Hijacking Bitcoin_ The Hidden History of BTC -- Roger Ver with Steve Patterson

Folks, If you really want to know and understand what has been going on “inside the cryptos/Bitcoin/Bitcoin Cash community” , the crookery mindset of the greedy and statist power hungers, and the plan of government to control the cryptos world asI have pointed out in some previous posts, please read this thin book by Roger Ver, the “young” man I like and restpect for his resolute love of liberty despite his flaws (who has not? Not me. I do have quite a bunch). Roger Ver is disliked by many “crypto-ers” for his anarchistic tendency.

I am in no way an “expert” but I’ve supported BCH from day one and saw “something very wrong” with the way and direction the BTC has moved into.

Please, educate yourself, if you really and truly want to be well informed and to develop the capability to make a well informed decision. Please read as much as you can, then think for yourself and come to your own decision.

Here is the book, just around 160 pages , at my online bookshelf

https://www.mediafire.com/file/d6uiqnmvaa5ipy3/Hijacking_Bitcoin__The_Hidden_History_of_BTC_--_Roger_Ver_with_Steve_Patterson_--_PublishDrive%252C_2024.pdf/file

Here are some excerpts: (the first ten pages and the Conclusion)

Foreword By Jeffrey Tucker

The story you will read here is of tragedy, the chronicle of an emancipationist monetary technology subverted to other ends. It’s a painful read, to be sure, and the first time this story has been told with this much detail and sophistication. We had the chance to free the world. That chance was missed, likely hijacked and subverted.

Those of us who watched Bitcoin from the earliest days saw with fascination how it gained traction and seemed to offer a viable alternative path for the future of money. At long last, after thousands of years of government corruption of money, we finally had a technology that was untouchable, sound, stable, democratic, incorruptible, and a fulfillment of the vision of the great champions of freedom from all history. At last, money could be liberated from state control and thus achieve economic rather than political goals—prosperity for everyone versus war, inflation, and state expansion.

That was the vision in any case. Alas, it did not happen. Bitcoin adoption is lower today than it was five years ago. It is not on a trajectory of final victory but on a different path to gradually increase in price for its earlier adopters. In short, the technology was betrayed by small changes that hardly anyone understood at the time.

I certainly did not. I had been playing with Bitcoin for a few years and was mainly astounded at the speed of settlement, the low cost of transactions, and the ability for anyone without a bank to send or receive it without financial mediation. That’s a miracle about which I wrote rhapsodically at the time. I held a CryptoCurrency Conference in Atlanta, Georgia, in October 2013 that focused on the intellectual and technical side of things. It was among the first national conferences on the topic, but even at this event, I noticed two sides coalescing: those who believed in monetary competition and those whose sole commitment was to one protocol.

My first clue that something had gone wrong came two years later, when for the first time I saw that the network had been seriously clogged. Transaction fees soared, settlement slowed to a crawl, and vast numbers of on-ramps and off-ramps were closing due to high compliance costs. I did not understand. I reached out to a number of experts who explained to me about a quiet civil war that had developed within the crypto world. The so-called “maximalists” had turned against widespread adoption. They liked the high fees. They did not mind the slow settlements. And many were involving themselves in the dwindling number of crypto exchanges that were still in operation thanks to a government crackdown.

At the same time, new technologies were becoming available that vastly improved the efficiency and availability of exchange in fiat dollars. They included Venmo, Zelle, CashApp, FB payments, and many others besides, in addition to smartphone attachments and iPads that enabled any merchant of any size to process credit cards. These technologies were completely different from Bitcoin because they were permission-based and mediated by financial companies. But to users, they seemed great and their presence in the marketplace crowded out the use case of Bitcoin at the very time that my beloved technology had become an unrecognizable version of itself.

The forking of Bitcoin into Bitcoin Cash occurred two years later, in 2017, and it was accompanied by great cries and screams as if something horrible was happening. In fact, all that was happening was a mere restoration of the original vision of the founder Satoshi Nakamoto. He believed with the monetary historians of the past that the key to turning any commodity into widespread money was adoption and use. It’s impossible to even imagine conditions under which any commodity could take on the form of money without a viable and marketable use case. Bitcoin Cash was an attempt to restore that.

The time to ramp up adoption of this new technology was 2013-2016, but that moment was squeezed in two directions: the deliberate throttling of the ability of the technology to scale and the push of new payment systems to crowd out the use case. As this book demonstrates, by late 2013, Bitcoin had already been targeted for capture. By the time Bitcoin Cash came to the rescue, the network had changed its entire focus from using to holding what we have and building second-layer technologies to deal with the scaling issues. Here we are in 2024 with an industry struggling to find its way within a niche while the dreams of a “to-the-moon” price are fading into memory.

This is the book that had to be written. It is a story of a missed opportunity to change the world, a tragic tale of subversion and betrayal. But it is also a hopeful story of efforts we can make to ensure that the hijacking of Bitcoin is not the final chapter. There is still the chance for this great innovation to liberate the world but the path from here to there turns out to be more circuitous than any of us ever imagined.

Roger Ver does not blow his own trumpet in this book, but he truly is a hero of this saga, not only deeply knowledgeable of the technologies but also a man who has clung to an emancipatory vision of Bitcoin from the earliest days through the present. I share his commitment to the idea of peer-to-peer currency for the masses, alongside a competitive marketplace for free-enterprise monies. This is a hugely important documentary history, and the polemic alone will challenge anyone who believes himself to be on the other side. Regardless, this book had to exist, however painful. It’s a gift to the world.

Jeffrey Tucker

President, Brownstone Institute

Introduction

The past thirteen years of my life have been spent trying to make Bitcoin and other cryptocurrencies the money of the future. The technology has the potential to make the world a radically freer and more prosperous place, and it will end up being one of the most important inventions of all time. I have spent more than a decade evangelizing about the benefits of Bitcoin, funded numerous startups within the industry, built my own businesses around it, and have seen the price increase by more than 6,500,000%. Yet, this book is not a love story, and I wish it did not have to be written. The project I got involved with in 2011 has been hijacked and changed for the worse.

Bitcoin was designed to be digital cash, usable in everyday commerce, with minimal fees and fast transactions, and it worked that way for years. But today, Bitcoin is thought to be “digital gold,” not meant for everyday commerce, with high fees and slow transactions—a complete reversal of the original design. It’s discussed as a “store of value,” with little care for its utility as a payment system. Some people even claim that Bitcoin cannot work as a payment system, because it does not scale. These common ideas are simply untrue. 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.”

As I travel and continue to speak around the world about the benefits of cryptocurrency, 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.

Hijacking Bitcoin has three parts. Part I is a detailed look at the original design of Bitcoin and the radical changes made to it. Part II is the history of the takeover, including the many dirty tactics employed like censorship, propaganda, and attacks on businesses that dissented from the narrative. The final section, Part III, is about rescuing Bitcoin from its captors and providing a realistic vision for the future.

Getting involved early with a breakthrough technology is a dream of many entrepreneurs, and my journey has been filled with exciting moments and interesting stories. But this book is not a memoir. Its purpose is to educate. For the last few years, I have been sharing this information in private conversations, public speeches, and online videos, but now it’s time to put it all in writing. The goal is to help people understand Bitcoin’s current situation and how it got there. To the entrepreneurs and investors who are interested in bringing fast, cheap, reliable, and inflation-proof digital cash to the world: we can still do this. We just have to work together on the right project.

Part I:

An Ingenious Design

Altered Vision

The cryptocurrency revolution began when Bitcoin was released to the world in 2009. Over the past decade, Bitcoin has gone from being completely obscure to being an international sensation that spawned a new industry. Entrepreneurs are trying to use the technology to solve a wide range of problems, from simply improving online payments to rebuilding the global financial system. Between all the news coverage, Wall Street speculation, and online enthusiasm, cryptocurrencies are probably the most hyped technology of the twenty-first century. Yet, despite the hype and astronomical price increases, their real-world impact has been minor. In the future, they might serve as the foundation of a new financial system or become an alternative to government-issued money, but to date, the primary use of cryptocurrency has been financial speculation.

The situation reminds me of when I was living in Silicon Valley during the internet boom of the 1990s. Internet technology was predicted to revolutionize commerce around the world, which meant that any “internet company” with no infrastructure or plausible business plan could raise millions just by owning a premium domain name. The speculation was mind-boggling. Many of the biggest startups went bankrupt only a few years after going public. Yet, despite the infamous burst of the dotcom bubble, the world has indeed been revolutionized by the internet. The technology has become essential infrastructure for the global economy and an indispensable part of modern life, though its maturation process took longer than people had hoped. Cryptocurrencies are following a similar path. Despite the wild speculation and relative lack of usage, they look like an inevitable part of our future.

Any story of modern cryptocurrency must begin with Bitcoin, the grandfather of them all. My own life has been wrapped up with Bitcoin since discovering it in 2010. My first coins were purchased in early 2011 for less than $1 each. A few months later, the price spiked to $30, only to crash back to $2 by November that same year—the first of many extreme price fluctuations that have since become common for the industry. Rapid price appreciation, followed by a crash of 80% or more, is a regular cycle that has been repeated several times in Bitcoin’s short history. The volatility makes for good news headlines, since the general public is almost exclusively focused on price. But for me, Bitcoin has always been more than just a financial investment. It’s a magnificent tool for increasing the amount of economic freedom in the world.

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. There’s no “Bitcoin Central Bank” that controls the supply of coins, and the technology does not recognize international borders. Few things have more potential for increasing global freedom than fast, cheap, permissionless, inflation-proof digital money.

Futurism is the other primary philosophical motivation behind my enthusiasm for cryptocurrencies. Thinkers like Ray Kurzweil paint a compelling picture of the future in which humans radically improve their well-being through advanced technology. We might be able to greatly reduce the amount of suffering in the world, and even extend our own lifespans to enjoy more time on Earth, when we reach sufficient economic and technological development. In order to get there, it will require enough wealth and prosperity to continue financing research, as well as ongoing freedom to innovate. In my mind, Bitcoin gets us one step closer to a more technologically sophisticated future in which everybody’s life is improved.

These beliefs were not unique in the early Bitcoin community. Online forums and message boards were the central hubs for discussion, and if you visited them, you would see endless discussions about Bitcoin being much more than a simple payment system or speculative investment. We all knew that the technology could be used to dramatically improve the world. Brian Armstrong, the co-founder and CEO of Coinbase, captured this sentiment perfectly in an article entitled “How Digital Currency Will Change the World” by stating:

Digital currency may be the most effective way the world has ever seen to increase economic freedom. If this happens, the implications are profound. It could lift many countries out of poverty, improve the lives of billions of people, and accelerate the pace of innovation in the world… reduce wars, make the poorest 10% better off, overthrow corrupt governments, and raise happiness.1

My enthusiasm quickly turned into evangelism, and I was nicknamed “Bitcoin Jesus” for preaching the Gospel of Bitcoin to anybody who would listen—and to plenty of people who wouldn’t. My friends and family, the media, and businesses that I patronized would hear the same message: Bitcoin is fast, cheap, reliable money that was designed for the internet. With it, you can send any amount of money anywhere in the world instantly for around a single US cent or less. In fact, in the earliest days, most Bitcoin transactions were completely free and only included a small fee if your coins had recently been moved. People could immediately see the value in such a technology, regardless of their personal ideology. One of the best marketing pitches was to simply have people use Bitcoin, since the user experience was fantastic compared to other payment systems. I would get people to download a wallet onto their phones to send them a few dollars. After experiencing their first Bitcoin transaction, it would only take a few seconds to hear the inevitable “Wow!” after being dazzled by their first impression.

By 2015, Bitcoin had built up so much momentum that it looked unstoppable. Prominent companies, from Microsoft to Expedia, were starting to accept it for payment, and the young industry was growing exponentially. The successes started to pile up. Venture capital increased. Media coverage became positive. Bitcoin was on a direct flight to the moon.

Failure to Launch

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. And perhaps worst of all, these failures have pushed the industry to adopt so-called “custodial wallets,” which are simply customer accounts managed by a company, similar to a regular bank account.

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. This was only possible because FTX ultimately controlled their customers’ money. The integration of Bitcoin into Paypal is another prominent example of users being onboarded to custodial wallets instead of having full control over their funds. If regular people are all using custodial wallets, Bitcoin will have lost a key property that made it so revolutionary.

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.

When I tell people about this today, they often think I’m exaggerating, but the developers say it themselves. For example, the influential Bitcoin developer Greg Maxwell has said quite plainly, “I don’t think that transaction fees mattering is a failing-- it’s success!”2 Mark Friedenbach, another Bitcoin developer, stated that “Slow confirmation, high fees will be the norm in any safe outcome.”3 When the network nearly ground to a halt in December 2017, and the average transaction fee reached more than $50, they celebrated by “pulling out the champagne”4 and were pleased to see the congestion, claiming that a consistent backlog was “the required criteria for stability.”5

If you told me in 2012 that Bitcoin developers would eventually want high fees and slow transactions, I would not have believed you, nor would any of the early entrepreneurs that helped create the industry. The ideas are too bizarre. Expensive transactions and network congestion are not necessary for safety or stability. The opposite is true: high fees and unreliable payments push people into using custodial wallets, which undermines the whole purpose of Bitcoin in the first place.

On its current course, Bitcoin will not empower the average person. The project has stagnated over the past few years not because of technological failures, but because of human failures. Specifically, bad leadership and a flawed governance model. When I learned about Bitcoin back in 2010, it was so exciting that I almost felt a moral obligation to tell people about it and share the good news. Today, given the changes that have been made, I feel a moral obligation to tell people the bad news: Bitcoin was hijacked and no longer resembles the original project that inspired myself and countless others. But its story isn’t over yet.

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. Before losing faith in blockchain technology, entrepreneurs and developers need to first experience the original version. I am constantly trying out new cryptocurrencies, and Bitcoin Cash still provides me with one of the best user experiences after all these years.

Since Bitcoin stands at the intersection of international finance, political power, and disruptive technology, its story has to be one of the most dramatic of all industries, with enough material for several Hollywood productions. This book is just one piece of that story—the takeover of the development of Bitcoin and subsequent split into Bitcoin Cash, from the perspective of a businessman that has arguably used the technology in commerce more than anybody else in the world.

2

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.

To see past the narrative and truly understand the difference between Bitcoin Core and Bitcoin Cash, we must first understand how Bitcoin was originally designed. History can help us, because the creator of Bitcoin, Satoshi Nakamoto, had many public communications about his invention that explain its design. Other great minds and engineers that succeeded him, like Gavin Andresen and Mike Hearn, also explained the core ideas in a clear manner. Their writing, quoted throughout this book, is essential for anybody trying to understand Bitcoin at more than a superficial level. Before diving deeper, it’s helpful to familiarize ourselves with three key concepts: the blockchain, miners, and full nodes.

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.”2

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.

The Fundamental Five

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.

At a conference in July 2021, Elon Musk also noted that BTC’s transaction throughput could be a problem and defended the idea of scaling a cryptocurrency by expanding the size of its base layer:

There’s some merit to considering something that has higher max transaction rates and lower transaction costs, and seeing how far you can take a single-layer network… I think you can probably take that further than people realize.3

Musk is a prominent supporter of BTC, but his engineering intuitions are aligned with the BCH philosophy. Scaling the base layer is the right idea and was always part of the original design.

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. The following chapters will examine each of these claims in detail.

3

Digital Cash for Payments

The internet is the most powerful tool for information distribution that the world has ever seen. People can learn just about anything by using Google, Youtube, Wikipedia, and even social media. However, these channels can easily become polluted or even co-opted. For example, if you mention cryptocurrency on Twitter, you are guaranteed to hear from a hoard of random Twitter users pitching their preferred coin and trashing all others. If you look closely, many of these accounts have fake profile pictures, no followers, and seem to spend all day tweeting about their favorite crypto projects. Individually, they might seem irrelevant and powerless, but when there are hundreds or thousands of accounts doing this, it can sway public opinion. I have seen this firsthand. The cryptocurrency industry has been permanently affected by social media campaigns and online misinformation. These techniques have a particularly ugly history in Bitcoin.

While these tactics are immoral, they are undoubtedly effective. 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 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.

Even in Satoshi’s emails and forum posts, the concept of Bitcoin as a store of value can only be inferred a handful of times. Sam Patterson, co-founder of the cryptocurrency company OB1, wrote a popular article in which he catalogued every single mention of Bitcoin as a payment system versus a store of value. He concluded:

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.

Once [Bitcoin] gets bootstrapped, there are so many applications if you could effortlessly pay a few cents to a website as easily as dropping coins in a vending machine.8

Satoshi wanted Bitcoin to be used for “effortlessly paying a few cents to a website.” Contrast this with what Core developer Peter Todd says:

I’d be very happy to be able to wire money anywhere in the world, completely free from central control, for only $20. Equally I’ll happily accept more centralized methods to transfer money when I’m just buying a chocolate bar.9

Satoshi’s and Todd’s visions are incompatible with each other, as they disagree about the acceptable fee level by more than three orders of magnitude. $20 fees destroy every use-case for Bitcoin other than high-value transfers—a kind of digital gold extremism. We do have one quote from Satoshi that directly compares Bitcoin to gold. He was responding to questions about the apparent wastefulness of consuming electricity to mine Bitcoin:

It’s the same situation as gold and gold mining. The marginal cost of gold mining tends to stay near the price of gold. Gold mining is a waste, but that waste is far less than the utility of having gold available as a medium of exchange.

I think the case will be the same for Bitcoin. The utility of the exchanges made possible by Bitcoin will far exceed the cost of electricity used. Therefore, not having Bitcoin would be the net waste.10

Gold is used as an analogy to illustrate that its utility as a medium of exchange outweighs the costs of mining it. Ironic, in hindsight.

Snack machine purchases are also discussed in one forum post, highlighting Bitcoin’s capacity for instant, small-value payments. Since instant payments are not perfectly secure, Satoshi envisioned payment processors taking on the minor risk of fraud to handle them:

I believe it’ll be possible for a payment processing company to provide as a service the rapid distribution of transactions with good-enough checking in something like 10 seconds or less.11

He was right, and it turns out that Bitcoin payment processors need only a couple of seconds to do good-enough checking.

All About Commerce

The forums are filled with similar discussions about using Bitcoin in commerce. Satoshi and others talked about creating interfaces for online merchants,12 tools for physical merchants,13 point-of-sale transactions,14 use-cases where the customer is uneasy about using a credit card,15 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. In an interview in 2017, CEO Stephen Pair said:

At BitPay, the Bitcoin blockchain has stopped working for us… and we have a couple of options. One is we start using a fork of Bitcoin. The second option is we start using a fork of Bitcoin. And the third option is we start using a fork of Bitcoin. We are really at a point where we have no choice, and that’s what we have to do.17

For this reason, BitPay was one of the first companies that integrated Bitcoin Cash after the split. 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…

But I think other networks like Bitcoin Cash or Ethereum are all working on this, and so, that vision is going to be realized, but it was a little frustrating to not see the original Bitcoin get there.

Armstrong’s opinion was common among early Bitcoin entrepreneurs and early Bitcoiners generally. 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.”

Figure 1: Early infographic comparing Western Union to Bitcoin

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.

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.

The Economics of Storing Value

To see the problems with the “store of value only” idea, we must dive deeper into economics. I was lucky to discover the Austrian School of Economics early in my life. Great thinkers like Ludwig von Mises and Murray Rothbard helped me understand the world through an economic lens, and the reason I knew that Bitcoin was going to become popular was because I had previously read their ideas on money. I could see that Bitcoin had the properties of extremely high-quality money, which meant I should buy some immediately.

Bitcoin’s potential as a store of value is an interesting economic puzzle. For that matter, value itself is an interesting puzzle that perplexed economists for centuries. Why does anything have value in the first place? One of the insights from the Austrian School of Economics—that has since been incorporated into mainstream economics—is that value is subjective. Value is not found inside material goods; it’s found inside human minds. Things don’t possess value in themselves. We give them value because we believe they can be used to satisfy our desires.

A “store of value” cannot literally “store” value, as if it’s a physical box into which value is placed for later retrieval. Rather, if something is a store of value, that just means it has a consistent track record of being valued by humans. And because of its successful history, people have good reason to believe it will be valued in the future. So, it retains its purchasing power over time. Lots of things are used to store value. Cattle, for example, have been a store of value for a long time. Humans have good reason to believe that cattle can be used to satisfy their wants. You can milk them, eat them, use them for farm labor, and many other things. Because of this usefulness, if you want to sell your cattle, you’ll likely find buyers. Real estate is another popular store of value with a long track record. Humans have good reason to believe that owning land will benefit them. They can live on the land, use it to produce food, develop it, lease it, etcetera. A thousand years from now, it’s likely that cattle and real estate will still be valued by humans. The most popular store of value is money.

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 makes it far easier to plan, save, and invest. The farmer can sell his chickens in the summer for money that he plans to use in the winter. Or he can invest his money into projects that earn a return. Without money, investment is much harder to coordinate—a farmer would need to find projects that accept chickens directly as investment. Using money instead, he can sell his chickens for, say, Euros, then invest those Euros into other projects. Truly, money is a great invention that makes us all wealthier.

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.

Maybe it could get an initial value circularly as you’ve suggested, by people foreseeing its potential usefulness for exchange. (I would definitely want some) Maybe collectors, any random reason could spark it.

I think the traditional qualifications for money were written with the assumption that there are so many competing objects in the world that are scarce, an object with the automatic bootstrap of intrinsic value will surely win out over those without intrinsic value. But if there were nothing in the world with intrinsic value that could be used as money, only scarce but no intrinsic value, I think people would still take up something.7

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. Other applications could be things like asset registries, new systems for voting, or identity verification to improve online security. Relative to Bitcoin’s utility as a general payment system, these abilities seem minor, but they do exist.

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. The famous internet entrepreneur Kim Dotcom, founder of MegaUpload, expressed similar sentiments in a conversation in January 2020, saying:

In order to be a very successful cryptocurrency you need to provide fast and cheap transactions, there’s no way around that. It’s nice to be a store of value, but if you really want to succeed in this game, you need to be electronic cash.

Kim also pointed out that the vast majority of people still have no experience using cryptocurrencies, and in order to onboard them, fees need to be low, and reliability needs to be high.

[Most people] don’t know anything about the current wars that are taking place or the current toxicity within the crypto community. They are going to go with the currency that gives them the cheapest fees, the fastest transactions, the most reliability, and currently, unfortunately, that is not Bitcoin [Core].8

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.

The Blocksize Limit

If you told me in 2011 that we would be sitting here in 2017 and we hadn’t bumped up this block size, I would’ve said, “there’s no way that could happen.”1

—Stephen Pair, CEO of BitPay

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. Since the network cannot handle more than 3,000 transactions per block, a queue forms. Raising your fee increases the chance that miners will include your transaction in the next block, but if enough people pay more than you, your transaction gets pushed back farther in the queue. This makes fees rise exponentially and creates a horrible user experience. As soon as blocks become full, fees can rise from a dime to a dollar, then to five, ten, twenty, fifty dollars, or even more if enough people are using it. During the fee spikes in 2017 and 2021, some complex transactions cost more than $1,000 each, which I ended up paying multiple times. A quick search of the blockchain for transactions with fees from $900 to $1,100 returns nearly 35,000 results.2

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.

The Reason for the Blocksize Limit

By the time Satoshi Nakamoto left Bitcoin, there were many enthusiastic and talented developers working on the project, but two stand out as exceptional: Gavin Andresen and Mike Hearn. Andresen was chosen by Satoshi as his successor and the lead developer of the project. Naturally, he was also a big-blocker. Over the years, he wrote influential articles on his blog3 about Bitcoin and scaling, developer culture, economics, and other topics.4 He was soft-spoken, perhaps to a fault. Hearn, on the other hand, was a feistier developer who was more outspoken against the small-blockers whom he believed were disrupting the project. His previous work experience was especially relevant. 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. Between their blog posts, emails, forum conversations, and public interviews, Andresen and Hearn captured the original vision for Bitcoin better than anybody else. Their commentary is essential reading and is cited throughout this book.

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 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. Andresen stated that the scalability of Bitcoin was part of the allure that drew him to the project:

When I first heard about Bitcoin, it was small enough I could read everything, and I did, including all of those mailing list posts. The promise of a system that could scale up to rival Visa is part of the vision that sold me on Bitcoin.12

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.16

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.

The New Bitcoin

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)…

When checking out on Steam, a customer will transfer x amount of Bitcoin for the cost of the game, plus y amount of Bitcoin to cover the transaction fee charged by the Bitcoin network. The value of Bitcoin is only guaranteed for a certain period of time so if the transaction doesn’t complete within that window of time, then the amount of Bitcoin needed to cover the transaction can change. The amount it can change has been increasing recently to a point where it can be significantly different.

The normal resolution for this is to either refund the original payment to the user, or ask the user to transfer additional funds to cover the remaining balance. In both these cases, the user is hit with the Bitcoin network transaction fee again. This year, we’ve seen [an] increasing number of customers get into this state. With the transaction fee being so high right now, it is not feasible to refund or ask the customer to transfer the missing balance (which itself runs the risk of underpayment again, depending on how much the value of Bitcoin changes while the Bitcoin network processes the additional transfer).

At this point, it has become untenable to support Bitcoin as a payment option. We may re-evaluate whether Bitcoin makes sense for us and for the Steam community at a later date…

-- The Steam Team

It’s impossible to fault Steam for their decision. Trying to use Bitcoin when the blocks are full can be an awful experience. Customers seeking refunds are guaranteed to lose money. If they are refunding a $30 game and the transaction fees cost $10 each, users can end up losing $20 and have nothing to show for it. In my opinion, if you wanted to break Bitcoin, allowing blocks to become full would be the best way. If the high fees and processing delays were caused by a technical glitch, it probably would have been better for Bitcoin, since it’s a new technology and the issue could have been considered a fluke. But instead, the public was told that high fees are perfectly fine, that you aren’t supposed to use Bitcoin for everyday purchases, and that blockchains actually can’t scale.

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.

Elon Musk is one person who seems to understand the value of scaling the base layer for cryptocurrencies. In a Twitter thread about network design, he shared his thoughts as an engineer:

BTC & ETH are pursuing a multilayer transaction system, but base layer transaction rate is slow & transaction cost is high… There is merit [to] maximizing base layer transaction rate & minimizing transaction cost… Block size & frequency should steadily increase to match broadly available bandwidth.21

If Musk had been around at the time, it sounds like he would have agreed with Satoshi, Andresen, Hearn, and most of the early Bitcoin entrepreneurs like myself. There is just no substitute for cheap, on-chain transactions.

The technical parameter that ended up splitting Bitcoin in two was the blocksize limit. Before the blocks became full, BTC enjoyed a market share in the cryptocurrency industry of around 95%. Once the blocks started filling up, the market share quickly dropped. At the peak of the network failure in January 2018, it dropped to 32%, and many users, businesses, and developers left BTC outright. As of March 2023, BTC market share is around 40% and will likely drop again with more network failures. 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.

Notorious Nodes

Bitcoin was designed to scale with larger blocks. So why would anybody think that big blocks are a problem? While it’s impossible to know the internal motivations of the Bitcoin Core developers, this chapter will address their stated reasons for keeping the blocks small. 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.

The Majority Opinion

Gavin, Mike, and Satoshi were not the only people who thought this way. The early forums are filled with other developers and users who also understood that the system does not require most people to run their own node. 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.5

Furthermore, it’s not even clear that the total number of people running nodes would be smaller if the costs increased. The total number of hobbyists running nodes would be smaller, but if Bitcoin was the new financial network of the globe, thousands of companies would have a financial incentive to run their own nodes. As Satoshi says in the whitepaper:

Businesses that receive frequent payments will probably still want to run their own nodes for more independent security and quicker verification.6

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.

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 to make.

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.

The historical facts are clear. Bitcoin was not designed for regular users to run their own nodes. Satoshi was explicit about this on multiple occasions, saying:

The design outlines a lightweight client that does not need the full block chain… it’s called Simplified Payment Verification. The lightweight client can send and receive transactions, it just can’t generate blocks. It does not need to trust a node to verify payments, it can still verify them itself.9

Massive scaling was always possible with big blocks, and the infrastructure was supposed to be maintained by specialist “server farms.” Despite this, the Bitcoin Core developers decided they didn’t like Satoshi’s design and thought they could improve it by having regular users download the entire blockchain and verify every transaction that takes place on it, even though they have no financial interest in doing so. That’s currently the governing idea on the BTC network, and it’s the reason transaction throughput is restricted and fees are high.

The Real Cost of Big Blocks

“I want to be able to run a full node from my home computer.” Does anybody actually care about that? Satoshi didn’t, his vision was home users running SPV nodes and full nodes being hosted in datacenters.1

—Gavin Andresen, 2015

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. I have watched these trends from the front line; my company MemoryDealers was built to sell computer hardware.

In The Bitcoin Standard, Ammous tries to explain why on-chain scaling is not feasible by going through the numbers:

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.

Figure 2: Computer memory and storage measured in US dollars per megabyte 6

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 too high.

Bandwidth technology has rapidly improved for decades and shows no signs of slowing down. When Satoshi predicted that sending HD movies over the internet would eventually be normal, that was four years prior to the rollout of Google Fiber in 2012, which was the first mainstream service to bring gigabit internet connections to home users. Fiber promised to be nearly a hundred times faster than the average home connection at the time.13 Future bandwidth technology looks equally as promising. In 2021, researchers in Japan set a new world record for internet speed, reaching an unbelievable rate of 319 terabits per second14—around 3.2 million times the current average US internet speed of 99.3 megabits per second.15 It will take many years before that technology reaches the market, but it serves as another demonstration that exponential growth will continue to be normal, with many breakthroughs still ahead of us. Bandwidth is simply not a serious concern for Bitcoin at scale, and by the time global adoption is reached, the costs will be more trivial than they already are. This led Gavin Andresen to conclude that Bitcoin did not have any serious roadblocks to scaling. In 2014, he wrote:

According to my rough back-of-the-envelope calculations, my above-average home Internet connection and above-average home computer could easily support 5,000 transactions per second today.

That works out to 400 million transactions per day. Pretty good; every person in the US could make one Bitcoin transaction per day and I’d still be able to keep up.

After 12 years of bandwidth growth that becomes 56 billion transactions per day on my home network connection — enough for every single person in the world to make five or six bitcoin transactions every single day. It is hard to imagine that not being enough…So even if everybody in the world switched entirely from cash to Bitcoin in twenty years, broadcasting every transaction to every fully-validating node won’t be a problem.16

The BTC network is producing blocks that are roughly 1MB† in size every ten minutes, which is comically small—even smaller than your average cell phone picture. We are constantly streaming videos that can be orders of magnitude larger than 1MB and transmitted over cellular networks, and the cost of data keeps falling. Bitcoin was intentionally designed so that regular users do not have to run their own node, but even at massive scale, the costs would not be prohibitive.

* Some specialized businesses that need ultra-fast performance, like cryptocurrency exchanges or payment processors, could see higher costs due to RAM requirements—though these can be mitigated also. See Gavin Andresen, “UTXO uh-oh…”, http://gavinandresen.ninja/utxo-uhoh

† Technically, these numbers have increased slightly after changing the metric from “block size” to “block weight,” but the total number of transactions per block is comparable. Explained further in Chapter 19.

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 Hubris of Central Planners

Frederich Hayek is one of the best-known economists from the Austrian School. In 1974, he won a Nobel Prize in Economics for his academic work. One of his most famous books is called The Fatal Conceit, which is a brilliant examination of the problems with centrally-planned economies. He authored the famous quote:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.2

The more you learn about how free markets work, the more arrogant it seems to imagine that a better system could be designed by central planning. Markets are unbelievably efficient at coordinating scarce resources, and yet they do so without any central authority setting prices and production quotes for things. Hayek’s famous quote continues:

To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account.3

In other words, free markets allow for a rapid flow of information between buyers, sellers, producers, consumers, growers, manufacturers, and every other participant in the economy. They are all trying to figure out what types of products to produce, in what quantities, out of what materials, for what costs, in which locations, through which manufacturing processes, and so forth. There’s literally too much information for a central planning board to figure it all out. That’s why it would seem silly for any one person to say, “The ‘correct’ price of shoes is $45 a pair.” It depends on too many factors—what are the shoes made of, what is their quality, where are they being sold? Rather than having some committee decide the price of shoes for everybody, it’s better to let individual entrepreneurs set prices themselves inside the marketplace, which results in more information being processed and better overall coordination.

These lessons are directly relevant to Bitcoin. 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.

The central planning tendency of the Core developers was not limited to the creation of unnecessary fee markets. They even used the blocksize limit to try and influence which projects other developers were working on. Core developer Wladimir van der Laan explained:

A mounting fee pressure, resulting in a true fee market where transactions compete to get into blocks, results in urgency to develop decentralized off-chain solutions. I’m afraid increasing the block size will kick this can down the road and let people (and the large Bitcoin companies) relax, until it’s again time for a block chain increase, and then they’ll rally Gavin again, never resulting in a smart, sustainable solution but eternal awkward discussions like this.5

Not only did the developers think themselves wise enough to set a mandatory maximum on the size of blocks, they also thought they could use high fees to incentivize people to work on their preferred projects. They were fine with the network buckling because it would create “urgency to develop decentralized off-chain solutions.” Talk about a fatal conceit! Of course, what actually happened was an exodus of developers from BTC who simply joined other projects that were more promising.

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. Even if the people in the production chain hate each other—or might even hate him personally—he trusts that the system will sufficiently reward good behavior and punish bad behavior to produce reliable products.

Bitcoin works the same way. The system was designed to operate without a central authority, so nobody has to trust any particular individual or company. But they do have to trust that the incentives are strong enough to create a reliable network. This trust cannot come from each individual analyzing the code for himself. It must come from seeing Bitcoin as a whole, which includes many humans and businesses acting in their own self-interest. When Bitcoin Core changed the incentives of the system, they fundamentally changed its whole design.

Satoshi’s system was not perfect and did overlook a key problem: the governance and funding of Bitcoin’s software development. Miners have strong incentives. Users have the correct incentives. But developers’ incentives are murky and can result in conflicts of interest. In the case of Bitcoin Core, the structure of their decision-making process was flawed and ultimately derailed the entire project.

We have examined each of the Fundamental Five ideas for understanding the original design of Bitcoin:

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.

It should be clear that it’s not a question of whether Bitcoin Core changed the original design. The question is whether you like their changes. In my opinion, their new design is not an improvement. In almost every way, other than price, it seems worse than the Bitcoin of 2013.

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.1

Sztorc's proposed solution is to have a big block “sidechain” (explained in Chapter 13) that can onboard more users. My solution is to just use big block Bitcoin instead, which does not need the Lightning Network to be viable at global scale. The requirement to have larger blocks is why 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.

Online Nodes

The Lightning Network requires users to run their own nodes. This fact famously perplexed Tone Vays, the popular Bitcoin personality. He apparently did not understand this basic feature, despite relentlessly promoting Lightning as an alternative to blocksize increases. In a YouTube conversation with Jimmy Song, he starts by fielding a question from the audience:

Vays: Here’s a good question for you, Jimmy. Someone says “What benefit do I get from setting up my own Lightning node?”

Song: Uh, you can go and pay people, like in Lightning…

Vays: Wait a minute, I need clarification on that. Do I need to have a Lightning node in order to pay people through Lightning?

Song: Yes.

Vays: Really?

Song: Yes, because the only way you can pay anyone is by having a channel, and you can’t have a channel unless you have a node.

Vays: But, do you need your own node, or do you need someone else’s?

Song: You need your own node…

Vays: Oh wow, so every single person might need their own Lightning node?

Song: Yeah…3

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. Rick Falvinge, the IT entrepreneur turned Swedish politician, concluded in a series of videos about Lightning:

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

Andreas Brekken, the founder of the popular Sideshift cryptocurrency exchange, came to a similar conclusion. I asked him about his experience using Lightning for his business, and he said:

Routing is a serious problem on the Lightning Network. Payments frequently fail to route, and the way I have tried to mitigate this problem is by being connected to the largest exchanges. But even that does not solve the problem completely. I have to use software that estimates the probability of a successful payment, and if the percentage is not high enough, I simply do not send the payment.

Frankly, large numbers of Bitcoin users are being tricked into thinking this thing can work, but after having incorporated it into my business, I just don’t think it will.

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. In fact, it’s even been the subject of academic research. The structure of the network is called a “hub and spoke model”—resembling the spokes on a wheel— where small nodes connect to larger nodes, which are connected to a few super-nodes.

Figure 3: Diagram of a hub and spoke network

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. Further inspection of the resilience of the BLN shows that removing hubs leads to the collapse of the network into many components, an evidence suggesting that this network may be a target for the so-called split attacks.

These researchers put forward several mathematical and empirical arguments which demonstrated that the centralization tendency is inherent to the network design and concluded:

The tendency to centralisation is observable even when considering weighted quantities, as only about 10% of the nodes hold 80% of the bitcoins at stake in the BLN (on average, across the entire period)… These results seems to confirm the tendency for the BLN architecture to become “less distributed”, a process having the undesirable consequence of making the BLN increasingly fragile towards attacks and failures.

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—in fact, the larger blocksize allows for even better functionality of secondary layers.

I want Lightning to live up to its promises, because if it could, then the world would be a better place. But I currently have no reason to believe this will happen. All signs point to it being a failed experiment, an embarrassment to the Core developers, and a demonstration that the Bitcoin Maximalists pushing this technology as a replacement for on-chain transactions were completely wrong and have misled millions of people.

It’s hard to imagine a more effective way of disrupting Bitcoin than what actually occurred. 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.

Part II: Hijacking Bitcoin

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.

A Reality Check

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. Even if the coins do not move to a centralized exchange, they have likely moved from one, which—due to compliance with know-your-customer laws—gives the government the identity of at least one person who has touched those coins. From that point, they can surveil the blockchain to track the economic activity of that individual and work out plausible identities for anybody they have transacted with. This already happens when Bitcoin is involved with large criminal cases, but there is no fundamental reason why it couldn’t happen to everyday users.

The idea that Bitcoin is a “clear technical solution” to the threat of physical force from political actors is naive. If the government suspects you are hiding something, they can investigate as they would any other situation. They can demand you turn over your financial records, private keys, and electronics. If you refuse, they can gain entry to your home, imprison you, and confiscate your property. Bitcoin does not emancipate you from the physical world or prevent the government from threatening you with violence. A savvy technical user might be able to avoid confiscation or destruction of their savings, but average users will have a difficult time.

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.

The Governance of Bitcoin

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.

Bitcoin is famously an “open-source” project, which means all the code is made public and anybody can freely view, use, and modify it without burdensome licensing constraints. This feature is often misrepresented by those who want to claim there are no centralized authorities controlling the software. All the rhetoric surrounding Bitcoin development makes it sound like the process is open and meritocratic—that if you write good code it will be automatically incorporated into the software. Even the Bitcoin.org website reads, “Bitcoin is free software and any developer can contribute to the project.”2 But that’s simply not true. There are strict hierarchies that determine what code gets added to the software, and there are specific individuals who have the power to approve or reject code changes. If you have a different philosophy than these individuals—for example, if you agree with Satoshi and think the blocksize limit should be raised or eliminated—then no matter how good your code is, they won’t incorporate it.

To contribute any code at all, you must persuade the right people. If they don’t like your idea, or if they don’t like you personally, they can simply ignore you. Bitcoin development is a social phenomenon like any other. Instead of saying, “Anybody can contribute to the project,” it would be more accurate to say, “Anybody that agrees with the philosophy of a handful of Core developers and their vision for Bitcoin, accepts their development processes and hierarchies, and is socially approved by them can submit code for their evaluation!” But that doesn’t sound like decentralization, does it? The reality of the situation was summed up well by Professor Hilary Allen from American University. In a congressional hearing in late 2022, she told a panel of US senators:

[We] typically hear that “crypto is different” because it’s decentralized, but in fact, it’s not decentralized. At every level, there are people controlling things.

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.3

She is not wrong, despite her conclusions invalidating the common narrative about Bitcoin’s software development. The most insistent supporters who claim that the software is not centrally controlled will point out that, technically, anybody can download Bitcoin’s source code, open it up, and modify it on their own computer. While this is true, it’s misleading. 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.

The Succession of Keys

The mere fact that Bitcoin Core’s software development has a governance structure is not inherently a bad thing. Decisions have to be made somehow. No software project could succeed if anybody could change the code on a whim. But given that hundreds of billions of dollars are now wrapped into this network, exactly who gets to update the code and how?

The keys to Bitcoin Core’s development have gone through a specific progression. In January 2009, the governance was straightforward: Satoshi Nakamoto was the man in charge. All code changes had to be approved by him personally, and there were no objections to his authority. In an interview in 2015, Gavin Andresen recalled the early governance process:

If you go back in history, it was really simple. It was whatever Satoshi decided at the beginning, and that’s really where we started. We had one source code. We had one pseudonym/person who made all the decisions about ‘what should Bitcoin be’, ‘how should it evolve, ‘what should it do.’ That’s where we started.4

By the end of 2010, Satoshi decided that he needed somebody else to run the project. So he chose Andresen, who shared the same vision for Bitcoin. On December 19, 2010, Andresen wrote in the forums:

With Satoshi’s blessing, and with great reluctance, I’m going to start doing more active project management for bitcoin. Everybody please be patient with me; I’ve had a lot of project management experience at startups, but this is the first open source project of any size I’ve been involved with.5

Andresen became the figurative “heir” of Satoshi and was the Lead Maintainer until 2014. Unlike Satoshi, he was not the only person allowed to make code changes, because early on, he decided to give a handful of others this power. He explained why:

As soon as Satoshi stepped back and threw the project onto my shoulders, one of the first things I did was to try to decentralize that, so that if I got hit by a bus, it would be clear that the project would go on. And so that’s why at this point there are five people who have commit access to the Github Bitcoin source tree.6

Andresen’s decision was reasonable and well-intentioned, but unfortunately it had unforeseen consequences and looks like a strategic mistake in hindsight. He gave a handful of other people “commit access”—that is, the ability to change code on the official online repository—but they were not all aligned with Satoshi’s vision for big blocks and low-fee transactions. Some apparently thought they could design a better system. Philosophical differences between the developers caused extreme development delays and factions to emerge. Eventually, one faction formed their own company, and shortly afterwards, the different groups turned into hostile camps.

In 2014, Andresen said he was shifting from the day-to-day maintenance of Bitcoin Core to higher-level research and chose Wladimir van der Laan as his successor. Van der Laan was an active contributor to Bitcoin’s code, but he ended up being the most passive of the three project leaders, allowing critical decisions to go unresolved. Mike Hearn shared his frustration with the lack of competent leadership in Bitcoin Core in 2015:

What we’ve seen in Bitcoin Core is it started out as the traditional open source project. Satoshi was in charge. Then he delegated to Gavin, and Gavin was in charge, and then Gavin delegated to Wladimir, and Wladimir was in charge, and that’s completely normal for any technical project. You have one leader who listens to input from people and makes the decision. Wladimir, unfortunately, prefers to not make decisions, I would say. I don’t think he would disagree with his characterization. When there’s a sort of dispute, he tends to stand back and try and hope that it resolves itself into a nice consensus, where everyone agrees, and when that doesn’t happen, he just sort of ignores what’s happening.

So Bitcoin Core sort of devolved over the last few years into this rule-by-consensus—but it’s actually much closer to anyone who wants having a veto, because as long as anyone is objecting or making vaguely intellectual-sounding objections, then there’s no consensus, and therefore change won’t happen. [This] has become a huge problem, especially because some of the people who have commit access and love to make these sorts of arguments… they enjoy coming up with complicated theories and complicated proposals for redesigns of Bitcoin… and then what tends to happen is the more practical day-to-day needs of developers get lost.7

These issues were never fixed and eventually caused Hearn to leave the project altogether in 2016. On his departure, he published a fantastic essay entitled “The Resolution of the Bitcoin Experiment” which has since become mandatory reading for anybody trying to learn about the theory and history of Bitcoin. In it, he explains why the governance structure failed, causing BTC to fail from the perspective of its original design:

In a company, someone who did not share the goals of the organisation would be dealt with in a simple way: by firing him. But Bitcoin Core is an open source project, not a company. Once the 5 developers with commit access to the code had been chosen and Gavin had decided he did not want to be the leader, there was no procedure in place to ever remove one. And there was no interview or screening process to ensure they actually agreed with the project’s goals.

As Bitcoin became more popular and traffic started approaching the 1mb limit, the topic of raising the block size limit was occasionally brought up between the developers. But it quickly became an emotionally charged subject. Accusations were thrown around that raising the limit was too risky, that it was against decentralisation, and so on. Like many small groups, people prefer to avoid conflict. The can was kicked down the road. Complicating things further, [Core developer Greg] Maxwell founded a company that then hired several other developers. Not surprisingly, their views then started to change to align with that of their new boss…8

I agree with Hearn’s analysis and have often wondered what would have happened if Andresen had chosen different developers to share his authority with, or if he had remained the only person with commit access, or if the industry had rejected the Bitcoin Core developers entirely and had chosen a different team—a situation that almost occurred in 2015, 2016, and again in 2017. To understand how the software development became so centralized, it’s helpful to first understand where Bitcoin Core came from.

The Origins of Bitcoin Core

Before 2013, there was no such thing as “Bitcoin Core.” Until then, everything was referred to as “Bitcoin”—the software, the currency unit, and the network—which caused unnecessary confusion for a project that already had a reputation for being confusing. So, in November 2013, a proposal was put forward to change the name of the software:

To remove the confusion between the Bitcoin network and the reference client implementation that we maintain in this repository, both confusingly named ‘bitcoin’, we’d like to rebrand the client.9

This proposal did not cause any controversy. Gavin Andresen agreed with it stating, “Now is a good time to change names, let’s do it.” From that point onward, the software was renamed “Bitcoin Core” and its developers became the “Bitcoin Core” developers. Despite what transpired over the subsequent years, the origins of Bitcoin Core were not nefarious.

After Satoshi’s departure, Bitcoin Core was not even supposed to be the only software implementation of the Bitcoin protocol. The idea was to have multiple implementations, not just the Core software, so that specialization could happen. Miners, for example, might create their own version that focused on fast transaction validation, while nodes could specialize on other features. During an excellent interview in 2015, Andresen explained:

It’s really important for people to separate in their head “Bitcoin” the protocol—you know, Bitcoin the system that we’re all using to transact—and the Bitcoin Core open-source software project that lives on Github and a bunch of people are contributing code to. They really aren’t the same thing. I call Bitcoin Core the “reference implementation,” and I’ve called it that for years, and that implies that there will be other implementations of the Bitcoin protocol.10

It’s not hard to understand why having multiple implementations is a good idea. In addition to catching bugs that one team might overlook, having multiple implementations is the most straightforward way to prevent developer capture. For a project that is supposed to be about the decentralization of power, it would be a critical flaw to allow a single group to control the software development for the entire network. Andresen continues:

When we think of governance, we have to think about the governance of ‘how will the protocol evolve’ as separate from ‘how will Bitcoin Core, the reference implementation code, evolve and be governed’. I think there are two separate governance processes, [but] because we started with this one source code that defined the protocol and was all anybody was ever running, in a lot of people’s heads, they don’t make that separation.

But I think it really is important to think of the protocol separately from this one source code… I’ve been saying for a while that I want to get to a point where there are multiple robust implementations.11

Mike Hearn shared this view and thought it was essential to having real decentralization. On the surface, it might seem that Hearn’s desire to have a single person like Satoshi making final software decisions is at odds with the ability to maintain a decentralized project, but he explains why these two ideas are compatible:

Interviewer: If we assume that Bitcoin Core keeps having this [influence] determining the rules, then I find the argument a little bit strange that those five people can agree, “Well let’s just give all the power to one person.” I mean, that may be fine as long as Gavin is there and he’s a rational guy, but that really seems to be in conflict with the whole idea of a decentralized system…

Mike Hearn: Not at all. The decentralization of Bitcoin doesn’t come from the fact there’s like five guys instead of three or two, right? Or even instead of one. [With] one to five people, you might as well say, “The central bank has a committee that sets monetary policy, so the Dollar is decentralized.” It doesn’t make any sense to view the system that way.

The decentralization in Bitcoin comes from the fact that everyone can audit the blockchain and check the rules for themselves. It comes from the fact that there’s a competitive market of implementations and, ultimately, from the fact that people can switch to other implementations and fork the blockchain if they want to.12

Other implementations did eventually arise in BTC. 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.

Now that the changes to Bitcoin’s design are understood, along with its centralized development structure, the history of Bitcoin can be reconstructed with more clarity.

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. At the end of 2021, Cointelegraph wrote an article that demonstrated this point well:

South Korean crypto exchange Coinone has announced it plans to no longer allow withdrawals of tokens to unverified external wallets starting in January...

Coinone said users would have from Dec. 30 to Jan. 23 to register their external wallets at the exchange, after which time it would restrict withdrawals. The exchange specified that crypto users could only register their own wallets, and the verification process “may take some time” and could change in the future.

According to Coinone, it planned to verify users’ names and resident registration numbers — issued to all residents of South Korea — to ensure crypto transactions were “not used for illegal activities such as money laundering.”1

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.

Finding the Balance

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!

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.

The first tradeoff is between focusing our efforts on one cryptocurrency project versus multiple. In the big picture, having competition between multiple projects is a great thing. We should never pledge allegiance to any particular coin. However, our time, attention, and resources are scarce. If any cryptocurrency is going to compete against existing financial systems, we need to coordinate with each other. The more coordination that exists on the same project, the stronger it will become over time. If everybody builds on a separate network, none of those networks will succeed. This is why I am focusing primarily on Bitcoin Cash right now, because I know the underlying technology can scale, and it has already been battle-tested in the real world. Until there is clear evidence that there’s a genuinely superior option—not merely the theoretical possibility of one—I will continue to promote BCH as the most promising cryptocurrency for becoming digital cash.

A similar tension exists between the need to have multiple software implementations and the need for strong, competent leadership. The hijack of Bitcoin Core and the attempted hijack of Bitcoin Cash demonstrated that a single development team cannot be trusted in perpetuity. Bitcoin must remain separate from any particular implementation. However, this does not mean that every developer needs to create his own separate implementation. Competent leaders should have a team around them that respects the professional hierarchy, as Mike Hearn suggested. Having a lead implementation is fine, so long as the system remains meritocratic. Otherwise, it will degrade into another case of development capture.

The same can be said for contentious hard forks. On the one hand, the ability to fork is a critical part of the governance of Bitcoin. On the other hand, forks are extremely disruptive and damaging to network effects. They must remain a last resort, otherwise a community will fork itself into irrelevance. Mike Hearn commented on some of these ideas in a fantastic Q&A in 2018. When asked about Bitcoin Cash’s community and development structure, he responded:

My view is that Bitcoin Cash strongly resembles the Bitcoin community of 2014. This is not good. That experiment was tried and it didn’t work. It’s tempting to think that what happened was a freak one-off occurrence, but I don’t think it was. I think it was inevitable given the structure and psychological profile of the community at the time.

So just trying to “get back on track” as I see it, is nowhere near radical enough. If I could get one message across to you in this session it’s this: be bold. Be willing to accept that what happened was not just bad luck.2

Once again, history proved Hearn right, and since he wrote these comments, BCH has split two more times. Any more could prove disastrous. Those underlying structural problems must be fixed. One way is to reduce the number of critical parameters that developers control. For example, all the drama surrounding the blocksize limit can be avoided by simply removing the limit altogether and letting miners determine the size of blocks to produce. The more decisions we can put into the hands of miners and businesses, and not protocol developers, the better.

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. There are plenty of other cryptocurrencies that are trying to be like Ethereum and provide a universal platform for smart contracts and other complex functionality. But not every coin needs to be like Ethereum; we need some project(s) to focus on simple, effortless cash transactions that can reach global scale.

One more feature that is unique to Bitcoin is worth addressing. 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.

The Pursuit of Freedom

The cryptocurrency industry is notorious for being toxic and divisive, where competing projects are viewed as mortal enemies. But in the bigger picture, most of us are on the same side. We want more human freedom and less centralized control over our lives. The world is ready for peer-to-peer electronic cash. The Bitcoin Core narrative—despite its many factual errors—has inspired millions of people who are eager to see the separation of money and state. The concept of digital gold has proven popular; just wait until people realize they can have digital gold and digital cash at the same time, on the same network, with the same currency.

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.

The last decade has been a whirlwind for me personally. I have seen the birth of a breakthrough technology and its subsequent corruption. I helped to plant the seeds of an emerging industry, saw them grow, and have made lifelong friends on the way. My enthusiasm for promoting Bitcoin got me the nickname “Bitcoin Jesus,” only to be demonized a few years later as “Bitcoin Judas” for preaching the same message. I have watched the value of my assets rise and fall millions of percent. It has truly been a wild ride. I hope it will be clear in thirty years’ time that the physical, mental, financial, and emotional investments put into this industry have made the world a dramatically better place. The success of Bitcoin and cryptocurrencies should not be measured by how expensive the coins are, nor how rich the early investors become, but rather how much freer the world has become by utilizing this wonderful new technology.