The Wildest Year in Bitcoin

(Poetry Foundation)

PART I: MONEY PROBLEMS

THE SCENE: 2017

Blockchain is the fastest-growing technology in mankind’s history.

(CoinDesk)

BLOCK SIZE

At a time when a dozen Bitcoin could buy you a new car, the network supporting it was quite literally splitting at the seams.

Typical block size in my hometown (images.reference.com)

SEGWIT

Pieter Wuille is as much of a software engineer as a software engineer can get. He writes code obsessively. He even looks like an engineer — a short guy, messy hair and a beard, glasses, with the kind of pale skin you develop by typing in dark rooms all day and night. In a community where everybody shouts at one another, and people who don’t actually know much pretend they do (e.g. this author), Pieter is hardly ever seen or heard in public, and when it comes to Bitcoin, he basically does know everything there is to know. As a result, he’s taken on a kind of cult status. In 2018, the website CoinDesk labeled him “the Zen Master.” The Chuck Norris-style website ‘PieterWuillefacts.com’ summed it up best.

PART II: THE AGREEMENT

THE NEW YORK AGREEMENT

Jeff Garzik has a knack for getting in early on big software projects.

Jeff Garzik (El Confidencial)
"out" : [
{
"value" : 92233720368.54277039,
"scriptPubKey" : "OP_DUP OP_HASH160 0xB7A73EB128D7EA3D388DB12418302A1CBAD5E890 OP_EQUALVERIFY OP_CHECKSIG"
},
{
"value" : 92233720368.54277039,
"scriptPubKey" : "OP_DUP OP_HASH160 0x151275508C66F89DEC2C5F43B6F9CBE0B5C4722C OP_EQUALVERIFY OP_CHECKSIG"
}
]

184,000,000,000

-21,000,000

______________

…okay, drag the one…and…

183,979,000,000

According to the math, one person was going to receive approximately 184 billion more Bitcoin than will ever exist.

SEGWIT2X

SegWit2x (originally SegWit2Mb) was deceptively simple. Here, I can describe it in one sentence: adopt SegWit, then double the block size from 1 megabyte to 2. Get it? SegWit-2x. SegWit, and double the block size. Easy.

Barry Silbert (sludgefeed.com)

CENTRALIZATION

As we’ve seen, doubling the size of the blocks has its benefits with regards to higher throughput and lower fees. But it also has its downsides. Consider the issue of “full nodes” versus “light nodes.”

A massive block (Cavs Nation)
(Reddit u/slorex)

POLITICAL POISON

And let’s be clear: this wasn’t an ordinary conflict among respectfully disagreeing parties. The SegWit2x debate quickly devolved into a chaotic mess, where any sympathy for the wrong side could get you in major trouble.

PART III: THE DEBATE

A CASE STUDY

There is, perhaps, no better encapsulation of why Bitcoin struggles as a payment system than what occurred when two famous Bitcoin proselytizers got on stage together for a debate last year.

(Bitcoin.com YouTube)
Roger Ver (Wikipedia)
Tone Vays (Crypto Slate)

EARLY UPGRADE PROPOSALS

It didn’t have to get to this point.

Quoted from Satoshi’s email to Mike Hearn in April ’09 (BitcoinTalk)

PRO 2X: LOW THROUGHPUT HURTS EVERYONE

To understand where the argument for SegWit2x begins, we have to admit that Bitcoin, in its modern state, is problematic as a payment system. Throughput with a 1 MB limit frequently leaves pools of unconfirmed transactions in a state of limbo, where getting out of that limbo is unnecessarily expensive.

NO 2X: LIGHTNING NETWORK

There are, however, ways to increase Bitcoin’s transaction capacity — significantly — without doing anything to the block size.

Lightning Network node map (Bitcoin Lightning)
Artwork from somebody firmly on one side of the block size debate (Medium)

NO 2X: VULNERABLE CODE

Any argument about the viability of Lightning Network must also take into account that SegWit2x relied on an unproven alternative to Bitcoin’s core software. ‘BTC1’ was the name of the software implementation which, when activated by a node on the network, would run Bitcoin according to the SegWit2x rules.

Blocks (Etsy)
else if (inv.type == MSG_THINBLOCK)
{
//irrelevant
} else {
assert(0);
}

NO 2X: HARD FORK

There were a whole host of other technical and philosophical issues small blockers had with the SegWit2x plan (and a whole lot of technical and philosophical reasons big blockers had to support it anyway). The single biggest concern of all, though, was that it would initiate a contentious hard fork.

MOTIVES

Why wasn’t this enough for the SegWit2x supporters? Transaction throughput was about to quadruple. Now it needed to double again, three months later? Via a hard fork that would fracture the community in half? Questions like these made some No 2x supporters question the motives of SegWit2x supporters. If they were honestly trying to help, they would have collaborated with the user community rather than alienate them. They wouldn’t stake Bitcoin’s future on a contentious hard fork.

PART IV: POWER PLAYS

REPLAY PROTECTION

Crypto enthusiasts will remember the DAO hack — when an investment pool running on the Ethereum blockchain was compromised. In that instance, the community forked their blockchain in two: Ethereum, with the stolen funds returned to its original owners, and Ethereum Classic, without the change.

A small flock (roadsendnaturalist.com)

51%

Theories abound that SegWit2x was nothing less than an attack meant to destroy Bitcoin Core. It was a power grab. It was a mass transfer of wealth to those with the means to affect change, from those without. It was a cyber attack. Indeed, some community members were suggesting that SegWit2x was, in effect, the first major instance of the worst kind of scenario any cryptocurrency holder could fear: a 51% attack.

A big flock (Plants of the Nile)

PURPOSEFUL SLOWDOWNS

This isn’t to say miners are all bad or exclusively self-interested — far from it. Nonetheless, investors had reason to worry about how they might exert their power. In a Medium article, Sam Wouters — a blockchain public speaker — laid out a pretty good reason why.

(Medium)

PART V: DOGFIGHT

SUMMARY SO FAR

Who controls Bitcoin?

Andreas Antonopoulos (Forbes)

AA: I think it was a misguided attempt for compromise at a time when the debate had shifted from which is the most technically efficient way of addressing scaling, to a secondary debate. A meta debate, if you like, which was who should have the power to make this decision?

The original sin of SegWit2x had nothing to do with technology. A group of wealthy business leaders had got together in a swanky New York hotel, wrote up their idea for how to upgrade the network, and didn’t bother asking the rest of the community what they thought. Not great optics.

AA: It was tone deaf to the level of power struggle that was going on.

I don’t think anybody who was doing SegWit2x, although I might be wrong, was trying to do some grand conspiracy to do something bad to the network. I think they were looking out for their own self interest and they wanted to make their business model succeed. They just walked straight into that one. In fact, I was invited at the time to sign on to that and I said, “You’re playing with fire, I want nothing to do with this. I am not wading into this controversy. This is not about a technical decision anymore.”

Barry Silbert, the leader of the project, marketed SegWit2x as a compromise. In reality, he’d walked up to a garbage fire and said: “You know what might fix this? Some gasoline.”

AA: Once it became a power struggle, it became very, very personal and it became acrimonious and people ascribed ulterior motives and agendas, and then nefarious agendas, and then complete conspiracy theories to explain the motivations of other people who could not see what was plainly obvious. [. . .] and at that point, surprisingly, and very interestingly, a user revolt was fomented.

UASF

Shortly after SegWit2x was proposed, a coalition of users got together and made their own bet: a bet that they controlled the network, not the big businesses and miners. Their proposal, to prove the point, was a “User Activated Soft Fork,” or “UASF.”

Bitcoin developer Peter Todd sporting user revolt swag (Twitter @mir_btc)

AA: So SegWit effectively became the linchpin of the debate and opposition to SegWit became a mechanism for signaling something deeper about who should be making the decision.

We said that SegWit2x was an exercise in power. A majority of users didn’t like the idea, so if it succeeded, it would demonstrate that miners and big businesses control the network.

BIP 91

This was the setting in the hot summer of 2017 — miners mobilizing behind SegWit2x, users threatening the UASF, and a few developers caught in the middle.

James Hilliard (CoinDesk)
Sailing blocks (ravencruise.com)

BCH

And so it might’ve seemed for a moment, for a fleeting second, that a community at war had finally, for once, resolved their differences.

PART VI: PULLING THE STRINGS

JIHAN WU

In 1986, in the sprawling Chongqing municipality of southwest China, a boy was born and given the name Wu Jihan — or, to us in the West, Jihan Wu. The short, skinny, bespectacled young Jihan would go on to graduate from Peking University in 2009, with a degree in economics and psychology. He took a job as a financial analyst at a private equity firm until, one day in May 2011, he discovered a thing called “Bitcoin.” Like Jeff Garzik, Pieter Wuille, and other pioneers before him, he immediately became enamored with Satoshi Nakamoto’s original white paper.

(BTCNN.com)

HONG KONG AGREEMENT

If there were a time in history when Jihan transformed from being respected to feared, it would be 2016.

Micree Zhan, Jihan Wu, James Hilliard, Peter Todd and other HK Agreement signatories (CCN)

AA: Because if the debate had been about one megabyte, then it wouldn’t have been contentious. Just like if the debate had been about the activation of a script and transaction malleability improvement, it wouldn’t have been contentious. But that’s not what the debate was about. That was the debate in the beginning, before there was disagreement and there was no way to reach consensus.

[. . .]

It became a debate more about the means rather than the ends. Rather than about how do we scale Bitcoin, it became more about which specific techniques do we use and in which sequence? Then because there wasn’t a consensus being reached on that question, then it became a power struggle because the debate shifted into who should make that decision.

The scaling debate was once about how big blocks should be. By late 2016, however, it shifted. In 2017, it was no longer really about 1 MB or 2. It was about how to make the change and, more importantly, who gets to decide how.

UAHF

In Spring 2017, Jihan and Bitmain signed onto the Hong-Kong-Agreement-adjacent New York Agreement. Then came UASF. As if Jihan didn’t have enough reason to dislike the small block community, here was a direct affront to miners. What was he to do? As co-CEO of the largest mining company in the world, he couldn’t simply stand by.

A reliable voting bloc (The Nation)
(cointimes.com)

PART VII: THE BIG PLAY

COVERT ASICBOOST

AA: ASICBoost is an efficiency improvement, let’s call it, that I first heard about from Sergio Lerner.

Sergio Lerner, a cryptocurrency consultant, co-created ASICBoost with Timo Hanke, a cryptology expert. They took out a patent on it in November, 2014.

AA: To my great shame, I initially ignored him because he was talking about a backdoor that makes SHA256 more efficient. If you’re in this space, you hear a lot of stuff like that all the time. It seemed like the perpetual energy machine, nut job rant and I ignored him. I had to mea culpa myself afterwards.

In Bitcoin, all miners compete to “mine” new blocks in the chain, every ten minutes. Each block presents a new, highly complex mathematical problem, and miners run high-powered computers designed to solve that problem. This paradigm is called “Proof of Work.” Whichever miner or miners gets the answer first gets the fees and extra reward associated with the block. This is how miners make money.

AA: This efficiency basically allows a pre-calculation of the mid-state of SHA in such a way that you can reduce the energy consumption by about 20% on the calculation of the end state of SHA.

One of many diagrams from Sergio and Timo’s patent (PatentScope)
Greg Maxwell (Pinterest)

THE CONSPIRACY

AA: The conspiracy comes in from the fact that the way SegWit was introduced as a soft fork, actually ended up changing the usable space in the Coinbase transaction in such a way that it broke the use of ASICBoost in a covert way.

Because of how SegWit restructured the transaction block, it rendered covert ASICBoost ineffective. Whichever miners were secretly using ASICBoost would, naturally, have had an under-the-table financial incentive to block the SegWit upgrade.

AA: We now know that Bitmain and potentially other ASIC mining farms and mining producers were using this on their own mining farms primarily. And eventually, they started giving it out as part of the equipment and were using this to gain a significant advantage over the competitors, which at the time resulted in a big enough edge that they were able to generate literally billions of dollars in profit. This was a lot of money on the table.

[. . .]

I don’t think it’s far fetched to think that when you have an organization that has for years perhaps at that point, made the sustainable 20% advantage in a marketplace that is cutthroat competitive and where there are billions of dollars on the table, would take that into very serious consideration. The conspiracy really isn’t in whether this was to their advantage or not, or whether they would make decisions based on their own profit motive. The conspiracy is whether those incentives that were invisible to everyone else and affected their decision were hidden on purpose so as to not tip their hand on ASICBoost.

Antminer S9 (StaticFlickr.com)

THE FORK

And so, on August 1st, 2017, the scenario everyone worked so hard to avoid was happening anyway. There were now two, competing blockchains. Then, as it goes in the world of blockchain, a hash race began. The old Bitcoin and the new Bitcoin Cash competed for computing power, battling to mine more blocks than the other. The prize for winning — being the more popular chain — was simple: the right to call your chain the “better” Bitcoin, and a higher stock price. The price for losing — being the less popular chain — was not so simple. At best, the losing chain would become an “altcoin” — an alternative, but not the real Bitcoin. At worst, without enough popular support behind it, the losing chain would not survive at all, leaving only the winner standing.

Starting block (Wikipedia)
(u/finalhedge)

CONCLUSION

AA: To me, consensus is an emergent phenomenon that comes from the interplay of various participants in the system. The participants are the developers who write the software, but can’t force anyone to run that software and who can write down the consensus rules, but those consensus rules are meaningless if no one’s running that software. Then it’s the miners who effectively use those consensus rules to adjudicate and sequence transactions and secure the network.

Those are the two primary players, the most obvious ones, but then none of this all matters unless you take into consideration the economic activity of the network. Because if you’re building software that nobody uses, or if you’re mining blocks that have no economic value, it’s all meaningless. It’s moot. The economic interest constituencies are primarily the users who choose which wallets, which chain to run on and by extension choose the consensus rules they’re participating in. Some of them run nodes and become node operators, in which case they explicitly choose the consensus rules and can even run blockades, as we saw with user activated soft forks. Then the other two big economic interests, which are effectively users but on a different scale, are the exchanges that are not only price makers or price discovery mechanism and market makers, but they’re also the on ramps, off ramps.

[. . .]

and merchants who run all of the eCommerce, retail and business to business transaction processing on behalf of users, if users need bigger scale.

[. . .]

These five constituencies each have power only if they agree with the other four. Anytime any one of them tries to step ahead of that agreement, they lose badly. That’s how consensus keeps everyone in line. And during this entire debate, what we saw is each and every one of these constituencies trying to step up and say “it’s our decision,” and then face plant shortly thereafter when their bravado roar of “we have the power” landed on deaf ears.

2017 was the year when Satoshi Nakamoto’s utopian idea of a truly decentralized network was put to the test. Coordinated, powerful interest groups warred over controversial network upgrades, each side trying to supplant the other’s power. If any one of them succeeded, decentralization failed.

AA: You can even look at all of this arguing and drama and consider the fact that several multi-hundred-millionaires attempted to hijack the system and failed. Look at that and say: in the end, this is a system in which the participant who has almost nothing, and the participant who has multi-hundred-million are playing on a level playing field that unless changed by overwhelming consensus, maintains the status quo and gives you predictable neutral rules that work for everyone. That is the beauty of this system. No other system of commerce, no other industry is such that a billionaire can’t walk in and change the rules to suit them. In Bitcoin, as proven in 2017, you can’t. That’s really the amazing thing about the decentralization of power and that’s what makes this system tick.

We asked the question: who controls Bitcoin? Is it the users? The miners? The biggest company on the network?

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Tech writer.

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