largest financial services company in the world according to Fortune Global 500.17 At the time, the CEO of AXA was Henri de Castries, a magnate of the international financial system. In a 2015 news article, The Guardian newspaper described De Castries as follows: Henri de Castries might just be the most powerful man in the world. He is chief executive and chairman of one of the world’s biggest insurers, Axa, and a member of France’s illustrious noble house of Castries. But De Castries is also chairman of the Bilderberg group, a collection of political and business leaders from Europe and North America that meets in private every year to debate “megatrends and major issues facing the world” – or which is secretly running the world if you are a conspiracy theorist.

Henri de Castries might just be the most powerful man in the world. He is chief executive and chairman of one of the world’s biggest insurers, Axa, and a member of France’s illustrious noble house of Castries. But De Castries is also chairman of the Bilderberg group, a collection of political and business leaders from Europe and North America that meets in private every year to debate “megatrends and major issues facing the world” – or which is secretly running the world if you are a conspiracy theorist.18 As if the mysterious John Dillon wasn’t enough fodder for conspiracy theories, Bitcoin’s history also includes a real connection to the Bilderberg group. For decades, the Bilderberg group has been controversial, due to its highly secretive meetings and their attendance by some of the most powerful people in the world—a who’s-who of elites from across political, financial, academic, and media industries. The organization has been operating since the 1950s and includes far too many powerful attendees to name, ranging from heads of state like Tony Blair and Bill Clinton, to European royalty like the kings of Belgium, Norway, and Spain, business magnates like Bill Gates and Jeff Bezos, and a long list of CEOs and founders of large companies, banks, and news outlets across the world.19 Naturally, when a large number of powerful people get together and hold secretive meetings, conspiracy theories are inevitable, whether or not they are justified. We know from history that some conspiracies are real, and it’s naive to think meetings like this are not influencing world affairs to some extent—that’s why they hold them in the first place! Their real-world impact is unknown, but it is definitely greater than zero.

Blockstream’s largest fundraising round came in 2021, when it raised over $200 million in Series B funding, bringing its valuation to $3.2 billion.21 This enormous haul came several years after the capture of key Bitcoin Core developers, a significant loss of total market share of BTC, the Bitcoin Cash split in 2017, and multiple network failures which saw skyrocketing transaction fees and dramatically increased confirmation times. One interpretation, from a purely business perspective, is that investors believe Blockstream’s alternative network will generate significant revenue in the future by competing with the main BTC network for transactions. A less charitable interpretation is that Blockstream received a large payoff for crippling Bitcoin’s development at a critical time and fundamentally changing it to resemble the existing financial system. A few hundred million dollars is nothing compared to what the banks might lose if Bitcoin were running at its full potential.

Early Bitcoin adopter and internet personality Stefan Molyneux had this concern as early as 2014, when he predicted that existing financial and political interests would recognize Bitcoin as a threat and try to slowly capture it. He said:

It’s really important for people to understand how big the behemoth is that Bitcoin is facing. There will be efforts on the part of the financial-government complex to keep the technology at bay… [by saying] ‘Let’s not kill it outright, because it’s big enough now that people will see what we’ve done…’ Instead, what they’re going to try to do is throw little bits of sand in it until most people find it too cumbersome to use, and then say ‘Well, it was an interesting idea, but it didn’t quite work out the way people wanted.’ I think that is the great danger.22 Molyneux might have been prescient. Regardless of whether malice was involved, we can say with confidence that the Bitcoin of 2024 is far less threatening to existing powers than the Bitcoin of 2014. It is a cumbersome network that pushes users to secondary, controlled layers to have a better experience. Custodial wallets are also easy to control and inject the need for trusted third parties back into the system. In the big picture, Bitcoin’s re-design looks remarkably similar to the existing monetary system, where everyday users do not have ultimate control over their own funds and require companies to provide financial services for them. The benefits of this new system are primarily enjoyed by early adopters who benefitted from the enormous price appreciation.

From the perspective of the original design and purpose of Bitcoin, Blockstream’s influence over the protocol has been disastrous. BTC looks nothing like the original Bitcoin, and it’s unlikely to in the future. Fortunately, Blockstream does not have a monopoly over all cryptocurrency development, and Bitcoin Cash developers successfully routed around them in 2017—though the process was not easy and involved an enormous amount of pain and drama.

# 14 Centralizing Control

The blocksize limit was not the only area in which the Core developers asserted their power. Another great example was the notion of so-called “spam transactions” and the utilization of Bitcoin for smart contracts. Though it’s been stripped out of the BTC software and nearly forgotten about today, Bitcoin was originally designed to handle smart contracts—the sorts of complex computations that Ethereum is known for. The smart contracting system in Bitcoin was clunkier than more recent cryptocurrencies, but it still had broad functionality, much of which has been reactivated on Bitcoin Cash.

The Core developers not only destroyed Bitcoin’s utility as digital cash, they also stripped out basic functionality from the original technology itself. Why would they do that? For the same reason they refused to increase the blocksize limit: it did not fit their new vision for Bitcoin. They did not like Satoshi’s vision, so they created their own where the blockchain is only used for high-value transactions. Everything else, whether small payments or smart contracts, is at risk of being designated as “spam” and restricted by the Core developers. The Counterparty team found this out the hard way.

It took years before the Liquid Network was openly promoted as an alternative to the Bitcoin blockchain—a smart strategy by Blockstream, since if they immediately advertised their proprietary network as a scaling solution, they would have been met with laughter and overwhelming resistance.

Instead, Bitcoin Core and Blockstream’s centralization of power was somewhat slow and methodical. They took advantage of small opportunities to give themselves more control over the network. They took advantage of Van der Laan’s weak leadership and desire to avoid controversy. Perhaps most importantly, they leveraged the idea of “developer consensus” to effectively give themselves veto power over the software—even if their veto radically changed the structure and economics of the entire system.

# 15 Fighting Back

Mike Hearn and others would create BIP101, proposing an immediate increase of the blocksize limit to 8mb, followed by tiny increases every block, resulting in a doubling of the limit every two years up to a new maximum size of 8GB by 2035—allowing for approximating 40,000 transactions per second (which was several times larger than Visa’s throughput at the time). Hearn would later reflect on the proposal: In August 2015 it became clear that due to severe mismanagement, the “Bitcoin Core” project that maintains the program that runs the peer-to-peer network wasn’t going to release a version that raised the block size limit… So some long-term developers (including me) got together and developed the necessary code to raise the limit. That code was called BIP 101 and we released it in a modified version of the software that we branded Bitcoin XT. By running XT, miners could cast a vote for changing the limit. Once 75% of blocks were voting for the change the rules would be adjusted and bigger blocks would be allowed.4 The upgrade mechanism was simple and straightforward. Miners running BitcoinXT could cast a vote, and if a supermajority of the hashrate voted in favor of BIP101, then it would be activated after a two-week grace period. BIP101 was considered a “hard fork” upgrade because it would be incompatible with previous versions of the software—as opposed to a “soft fork” which maintains compatibility. Because of the way Satoshi hastily added the blocksize limit, it would take a hard fork to increase it. The Core developers would make loud protestations at the notion of a hard fork, claiming it could cause a network failure or split. In fact, many of them claimed it would be less risky to change the entire economics of Bitcoin than to have a hard fork. Pieter Wuille from Bitcoin Core stated: If we are willing to go through the risk of a hard fork because of a fear of change of economics, then I believe [the Bitcoin] community is not ready to deal with change at all.5 In hindsight, the drama surrounding hard forks looks overblown. Nearly every cryptocurrency project undergoes hard forks, because they are an essential mechanism for upgrading critical code, fixing bugs, and reducing technical baggage. Ethereum regularly undergoes hard forks. Bitcoin Cash has undergone several since its release. But back in 2015, this precedent was not yet established, and Core was able to stoke fears that a hard fork could break the network. In reality, even if there was a software bug in the upgrade and the network was disrupted, it would simply be fixed, as other critical bugs have been in the past. The risks of disruption are negligible compared to the risks of overhauling the entire system—akin to taking chemotherapy to protect yourself from a common cold!

In my opinion, the real reason for the fear surrounding BIP101 was because it would have resulted in Bitcoin Core losing control over development and no longer holding the keys to the code repository online. Since XT would add BIP101, and Core would not, the two implementations would become incompatible with each other on the protocol level, resulting in the minority implementation being “forked off” the main network. Though this would be devastating for Core and their supporters, by requiring 75% of miners to support the change, it would ensure minimal disruption for regular users. The remaining miners would either have to upgrade their software to allow for larger blocks or create their own separate blockchain.

The history of BitcoinXT would permanently disprove the idea that Bitcoin is somehow beyond the reach of human influence. Instead, it is deeply social, and its history is not shaped by software code writing itself—it’s shaped by individuals making difficult decisions in a social, economic, and political context. Though nearly every serious businessperson was supportive of a blocksize increase, some thought that firing Core outright would be too divisive. Instead, they would publicly support BIP101 and urge Bitcoin Core to merge it into their software. Several of the largest non-mining Bitcoin companies issued a joint statement endorsing BIP101 and 8MB blocks without explicitly endorsing BitcoinXT. Signatures included Stephen Pair, the CEO of Bitpay, Peter Smith, the CEO of Blockchain.info, Jeremy Allaire, the CEO of Circle.com, Wences Casares, the CEO of Xapo.com, Mike

It’s become clearer and clearer that the “consensus” that’s so often talked about in the Bitcoin Core community really means the views of a tiny handful of people, regardless of what anyone else in the wider community might think, how much work they have done, or how many users their products have.

Put another way, “developer consensus” is marketing, wool pulled over the eyes of Bitcoin users to blind them from the truth: just two or three people acting in concert can break Bitcoin in whatever way they see fit.

# 16 Blocking the Exit

Blocking the Exit Bitcoin looks the most decentralized when observed from a distance. Upon closer examination, it becomes clear that there are a small number of critical positions that have overwhelming influence over the network. Control over the software keys has already been established as one example. Another is the control of information flows online. BTC’s powerful narrative, repeated everywhere in the media, did not spontaneously emerge, nor was it the result of free and open discussion among Bitcoin enthusiasts. The two most important discussion platforms, on which the overwhelming majority of conversations happened, were bitcointalk.org and the r/Bitcoin subreddit, both of which still enjoy immense popularity. Both platforms happen to be controlled by the same person, known by the pseudonym “Theymos.” He also owns The Bitcoin Wiki (Bitcoin.it). That’s one person with enormous power to shape narratives and direct the flow of information, and when the time came, he was not hesitant to exercise this power.

The Censorship Begins Bitcoin.org used to be considered a neutral page for people learning about Bitcoin. It had basic introductory information, links to companies and services within the industry, and other resources that newcomers would find helpful. However, since it was controlled by hardcore Bitcoin Core supporters, this veneer of neutrality quickly evaporated once BitcoinXT started to threaten the dominance of the Core developers. On June 16th 2015, Bitcoin.org announced their official “Hard Fork Policy,” which read: It appears that the recent block size debate will likely result in a contentious hard fork attempt… The danger of a contentious hard fork is potentially so significant that Bitcoin.org has decided to adopt a new policy: Bitcoin.org will not promote any software or services that will leave the previous consensus because of a contentious hard fork attempt.

This policy applies to full node software, such as Bitcoin Core, software forks of Bitcoin Core, and alternative full node implementations. It also applies to wallets and services… which release code or make announcements indicating that that will cease operating on the side of the previous consensus…1 In other words, any companies siding with BitcoinXT over Core would have their listings removed from the site. Since Bitcoin.org was, and still is, often considered the “official” website for Bitcoin, this policy would help create the narrative that any “contentious forks” away from Core are illegitimate by default. The announcement was immediately blasted by many Bitcoiners, Mike Hearn among them saying: You want to ensure new users don’t learn about Bitcoin XT. Why not just say that outright? Your position is wrong and will just reduce bitcoin.org’s utility as a place to learn important information. What’s more, you are inherently supporting a status quo in which a tiny number of people can veto any change to Bitcoin regardless of how widely supported it is by the rest of the community. That’s not decentralisation. And it is ultimately far more dangerous to Bitcoin.

If you try and shut down the only method the community has to reject the decisions of this tiny group, you’re effectively dooming the project to the whims of whoever happened to be around early on in the project and ended up with commit access.2

Reddit Gets Captured

For months, it was common on the r/Bitcoin subreddit for users to complain about their posts being censored and removed from the platform. One of the most highly upvoted threads in the forum’s history called for the moderators to step down and be replaced. Shortly after this thread was posted it was removed, and the very next day in August 2015, Theymos announced a new moderation policy on r/Bitcoin that censored all discussion of BitcoinXT.

Congrats r/bitcoin, I am glad you have finally settled on the Bitcoin CEO, now you have that central authority that you always wanted that will tell you exactly how you are supposed to think and act. No more having to think and decide for yourself, you have theymos to tell you exactly what is bitcoin, what the laws and rules are about bitcoin, what the devs think… So if you are ever unsure about bitcoin Theymos will from now on make all the decisions for you..

One user speculated that the moderators might have been compromised: I think it’s worth discussing the possibility that the mod team has become compromised and banks (or whomever) could stand to make money controlling the discussion.

Theymos was not shy about his decision, and he revealed his censorship strategy in conversation that would eventually be leaked: You must be naive if you think it’ll have no effect. I’ve moderated forums since long before Bitcoin (some quite large), and I know how moderation affects people. Long-term, banning XT from r/Bitcoin will hurt XT’s chances to hijack Bitcoin. There’s still a chance, but it’s smaller. (This is improved by the simultaneous action on bitcointalk.org, bitcoin.it, and bitcoin.org)… I do have power over certain centralized websites, which I’ve decided to use for the benefit of Bitcoin as a whole…6 Regardless of the moral status of his decision, Theymos was correct that moderation can be effectively used for manipulation. It can teach people that questioning the official narrative is unacceptable and will be punished, and in this case, it was critical to establishing the popularity of small-block ideas. To this day, newcomers have no idea they are only being presented with one perspective—a perspective that Satoshi himself would strongly disagree with. When the average person encounters the same information on multiple platforms, on the Bitcoin Wiki, and throughout the discussion forums, he will not even be aware that there is another perspective, much less have an informed opinion about it. Over time, that kind of information control is immensely powerful.

Ripple Effects

The decision to censor all discussion of BitcoinXT did not just infuriate regular Bitcoiners. It also upset fellow moderators. A few days after Theymos’ announcement, a dissident moderator “jratcliff63367” wrote a sharply critical article entitled, “Confessions of an r/Bitcoin moderator.” One section reads: When theymos decided to use his centralized authority of r/bitcoin to stifle all debate and discussion of bitcoin-xt, he violated a core principle. As a decentralized peer-to-peer network, any point of centralized control is problematic… This one single person holds absolute centralized control of the two largest communications platforms for the community to discuss the future and evolution of bitcoin...

He exercises absolute power of what is, or is not, allowed to be discussed; including complete and total censorship power over the narrative in the two largest media outlets.7 Only ten days after jratcliff63367’s public criticism of Theymos, he was removed as a moderator from r/Bitcoin. He would later speculate that his removal was because of suggesting that the Core developers might be compromised: It is not at all unreasonable to suppose that core-devs have been contacted by the ‘spooks’ and are applying influence. Crippling bitcoin so that almost all of the value has to flow through side-channels and only large institutions can access the core network would be a great solution to what world governments consider as a major problem… The government doesn’t actually care if there is some new ‘asset class’ like bitcoin. There are zillions of asset classes, what do they care if it is bitcoins or beanie babies? What they care about is people transferring that value without their ability to track and intercept. If the only people who can directly access the blockchain are big-banks...well you get the idea.

Without a pool, individual miners must wait until they personally find a block in order to earn any Bitcoins. But with a pool, miners put their hashing power together and share the block rewards, smoothing out their income considerably. Virtually all miners are part of a pool. So, when SlushPool was hit with a DDoS attack after allowing voting on BIP101, it affected a lot of people. On August 25th, 2015, Slushpool received a letter from the perpetrators, telling them the attacks would continue until they stopped supporting BitcoinXT.

No Competition Allowed

The Core developers were not happy about the idea of letting miners decide what the main software implementation should be. Just like with the blocksize limit, they argued that it would harm Bitcoin’s decentralization. Hearn pointed out that without such a mechanism, the obvious threat to decentralization would be Core’s monopoly over the protocol: Right now the people doing the most to hurt decentralisation of Bitcoin are Blockstream and Wladimir, by telling people that using the block chain as a voting mechanism (as was done in the past) is reckless and will destroy Bitcoin’s value. The logical implication of this argument is that only Bitcoin Core developers, and really only Wladimir, can change big chunks of the Bitcoin protocol. And thus that they are effectively the “CEOs of Bitcoin”. Which is the opposite of decentralisation.

I mean, what is the point of open source, if you aren’t supposed to fork it and modify the code when the original project does something wrong? How is Bitcoin’s decentralisation even meant to work, with such a belief?

In December 2015, Coinbase announced that they were running BitcoinXT on their servers and supporting BitcoinXT, though they were still open to other proposals.16 In response, the owners of Bitcoin.org promptly removed Coinbase from their website—a remarkable move considering that Coinbase might have on-boarded more people to Bitcoin than any other company in the world! The removal was made by one of the owners of Bitcoin.org, another shadowy figure known by the pseudonym “Cobra”

But despite the general backlash, Coinbase was successfully removed from the Bitcoin.org website and was taken offline by a DDoS attack the very next day.

# 17 Hotwired for Settlement

BitcoinXT posed a real threat to small-blockers. So, they attacked it, claiming it risked the integrity of the entire Bitcoin network. Because the Core developers did not approve, XT was deemed “controversial” and therefore too risky, or even reckless, for anyone to support. Yet, this way of upgrading Bitcoin was described by Satoshi himself, all the way back in 2010. When asked by a forum member how to increase the blocksize limit, he responded: It can be phased in, like:
if (blocknumber > 115000)
maxblocksize = largerlimit
It can start being in versions way ahead, so by the time it reaches that block number and goes into effect, the older versions that don’t have it are already obsolete. When we’re near the cutoff block number, I can put an alert to old versions to make sure they know they have to upgrade.2 Satoshi’s method was simple and straightforward, as usual. He recommended creating a hard-fork upgrade that would increase the blocksize limit at a predetermined time in the future. That way, miners would have sufficient time to upgrade their software. Satoshi was not concerned with “consensus”—if a minority of miners did not upgrade their software, they would simply be kicked off the network.

While the desire to avoid controversial forks is understandable, Satoshi’s design requires that miners assert themselves, especially when faced with development capture. This is a mechanism to balance power within Bitcoin, but ultimately, it’s one that depends on human choices and cannot be enforced by the software itself. So, when XT failed, Mike Hearn considered it a demonstration that Bitcoin could not overcome the human, social, and psychological barriers limiting its own success. He would later write: [Regarding] the miners specifically I called some of them via Skype… One or two refused point blank to talk to me. One miner said he supported me, but couldn’t be seen to do so in case it hurt the price. Another conversation went like this: Miner: “We agree the block size should be raised and we agree Core is not going to do so.”

Me: “Great! So when will you start running XT?”

Miner: “We aren’t going to run XT.”

Me: “Er, but you just said you agree with our policies and don’t think Core will come around.”

Miner: “Yes, we agree that you are right, but we will never run anything except Core. To do that would be to leave the consensus…We can’t run XT, that’d be crazy. We will wait for Core to change their minds.”

That was the point where I decided it had all become a waste of my time. The vast majority of mining hash power was controlled by people who were psychologically incapable of disobedience to perceived authority.9 “The Resolution of the Bitcoin Experiment”

Amid the vitriol, censorship, DDoS attacks, and lawsuit threats, the number of miners running BitcoinXT steeply declined. And once it became clear that the 75% miner threshold would not be reached, Mike Hearn decided he had enough. If Bitcoin could not overcome Core’s centralized power and increase its tiny blocksize limit beyond 1MB, then in his mind, Bitcoin had failed.

On January 14th, 2016, Hearn penned the last of his excellent essays, entitled “The Resolution of the Bitcoin Experiment.”10 In it, he explained why he considered Bitcoin a failed project: It has failed because the community has failed. What was meant to be a new, decentralised form of money that lacked “systemically important institutions” and “too big to fail” has become something even worse: a system completely controlled by just a handful of people… there’s no longer much reason to think Bitcoin can actually be better than the existing financial system.

Think about it. If you had never heard about Bitcoin before, would you care about a payments network that:

Couldn’t move your existing money Had wildly unpredictable fees that were high and rising fast Allowed buyers to take back payments they’d made after walking out of shops, by simply pressing a button (if you aren’t aware of this “feature” that’s because Bitcoin was only just changed to allow it) Is suffering large backlogs and flaky payments Which is controlled by China And in which the companies and people building it were in open civil war?

It has failed because the community has failed. What was meant to be a new, decentralised form of money that lacked “systemically important institutions” and “too big to fail” has become something even worse: a system completely controlled by just a handful of people… there’s no longer much reason to think Bitcoin can actually be better than the existing financial system.

Think about it. If you had never heard about Bitcoin before, would you care about a payments network that:

I’m going to hazard a guess that the answer is no.

Hearn draws a pessimistic conclusion, saying that the mining centralization in China would remain a problem, even with a different development team in charge: Even if a new team was built to replace Bitcoin Core, the problem of mining power being concentrated behind the Great Firewall would remain. Bitcoin has no future whilst it’s controlled by fewer than 10 people. And there’s no solution in sight for this problem: nobody even has any suggestions. For a community that has always worried about the block chain being taken over by an oppressive government, it is a rich irony.

Some people believe that Bitcoin is best suited as a settlement system rather than a payment system. This notion is rooted in a view that it’s not possible to have a truly decentralized, trustless payment system that can handle the day to day payments needs for the population of people on this planet. They think that Satoshi’s vision of Bitcoin as a purely peer-to-peer version of electronic cash is unattainable.

That’s nonsense. It can be done.

He then went on to explain that Bitcoin’s value proposition comes from it first being a payment system, then, once successful, a settlement system in the future: History suggests settlement systems must start out as widely accepted payment systems… Bitcoin will make a fine settlement system if it first works well as a payment system. Bitcoin should only be limited by actual processing constraints and not arbitrarily chosen caps.13

A few weeks ago, I had a conversation with someone who expressed a notion that some control should be taken out of the hands of miners. I found that interesting. It begs the question, if you take some power out of the hands of miners, who are you giving that power to?

Should one person own the Bitcoin trademark? Should they have the power to set the official Bitcoin™ consensus rules? Perhaps miners should sign their blocks such that only those that have been certified to follow the official, trademark protected, Bitcoin™ consensus rules are allowed to create blocks. If you follow this line of thought to its logical conclusion, you end up with a centrally managed system with no need at all for mining.

He then explained the power of Bitcoin’s incentive system, how it keeps miners from misbehaving, and why the miners are the most critical part of the network’s security: Individually, miners control very little, but collectively, they control everything about bitcoin. This is an important and fundamental property of Bitcoin… [O]ne miner alone, operating on a different set of rules, would produce blocks that are rejected by other miners. They wouldn’t earn any reward for their efforts. So, while miners are competing with one another to produce blocks most efficiently, miners also have a need to cooperate… Bitcoin places all power over the operation of the network in the hands of miners, and anyone can become a miner. This collective, coordinated action is what makes Bitcoin a powerful, novel and revolutionary system. To undermine the power that miners have over Bitcoin is to undermine everything that is Bitcoin.

Despite the power assigned to miners by Satoshi, Pair acknowledges that this power can be surrendered if the miners refuse to make decisions, or if they simply do not realize that they possess such power in the first place: Miners can delegate their power. They may choose to let a mining pool produce the blocks they mine, thus letting the pool enforce the consensus rules or censor transactions if they desire. Miners can also let others influence or control what software they run and the rules that software enforces. The only reason developers, mining pools or any other non-mining constituents have any say in the matter regarding consensus rules is that miners have chosen (consciously or negligently) to delegate their power.14 Pair’s perspective was a commonly held one in 2016, but it’s nearly unheard of today. In fact, if newcomers are trying to learn about Bitcoin’s design, they will more than likely encounter the Bitcoin Wiki page which is dedicated to this exact topic, entitled “Bitcoin is Not Ruled by Miners.” Readers are told that full nodes set and control Bitcoin’s rules, not miners. According to the article, the ability for nodes to not upgrade their software keeps miners in check: [I]f miners produce blocks which break the consensus rules, then to everyone running a full node, it will be as if these blocks never existed; these blocks create no bitcoins and confirm no transactions. Since most of the economy is in some way relying on a full node to verify transactions, this prevents the miners who are creating invalid blocks from actually breaking any rules with any sort of real-world effectiveness, even if 100% of miners are doing so…15 As explained in Chapter 6, if the majority of miners decide to change the software they run, while some nodes run incompatible software, the nodes simply get forked off the network. Full nodes, by themselves, do not have the power to generate blocks, and therefore do not have the power to process transactions by themselves. The network can run fine without these nodes, but it would come to a screeching halt without miners. It is absurd to imagine Bitcoin was designed so that hobbyists running nodes in their basement could prevent 100% of miners—who spend hundreds of millions of dollars on infrastructure—from upgrading their software. Yet, the article doubles down and further claims that the network requires most participants to run their own nodes, otherwise the whole system becomes insecure: If not much of the economy is running independent full nodes, then Bitcoin is ruled by someone. If most of the economy is using SPV-style lightweight nodes… then Bitcoin is ruled by miners and therefore insecure.

After articulating the opposite of Satoshi’s philosophy, the article concludes with another absurdity: The result of all this is that there is no “Bitcoin governance”; Bitcoin is not governed. No person or group can force their views on anyone else, and even things like the definition of a bitcoin can be subjective… [A]chieving this non-governance was one of the primary motivations behind Bitcoin, it continues to be one of its biggest advantages over traditional systems, and both the system itself and the Bitcoin community will vigorously resist any attempt to weaken this feature of Bitcoin.16 No one who understands the history and network design of Bitcoin could say it exists without governance. The term “non-governance,” like “digital gold,” is nothing more than a catchy slogan that misleads people about Bitcoin’s true design. Readers should not be surprised to learn that this article on the Bitcoin Wiki—which claims to speak on behalf of the Bitcoin community—was written by the same person who has control over all the major discussion platforms: Theymos himself.

# 18 From Hong Kong to New York

The Hong Kong Agreement The goals of the industry were clear: find a way to scale Bitcoin to avert the impending network failure and do it without fracturing the community into pieces. The goals of the Core developers were different. First and foremost, they had to protect their own jobs, since they were under the threat of being fired and replaced by Bitcoin Classic. So, they promised a small blocksize increase in exchange for miners pledging to only run Core software. On February 20th, an agreement was reached, now called the “Hong Kong Agreement” or “HKA.”7 The two key components of the HKA were:

1) A hard-fork upgrade to raise the blocksize limit to 2MB.

2) A soft-fork upgrade to enable SegWit.

The miner pledge read, “We will only run Bitcoin Core-compatible consensus systems, eventually containing both SegWit and the hard-fork, in production, for the foreseeable future.” The agreement also came with a timeline. SegWit would be released in April 2016, the code for the hard-fork in July, and the hard-fork would be activated around July the following year. Since Classic was a 2MB upgrade, and Core promised the same, the agreement made sticking with Core more palatable to miners—if they could just hold on another few months, they would get to 2MB without all the controversy.

In contrast with the relatively simple blocksize increase, SegWit is a much more complicated change to the software which alters the way transactions are structured. SegWit slightly increases transaction throughput, but its primary purpose is to make second layers like the Lightning Network easier to build. Significant criticisms have been leveled at SegWit from people like Dr. Peter Rizun and others.8 Critics have pointed out potential security weaknesses, and everyone acknowledges the code comes with serious “technical debt”—permanent increases in software complexity.

The Core developers missed their deadlines for both the SegWit upgrade and blocksize increase. They did not adhere to the HKA, and the blocks kept getting fuller.

Tighter Information Controls

Meanwhile, the war to control Bitcoin’s dominant narrative was raging. Rampant censorship was not the most extreme tactic used. The owners of key informational websites became even more brazen. In July 2016, the Bitcoin.org owner “Cobra” came up with an idea: perhaps newcomers could be prevented from learning about Bitcoin’s original design by changing the whitepaper itself: I’ve been noticing that the Bitcoin paper… is getting a lot of traffic… Almost all the people reading the paper are probably reading it for the first time, and using it as a learning resource. However since the paper is so outdated, I believe it doesn’t do a good job anymore of giving people a firm understanding of Bitcoin… I feel like the Bitcoin described in the paper and the Bitcoin described on bitcoin.org are starting to diverge. At some point, I think the paper will start to do more harm than good, because it tricks people into believing they understand Bitcoin.

Cobra then makes the extraordinary claim that the whitepaper is not meant to explain Satoshi’s original design but rather to explain how the present Bitcoin Core software works: I have seen people promote toxic and crazy ideas, and then cite parts of the paper in an effort to justify it. Academics are also regularly citing the paper and basing some of their reasoning and arguments on this outdated paper… I believe the paper was always designed to be a high level overview of the current reference implementation, and that we should update it now that the paper is outdated and the reference implementation has changed significantly from 2009.14 By Cobra’s logic, even if the Core developers wildly changed the code to lose all resemblance to the original Bitcoin, the whitepaper should be altered to reflect those changes. Theymos immediately commented on the thread, agreeing that the whitepaper misleads people: Interesting suggestion. The paper is definitely outdated, and I do often see people saying “just read the whitepaper!” as if the paper is still a good way to learn about Bitcoin…15 Fortunately, this proposal was met with sufficient resistance to block the change, though it would not stop them from trying again in the future. Theymos would later make another outrageous proposal, that companies should be required to pledge their allegiance to the small-blocker narrative in order to have their products listed on the Bitcoin.org website: [S]everal companies said that miners control Bitcoin. This belief is one of the most dangerous threats to Bitcoin… I’ve been thinking that bitcoin.org should somehow act against this more than it is already. For example, maybe bitcoin.org should require that wallets and services sign a very simple pledge that acknowledges that Bitcoin is not ruled by miners in order to be linked from bitcoin.org.16 Cobra chimed in, again criticizing the whitepaper and calling for it to be revised or replaced altogether: The whitepaper is to blame for all these dangerous beliefs. We seriously need to rewrite it, or produce a completely new whitepaper and call that the Bitcoin whitepaper.17 These quotes are shocking in their brazenness. Two unknown people who control the most prominent websites in Bitcoin are eager to censor, propagandize, and even rewrite history to push their narrative. The average user does not even know of the existence of Theymos and Cobra, much less so the history of how they pushed a version of Bitcoin that is diametrically opposed to the original one—neither do prominent investors that I have spoken with in private, because it takes significant independent research or long-term involvement in the industry to figure out.

2016 came and went without SegWit or a blocksize increase, and the next year would become the craziest in Bitcoin’s history. In January 2017, blocks were regularly running at 90%+ capacity, occasionally bumping into the 1MB limit, and by March, the average transaction fee passed $1—an increase of more than 1,000% in less than a year. Early Bitcoin entrepreneur Charlie Shrem wrote: If we don’t implement bigger blocks ASAP, Paypal will be cheaper than #bitcoin. I already pay a few dollars per tx. Stop hindering growth

An agreement was quickly reached—a conservative one, resembling the HKA that was previously agreed upon. SegWit would be activated with an 80% miner threshold, and a 2MB blocksize increase would happen within six months. This would become known as the New York Agreement, or “NYA.” Famously, all the Core developers refused to show up for the conference, so the industry had to find agreement amongst themselves. My company Bitcoin.com signed the NYA, though I was unable to attend personally. Had I been there, I would have objected to one glaring problem with the whole plan: the blocksize increase was supposed to happen after SegWit was activated. What if, after accepting SegWit, another campaign was organized to attack all alternatives to Core? Would the miners finally commit to an alternative implementation? It was an enormous gamble that turned into an enormous blunder.

The New York Agreement gained signatures from 58 companies from 22 different countries, representing 83% of the hashpower, over $5 billion of monthly on-chain transaction volume, and more than 20 million Bitcoin wallets.21 The support was so universal, that even prominent critics of Core and SegWit signed on. For example, the mining pool ViaBTC had written a scathing article the month prior explaining why they did not support SegWit as a scaling solution, saying: Network capacity is now the most urgent issue for Bitcoin… SegWit, which is a soft fork solution for malleability, cannot solve the capacity problem… Even if SegWit after activation can slightly scale up block size with new transaction formats, it’s still far behind the demand for the development of Bitcoin network.

Second-tier networks such as Lightning Network (which relies on SegWit) cannot be considered as a block scaling solution. LN transactions are NOT equal to Bitcoin’s peer-to-peer on-chain transactions and most Bitcoin use scenarios are not applicable with Lightning Network. LN will also lead to big payment “centers”, and this is against Bitcoin’s initial design as a peer-to-peer payment system. It can be a good method though for frequent and small Bitcoin transactions in certain cases. But we cannot rely on it as a cure for Bitcoin scaling.

Their article then explains how SegWit will strengthen Core’s dominance over the Bitcoin protocol: As an implementation reference for Bitcoin, Bitcoin Core was of significant influence in the community. However, their influence has long been overrated by their actions. By abusing their previous influence, they’ve obstructed Bitcoin block size increase from happening, against the will of the community. Core team has in some cases explicitly, supported censorship of Bitcoin’s mainstream forums, along with banning of many prominent developers, businesses, and community members who have different opinions with Core’s current roadmap. Today, Bitcoin is in urgent need of diversified dev teams and implementations to achieve decentralization in Bitcoin development.

Should SegWit be activated, Bitcoin will have no choice but to proceed with Core’s current roadmap in the coming years.

# 19 The Mad Hatters

Pseudonymous developer ShaolinFry announced his idea for a “User-Activated Soft-Fork” (UASF) in February 2017,1 though the plan did not initially gain much attention. UASF was an attempt to explicitly challenge the power of miners by threatening to disrupt the network if SegWit was not quickly adopted.2 Nodes running UASF code would refuse to accept blocks that did not signal for SegWit activation. Therefore, if miners produced blocks that were incompatible with the UASF code, the nodes would end up forking themselves off the network. While this sounds like a self-evidently bad idea, it could theoretically cause problems if they were able to recruit enough nodes with economic influence to run their code—say, from exchanges, payment processors, or wallet providers. Users could end up on a separate blockchain from the majority of miners, without their knowledge or consent, potentially losing funds or having their payments fail.

The UASF architects tried to appeal to economic incentives to gain momentum behind their idea. In addition to the possible pain caused by network disruption, they also argued that miners could make more profits by adopting SegWit, since it allowed for new transaction types. Fees could be earned from transactions in the original format plus the new one. The goal was to make immediate SegWit adoption the easiest path for miners, since they were already planning on adopting it anyway.

Both the UASF and its proponents had many detractors. The co-founder of OB1, Dr. Washington Sanchez, claimed that the “UASF is a fancy name for a Sybil attack.”3 A Sybil attack is where participants in a network cannot discern honest from dishonest actors. Since Bitcoin nodes are easy to create, it’s possible to flood the network with dishonest nodes to make it harder for honest ones to connect with each other. Ironically, the proof-of-work requirement in Bitcoin is intentionally designed to protect from Sybil attacks. Nodes are cheap and easy to create, but miners are not. By requiring miners to demonstrate proof-of-work, it makes the cost of attacking the network exponentially higher, and this high cost is what allows honest actors to find each other. UASF tries to overcome this protection by threatening to fork off economically-relevant nodes from the network.

Miners Versus Full Nodes
There are several critical problems with the UASF concept. Most fundamentally, given Bitcoin’s design, it still requires miners to participate. Even if the UASF nodes successfully forked themselves off the main network, without any miners cooperating, their chain would not be able to produce any new blocks. So, it would be immediately unusable. If they brought 5% of the hashrate with them, their chain would only be able to produce blocks at 5% the normal rate—instead of each block taking ten minutes on average, it would take two hundred minutes. They would also be subject to “51% attacks.” A 51% attack is where a majority of hashrate is dishonest or malicious and can cripple a blockchain. If the UASF supporters took 5% of the hashrate to a new chain, it would mean 95% stayed on BTC. That means it would only take another 6% of miners to move to the UASF chain to attack it. 89% of the total hashrate would be on BTC, and 11% would be on the UASF chain. Of that 11%, more than half would be hostile and could wreak havoc. At the end of the day, Satoshi’s design gives miners the power to determine whether the blockchain is functional or not.

While the UASF concept might have been flawed, it did bring up an important question: do miners connect to a network of full nodes, or do full nodes connect to a network of miners? Thankfully, the answer is “both.” While miners form the technical backbone of Bitcoin, they do not operate independently from a broader economic network. Miners are still profit-driven, and that means they must consider what other parties want. They cannot simply ram through changes without undermining the credibility (and price) of the coin they mine. However, being excessively concerned with minority opinion can also be counterproductive in the long run, especially if it prevents the blockchain from scaling.

UASF had no traction at the beginning, but it eventually gained supporters after the most extreme small-blockers took up the cause, people like Samson Mow, the CSO of Blockstream, and Luke Dashjr, a Blockstream contractor. Mow organized a public fundraiser for the best UASF proposal,4 and over the next few months, support for UASF grew, especially on social media, though it was never clear how much support was real versus manufactured. On Twitter, for example, hundreds of accounts would swarm public discussions about Bitcoin, aggressively promoting the UASF idea. A remarkably high number of these accounts were new, had cartoon profile pictures, almost no followers, and apparently used their Twitter accounts to solely share their strong opinions about Bitcoin—which they seemed to do for several hours a day, for multiple months. Meanwhile, at real-world meetups and conferences, there were never more than a couple of UASF supporters in any group, despite their loud online presence. They quickly gained a reputation for being the most hostile and disruptive Bitcoiners at conferences and could be identified by their matching camouflage hats.

The drama surrounding SegWit and UASF did have another consequence, however. It spurred on a group of miners to finally create a backup plan. If SegWit turned out to be a bad idea, or if its adoption caused a chain split, or if the 2X blocksize increase failed to occur, there had to be a Plan B. So, an alternative implementation was created to safely split off from BTC and form a separate chain, without SegWit, and with an immediate increase of the blocksize limit to 8MB. This implementation was called Bitcoin ABC—the “ABC” standing for “adjustable blocksize cap,” which would allow miners to set their own limits without needing the approval of developers. Bitcoin ABC brought about a new network, and therefore a new coin, called Bitcoin Cash. That’s how BCH started, not as an immediate replacement for BTC, but as a contingency plan by the biggest miners in case the BTC upgrades failed. It turned out to be a good idea.

One particularly dishonest tactic was to claim that the SegWit upgrade was a blocksize increase, implying that Core had already followed through on their promise made in Hong Kong. Samson Mow started this narrative on Twitter with a short dialogue: SegWit activation would put a definitive end to the perceived Bitcoin ‘Civil War’ and threat of a network splitting hard-fork.8 Edmund Edgar responded with skepticism: What they mean by this is, once they get segwit, there will be no block size increase, ever.9 Which Mow responded to, claiming: SegWit is a block size increase. Prove it isn’t.10 This claim would be shamelessly repeated by the usual characters, including Adam Back,11 Peter Todd,12 Greg Maxwell,13 Eric Lombrozo,14 and even on the segwit.org website.15 The reason they could make this claim was because of the way SegWit restructured transactions. The technical details are not important, but they accomplished this by changing the metric of “blocksize” to “block weight,” essentially weighing different parts of the transaction differently. By this new accounting method, the literal size of blocks could be increased slightly beyond 1MB—the average is currently 1.3MB—but without a substantial increase in transaction throughput capacity. Stating that this qualified as a 2MB blocksize increase was deceptive—as if the proponents of SegWit2x simply wanted to have blocks containing more data, irrespective of whether it allowed them to process more transactions per block. Using “block weight” metrics, SegWit2x would have resulted in a 8MB block weight limit, though the throughput capacity would essentially be the same as a 2MB blocksize limit. SegWit on its own only allowed for 50% of the capacity the industry was planning on after the Hong Kong and New York Agreements. If SegWit really was a blocksize increase by the usual definition, then the SegWit2x controversy would not have existed at all.

By Any Means Necessary

Instead of avoiding forks, Bitcoin looked like it would split into three different chains by the end of 2017: the Segwit1x chain (S1X), the Segwit2x chain (S2X), and Bitcoin Cash (BCH). The fight between S1X and S2X brought about a critical question: which chain would keep the name “Bitcoin” and the ticker symbol “BTC”? If “Bitcoin” is identical to the network brought about by the Bitcoin Core software, then obviously that would mean S1X is Bitcoin. But if Bitcoin is the network brought about by the miners and greater industry—and is not synonymous with one software implementation—then S2X would obviously be Bitcoin.

Most of the industry adopted the same policy, often considered the neutral one. The name “Bitcoin” would be assigned to whichever chain accumulated the most hashrate, regardless of whether it was S1X or S2X. Not only was this consistent with Satoshi’s design, it also made sense in terms of giving customers maximum stability. A minority hashrate chain is not simply unreliable, it could result in lost funds. While this policy was reasonable, it was also an existential threat to Blockstream and the Core developers. By September 2017, roughly 95% of the hashrate was signaling for S2X,20 practically guaranteeing that the Bitcoin name, ticker symbol, and network effects would go with the 2MB chain. And unless the Core developers put in additional protections—like the ones put in place when Bitcoin Cash forked off—they risked having their chain entirely wiped out. However, putting those protections in place would concede that they were a minority fork and had lost the battle for Bitcoin. So, instead of admitting defeat, they became even more aggressive and tried to get the government involved.

Core developer Eric Lombrozo called S2X a “serious cyber attack” and threatened to take legal action against it. Blockstream co-founder Matt Corallo wrote directly to the SEC to ask them to intervene and provide “consumer protection” from the fork.

In addition to lawsuit threats, they also used more direct ways of attacking businesses that did not define “Bitcoin” by Bitcoin Core’s software. Wallet providers, for example, could face waves of fake one-star reviews on their apps, warning users of potential “lost funds” or “malware” because their company would not support the “real” Bitcoin.

The Mob Wins

Once again, the pressure started to work. Companies were being seriously harmed by the organized campaigns against them. While the censorship of big-blockers remained on the online forums, posts that attacked S2X-supporting companies were promoted, no matter how integral they had been to the Bitcoin economy. Brian Hoffman from OB1 was one of the first to publicly retract his support for S2X, not because he supported S1X, but because he was exhausted by the attacks against his company. In an article entitled “SegWit2X: You’re f***ed if you do, you’re f***ed if you don’t,” he wrote: Another reason I supported SegWit2x is because I hoped that by making SegWit a reality that we could somehow bring a fractured Bitcoin community tighter together when it needed it most. I was wrong. I no longer feel this is a reality. The Bitcoin community does not care about unity other than to preserve the wealth already accumulated by so many early holders and wealthy investors.

Amid the controversy and confusion, the cryptocurrency exchange BitFinex—which notably did not sign the NYA—found a way to raise the costs of following through with Segwit2x. Unlike most of the industry, they decided that the ticker symbol BTC would not be assigned based on hashrate. Instead, it would be given to the “incumbent implementation.”

A few other smaller exchanges would soon follow the same policy. That meant users could find themselves trading “BTC” for one price on BitFinex, a wildly different price on Coinbase, and payment processors like BitPay might not even recognize their coins at all—essentially a nightmare scenario for the average user. Imagine a transaction processor like BitPay trying to explain this situation to merchants or to customers asking why their BTC payments did not go through. The headache would be enormous, which is why on November 8th, 2017, roughly a week before the planned fork, BitPay wrote a letter calling for the cancellation of Segwit2x.28 Shortly afterwards, a joint announcement was made by some of its strongest backers, including the lead developer Jeff Garzik: Our goal has always been a smooth upgrade for Bitcoin. Although we strongly believe in the need for a larger blocksize, there is something we believe is even more important: keeping the community together. Unfortunately, it is clear that we have not built sufficient consensus for a clean blocksize upgrade at this time. Continuing on the current path could divide the community and be a setback to Bitcoin’s growth. This was never the goal of Segwit2x.

As fees rise on the blockchain, we believe it will eventually become obvious that on-chain capacity increases are necessary. When that happens, we hope the community will come together and find a solution, possibly with a blocksize increase. Until then, we are suspending our plans for the upcoming 2MB upgrade.29 And with that, the New York Agreement failed, just like the Hong Kong Agreement did before it, and like Bitcoin Unlimited, Classic, and XT before that. The threat of disruption was too great a risk, especially for only a 2MB limit which would only provide a fraction of the throughput capacity needed for mass adoption. The failure of S2X would demonstrate, once and for all, that Bitcoin Core had totally captured BTC and would permanently overhaul its design. Anybody adhering to the original vision for Bitcoin as digital cash would be forced to move to a different project. Fortunately, Bitcoin Cash immediately provided that outlet as big-block Bitcoin without the burdens of Blockstream and the Core developers. Three days after the cancellation of Segwit2x, Gavin Andresen identified BCH as the continuation of the original Bitcoin project: Bitcoin Cash is what I started working on in 2010: a store of value AND means of exchange. 30 Bitcoin’s darkest time was during its Civil War era, and it resulted in a successful hijack of the original project. But fortunately, its story does not end there. Maximalists will insist that the battle for Bitcoin is over, that the Core developers are now the final authority, and that the price appreciation of BTC has vindicated the small block philosophy. None of these things are true. Bitcoin technology is still new, and with big blocks, it can compete against any cash system in the world. The Core developers might control BTC, but they do not have any control over BCH. The price of each coin depends on the quality of information within the economy. If misinformation is currently widespread, then prices are destined to adjust as better information becomes known. Bitcoin’s original, ambitious goal was to be a fast, cheap, reliable payment system for the internet without needing to trust a centralized authority. That project is alive and well. It just got delayed a few years.

# 20 Challenger for the Title

No cryptocurrency project is beyond corruption, no matter how promising the technology, because all cryptocurrencies depend on software—and therefore humans—for their existence. Individuals can always be compromised, and software can always be rewritten. The successful capture of Bitcoin Core was a clear demonstration of this unfortunate truth. While cryptocurrencies will likely be the money of the future, it remains an open question whether they will make the world a freer place. On its current trajectory, the technology might end up completely corrupted. Instead of being used to empower individuals and give them more financial freedom, it might be used for the opposite purpose—to empower governments to track, surveil, and control people. This negative outcome is much more likely if people cannot access the blockchain and are forced to rely on second layers instead. Peer-to-peer cash is an incredible tool for promoting human freedom; a permissioned blockchain is an incredible tool to restrict it. Whether Bitcoin ends up being a peer-to-peer cash system or a control system within a dystopian nightmare depends on what decisions we make going forward.

The Real Bitcoin

By the end of 2017, Bitcoin started its transition from the Civil War era to the present Mainstream era. The failure of Segwit2x sent a clear message that Satoshi’s design would never be implemented on the Bitcoin Core network. Small blocks had become a fundamental feature of BTC. So, anybody wanting to scale Bitcoin with big blocks was forced to switch from BTC to BCH. Because of this, I immediately dedicated all of my efforts to promoting Bitcoin Cash, since it was the continuation of the project I had been working on for the previous seven years. It did not take long before the largest companies like BitPay and Coinbase integrated BCH into their services to allow people to purchase and pay with BCH instead of BTC.

Right away, a competition began between Bitcoin Cash and Bitcoin Core, and they were not just competing for users. The mere existence of Bitcoin Cash posed a fundamental challenge to Bitcoin Core, because it held a legitimate claim to the title of “the real Bitcoin.” For the first year of Bitcoin Cash’s existence, BTC and BCH were battling for the very title of “Bitcoin.” While today, the industry norm is to call BTC “Bitcoin,” that convention was not established for some time, and when you understand the technology and its history, it becomes clear why. The battle over the name “Bitcoin” was, and still remains, critically important, and no group can ever be allowed to monopolize it. Vitalik Buterin echoed this sentiment back in 2017, even though he thought it was premature to call BCH “Bitcoin,” writing on Twitter: I consider BCH a legitimate contender for the bitcoin name. I consider bitcoin’s *failure* to raise block sizes to keep fees reasonable to be a large (non-consensual) change to the “original plan”, morally tantamount to a hard fork… That said, *right now*, I think trying to claim “BCH = bitcoin” is a bad idea, as it *is* a minority opinion in the “greater bitcoin community”.1 Three Critical Questions The BCH fork raised three critical questions that every Bitcoiner must answer: 1) Is Bitcoin identical to what the Bitcoin Core developers produce?

Even the most rabid Bitcoin Core supporters have to admit that Bitcoin cannot simply be whatever the Core developers produce. It takes little imagination to see how such a project could be corrupted. For example, imagine that the main Github accounts associated with Bitcoin Core are compromised and change the code to require every transaction to pay a fee to an unknown address. Obviously, that would suggest Bitcoin Core had been hijacked, and “the real Bitcoin” would have to continue with a different software implementation. Since the threat of hijack is always present, that means Bitcoin must remain separate from the Bitcoin Core implementation to protect the network’s integrity. But this brings up the next question: 2) When does forking away from Bitcoin Core become necessary?

The Bitcoin ecosystem must always be prepared to switch software implementations if necessary—otherwise, there is no defense against the corruption of developers. So there must be some criteria for determining when a fork is required. If every transaction is suddenly required to pay a fee to a mysterious entity, that’s an obvious sign it’s time to fork, but not every situation is so clear. For example, if the fundamental design of Bitcoin is changed to restrict people’s access to the blockchain, that might also be a sign. Or, if the most powerful developers form a company that diverts traffic from Bitcoin onto their proprietary sidechain—that too could be a sign. The centralization of development is a permanent concern, and ironically, even the top developer Van der Laan admitted so in 2021. In a blog post announcing that he no longer wanted to lead the project, he wrote: I realize I am myself somewhat of a centralized bottleneck. And although I find Bitcoin an extremely interesting project and believe it’s one of the most important things happening at the moment, I also have many other interests. It’s also particularly stressful and I don’t want it, nor the bizarre spats in the social media around it, to start defining me as a person.2 When the lead developer admits they have become a centralized bottleneck, that also might be a sign that it’s time to fork. The fact that forks are justified and necessary in certain situations raises the next critical question: 3) When does a fork earn the title of “the real Bitcoin”?

By itself, the ability to fork the software does not prevent development capture. Forking the software must also come with the threat of capturing pre-existing network effects—each side of a fork must compete for the title of “the real Bitcoin” and the “BTC” ticker symbol. The integrity of the entire system depends on it.

Most people do not realize that the ticker symbols (BTC, BCH, ETH, XMR, etc) are separate from the underlying blockchain they are attached to. In fact, in the first days of Bitcoin Cash’s existence, it traded on some cryptocurrency exchanges as “BCC” before the “BCH” convention was adopted. These ticker symbols are a large part of the network effects for any coin. In practice, whatever is traded on the exchanges under the “BTC” ticker is what people refer to as “Bitcoin.” So, it is critically important that forks can compete for the dominant ticker symbol too. If Bitcoin Core always inherits these network effects, it’s an enormous advantage and a substantial step toward totally capturing Bitcoin, since any new competitor would have to build up their own network from scratch. If the existing infrastructure defaults to Bitcoin Core no matter what, then all serious competition has been lost, and the Core developers can never really be fired or replaced.

Immediately after the failure of Segwit2x, there was a real possibility that Bitcoin Cash would simply replace BTC as the real Bitcoin. I was not the only one who thought so. Within a month, the price of BCH went from around $650 to an inter-day high of over $4,000! For a brief period, it looked like Bitcoin was going to free itself from Core once and for all. The momentum did not continue, however, and in the face of suffocating information control, the price of BCH has steadily decreased relative to BTC for the past few years. Bitcoin Core supporters are eager to declare a victory because of the large price difference between the two coins, but this is premature.

In my view, the higher price of BTC is almost entirely due to the inheritance of network effects, not because people were excited about small blocks—since years later, there is still hardly anybody who understands the difference between big and small blocks.

Reverse the situation

Imagine the dominant bitcoin had 32mb blocks with a fleshed out scaling plan including successful testing of GB+ blocks , support by every major crypto business, project, and service, guaranteed sub-cent fees and a more the merrier growth strategy for true global adoption.

Now imagine some upstart devs forked off and reduced block size to 1mb, heavily restricting transactional capacity to create a fluctuating fee market intended to produce long term fees in excess of $100+ driving users to a second layer system of fee taking government regulated financial intermediaries they call “hubs”.

Would this new high fee coin see any traction whatsoever?

It needs to be understood that the current BTC price is the result of incumbency, not merit. Any suggestion that the market could never come to the realisation that the Blockstream/Core redesign of bitcoin was a mistake is pure cult ideology.3 This is a great point. It’s hard to take seriously the idea that the small block, high fee chain would have had any real momentum behind it. It would be fine as an experiment or a sidechain, because it’s effectively a new idea when compared to Satoshi’s vision. I fully support such experimentation, but it should not have inherited the network effects of BTC—the entire industry has been stalled for years because their experiment has largely failed from a technological perspective. This is a great point. It’s hard to take seriously the idea that the small block, high fee chain would have had any real momentum behind it. It would be fine as an experiment or a sidechain, because it’s effectively a new idea when compared to Satoshi’s vision. I fully support such experimentation, but it should not have inherited the network effects of BTC—the entire industry has been stalled for years because their experiment has largely failed from a technological perspective.

The most potent weapon in the arsenal of BTC maximalists has always been narrative control. So immediately, they went to work using their old tactics of smearing people and directing the flow of information online. My nickname of “Bitcoin Jesus” was inverted to “Bitcoin Judas,” as if I was a great betrayer of Bitcoin, despite my ideas remaining constant since 2011. A campaign was created to only refer to Bitcoin Cash as “bcash” to discredit and distance BCH from the Bitcoin brand. Nobody within the BCH community used “bcash” to refer to Bitcoin Cash, but that did not matter.

It’s simple: They want to disassociate Bitcoin Cash from Bitcoin. They don’t want to allow Bitcoin Cash to use the Bitcoin brand name. And that’s completely hypocritical given the fact that the Core group has used every dirty trick in the book (censorship, corporatism, lies and stalling) to usurp the Bitcoin project to their own ends...

They are hoping new users won’t even realize there’s another version of Bitcoin. They are hoping those users won’t realize that Bitcoin was originally peer to peer electronic cash (not this settlement layer that Core is pushing.) And ultimately, they are hoping people don’t see that Bitcoin has changed course, and that there’s a version of Bitcoin that stayed with the original formula.

# 21 Bad Objections

The Bitcoin Maximalist playbook should be clear by now—relentlessly push a narrative and attack anybody that questions it. Censor discussion and revise history if necessary. Utilize social media to harass, shame, and bully people into submission. I expect these tactics will continue in the future because they have been effective so far, and also because the Bitcoin Core narrative is quite fragile. Anybody willing to dig beneath the surface will quickly find holes in their story. While there are endless examples of outrageous, deceptive behavior, not every criticism of Bitcoin Cash comes from bad actors. Information has been tightly controlled online for several years, so most people are simply confused because they have only heard one side of the story. The most common criticisms of BCH are easy to refute but still worth addressing.

Since I personally witnessed the capture and corruption of BTC, I am painfully aware that it can happen to BCH or to any other project. No technology or community is perfect, and success is never guaranteed. So, my focus is on the general utility of cryptocurrency to improve the world and not any particular coin for its own sake.

Also, it’s worth remembering one of Satoshi’s messages to Mike Hearn in 2011, when he wrote: As things have evolved, the number of people who need to run full nodes is less than I originally imagined. The network would be fine with a small number of nodes if processing load becomes heavy.3 Satoshi understood that some degree of centralization is unavoidable, and that pattern is repeated across different industries. The problem is not centralization for its own sake, but rather the risks of 51% attacks. As the mining industry grows, it becomes less realistic to imagine that the largest participants would coordinate a malicious attack on a network into which they have invested hundreds of millions of dollars.

# 22 Free to Innovate

Restoration and Improvement The Bitcoin Cash developers quickly uncapped some of the unnecessary restrictions placed on Bitcoin. The software functions by using operation codes (“opcodes”) to construct and process transactions. One of these opcodes, “OP_RETURN,” was previously mentioned in Chapter 14. OP_RETURN allows data to be added to the blockchain in an easy, scalable way. The size of OP_RETURN was tripled in BCH, allowing it to be utilized much more easily. Different companies have already used this feature to build next-generation internet services like decentralized social media platforms.

Early in Bitcoin’s history, some of Satoshi’s original opcodes were deactivated as a precaution, but the Core developers never bothered to reexamine or reactivate them. The Bitcoin Cash developers successfully reactivated several of them in May 2018, further expanding functionality. They also added a brand-new opcode called OP_CHECKDATASIG which allows the software to incorporate data outside the blockchain to be used within smart contracts.1 Since then, even more opcodes have been added, including a host of new “Native Introspection opcodes” that combine together to greatly increase the sophistication of BCH’s smart contracting system and help make the code simpler, smaller, more efficient, and more powerful.

Freed from Bitcoin Core’s roadmap, the BCH developers could finally return to the original focus and purpose of Bitcoin: as a digital cash payment system. The controversial Replace-By-Fee (RBF) feature—that allowed zero-confirmation transactions to be easily reversed—was removed, making instant transactions much more reliable for merchants and payment processors.

# 23 Still Forking Around

Forks are not inherently a bad thing. In hindsight, Bitcoin would probably have been better off forking away from Core several years earlier. When irreconcilable differences occur within a community, forking is a way for each side to develop its own project independently. It’s like an evolutionary process, with different groups branching off to find their own unique form. If they make positive changes, then their projects will have a better chance of success; if they make negative changes, their projects will naturally die off. These forks come at a cost though, because they necessarily splinter the network effects into smaller parts, and network effects are a huge part of any cryptocurrency’s success.

Satoshi’s Vision

Big blockers were finally unified around Bitcoin Cash after the split from BTC in 2017. We all recognized the genius of the original design and wanted to break free from Bitcoin Core to scale the technology immediately. However, discussions about scaling did not disappear. Just how fast should the blocksize limit be raised and to what levels?

The first split to occur was between different Bitcoin Cash implementations. The most popular implementation was still Bitcoin ABC led by Amaury Sechet, the main programmer behind the 2017 BCH fork. But some people thought the roadmap of Bitcoin ABC was too reserved and did not scale aggressively enough. So a separate development team was formed called “Bitcoin SV.” The “SV” stands for Satoshi’s Vision, since they claimed to be implementing the vision of Bitcoin’s creator. While this may have been a laudable goal, the effort was complicated by the leadership of a man who claimed to actually be Satoshi himself: Craig S Wright (CSW).

CSW is a unique character, and most people are extremely skeptical of his claim. However, for some time, I did think he might actually be Satoshi. I have great respect for Gavin Andresen, and Gavin once claimed that he thought Craig was Satoshi, even though he could not be sure. After a handful of other respected minds within Bitcoin said the same thing, I trusted their judgment—plus it helped that Craig was unabashedly a big blocker who knew Bitcoin had the potential to scale massively. However, since that time, an enormous amount of controversy has erupted around his claim to be Satoshi, and the evidence he has provided publicly is extremely suspicious. Whether or not his claims are true, he was able to successfully rally a community of people around his vision for Bitcoin’s future. One prominent Bitcoin SV supporter was Calvin Ayre, a successful businessman with a background in online gambling, who ended up providing the financial resources to develop the Bitcoin SV software.

At that time, I thought Bitcoin ABC’s implementation was more promising, but I was optimistic that we would find common ground. I attended and had a reasonable discussion with Ayre over dinner the night before the conference. But I was upset to discover that the next morning Ayre’s media outlet published an article claiming that the miners present at the conference had all agreed to follow the SV implementation—even though discussions had not even started! My distrust grew when CSW stormed out of the conference only a few hours later, preventing any further effective discussion or compromise. These underhanded tactics left a bad taste in my mouth.

Bitcoin ABC and Bitcoin SV looked like they were on a collision course to fight a hash war. Since my focus has always been on using Bitcoin for payments, I knew the credibility of Bitcoin Cash could take a hit if the network experienced significant disruption. So, I spent more than a million dollars renting mining equipment to ensure ABC secured more hashrate than SV.

While I was pleased that my side won the battle—and we successfully got rid of the extremely divisive Craig Wright—the victory came at the cost of shrinking the size of our network even further. After the BSV split, big block Bitcoiners were no longer unified around one project.

Since that split in November 2018, BSV has fallen further behind BCH in terms of price and hashrate. As a result, their strategy seems to have shifted towards relying on patent trolling and lawsuits. I have been sued repeatedly by Craig, as have a long list of people in the cryptocurrency industry. These tactics have been widely condemned, and as a result, BSV has one of the poorest reputations of all cryptocurrencies. Most exchanges have banned BSV’s coin from their platforms, further hampering its acceptance. While I completely support and encourage competition between projects, I find it impossible to overlook the fact that BSV’s leadership has decided to weaponize the legal system to harass and harm people, myself included.

On the one hand, these forks have been damaging for the continuity and growth of Bitcoin Cash. Every time there is a contentious split, the network shrinks, bitterness grows, the user experience gets worse, and talented individuals leave due to the drama. However, on the other hand, Bitcoin Cash successfully fired a development team that tried to hijack the protocol for their own gain. That’s a great sign.

# 24 Conclusion

We are at the beginning of a monetary revolution. From a historical perspective, the blockchain is still a brand-new invention, and like any powerful new technology, it can make the world a considerably better or worse place. If we are not careful, it might be co-opted and used to track and control people at an unprecedented level. But if we unlock its potential for good, it will usher in a new era of sound money, personal freedom, and prosperity. The benefits of sound digital money are enormous—as enormous as the risks of unsound digital money. If I have learned anything in the last decade, it’s that this power has not gone unnoticed. The political and financial establishment has taken note of Bitcoin and other cryptocurrencies because they are an existential threat to the status quo.

Transactions that are not peer-to-peer require third parties to facilitate them, and the old financial system is largely composed of third parties—banks, payment processors, credit card companies, regulatory agencies, and central banks manipulating the money supply. Middlemen are everywhere, profiting in some way from every transaction they touch. Satoshi’s version of Bitcoin—used for everyday commerce, with large blocks and universal access to the blockchain—routes around these intermediaries. The Bitcoin Core version does not. In fact, BTC now depends on the old system in order to work for the average person. Even the Lightning Network depends on trusted third parties, since nearly everybody must use custodial wallets, which are merely account balances held with a company. There is nothing revolutionary about that.

The world is trending in this direction, where companies are forced to comply with regulations that completely strip their customers of privacy. One way to fight this trend is to keep transactions peer-to-peer and not use custodial wallets. However, this is not feasible if the cryptocurrency being used does not scale to allow everybody to access the blockchain.

We may never know the true motivation behind Bitcoin Core’s decision to overhaul Satoshi’s design. Maybe it happened in good faith. Maybe it happened because Core was infiltrated. Regardless, the result is the same: a small-block version of Bitcoin that is considerably less disruptive to the status quo. If interested parties did not directly corrupt Bitcoin, they certainly benefit from its corruption. The same can be said for the rampant censorship online, the widespread information control, and the social media engineering that surrounds this topic—even if the opposition did not cause it, they certainly benefit from it.

The next generation of digital cash enthusiasts will need to have a more sophisticated philosophy than we had in the early days. To build such a philosophy, we should start by analyzing the different tensions that exist within systems. Every cryptocurrency project is faced with an endless list of problems, and these problems never have perfect solutions. Instead, there are tradeoffs that must be balanced against each other. Analyzing these tradeoffs is critical for improving our overall understanding.

First-generation Bitcoiners, like myself, who wanted to see Bitcoin widely adopted as a peer-to-peer electronic cash system have failed so far. However, our mistakes can be learned from. The vision for fast, cheap, reliable, inflation-proof digital cash is still alive, but it requires a network of people to bring it into existence. Software alone cannot improve the world; humans are still required!

Both BTC and BCH have diminishing block rewards over time, which means that before long, miners will receive the vast majority of their revenue from transaction fees, not newly minted coins. This poses a serious challenge to BTC because of small blocks, where high fees are necessary in order to maintain security. But BCH miners will continue to have a straightforward profit mechanism thanks to Satoshi’s original design. Simply by scaling the user base and processing more transactions, they can get paid well. For example, if half a billion people are transacting with Bitcoin Cash twice a day, that’s one billion daily transactions. With a $0.01 fee per transaction, that’s around $10 million per day of revenue, or over $3.5 billion per year split among miners. This provides a great incentive to keep scaling the network indefinitely.

More fundamentally, a successful project will need to demonstrate stability over time. Adding new features can be attractive, especially for computer programmers, but it comes at the cost of stability. Businesses simply cannot build on unstable platforms, and if the payment technology they are using changes every few months, it quickly becomes more of a hassle than a benefit. A global digital cash system must be rock solid. Once the core features are set, they should not be changed unless absolutely necessary.

Most people simply do not know the story of Bitcoin Core. They do not know that blockchains can scale just fine and that the Bitcoin network was intentionally redesigned to have high fees. They do not know that Blockstream profits by diverting traffic onto their own proprietary blockchain. They do not know about the failures of the Lightning Network and the inevitable proliferation of custodial wallets. They do not know that the information they consume online has been tightly controlled and censored for years to promote a single, dominant narrative. But they are totally on board with the idea of sound digital money that is not controlled by a centralized authority—a beautiful vision that simply cannot be realized on the BTC network. So in one sense, despite the widespread misinformation, the hardest sell is already done. Switching from one blockchain to another is easy compared to getting sold on the idea of cryptocurrencies in the first place.

If you are done reading this, you can try reading my sci-fi story about Satoshi Nakamoto here.

Birth of Bitcoin

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