Capitalist View on a Bitcoin Hard Fork

I thought I’d write a few thoughts about what the rational capitalists will likely do in the event of any Bitcoin hard fork that is remotely contentious:

1/  A far larger amount of Bitcoin will be deposited on exchanges than is usual, allowing investors to sell at will depending on how they interpret the events both before and after any hard fork.

Why is this interesting?  Firstly, it risks a massive collapse in value if investors panic and bears smell blood.  It is my view the at the recent PBoC panic is nothing compared to what might happen.  Secondly, it means that a switch to Proof-of-Stake would make exchanges and investment funds the kingmakers (see point 7 below).

2/  ALL exchanges will support both coins … following the success of Ethereum Classic’s trading volumes (which had 0.5-1% of hashpower for a couple of days following the fork), exchanges will not want to miss out on the transaction fees nor have exposure to replay attacks, etc..  They will be prepared and ensure their clients have full freedom … the only way to avoid falling out of favour.  We live in a world where PascalCoin can have $50million in volume traded in a few days … the chances of exchanges not supporting ‘both’ Bitcoins are near zero (there may be an exchange or two run by morons who don’t like money … they will go bust).

1j51ly

3/  While most people will sell for fiat currencies, I think Altcoins like Ethereum, Litecoin, etc. will likely surge (vs BTC) due to the uncertainty … altcoins are already seen as ‘hedges’ vs Bitcoin by many traders.  People that were  90-100% BTC pre-fork may eventually re-buy to perhaps 60% (when the dust has settled).  Doesn’t sound like much?  Altcoins will move 100’s of percent.  More than one will have a market cap above $1billion.

4/  After the inevitable crash, the obvious ‘pairs trade’ speculators will opt for is to sell the coin with less developer support, and buy the ‘Core’ chain.  Like or loathe it, traders will play the odds and expect the non-Core team to have problems or, at best, very slow development.  The non-Core chain will carry a ‘newbie’ discount while the new development team & adoption metrics are assessed by the market.  Investors will prefer to buy the Core roadmap which includes changes required for Lightning and similar networks.

“You know what’s cooler than a billion Indians buying their vegetables with Bitcoin? Bitcoin being the settlement system for the $7trillion/day FX market … AND a billion Indians buying their vegetables with Bitcoin”

5/  The majority of miners will continue to limit block capacity on both chains.  Regularly full blocks are worth at least 4-5x in transaction fees.  They will continue to game the fee calculators used by most Bitcoin wallets.  Those who believe larger blocks will bring about near-free transactions again will be disappointed.  Only competition will force transaction fees down (i.e. optional settlement of a payment channel, sidechains, etc.)

6/  No-one will waste $millions trying to attack the minority chain. The worst ‘bad actors’ are likely to do is market sell their coins on that chain to hurt its value and discourage HODL’ing.  This failed spectacularly with Ethereum vs Ethereum Classic even when only 1-3 exchanges traded it!  Only a lack of investor/user interest can kill a coin (although they never truly die).

7/  If either chain comes under attack by hostile miners, you can expect a switch to a new PoW or hybrid PoW/PoS algorithm to make it very expensive and nearly impossible for them.  If it was me forking against hostile miners, I’d also jump 3.5 years to have the next halving event immediately … likely creating a resurgence in investor and therefore profit-seeking miner interest.  Existing users will love it.

8/  The customer is always right:  both chains will survive as long as there is demand. Miners, exchanges, wallets/vaults, etc. merely follow the users.  Users want the value of their investment to grow and will therefore invest in the most persuasive team/roadmap combination.

9/  Attempting to convince a bunch of libertarian Bitcoin believers to do something through force, blackmail or threats will backfire spectacularly.  It is so obviously a bad idea for anyone that wants to retain their wealth and reputation that you wonder why some are concerned it might happen.

If you liked this article, please consider tipping my Son’s Denarium Physical Bitcoin

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Turbocharging Bitcoin

NOTE:  The following was written specifically for a non-technical audience with a very superficial knowledge of Bitcoin

If Bitcoin were a company, it would have been shut down. Satoshi Nakamoto, its inventor, probably would be incarcerated or on the run.

However, Bitcoin is not a company. It is an ownerless entity, living on the Internet upon a network of computers all over the world.  This decentralised nature allows it to operate outside of government control, ignoring borders and regulations.  At this point, the only way to shut down Bitcoin would be to turn off the Internet.

This gives Bitcoin certain advantages:

  • Bitcoin doesn’t care where you are so long as you are connected to the Internet (or even SMS)
  • Bitcoin doesn’t care who you are (no AML/KYC, no need for a bank account, no age restrictions)
  • Bitcoin can be sent person-to-person, like e-mail, globally

It also brings some disadvantages:

  • Bitcoin is slow – to be sure you have received Bitcoin, you need to wait 30-60 minutes
  • Bitcoin’s capacity has been limited due to the restrictions on computer power & Internet speed in developing nations
  • Bitcoin’s value is volatile, as it is currently still very small ($12.5billion at the time of writing)

Bitcoin has already reached its maximum throughput of transactions due to the existing limits written in its software. The main limiting factor is the size of each block in Bitcoin’s blockchain.  Currently the limit is for each block to be only 1Mb in size, thus creating a hard ceiling on how many transactions can fit inside a block.

There is a lot of debate around how best to ‘scale’ Bitcoin so that it can accommodate far more users.

Some want to simply increase the maximum size of a block, others want to deploy an enhancement called ‘Segregated Witness’ or SegWit to increase the effective size of a block and enable ‘second layer’ solutions to enable far greater scaling.  SegWit also fixes a minor security bug.

The best way I can describe the two main spheres of thought, is to compare it to car engine design/improvement.

The obvious way to make an engine more powerful is to make it bigger … more capacity, more cylinders.  The downside to this approach is that they guzzle fuel (expensive to run) and are heavy.

This represents the more simple scaling method preferred by some Bitcoin users, simply increase Bitcoin’s block size so that more transactions can fit inside each one.

The main disadvantage of this approach is that you need to completely remove and replace the engine … and there are 1000’s of engines out there to change, and everyone needs to agree to make the upgrade.

Bitcoin Turbo


The more European/Asian way is to optimise an engine; increase efficiency (better air filters, reduce weight & friction, new exhausts, etc.) and maybe bolt on turbos/superchargers to meet the demand for power when required.  More recently, some manufacturers have added energy recovery systems and electric motors.

The downside to seeking optimisations and bolt-ons is that the engine becomes more complex and perhaps more fragile as a result.

This approach represents the ‘Core’ development approach to Bitcoin; being very conservative with regard to increasing block size and seeking optimisations and/or bolt-ons which may result in far more ‘bang for your buck’ (more BHP per litre of engine size … or more transactions inside each Mb of block space).

Those of you with some familiarity with computers may think that 1Mb is very small these days, so why have such a low limit.  It seems logical to increase the blocksize to a more ‘modern’ amount and optimise later.

The main two reasons against the simplistic ‘bigger is better’ arguments are:

1/ If you cannot reach unanimous support for a full engine upgrade, you risk having two different cars on the road … essentially two different Bitcoin networks.  Very bad news!  It would create uncertainty and huge price volatility is likely.  If poorly managed, there is the potential for some to lose funds.  It would be a lot of extra work for Bitcoin businesses to maintain two different ‘models’ of Bitcoin.

2/ Bigger may not be better in developing nations like China, India or in Africa … thus hurting decentralisation (an absolute requirement for Bitcoin to be resilient against interference from any overbearing governments).  There is a reason they don’t drive around in 500BHP pick-up trucks in India … they can’t afford to buy or run one!  If you’ve been to India, you will know that small hatchbacks are by far the majority of cars (massively outnumbered by scooters and motorbikes!).

As I write this, the Bitcoin miners are ‘voting’ on whether to activate ‘SegWit’, an exciting new technology which I hope activates soon.  It is analogous to the second ‘optimise and bolt-on’ approach to engine design.

The new version of Bitcoin software will enable ‘second layer’ technologies to be bolted on to the ultra-resilient Bitcoin blockchain … enabling things like:

  • Instant payments with zero counterparty risk, with no minimum size
    • Good for micropayments, Internet of Things, real-time settlement, high frequency trading, etc. etc.
  • 10,000’s transactions per second throughput (i.e. VISA size capacity)
  • ‘Sidechains’ enabling innovators to build their blockchain ideas on top of Bitcoin’s security
    • It will be possible to ‘peg’ other blockchains to Bitcoin’s in order to harness its security and immutability but have entirely different functionality. For example, Rootstock will be a sidechain which will enable smart contracts.

My view is that with this ‘SegWit’ upgrade, Bitcoin would become the go-to blockchain for any project … even for banks and governments.  It would truly become the ‘World Wide Ledger’ for any use we can imagine.

We need to talk about Bitcoin marketing

TL;DR:  I think the Bitcoin community needs a Kickstarter-like platform to fund marketing ideas & proposals for the benefit of all Bitcoin stakeholders

Bitcoin has no owner, no central authority … therefore no-one responsible for a broad marketing effort.  Each stakeholder currently only worries about their own self-interest, promoting their business or agenda accordingly.  For this reason, the vast majority of marketing spend is probably targeted at existing Bitcoiners and not at trying to convert newbies into users and HODL’ers.

It is easy to rest on our laurels, sit back and wait for the network effect to grow the market organically.  Or we can, as a community with clearly aligned interests, create a platform where marketeers make proposals and we contribute to the ones we like … improving marketing material and messages available, accelerating the network effect and ultimately making Bitcoin worth more.

Reddit is full of people asking ‘Where do I get started?’ or ‘What site/video can I give to friends/family/colleagues to explain Bitcoin?’.  We need to fix that, as well as reach out to potential new users directly.

Examples of Bitcoin’s marketing deficiency:

  • Look at Paypal’s “There’s a new money in town” advert, it is pretty obvious it is in a different class to nearly all Bitcoin marketing undertaken so far
  • T-shirts, hats, etc. are typically made by nerds, for nerds and most make no sense to a non-Bitcoin aficionado
  • When you search Youtube/Google for “What is Bitcoin?” the most popular results are typically low-quality and usually too technical
  • Bitcoin often projects a “meritocracy” publicly which is discouraging to new users and non-techies
    • A sub-set of the above is the highly visible split community “at war” regarding block-size
  • The largest Bitcoin businesses rarely collaborate to promote Bitcoin rather than themselves

Magic Internet Money

As mentioned, I think we can fix the above with a platform dedicated to creating ‘open-source’ marketing material and funding marketing proposals.

What is stopping us, as a community, funding adverts in Venezuala promoting Bitcoin as a way to escape inflation?
Why don’t we have adverts on /r/investing showing the longer-term returns of HODL’ing?
Why isn’t there a library of design work, video, etc. that is free to re-publish for non-profit purposes but which can be licensed by businesses for their own use (the funds reinvested in funding more work)?
How are we targeting those remitting money to their home country?
Why are we letting the mainstream media control the message to the public?

The above may be idealist.  It may not work as Bitcoin’s ‘greed’ killer app is very strong.  Individuals and companies may think ‘why should I pay when others are not?’.

If there are others who agree with me and are willing to help try to make something like this work, please get in touch on Reddit or Twitter … I’d be happy to try and make it happen!

Let’s Play a (Bitcoin) Game

I had this Denarium physical bitcoin kicking around, so decided to do something a bit fun with it!

Brass Physical Denarium Bitcoin (front)

I will send this coin (unopened) and all BTC it contains to the winner of a ‘reverse auction’ for it.  A reverse auction is where the lowest unique bid wins.  This one is a little unique in that the cost to bid is the bid itself.  I.e. the more bids received, the higher the BTC balance you could win.  So it is really a reverse auction sweepstake!

HOW TO PLAY …

To bid, send the amount directly to the coin (click to enlarge):

Reverse Auction Address

Once sent, please send the transaction ID to me on Twitter:  alistairmilne

IMPORTANT:  All decimal places after the 3rd will be IGNORED.  Therefore 0.001 BTC is the lowest possible bid.  0.0011 still counts as a bid for 0.001, as does 0.0019 (no rounding, excess digits are thrown away)

If there is a dispute over who sent a bid, you will be requested to prove ownership (e.g. by moving the change or by proving you control the address the BTC came from)

The auction will end at 8pm, 4th November 2016 (CEST).  Your bid must be in the mempool of blockchain.info before this time to be counted.  We will wait for 3 confirmations before announcing the winner.

Click for countdown timer – Auction ended!

Click for blockchain.info data

NOTES:

  • If someone bids the same amount as you, your bid is no longer unique and therefore disqualified.  You may bid as many times as you want (e.g. to kill bids lower than your own)
  • I will ship the coin at my own expense, the whole balance will remain on the Denarium coin
  • No bid refunds!
  • Blockchain.info’s mempool will arbitrate the order bids are made & the cut off time