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From: Regardless of the moral status of his decision, Theymos was correct that moderation can be effectively used for manipulation. It can teach people that questioning the official narrative is unacceptable and will be punished, and in this case, it was critical to establishing the popularity of small-block ideas. To this day, newcomers have no idea they are only being presented with one perspective—a perspective that Satoshi himself would strongly disagree with. When the average person encounters the same information on multiple platforms, on the Bitcoin Wiki, and throughout the discussion forums, he will not even be aware that there is another perspective, much less have an informed opinion about it. Over time, that kind of information control is immensely powerful.
Ripple Effects
The decision to censor all discussion of BitcoinXT did not just infuriate regular Bitcoiners. It also upset fellow moderators. A few days after Theymos’ announcement, a dissident moderator “jratcliff63367” wrote a sharply critical article entitled, “Confessions of an r/Bitcoin moderator.” One section reads:
When theymos decided to use his centralized authority of r/bitcoin to stifle all debate and discussion of bitcoin-xt, he violated a core principle. As a decentralized peer-to-peer network, any point of centralized control is problematic… This one single person holds absolute centralized control of the two largest communications platforms for the community to discuss the future and evolution of bitcoin...
He exercises absolute power of what is, or is not, allowed to be discussed; including complete and total censorship power over the narrative in the two largest media outlets.7
Only ten days after jratcliff63367’s public criticism of Theymos, he was removed as a moderator from r/Bitcoin. He would later speculate that his removal was because of suggesting that the Core developers might be compromised:
It is not at all unreasonable to suppose that core-devs have been contacted by the ‘spooks’ and are applying influence. Crippling bitcoin so that almost all of the value has to flow through side-channels and only large institutions can access the core network would be a great solution to what world governments consider as a major problem…
The government doesn’t actually care if there is some new ‘asset class’ like bitcoin. There are zillions of asset classes, what do they care if it is bitcoins or beanie babies? What they care about is people transferring that value without their ability to track and intercept. If the only people who can directly access the blockchain are big-banks...well you get the idea.8
The same heavy-handed censorship still exists today, and the amount of people caught within this information bubble is much larger. The impact of these controls cannot be overstated. The enormous confusion surrounding Bitcoin exists, in large part, because of the deliberate efforts of a handful of people to filter out all information that challenges their narrative—and, ultimately, challenges their power. Unfortunately, mass censorship and propaganda were not the only tactics used against BitcoinXT. More aggressive measures were taken, too.
The DDoS Attacks Begin
SlushPool was one of many mining pools in Bitcoin. A mining pool is the standard way for miners to regulate their income. Without a pool, individual miners must wait until they personally find a block in order to earn any Bitcoins. But with a pool, miners put their hashing power together and share the block rewards, smoothing out their income considerably. Virtually all miners are part of a pool. So, when SlushPool was hit with a DDoS attack after allowing voting on BIP101, it affected a lot of people. On August 25th, 2015, Slushpool received a letter from the perpetrators, telling them the attacks would continue until they stopped supporting BitcoinXT.9 According to the MIT Technology Review:
Alena Vranova… said the company received a message saying that the attack would end once it turned off the ability for customers to declare support for Andresen’s idea. [They were] forced to comply with that demand because the attack was powerful enough to cause connectivity problems for some Slush Pool miners. “This is a destructive behavior,” says Vranova. “I would admire someone who stands out, explains, and promotes his idea. [But] this is just cowardly”…
Another victim was the Web hosting company ChunkHost, based in Los Angeles. It didn’t receive a message, but the attack was focused on one customer who had recently switched the software powering a Bitcoin ATM to BitcoinXT. “It seemed pretty clear. As soon as he switched, he got attacked,” says Josh Jones, a founder of ChunkHost.
Others running BitcoinXT reported the same thing. One user wrote on the forums:
Ripple Effects
The decision to censor all discussion of BitcoinXT did not just infuriate regular Bitcoiners. It also upset fellow moderators. A few days after Theymos’ announcement, a dissident moderator “jratcliff63367” wrote a sharply critical article entitled, “Confessions of an r/Bitcoin moderator.” One section reads:
When theymos decided to use his centralized authority of r/bitcoin to stifle all debate and discussion of bitcoin-xt, he violated a core principle. As a decentralized peer-to-peer network, any point of centralized control is problematic… This one single person holds absolute centralized control of the two largest communications platforms for the community to discuss the future and evolution of bitcoin...
He exercises absolute power of what is, or is not, allowed to be discussed; including complete and total censorship power over the narrative in the two largest media outlets.7
Only ten days after jratcliff63367’s public criticism of Theymos, he was removed as a moderator from r/Bitcoin. He would later speculate that his removal was because of suggesting that the Core developers might be compromised:
It is not at all unreasonable to suppose that core-devs have been contacted by the ‘spooks’ and are applying influence. Crippling bitcoin so that almost all of the value has to flow through side-channels and only large institutions can access the core network would be a great solution to what world governments consider as a major problem…
The government doesn’t actually care if there is some new ‘asset class’ like bitcoin. There are zillions of asset classes, what do they care if it is bitcoins or beanie babies? What they care about is people transferring that value without their ability to track and intercept. If the only people who can directly access the blockchain are big-banks...well you get the idea.8
The same heavy-handed censorship still exists today, and the amount of people caught within this information bubble is much larger. The impact of these controls cannot be overstated. The enormous confusion surrounding Bitcoin exists, in large part, because of the deliberate efforts of a handful of people to filter out all information that challenges their narrative—and, ultimately, challenges their power. Unfortunately, mass censorship and propaganda were not the only tactics used against BitcoinXT. More aggressive measures were taken, too.
The DDoS Attacks Begin
SlushPool was one of many mining pools in Bitcoin. A mining pool is the standard way for miners to regulate their income. Without a pool, individual miners must wait until they personally find a block in order to earn any Bitcoins. But with a pool, miners put their hashing power together and share the block rewards, smoothing out their income considerably. Virtually all miners are part of a pool. So, when SlushPool was hit with a DDoS attack after allowing voting on BIP101, it affected a lot of people. On August 25th, 2015, Slushpool received a letter from the perpetrators, telling them the attacks would continue until they stopped supporting BitcoinXT.9 According to the MIT Technology Review:
Alena Vranova… said the company received a message saying that the attack would end once it turned off the ability for customers to declare support for Andresen’s idea. [They were] forced to comply with that demand because the attack was powerful enough to cause connectivity problems for some Slush Pool miners. “This is a destructive behavior,” says Vranova. “I would admire someone who stands out, explains, and promotes his idea. [But] this is just cowardly”…
Another victim was the Web hosting company ChunkHost, based in Los Angeles. It didn’t receive a message, but the attack was focused on one customer who had recently switched the software powering a Bitcoin ATM to BitcoinXT. “It seemed pretty clear. As soon as he switched, he got attacked,” says Josh Jones, a founder of ChunkHost.
Others running BitcoinXT reported the same thing. One user wrote on the forums:
There’s a substantial difference between discussion of a proposed Bitcoin hardfork… and promoting software that is programmed to diverge into a competing network/currency. The latter is clearly against the established rules of r/Bitcoin, and while Bitcoin’s technology will continue working fine no matter what people do, even the attempt at splitting Bitcoin up like this will harm the Bitcoin ecosystem and economy.
Theymos further explains the decision in the form of a Q&A session:
Why is XT considered an altcoin even though it hasn’t broken away from Bitcoin yet?
Because it is intentionally programmed to diverge from Bitcoin, I don’t consider it to be important that XT is not distinct from Bitcoin quite yet…
Can I still talk about hard fork proposals on r/Bitcoin?
Right now, not unless you have something really new and substantial to say. After this sticky is removed, it will be OK to discuss any hardfork to Bitcoin, but not any software that hardforks without consensus, since that software is not Bitcoin.
How do you know that there is no consensus?
Consensus is a high bar. It is not the same as a majority. In general, consensus means that there is near-unanimity. In the very particular case of a hardfork, “consensus” means “there is no noticeable probability that the hardfork will cause the Bitcoin economy to split into two or more non-negligible pieces”.
I know almost for certain that there is no consensus to the change in XT because Bitcoin core developers Wladamir, Greg, and Pieter are opposed to it. That’s enough to block consensus…
But with such a high bar, 8 MB blocks will be impossible!
If consensus can never be reached on one particular hardfork proposal, then the hardfork should never occur. Just because you want something doesn’t mean that it’s ever reasonable for you to hijack Bitcoin from the people who don’t want it, even if your side is the majority (which it isn’t in this case). This isn’t some democratic country where you can always get your way with sufficient politicking. Get consensus, live without the change, or create your own altcoin…
Towards the end of his announcement, he added that it does not matter if everyone disagrees with him or despises the censorship:
If 90% of r/Bitcoin users find these policies to be intolerable, then I want these 90% of r/Bitcoin users to leave. Both r/Bitcoin and these people will be happier for it.5
The Bitcoin community was livid. Theymos’s announcement was another dark milestone in Bitcoin’s history, and it generated a huge reaction. The thread accumulated more than a thousand comments. A small sample of them provide the general tone of responses:
“[C]alling XT an altcoin is ridiculous, clinging to semantics at best. This topic deserves to be allowed to be hashed out, and banning further discussion of it is a gross disservice to the community.”
“Please change this sub to r/bitcoincore if that’s all that will be discussed here. Calling it r/bitcoin but banning discussions about alternative clients and consensus rules is misleading…”
Another user couldn’t help but be sarcastic about the situation:
Congrats r/bitcoin, I am glad you have finally settled on the Bitcoin CEO, now you have that central authority that you always wanted that will tell you exactly how you are supposed to think and act. No more having to think and decide for yourself, you have theymos to tell you exactly what is bitcoin, what the laws and rules are about bitcoin, what the devs think… So if you are ever unsure about bitcoin Theymos will from now on make all the decisions for you..
One user speculated that the moderators might have been compromised:
I think it’s worth discussing the possibility that the mod team has become compromised and banks (or whomever) could stand to make money controlling the discussion.
Theymos was not shy about his decision, and he revealed his censorship strategy in conversation that would eventually be leaked:
You must be naive if you think it’ll have no effect. I’ve moderated forums since long before Bitcoin (some quite large), and I know how moderation affects people. Long-term, banning XT from r/Bitcoin will hurt XT’s chances to hijack Bitcoin. There’s still a chance, but it’s smaller. (This is improved by the simultaneous action on bitcointalk.org, bitcoin.it, and bitcoin.org)… I do have power over certain centralized websites, which I’ve decided to use for the benefit of Bitcoin as a whole…6
Theymos further explains the decision in the form of a Q&A session:
Why is XT considered an altcoin even though it hasn’t broken away from Bitcoin yet?
Because it is intentionally programmed to diverge from Bitcoin, I don’t consider it to be important that XT is not distinct from Bitcoin quite yet…
Can I still talk about hard fork proposals on r/Bitcoin?
Right now, not unless you have something really new and substantial to say. After this sticky is removed, it will be OK to discuss any hardfork to Bitcoin, but not any software that hardforks without consensus, since that software is not Bitcoin.
How do you know that there is no consensus?
Consensus is a high bar. It is not the same as a majority. In general, consensus means that there is near-unanimity. In the very particular case of a hardfork, “consensus” means “there is no noticeable probability that the hardfork will cause the Bitcoin economy to split into two or more non-negligible pieces”.
I know almost for certain that there is no consensus to the change in XT because Bitcoin core developers Wladamir, Greg, and Pieter are opposed to it. That’s enough to block consensus…
But with such a high bar, 8 MB blocks will be impossible!
If consensus can never be reached on one particular hardfork proposal, then the hardfork should never occur. Just because you want something doesn’t mean that it’s ever reasonable for you to hijack Bitcoin from the people who don’t want it, even if your side is the majority (which it isn’t in this case). This isn’t some democratic country where you can always get your way with sufficient politicking. Get consensus, live without the change, or create your own altcoin…
Towards the end of his announcement, he added that it does not matter if everyone disagrees with him or despises the censorship:
If 90% of r/Bitcoin users find these policies to be intolerable, then I want these 90% of r/Bitcoin users to leave. Both r/Bitcoin and these people will be happier for it.5
The Bitcoin community was livid. Theymos’s announcement was another dark milestone in Bitcoin’s history, and it generated a huge reaction. The thread accumulated more than a thousand comments. A small sample of them provide the general tone of responses:
“[C]alling XT an altcoin is ridiculous, clinging to semantics at best. This topic deserves to be allowed to be hashed out, and banning further discussion of it is a gross disservice to the community.”
“Please change this sub to r/bitcoincore if that’s all that will be discussed here. Calling it r/bitcoin but banning discussions about alternative clients and consensus rules is misleading…”
Another user couldn’t help but be sarcastic about the situation:
Congrats r/bitcoin, I am glad you have finally settled on the Bitcoin CEO, now you have that central authority that you always wanted that will tell you exactly how you are supposed to think and act. No more having to think and decide for yourself, you have theymos to tell you exactly what is bitcoin, what the laws and rules are about bitcoin, what the devs think… So if you are ever unsure about bitcoin Theymos will from now on make all the decisions for you..
One user speculated that the moderators might have been compromised:
I think it’s worth discussing the possibility that the mod team has become compromised and banks (or whomever) could stand to make money controlling the discussion.
Theymos was not shy about his decision, and he revealed his censorship strategy in conversation that would eventually be leaked:
You must be naive if you think it’ll have no effect. I’ve moderated forums since long before Bitcoin (some quite large), and I know how moderation affects people. Long-term, banning XT from r/Bitcoin will hurt XT’s chances to hijack Bitcoin. There’s still a chance, but it’s smaller. (This is improved by the simultaneous action on bitcointalk.org, bitcoin.it, and bitcoin.org)… I do have power over certain centralized websites, which I’ve decided to use for the benefit of Bitcoin as a whole…6
Bitcoin.org used to be considered a neutral page for people learning about Bitcoin. It had basic introductory information, links to companies and services within the industry, and other resources that newcomers would find helpful. However, since it was controlled by hardcore Bitcoin Core supporters, this veneer of neutrality quickly evaporated once BitcoinXT started to threaten the dominance of the Core developers. On June 16th 2015, Bitcoin.org announced their official “Hard Fork Policy,” which read:
It appears that the recent block size debate will likely result in a contentious hard fork attempt… The danger of a contentious hard fork is potentially so significant that Bitcoin.org has decided to adopt a new policy:
Bitcoin.org will not promote any software or services that will leave the previous consensus because of a contentious hard fork attempt.
This policy applies to full node software, such as Bitcoin Core, software forks of Bitcoin Core, and alternative full node implementations. It also applies to wallets and services… which release code or make announcements indicating that that will cease operating on the side of the previous consensus…1
In other words, any companies siding with BitcoinXT over Core would have their listings removed from the site. Since Bitcoin.org was, and still is, often considered the “official” website for Bitcoin, this policy would help create the narrative that any “contentious forks” away from Core are illegitimate by default. The announcement was immediately blasted by many Bitcoiners, Mike Hearn among them saying:
You want to ensure new users don’t learn about Bitcoin XT. Why not just say that outright? Your position is wrong and will just reduce bitcoin.org’s utility as a place to learn important information. What’s more, you are inherently supporting a status quo in which a tiny number of people can veto any change to Bitcoin regardless of how widely supported it is by the rest of the community. That’s not decentralisation. And it is ultimately far more dangerous to Bitcoin.
If you try and shut down the only method the community has to reject the decisions of this tiny group, you’re effectively dooming the project to the whims of whoever happened to be around early on in the project and ended up with commit access.2
Hearn also noted the absurdity of the policy, given the enormous support for bigger blocks across the industry:
…it says you will delist any wallet or service that announces it will operate on the other side of the “previous consensus”. Currently every single wallet bar GreenAddress that we’ve polled has told us they support bigger blocks. Additionally, every major payment processor we’ve talked to has also said that. Plus the major exchanges. So to be consistent with this policy you will have to delete every wallet and all major services (except GreenAddress) from the website.
Fellow Bitcoiner Will Binns wrote:
Bitcoin.org should try to [stay] as non-biased as possible in the midst of publicly debated issues. Hundreds of people, if not thousands, are coming to this site every day, many of which are new users learning about Bitcoin for the first time. For existing users in the space, this website is also an incredible resource in most cases.
It seems like this post would be in an effort to sway public opinion more-so than anything else. It doesn’t provide a complete context nor link to a wider array of information about the underlying issues it references so the reader can form their own opinion - it comes across as forcing a biased one.3
This new Hard Fork Policy would not be the last time the Bitcoin.org website was used to mislead people into thinking that Bitcoin Core was the “official” software and that any competitors were illegitimate. Though, the impact of this particular policy was negligible compared to what happened to the online discussion forums.
Reddit Gets Captured
For months, it was common on the r/Bitcoin subreddit for users to complain about their posts being censored and removed from the platform. One of the most highly upvoted threads in the forum’s history called for the moderators to step down and be replaced.4 Shortly after this thread was posted it was removed, and the very next day in August 2015, Theymos announced a new moderation policy on r/Bitcoin that censored all discussion of BitcoinXT. The post is lengthy, but recommended reading, as it marked another milestone in Bitcoin’s history. The key message was that all hard forks are illegitimate without a “consensus” of Core developers. Because of this, BitcoinXT was not really Bitcoin and therefore could no longer be discussed on the platform. Excerpts from the announcement are provided below:
r/Bitcoin exists to serve Bitcoin. XT will, if/when its hardfork is activated, diverge from Bitcoin and create a separate network/currency. Therefore, it and services that support it should not be allowed on r/Bitcoin…
It appears that the recent block size debate will likely result in a contentious hard fork attempt… The danger of a contentious hard fork is potentially so significant that Bitcoin.org has decided to adopt a new policy:
Bitcoin.org will not promote any software or services that will leave the previous consensus because of a contentious hard fork attempt.
This policy applies to full node software, such as Bitcoin Core, software forks of Bitcoin Core, and alternative full node implementations. It also applies to wallets and services… which release code or make announcements indicating that that will cease operating on the side of the previous consensus…1
In other words, any companies siding with BitcoinXT over Core would have their listings removed from the site. Since Bitcoin.org was, and still is, often considered the “official” website for Bitcoin, this policy would help create the narrative that any “contentious forks” away from Core are illegitimate by default. The announcement was immediately blasted by many Bitcoiners, Mike Hearn among them saying:
You want to ensure new users don’t learn about Bitcoin XT. Why not just say that outright? Your position is wrong and will just reduce bitcoin.org’s utility as a place to learn important information. What’s more, you are inherently supporting a status quo in which a tiny number of people can veto any change to Bitcoin regardless of how widely supported it is by the rest of the community. That’s not decentralisation. And it is ultimately far more dangerous to Bitcoin.
If you try and shut down the only method the community has to reject the decisions of this tiny group, you’re effectively dooming the project to the whims of whoever happened to be around early on in the project and ended up with commit access.2
Hearn also noted the absurdity of the policy, given the enormous support for bigger blocks across the industry:
…it says you will delist any wallet or service that announces it will operate on the other side of the “previous consensus”. Currently every single wallet bar GreenAddress that we’ve polled has told us they support bigger blocks. Additionally, every major payment processor we’ve talked to has also said that. Plus the major exchanges. So to be consistent with this policy you will have to delete every wallet and all major services (except GreenAddress) from the website.
Fellow Bitcoiner Will Binns wrote:
Bitcoin.org should try to [stay] as non-biased as possible in the midst of publicly debated issues. Hundreds of people, if not thousands, are coming to this site every day, many of which are new users learning about Bitcoin for the first time. For existing users in the space, this website is also an incredible resource in most cases.
It seems like this post would be in an effort to sway public opinion more-so than anything else. It doesn’t provide a complete context nor link to a wider array of information about the underlying issues it references so the reader can form their own opinion - it comes across as forcing a biased one.3
This new Hard Fork Policy would not be the last time the Bitcoin.org website was used to mislead people into thinking that Bitcoin Core was the “official” software and that any competitors were illegitimate. Though, the impact of this particular policy was negligible compared to what happened to the online discussion forums.
Reddit Gets Captured
For months, it was common on the r/Bitcoin subreddit for users to complain about their posts being censored and removed from the platform. One of the most highly upvoted threads in the forum’s history called for the moderators to step down and be replaced.4 Shortly after this thread was posted it was removed, and the very next day in August 2015, Theymos announced a new moderation policy on r/Bitcoin that censored all discussion of BitcoinXT. The post is lengthy, but recommended reading, as it marked another milestone in Bitcoin’s history. The key message was that all hard forks are illegitimate without a “consensus” of Core developers. Because of this, BitcoinXT was not really Bitcoin and therefore could no longer be discussed on the platform. Excerpts from the announcement are provided below:
r/Bitcoin exists to serve Bitcoin. XT will, if/when its hardfork is activated, diverge from Bitcoin and create a separate network/currency. Therefore, it and services that support it should not be allowed on r/Bitcoin…
Why can this dispute not be resolved in some more civilised manner than an outright split? Put simply, the decision making process in Bitcoin Core has broken. In theory, like almost all open source projects, Core has a “maintainer”. The job of a maintainer is to shepherd the project and make decisions about what goes in and what doesn’t. The maintainer is the boss. A good maintainer gathers feedback, weighs arguments and then makes decisions. But in the case of Bitcoin Core the block size debate has been allowed to drag on for years.
The problem is that any change, no matter how obvious, can be nixed entirely if it becomes “controversial”, meaning another person with commit access objects. As there are five committers and many other non-committers who can also make changes “controversial” this is a recipe for deadlock. The fact that the block size was never meant to be permanent has ceased to matter: the fact that removing it is debated, is, by itself, enough to ensure it will not happen. Like a committee with no chairman, the meeting never ends…
After sharing a long list of key companies and individuals that were supportive of Hearn and Andresen, he then pointed out the enormous asymmetries of power between the Core developers and the rest of the entrepreneurs and engineers throughout the Bitcoin industry. No matter how much support a particular proposal received, it could be rejected by a handful of people with veto power:
Companies represent many of Bitcoin’s most passionate, devoted and technical people. They provide critical infrastructure. Yet the views of the people who build them are considered “misleading to the sense of consensus”. What about wallet developers? They are the people most exposed to the needs of day to day users. Never asked. When they spoke up anyway, it made no difference; their views are considered irrelevant…
It’s become clearer and clearer that the “consensus” that’s so often talked about in the Bitcoin Core community really means the views of a tiny handful of people, regardless of what anyone else in the wider community might think, how much work they have done, or how many users their products have.
Put another way, “developer consensus” is marketing, wool pulled over the eyes of Bitcoin users to blind them from the truth: just two or three people acting in concert can break Bitcoin in whatever way they see fit.
Hearn ended his article by illustrating that forks are the only way to prevent development capture, as they provide competitive pressure to keep developers from going rogue:
In short, they believe that the only mechanism that Bitcoin has to keep them in check should never be used. I don’t think they really mean it to come across this way, but it does. Their view is that there shouldn’t be any alternative to their decisions. That anything they object to, for whatever reason, is killed forever … and that Bitcoin is thus their toy to do with as they please.
This state of affairs cannot go on. The Bitcoin Core project has shown it cannot reform and so it must be abandoned. That is why Bitcoin has forked. We hope everyone understands.
Once again, nobody summed up the situation more accurately than Mike Hearn. His article was considered a brilliant articulation of the problems within Bitcoin, as well as a justification for forking off from Bitcoin Core. To small-blockers, however, it was considered an act of war. If a supermajority of miners followed Hearn and Andresen, the small-block vision of Bitcoin would be relegated to an altcoin, and the Core developers would effectively be fired. So, there was an immediate, widespread campaign to shut down XT before it gained too much momentum.
16
Blocking the Exit
Bitcoin looks the most decentralized when observed from a distance. Upon closer examination, it becomes clear that there are a small number of critical positions that have overwhelming influence over the network. Control over the software keys has already been established as one example. Another is the control of information flows online. BTC’s powerful narrative, repeated everywhere in the media, did not spontaneously emerge, nor was it the result of free and open discussion among Bitcoin enthusiasts. The two most important discussion platforms, on which the overwhelming majority of conversations happened, were bitcointalk.org and the r/Bitcoin subreddit, both of which still enjoy immense popularity. Both platforms happen to be controlled by the same person, known by the pseudonym “Theymos.” He also owns The Bitcoin Wiki (Bitcoin.it). That’s one person with enormous power to shape narratives and direct the flow of information, and when the time came, he was not hesitant to exercise this power.
The Censorship Begins
The problem is that any change, no matter how obvious, can be nixed entirely if it becomes “controversial”, meaning another person with commit access objects. As there are five committers and many other non-committers who can also make changes “controversial” this is a recipe for deadlock. The fact that the block size was never meant to be permanent has ceased to matter: the fact that removing it is debated, is, by itself, enough to ensure it will not happen. Like a committee with no chairman, the meeting never ends…
After sharing a long list of key companies and individuals that were supportive of Hearn and Andresen, he then pointed out the enormous asymmetries of power between the Core developers and the rest of the entrepreneurs and engineers throughout the Bitcoin industry. No matter how much support a particular proposal received, it could be rejected by a handful of people with veto power:
Companies represent many of Bitcoin’s most passionate, devoted and technical people. They provide critical infrastructure. Yet the views of the people who build them are considered “misleading to the sense of consensus”. What about wallet developers? They are the people most exposed to the needs of day to day users. Never asked. When they spoke up anyway, it made no difference; their views are considered irrelevant…
It’s become clearer and clearer that the “consensus” that’s so often talked about in the Bitcoin Core community really means the views of a tiny handful of people, regardless of what anyone else in the wider community might think, how much work they have done, or how many users their products have.
Put another way, “developer consensus” is marketing, wool pulled over the eyes of Bitcoin users to blind them from the truth: just two or three people acting in concert can break Bitcoin in whatever way they see fit.
Hearn ended his article by illustrating that forks are the only way to prevent development capture, as they provide competitive pressure to keep developers from going rogue:
In short, they believe that the only mechanism that Bitcoin has to keep them in check should never be used. I don’t think they really mean it to come across this way, but it does. Their view is that there shouldn’t be any alternative to their decisions. That anything they object to, for whatever reason, is killed forever … and that Bitcoin is thus their toy to do with as they please.
This state of affairs cannot go on. The Bitcoin Core project has shown it cannot reform and so it must be abandoned. That is why Bitcoin has forked. We hope everyone understands.
Once again, nobody summed up the situation more accurately than Mike Hearn. His article was considered a brilliant articulation of the problems within Bitcoin, as well as a justification for forking off from Bitcoin Core. To small-blockers, however, it was considered an act of war. If a supermajority of miners followed Hearn and Andresen, the small-block vision of Bitcoin would be relegated to an altcoin, and the Core developers would effectively be fired. So, there was an immediate, widespread campaign to shut down XT before it gained too much momentum.
16
Blocking the Exit
Bitcoin looks the most decentralized when observed from a distance. Upon closer examination, it becomes clear that there are a small number of critical positions that have overwhelming influence over the network. Control over the software keys has already been established as one example. Another is the control of information flows online. BTC’s powerful narrative, repeated everywhere in the media, did not spontaneously emerge, nor was it the result of free and open discussion among Bitcoin enthusiasts. The two most important discussion platforms, on which the overwhelming majority of conversations happened, were bitcointalk.org and the r/Bitcoin subreddit, both of which still enjoy immense popularity. Both platforms happen to be controlled by the same person, known by the pseudonym “Theymos.” He also owns The Bitcoin Wiki (Bitcoin.it). That’s one person with enormous power to shape narratives and direct the flow of information, and when the time came, he was not hesitant to exercise this power.
The Censorship Begins
The history of BitcoinXT would permanently disprove the idea that Bitcoin is somehow beyond the reach of human influence. Instead, it is deeply social, and its history is not shaped by software code writing itself—it’s shaped by individuals making difficult decisions in a social, economic, and political context. Though nearly every serious businessperson was supportive of a blocksize increase, some thought that firing Core outright would be too divisive. Instead, they would publicly support BIP101 and urge Bitcoin Core to merge it into their software. Several of the largest non-mining Bitcoin companies issued a joint statement endorsing BIP101 and 8MB blocks without explicitly endorsing BitcoinXT. Signatures included Stephen Pair, the CEO of Bitpay, Peter Smith, the CEO of Blockchain.info, Jeremy Allaire, the CEO of Circle.com, Wences Casares, the CEO of Xapo.com, Mike Belshe, the CEO of Bitgo.com, among others. The statement read:
Our community stands at a crossroads… After lengthy conversations with core developers, miners, our own technical teams, and other industry participants, we believe it is imperative that we plan for success by raising the maximum block size.
We support the implementation of BIP101. We have found Gavin’s arguments on both the need for larger blocks and the feasibility of their implementation — while safeguarding Bitcoin’s decentralization to be convincing. BIP101 and 8MB blocks are already supported by a majority of the miners and we feel it is time for the industry to unite behind this proposal.
Our companies will be ready for larger blocks by December 2015 and we will run code that supports this… We pledge to support BIP101 in our software and systems by December 2015, and we encourage others to join us.6
BitcoinXT is the unspoken part of this letter. “We will run code that supports BIP101 in December” translates to, “If Bitcoin Core does not allow this upgrade, we will switch to XT.”
Some of the biggest miners at the time released a similar statement. In it, they not only expressed their support for larger blocks, they specifically refuted one argument that Bitcoin Core had been promoting—that 8MB would be too large for Chinese miners who were stuck behind the famous “Great Firewall of China.” Core had previously argued that 8MB would cause bandwidth and latency issues. But several large Chinese mining companies—representing more than 60% of Bitcoin’s total hashrate7—signed a letter stating they were ready for 8MB blocks.
Figure 5: Industry letter signed by Chinese miners
One translated section reads:
If the current network is incapable of supporting blocks larger than 1MB, then Core’s insistence on the block size limit is understandable. But actually, even with the Great Firewall in place, Chinese mining pools have all said they want an 8MB block size.8
With the widespread international agreement that the blocksize limit must be raised, the power and influence of Bitcoin Core looked like it was coming to an end.
Time to Fork Off
On August 15th 2015, Mike Hearn wrote another landmark article in Bitcoin’s history entitled “Why is Bitcoin Forking?” that explained why a split had to happen.9 The entire article is worth reading, and several excerpts are quoted here:
So this is it. Here we are. The community is divided and Bitcoin is forking: both the software and, perhaps, the block chain too. The two sides of the split are Bitcoin Core and a slight variant of the same program, called Bitcoin XT… Such a fork has never happened before. I want to explain things from the perspective of the Bitcoin XT developers: let it not be said there was insufficient communication…
Satoshi’s plan brought us all together… It’s the idea of ordinary people paying each other via a block chain that created and united this global community. That’s the vision I signed up for. That’s the vision Gavin Andresen signed up for. That’s the vision so many developers and startup founders and evangelists and users around the world signed up for. That vision is now in jeopardy.
In recent months it’s become clear that a small group of people have a radically different plan for Bitcoin… They see a golden, one-time opportunity to forcibly divert Bitcoin from its intended path and onto a wildly different technical trajectory.
He then explained that, given the enormous difference between the competing visions, the most sensible resolution would for small blockers to create their own alternative coin rather than hijack Bitcoin by exploiting what he called a “temporary kludge”—i.e. the blocksize limit. However, it was clear that the small block faction would not leave to create their own independent project, nor would they compromise by even slightly increasing the limit. Hearn saw this as evidence of structural flaws within Bitcoin Core:
Our community stands at a crossroads… After lengthy conversations with core developers, miners, our own technical teams, and other industry participants, we believe it is imperative that we plan for success by raising the maximum block size.
We support the implementation of BIP101. We have found Gavin’s arguments on both the need for larger blocks and the feasibility of their implementation — while safeguarding Bitcoin’s decentralization to be convincing. BIP101 and 8MB blocks are already supported by a majority of the miners and we feel it is time for the industry to unite behind this proposal.
Our companies will be ready for larger blocks by December 2015 and we will run code that supports this… We pledge to support BIP101 in our software and systems by December 2015, and we encourage others to join us.6
BitcoinXT is the unspoken part of this letter. “We will run code that supports BIP101 in December” translates to, “If Bitcoin Core does not allow this upgrade, we will switch to XT.”
Some of the biggest miners at the time released a similar statement. In it, they not only expressed their support for larger blocks, they specifically refuted one argument that Bitcoin Core had been promoting—that 8MB would be too large for Chinese miners who were stuck behind the famous “Great Firewall of China.” Core had previously argued that 8MB would cause bandwidth and latency issues. But several large Chinese mining companies—representing more than 60% of Bitcoin’s total hashrate7—signed a letter stating they were ready for 8MB blocks.
Figure 5: Industry letter signed by Chinese miners
One translated section reads:
If the current network is incapable of supporting blocks larger than 1MB, then Core’s insistence on the block size limit is understandable. But actually, even with the Great Firewall in place, Chinese mining pools have all said they want an 8MB block size.8
With the widespread international agreement that the blocksize limit must be raised, the power and influence of Bitcoin Core looked like it was coming to an end.
Time to Fork Off
On August 15th 2015, Mike Hearn wrote another landmark article in Bitcoin’s history entitled “Why is Bitcoin Forking?” that explained why a split had to happen.9 The entire article is worth reading, and several excerpts are quoted here:
So this is it. Here we are. The community is divided and Bitcoin is forking: both the software and, perhaps, the block chain too. The two sides of the split are Bitcoin Core and a slight variant of the same program, called Bitcoin XT… Such a fork has never happened before. I want to explain things from the perspective of the Bitcoin XT developers: let it not be said there was insufficient communication…
Satoshi’s plan brought us all together… It’s the idea of ordinary people paying each other via a block chain that created and united this global community. That’s the vision I signed up for. That’s the vision Gavin Andresen signed up for. That’s the vision so many developers and startup founders and evangelists and users around the world signed up for. That vision is now in jeopardy.
In recent months it’s become clear that a small group of people have a radically different plan for Bitcoin… They see a golden, one-time opportunity to forcibly divert Bitcoin from its intended path and onto a wildly different technical trajectory.
He then explained that, given the enormous difference between the competing visions, the most sensible resolution would for small blockers to create their own alternative coin rather than hijack Bitcoin by exploiting what he called a “temporary kludge”—i.e. the blocksize limit. However, it was clear that the small block faction would not leave to create their own independent project, nor would they compromise by even slightly increasing the limit. Hearn saw this as evidence of structural flaws within Bitcoin Core:
The risk of a community fracture had to be compared to the risk of a network failure. If blocks became full, fees skyrocketed, and the network could not handle the transaction load—an unprecedented event at the time—the user experience would become torturous and unreliable, and it could permanently turn people off from Bitcoin. In 2015, the technology had still not become mainstream yet, and lots of people from the financial world were eager to see it fail. So, the blocksize limit had to be raised to avoid a crisis; the Core developers had to be fired, but the industry needed to wait until the right moment. In hindsight, now that we’ve seen multiple cases of network failure on BTC, it’s clear that the public can tolerate it—though perhaps because they have accepted the Core narrative and do not know better. Sky-high fees are certainly bad for BTC, but so far, they have not permanently destroyed its credibility.
Within Bitcoin development, there was a formal way to propose new changes to the software. Programmers would write “Bitcoin Improvement Proposals,” otherwise known as “BIPs.” BIPs ranged from trivial improvements to substantial changes. After a BIP was created, if there was any disagreement, a debate would ensue to figure out whether the proposal should be accepted or rejected. Various BIPs had previously been created to allow for blocksize increases. Some were modest increases; others were radical increases. None were accepted into Bitcoin Core.
Mike Hearn and others would create BIP101, proposing an immediate increase of the blocksize limit to 8mb, followed by tiny increases every block, resulting in a doubling of the limit every two years up to a new maximum size of 8GB by 2035—allowing for approximating 40,000 transactions per second (which was several times larger than Visa’s throughput at the time). Hearn would later reflect on the proposal:
In August 2015 it became clear that due to severe mismanagement, the “Bitcoin Core” project that maintains the program that runs the peer-to-peer network wasn’t going to release a version that raised the block size limit… So some long-term developers (including me) got together and developed the necessary code to raise the limit. That code was called BIP 101 and we released it in a modified version of the software that we branded Bitcoin XT. By running XT, miners could cast a vote for changing the limit. Once 75% of blocks were voting for the change the rules would be adjusted and bigger blocks would be allowed.4
The upgrade mechanism was simple and straightforward. Miners running BitcoinXT could cast a vote, and if a supermajority of the hashrate voted in favor of BIP101, then it would be activated after a two-week grace period. BIP101 was considered a “hard fork” upgrade because it would be incompatible with previous versions of the software—as opposed to a “soft fork” which maintains compatibility. Because of the way Satoshi hastily added the blocksize limit, it would take a hard fork to increase it. The Core developers would make loud protestations at the notion of a hard fork, claiming it could cause a network failure or split. In fact, many of them claimed it would be less risky to change the entire economics of Bitcoin than to have a hard fork. Pieter Wuille from Bitcoin Core stated:
If we are willing to go through the risk of a hard fork because of a fear of change of economics, then I believe [the Bitcoin] community is not ready to deal with change at all.5
In hindsight, the drama surrounding hard forks looks overblown. Nearly every cryptocurrency project undergoes hard forks, because they are an essential mechanism for upgrading critical code, fixing bugs, and reducing technical baggage. Ethereum regularly undergoes hard forks. Bitcoin Cash has undergone several since its release. But back in 2015, this precedent was not yet established, and Core was able to stoke fears that a hard fork could break the network. In reality, even if there was a software bug in the upgrade and the network was disrupted, it would simply be fixed, as other critical bugs have been in the past. The risks of disruption are negligible compared to the risks of overhauling the entire system—akin to taking chemotherapy to protect yourself from a common cold!
In my opinion, the real reason for the fear surrounding BIP101 was because it would have resulted in Bitcoin Core losing control over development and no longer holding the keys to the code repository online. Since XT would add BIP101, and Core would not, the two implementations would become incompatible with each other on the protocol level, resulting in the minority implementation being “forked off” the main network. Though this would be devastating for Core and their supporters, by requiring 75% of miners to support the change, it would ensure minimal disruption for regular users. The remaining miners would either have to upgrade their software to allow for larger blocks or create their own separate blockchain.
Within Bitcoin development, there was a formal way to propose new changes to the software. Programmers would write “Bitcoin Improvement Proposals,” otherwise known as “BIPs.” BIPs ranged from trivial improvements to substantial changes. After a BIP was created, if there was any disagreement, a debate would ensue to figure out whether the proposal should be accepted or rejected. Various BIPs had previously been created to allow for blocksize increases. Some were modest increases; others were radical increases. None were accepted into Bitcoin Core.
Mike Hearn and others would create BIP101, proposing an immediate increase of the blocksize limit to 8mb, followed by tiny increases every block, resulting in a doubling of the limit every two years up to a new maximum size of 8GB by 2035—allowing for approximating 40,000 transactions per second (which was several times larger than Visa’s throughput at the time). Hearn would later reflect on the proposal:
In August 2015 it became clear that due to severe mismanagement, the “Bitcoin Core” project that maintains the program that runs the peer-to-peer network wasn’t going to release a version that raised the block size limit… So some long-term developers (including me) got together and developed the necessary code to raise the limit. That code was called BIP 101 and we released it in a modified version of the software that we branded Bitcoin XT. By running XT, miners could cast a vote for changing the limit. Once 75% of blocks were voting for the change the rules would be adjusted and bigger blocks would be allowed.4
The upgrade mechanism was simple and straightforward. Miners running BitcoinXT could cast a vote, and if a supermajority of the hashrate voted in favor of BIP101, then it would be activated after a two-week grace period. BIP101 was considered a “hard fork” upgrade because it would be incompatible with previous versions of the software—as opposed to a “soft fork” which maintains compatibility. Because of the way Satoshi hastily added the blocksize limit, it would take a hard fork to increase it. The Core developers would make loud protestations at the notion of a hard fork, claiming it could cause a network failure or split. In fact, many of them claimed it would be less risky to change the entire economics of Bitcoin than to have a hard fork. Pieter Wuille from Bitcoin Core stated:
If we are willing to go through the risk of a hard fork because of a fear of change of economics, then I believe [the Bitcoin] community is not ready to deal with change at all.5
In hindsight, the drama surrounding hard forks looks overblown. Nearly every cryptocurrency project undergoes hard forks, because they are an essential mechanism for upgrading critical code, fixing bugs, and reducing technical baggage. Ethereum regularly undergoes hard forks. Bitcoin Cash has undergone several since its release. But back in 2015, this precedent was not yet established, and Core was able to stoke fears that a hard fork could break the network. In reality, even if there was a software bug in the upgrade and the network was disrupted, it would simply be fixed, as other critical bugs have been in the past. The risks of disruption are negligible compared to the risks of overhauling the entire system—akin to taking chemotherapy to protect yourself from a common cold!
In my opinion, the real reason for the fear surrounding BIP101 was because it would have resulted in Bitcoin Core losing control over development and no longer holding the keys to the code repository online. Since XT would add BIP101, and Core would not, the two implementations would become incompatible with each other on the protocol level, resulting in the minority implementation being “forked off” the main network. Though this would be devastating for Core and their supporters, by requiring 75% of miners to support the change, it would ensure minimal disruption for regular users. The remaining miners would either have to upgrade their software to allow for larger blocks or create their own separate blockchain.
I think the maximum block size must be increased for the same reason the limit of 21 million coins must NEVER be increased: because people were told that the system would scale up to handle lots of transactions, just as they were told that there will only ever be 21 million bitcoins.17
Only a few months after this post was written, it became unmistakably clear that the Core developers were not going to raise the blocksize limit. If big-block Bitcoin was going to exist as Satoshi designed it, Hearn and Andresen would have to take matters into their own hands.
15
Fighting Back
Endless debates did not work. Bitcoin was not scaling, and small blockers were not interested in compromise. In May 2015, Core developer Matt Corallo wrote:
Personally, I’m rather strongly against any commitment to a block size increase in the near future. Long-term incentive compatibility requires that there be some fee pressure, and that blocks be relatively consistently full or very nearly full. What we see today are transactions enjoying next-block confirmations with nearly zero pressure to include any fee at all…1
So, later that year, it was resolved that the Core developers had to be routed around. A different software implementation would have to be created, and if a majority of hashpower switched to it, the network would successfully bypass Core altogether. Since the long-term goal was always to have competing implementations, the intransigence of Core provided a great reason to start the competition—a decision that would permanently change Bitcoin’s history.
BitcoinXT and BIP101
Mike Hearn and Gavin Andresen had previously created an alternative implementation called BitcoinXT to make some non-critical changes to the software. BitcoinXT was still compatible with Bitcoin Core—they both connected users to the same network—but it allowed Hearn to work on another project called Lighthouse, which was a crowdsourcing platform that used Bitcoin as its currency. To get Lighthouse to work correctly, he needed minor changes made to the Core software, but since that proved nearly impossible, he just decided to make his own implementation instead. It was this alternative implementation that was chosen to be the big-block replacement of Bitcoin Core. The blocksize limit would be increased on BitcoinXT, making it incompatible with Core, and if a critical mass of miners used it, the network would be successfully upgraded, at long last, to allow for larger blocks. Satoshi described this upgrade mechanism in the whitepaper, stating:
[P]roof-of-work also solves the problem of determining representation in majority decision making… Proof-of-work is essentially one-CPU-one-vote. The majority decision is represented by the longest chain, which has the greatest proof-of-work effort invested in it…
[Miners] vote with their CPU power, expressing their acceptance of valid blocks by working on extending them and rejecting invalid blocks by refusing to work on them. Any needed rules and incentives can be enforced with this consensus mechanism.2
Not only would BitcoinXT upgrade the network from a technical perspective, it would also end Bitcoin Core’s dominance over the source code, making XT the main repository online. The bad decision-makers and broken decision-making process within Core would no longer matter. A journalist for the New Yorker asked Andresen about this in an interview:
I asked Andresen whether, if XT were to achieve full acceptance, he would then include all the earlier Bitcoin core devs in the new XT team. He replied that “[XT] will have a different set of developers. Part of the reason for forking is to have a clear decision-making process for the software development.3
Readers who are sympathetic to the original vision might be thinking to themselves, “It’s about time!”, but keep in mind that the decision to route around Bitcoin Core was an extremely difficult one to make. Nearly the entire cryptocurrency world, at that time, was unified within one Bitcoin community and network. In my many conversations with Bitcoin entrepreneurs, the frustration at Core was almost universal, but the desire to keep the network together was even stronger. If the situation got messy, it could fracture the community and economy.
Keep it Together
Only a few months after this post was written, it became unmistakably clear that the Core developers were not going to raise the blocksize limit. If big-block Bitcoin was going to exist as Satoshi designed it, Hearn and Andresen would have to take matters into their own hands.
15
Fighting Back
Endless debates did not work. Bitcoin was not scaling, and small blockers were not interested in compromise. In May 2015, Core developer Matt Corallo wrote:
Personally, I’m rather strongly against any commitment to a block size increase in the near future. Long-term incentive compatibility requires that there be some fee pressure, and that blocks be relatively consistently full or very nearly full. What we see today are transactions enjoying next-block confirmations with nearly zero pressure to include any fee at all…1
So, later that year, it was resolved that the Core developers had to be routed around. A different software implementation would have to be created, and if a majority of hashpower switched to it, the network would successfully bypass Core altogether. Since the long-term goal was always to have competing implementations, the intransigence of Core provided a great reason to start the competition—a decision that would permanently change Bitcoin’s history.
BitcoinXT and BIP101
Mike Hearn and Gavin Andresen had previously created an alternative implementation called BitcoinXT to make some non-critical changes to the software. BitcoinXT was still compatible with Bitcoin Core—they both connected users to the same network—but it allowed Hearn to work on another project called Lighthouse, which was a crowdsourcing platform that used Bitcoin as its currency. To get Lighthouse to work correctly, he needed minor changes made to the Core software, but since that proved nearly impossible, he just decided to make his own implementation instead. It was this alternative implementation that was chosen to be the big-block replacement of Bitcoin Core. The blocksize limit would be increased on BitcoinXT, making it incompatible with Core, and if a critical mass of miners used it, the network would be successfully upgraded, at long last, to allow for larger blocks. Satoshi described this upgrade mechanism in the whitepaper, stating:
[P]roof-of-work also solves the problem of determining representation in majority decision making… Proof-of-work is essentially one-CPU-one-vote. The majority decision is represented by the longest chain, which has the greatest proof-of-work effort invested in it…
[Miners] vote with their CPU power, expressing their acceptance of valid blocks by working on extending them and rejecting invalid blocks by refusing to work on them. Any needed rules and incentives can be enforced with this consensus mechanism.2
Not only would BitcoinXT upgrade the network from a technical perspective, it would also end Bitcoin Core’s dominance over the source code, making XT the main repository online. The bad decision-makers and broken decision-making process within Core would no longer matter. A journalist for the New Yorker asked Andresen about this in an interview:
I asked Andresen whether, if XT were to achieve full acceptance, he would then include all the earlier Bitcoin core devs in the new XT team. He replied that “[XT] will have a different set of developers. Part of the reason for forking is to have a clear decision-making process for the software development.3
Readers who are sympathetic to the original vision might be thinking to themselves, “It’s about time!”, but keep in mind that the decision to route around Bitcoin Core was an extremely difficult one to make. Nearly the entire cryptocurrency world, at that time, was unified within one Bitcoin community and network. In my many conversations with Bitcoin entrepreneurs, the frustration at Core was almost universal, but the desire to keep the network together was even stronger. If the situation got messy, it could fracture the community and economy.
Keep it Together
Despite their words, their actions were stalling Bitcoin’s growth at a critical time, and eventually, their small-block philosophy became even more radical. Bitcoiners everywhere were becoming impatient by 2013, louder by 2014, and were completely fed up in 2015. Nobody captured this sentiment better than Mike Hearn, in a public email thread with Greg Maxwell. Hearn started the email by quoting Maxwell, who was trying to argue that tiny blocks were always the plan from the beginning:
“It was well... understood that the users of Bitcoin would wish to protect its decenteralization [sic] by limiting the size of the chain to keep it verifyable [sic] on small devices.”
No it wasn’t. That is something you invented yourself much later. “Small devices” isn’t even defined anywhere, so there can’t have been any such understanding. The actual understanding was the opposite… Please don’t attempt to bullshit me about what the plan was…
If Satoshi had said from the start, “Bitcoin cannot ever scale. So I intend it to be heavily limited and used only by a handful of people for rare transactions. I picked 1mb as an arbitrary limit to ensure it never gets popular.”
... then I’d have not bothered getting involved. I’d have said, huh, I don’t really feel like putting effort into a system that is intended to NOT be popular. And so would many other people…
He finished the email by suggesting Maxwell create his own altcoin rather than hijack and re-engineer Bitcoin to fit his personal preferences:
Look, it’s clear you have decided that the way Bitcoin was meant to evolve isn’t to your personal liking. That’s fine. Go make an alt coin where your founding documents state that it’s intended to always run on a 2015 Raspberry Pi, or whatever it is you mean by “small device”. Remove SPV capability from the protocol so everyone has to fully validate. Make sure that’s the understanding that everyone has from day one about what your alt coin is for.
Then when someone says, gee, it’d be nice if we had some more capacity, you or someone else can go point at the announcement emails and say “no, GregCoin is meant to always be verifiable on small devices, that’s our social contract and it’s written into the consensus rules for that reason”.
But your attempt to convert Bitcoin into that altcoin by exploiting a temporary hack is desperate, and deeply upsetting to many people. Not many quit their jobs and created companies to build products only for today’s tiny user base.15
Nobody put it better than Mike Hearn, then or now. Though he and Gavin Andresen shared a similar technical vision for Bitcoin, Hearn was clearly the more confrontational of the two. After seeing the failures of Bitcoin and what it’s turned into today, I think Hearn’s anger and frustration were justified, and he was certainly not alone.
“Our New Overlords”
Andreas Antonopoulos, who has since become a popular advocate for Bitcoin and cryptocurrencies, also expressed his frustration at the behavior of the Core developers—and Mr. Maxwell in particular—in the online forums, saying:
[Maxwell] has previously posted several misattributed quotes and then failed to retract them or apologize… Treat any quotes he posts with extreme suspicion, especially if they are selective, short, out-of-context and attempting to slander - ie, his usual schtick. He rationalizes his opinion as the only one that matters, [a] somehow “neutral” opinion that we’d all accept if we weren’t so dumb…
The only thing that mattered in this debate was the opinion of the 3-4 developers who did not want any process that… resulted in anything but what they had already decided. They twisted, turned and rationalized, but in the end did exactly what they intended from the beginning: censorship of particular opinions by exclusion and decree.
All hail our new overlords. They’re not just coders, they are press directors and OWN bitcoin. As they often say, if you don’t like it... fork.16
In late 2014, while Gavin Andresen was still working at the Bitcoin Foundation, he would write an article laying out a roadmap for scaling. After writing countless forum posts, blog posts, and email threads explaining why the blocksize limit needed to be raised, he concluded that it was finally time to move forward:
The next scaling problem that needs to be tackled is the hardcoded 1-megabyte block size limit that means the network can support only approximately 7-transactions-per-second… The intent has always been to raise that limit when transaction volume justified larger blocks…
“Because Satoshi Said So” isn’t a valid reason [by itself]. However, staying true to the original vision of Bitcoin is very important. That vision is what inspires people to invest their time, energy, and wealth in this new, risky technology.
“It was well... understood that the users of Bitcoin would wish to protect its decenteralization [sic] by limiting the size of the chain to keep it verifyable [sic] on small devices.”
No it wasn’t. That is something you invented yourself much later. “Small devices” isn’t even defined anywhere, so there can’t have been any such understanding. The actual understanding was the opposite… Please don’t attempt to bullshit me about what the plan was…
If Satoshi had said from the start, “Bitcoin cannot ever scale. So I intend it to be heavily limited and used only by a handful of people for rare transactions. I picked 1mb as an arbitrary limit to ensure it never gets popular.”
... then I’d have not bothered getting involved. I’d have said, huh, I don’t really feel like putting effort into a system that is intended to NOT be popular. And so would many other people…
He finished the email by suggesting Maxwell create his own altcoin rather than hijack and re-engineer Bitcoin to fit his personal preferences:
Look, it’s clear you have decided that the way Bitcoin was meant to evolve isn’t to your personal liking. That’s fine. Go make an alt coin where your founding documents state that it’s intended to always run on a 2015 Raspberry Pi, or whatever it is you mean by “small device”. Remove SPV capability from the protocol so everyone has to fully validate. Make sure that’s the understanding that everyone has from day one about what your alt coin is for.
Then when someone says, gee, it’d be nice if we had some more capacity, you or someone else can go point at the announcement emails and say “no, GregCoin is meant to always be verifiable on small devices, that’s our social contract and it’s written into the consensus rules for that reason”.
But your attempt to convert Bitcoin into that altcoin by exploiting a temporary hack is desperate, and deeply upsetting to many people. Not many quit their jobs and created companies to build products only for today’s tiny user base.15
Nobody put it better than Mike Hearn, then or now. Though he and Gavin Andresen shared a similar technical vision for Bitcoin, Hearn was clearly the more confrontational of the two. After seeing the failures of Bitcoin and what it’s turned into today, I think Hearn’s anger and frustration were justified, and he was certainly not alone.
“Our New Overlords”
Andreas Antonopoulos, who has since become a popular advocate for Bitcoin and cryptocurrencies, also expressed his frustration at the behavior of the Core developers—and Mr. Maxwell in particular—in the online forums, saying:
[Maxwell] has previously posted several misattributed quotes and then failed to retract them or apologize… Treat any quotes he posts with extreme suspicion, especially if they are selective, short, out-of-context and attempting to slander - ie, his usual schtick. He rationalizes his opinion as the only one that matters, [a] somehow “neutral” opinion that we’d all accept if we weren’t so dumb…
The only thing that mattered in this debate was the opinion of the 3-4 developers who did not want any process that… resulted in anything but what they had already decided. They twisted, turned and rationalized, but in the end did exactly what they intended from the beginning: censorship of particular opinions by exclusion and decree.
All hail our new overlords. They’re not just coders, they are press directors and OWN bitcoin. As they often say, if you don’t like it... fork.16
In late 2014, while Gavin Andresen was still working at the Bitcoin Foundation, he would write an article laying out a roadmap for scaling. After writing countless forum posts, blog posts, and email threads explaining why the blocksize limit needed to be raised, he concluded that it was finally time to move forward:
The next scaling problem that needs to be tackled is the hardcoded 1-megabyte block size limit that means the network can support only approximately 7-transactions-per-second… The intent has always been to raise that limit when transaction volume justified larger blocks…
“Because Satoshi Said So” isn’t a valid reason [by itself]. However, staying true to the original vision of Bitcoin is very important. That vision is what inspires people to invest their time, energy, and wealth in this new, risky technology.
By pushing people away from Bitcoin, the Core developers reinforced their position as a centralized power over the entire network. They could determine how much creative experimentation would be allowed. They could also determine which projects were possible or impossible depending on what features they added—which made any personal connections with the Core developers valuable. They also ended up setting the culture around Bitcoin’s development—which was often unnecessarily dramatic and hostile towards innovation. Regardless of whether they were permissive or strict, the important fact is that they had this influence in the first place.
The hostility of the Core developers towards creative usages of the blockchain is particularly ironic considering the popularity of the narrative that Bitcoin is “programmable money.” Revisiting the OP_RETURN feature less than a year later, Greg Maxwell would write:
I think OP_RETURN has shown itself to be seriously problematic; and we continue to have problems with people beleving [sic] that storing non-bitcoin related data in the chain… is an approved, correct, non-antisocial use of the system.10
In Maxwell’s vision, users are supposed to behave like members of a congregation, following a list of approved behaviors handed down by their superiors. This level of rigidity and control is not conducive to creativity, nor is it realistic for a network that, if allowed to scale, could comprise of billions of people. Individuals cannot be expected to know what the “approved” usage of a technology is; they will just use whatever functionality is helpful to them.
Entrepreneurs and creative professionals need assurance that the protocol they are building on will not suddenly break due to some developers changing their minds or deciding that a particular usage of the blockchain is unacceptable. In practice, the more constraints put on Bitcoin, the more users have been pushed to alternative systems that provide them with additional functionality. As Gavin Andresen speculated in 2014, this was perhaps an intended result:
There is a small minority of people who believe that it would be BETTER if transactions moved to fiat currency, an altcoin, or some more-centralized off-blockchain solution. I strongly disagree.11
Fortunately, when Bitcoin Cash was released, OP_RETURN was one of the first things upgraded and increased to 220 bytes. This additional space, when coupled with significantly bigger blocks, enables more creative usages of the blockchain than are feasible with BTC. Increased data usage is not a significant concern within the big-block philosophy, since regular users do not have to run their own nodes, and miners can easily discard this data. Everyone is encouraged to take advantage of this feature and find new uses for it, even if Greg Maxwell would not approve!
Low fees are also critical to the long-term success of programmable money. The attitude towards high fees has shifted today, but originally, even a five-cent transaction fee was considered laughably high. In a famous interview, Vitalik Buterin commented:
Right now, a Bitcoin transaction costs five cents, which is… fine right now, because PayPal’s fees are even stupider. But, you know, the internet of money should not cost five cents a transaction. [Laughter] It’s kind of absurd.12
Despite how high the fees are across the cryptocurrency industry, Buterin was right. It is kind of absurd and unnecessary to have fees of more than a cent for the vast majority of transactions. If the utility of programmable money is hampered by five cent fees, imagine how much it’s hampered by $50 fees. Stephen Pair of BitPay shared a similar opinion, commenting on Bitcoin’s competitiveness as a payment system: “A penny for an average on-chain transaction is probably too expensive to be competitive.”13 There’s no technical reason why that can’t be achieved. It already is on the Bitcoin Cash network.
A Core Loss of Faith
The controversy surrounding OP_RETURN and other minor features was nothing compared to the anger that resulted from the refusal to increase the blocksize limit—especially since key Core developers had previously agreed that raising the limit was necessary, even if they did not want it entirely removed. Pieter Wuille wrote in 2013:
I’m in favor of increasing the block size limit in a hard fork, but very much against removing the limit entirely… My suggestion would be a one-time increase to perhaps 10 MiB or 100 MiB blocks (to be debated), and after that an at-most slow exponential further growth.14
The hostility of the Core developers towards creative usages of the blockchain is particularly ironic considering the popularity of the narrative that Bitcoin is “programmable money.” Revisiting the OP_RETURN feature less than a year later, Greg Maxwell would write:
I think OP_RETURN has shown itself to be seriously problematic; and we continue to have problems with people beleving [sic] that storing non-bitcoin related data in the chain… is an approved, correct, non-antisocial use of the system.10
In Maxwell’s vision, users are supposed to behave like members of a congregation, following a list of approved behaviors handed down by their superiors. This level of rigidity and control is not conducive to creativity, nor is it realistic for a network that, if allowed to scale, could comprise of billions of people. Individuals cannot be expected to know what the “approved” usage of a technology is; they will just use whatever functionality is helpful to them.
Entrepreneurs and creative professionals need assurance that the protocol they are building on will not suddenly break due to some developers changing their minds or deciding that a particular usage of the blockchain is unacceptable. In practice, the more constraints put on Bitcoin, the more users have been pushed to alternative systems that provide them with additional functionality. As Gavin Andresen speculated in 2014, this was perhaps an intended result:
There is a small minority of people who believe that it would be BETTER if transactions moved to fiat currency, an altcoin, or some more-centralized off-blockchain solution. I strongly disagree.11
Fortunately, when Bitcoin Cash was released, OP_RETURN was one of the first things upgraded and increased to 220 bytes. This additional space, when coupled with significantly bigger blocks, enables more creative usages of the blockchain than are feasible with BTC. Increased data usage is not a significant concern within the big-block philosophy, since regular users do not have to run their own nodes, and miners can easily discard this data. Everyone is encouraged to take advantage of this feature and find new uses for it, even if Greg Maxwell would not approve!
Low fees are also critical to the long-term success of programmable money. The attitude towards high fees has shifted today, but originally, even a five-cent transaction fee was considered laughably high. In a famous interview, Vitalik Buterin commented:
Right now, a Bitcoin transaction costs five cents, which is… fine right now, because PayPal’s fees are even stupider. But, you know, the internet of money should not cost five cents a transaction. [Laughter] It’s kind of absurd.12
Despite how high the fees are across the cryptocurrency industry, Buterin was right. It is kind of absurd and unnecessary to have fees of more than a cent for the vast majority of transactions. If the utility of programmable money is hampered by five cent fees, imagine how much it’s hampered by $50 fees. Stephen Pair of BitPay shared a similar opinion, commenting on Bitcoin’s competitiveness as a payment system: “A penny for an average on-chain transaction is probably too expensive to be competitive.”13 There’s no technical reason why that can’t be achieved. It already is on the Bitcoin Cash network.
A Core Loss of Faith
The controversy surrounding OP_RETURN and other minor features was nothing compared to the anger that resulted from the refusal to increase the blocksize limit—especially since key Core developers had previously agreed that raising the limit was necessary, even if they did not want it entirely removed. Pieter Wuille wrote in 2013:
I’m in favor of increasing the block size limit in a hard fork, but very much against removing the limit entirely… My suggestion would be a one-time increase to perhaps 10 MiB or 100 MiB blocks (to be debated), and after that an at-most slow exponential further growth.14
The blocksize limit was not the only area in which the Core developers asserted their power. Another great example was the notion of so-called “spam transactions” and the utilization of Bitcoin for smart contracts. Though it’s been stripped out of the BTC software and nearly forgotten about today, Bitcoin was originally designed to handle smart contracts—the sorts of complex computations that Ethereum is known for. The smart contracting system in Bitcoin was clunkier than more recent cryptocurrencies, but it still had broad functionality, much of which has been reactivated on Bitcoin Cash.
The Core developers not only destroyed Bitcoin’s utility as digital cash, they also stripped out basic functionality from the original technology itself. Why would they do that? For the same reason they refused to increase the blocksize limit: it did not fit their new vision for Bitcoin. They did not like Satoshi’s vision, so they created their own where the blockchain is only used for high-value transactions. Everything else, whether small payments or smart contracts, is at risk of being designated as “spam” and restricted by the Core developers. The Counterparty team found this out the hard way.
Counterparty was one of the first groups to take advantage of Bitcoin’s broader technical functionality. They effectively built a decentralized, digital asset register on top of Bitcoin. Users could mint and trade their own tokens directly on top of the base layer. The technical details of how they accomplished this are not relevant, except for one particular feature. Since Bitcoin’s beginning, users have been able to add bits of data to the blockchain, allowing it to handle more than simple monetary transactions. The Counterparty developers, among others, used this feature to build their products. Unfortunately for them, the Core developers were aggravated by people using the technology this way, because they thought it “bloated” the size of the blockchain. However, because it’s impossible to completely prevent users from doing this, the Core developers decided to make an explicit feature to add small amounts of data to the blockchain in the least disagreeable way possible, which they called the “OP_RETURN” function.
When OP_RETURN was originally announced, it was supposed to allow for 80 bytes of data to be added to transactions—which could then be easily discarded by miners and nodes. Working with this 80-byte number, the Counterparty developers would build out a new version of their platform. However, when OP_RETURN was finally released, its size was cut in half, effectively crippling the projects that were being built for 80 bytes3. This sparked a heated controversy and debate among the public, the Core developers, and the Counterparty developers.4
The Core developers’ decision left a bad taste in many people’s mouths and was considered anti-innovative. It was noticed by none other than Vitalik Buterin, who credited the controversy as one of the reasons he created Ethereum on an entirely separate blockchain instead of building on Bitcoin. He wrote:
The OP_RETURN drama preemptively pushed me toward building ethereum on Primecoin instead of Bitcoin. The primecoin plan was scrapped because we ended up getting more attention and resources than we expected, and so we could build our own base layer...5
And elsewhere he stated:
The very earliest versions of ETH protocol were a counterparty-style metacoin on top of primecoin. Not Bitcoin, because the OP_RETURN wars were happening at the time and given what certain core developers were saying… I was scared that protocol rules would change under me (eg. by banning certain ways to encode data in txs) to make it harder, and I did not want to build on a base protocol whose development team would be at war with me.6
Greg Maxwell would respond to Buterin, clearly upset at the claim that the behavior of the Core developers contributed to Buterin’s decision to leave Bitcoin. Maxwell said:
[C]an you show even a single piece of evidence supporting this? How would OP_RETURN have anything to do with ethereum, it does nothing by definition7
To which Buterin replied:
You don’t remember the OP_RETURN drama? The point is that I took things like the reduction to 40 bytes as an act of war against [Counterparty-style] meta-protocols using the bitcoin blockchain (which is what Ethereum would have been).8
Pushing Away Talent
Many of the key Counterparty developers, along with countless other creative minds, would eventually shift their focus from the Bitcoin blockchain to the Ethereum blockchain instead. Today, Ethereum is still known for having a culture and platform more open to innovation. Cryptocurrency entrepreneur Erik Voorhees would later write:
Unfortunately I think the [Bitcoin Maximalists] made Bitcoin pretty unwelcoming to experimentation and app developers, they all went to Ethereum, and the network effect now exists clearly there. I don’t think the Maxis care though, they have their gold 2.0 narrative, for better or worse.9
The Core developers not only destroyed Bitcoin’s utility as digital cash, they also stripped out basic functionality from the original technology itself. Why would they do that? For the same reason they refused to increase the blocksize limit: it did not fit their new vision for Bitcoin. They did not like Satoshi’s vision, so they created their own where the blockchain is only used for high-value transactions. Everything else, whether small payments or smart contracts, is at risk of being designated as “spam” and restricted by the Core developers. The Counterparty team found this out the hard way.
Counterparty was one of the first groups to take advantage of Bitcoin’s broader technical functionality. They effectively built a decentralized, digital asset register on top of Bitcoin. Users could mint and trade their own tokens directly on top of the base layer. The technical details of how they accomplished this are not relevant, except for one particular feature. Since Bitcoin’s beginning, users have been able to add bits of data to the blockchain, allowing it to handle more than simple monetary transactions. The Counterparty developers, among others, used this feature to build their products. Unfortunately for them, the Core developers were aggravated by people using the technology this way, because they thought it “bloated” the size of the blockchain. However, because it’s impossible to completely prevent users from doing this, the Core developers decided to make an explicit feature to add small amounts of data to the blockchain in the least disagreeable way possible, which they called the “OP_RETURN” function.
When OP_RETURN was originally announced, it was supposed to allow for 80 bytes of data to be added to transactions—which could then be easily discarded by miners and nodes. Working with this 80-byte number, the Counterparty developers would build out a new version of their platform. However, when OP_RETURN was finally released, its size was cut in half, effectively crippling the projects that were being built for 80 bytes3. This sparked a heated controversy and debate among the public, the Core developers, and the Counterparty developers.4
The Core developers’ decision left a bad taste in many people’s mouths and was considered anti-innovative. It was noticed by none other than Vitalik Buterin, who credited the controversy as one of the reasons he created Ethereum on an entirely separate blockchain instead of building on Bitcoin. He wrote:
The OP_RETURN drama preemptively pushed me toward building ethereum on Primecoin instead of Bitcoin. The primecoin plan was scrapped because we ended up getting more attention and resources than we expected, and so we could build our own base layer...5
And elsewhere he stated:
The very earliest versions of ETH protocol were a counterparty-style metacoin on top of primecoin. Not Bitcoin, because the OP_RETURN wars were happening at the time and given what certain core developers were saying… I was scared that protocol rules would change under me (eg. by banning certain ways to encode data in txs) to make it harder, and I did not want to build on a base protocol whose development team would be at war with me.6
Greg Maxwell would respond to Buterin, clearly upset at the claim that the behavior of the Core developers contributed to Buterin’s decision to leave Bitcoin. Maxwell said:
[C]an you show even a single piece of evidence supporting this? How would OP_RETURN have anything to do with ethereum, it does nothing by definition7
To which Buterin replied:
You don’t remember the OP_RETURN drama? The point is that I took things like the reduction to 40 bytes as an act of war against [Counterparty-style] meta-protocols using the bitcoin blockchain (which is what Ethereum would have been).8
Pushing Away Talent
Many of the key Counterparty developers, along with countless other creative minds, would eventually shift their focus from the Bitcoin blockchain to the Ethereum blockchain instead. Today, Ethereum is still known for having a culture and platform more open to innovation. Cryptocurrency entrepreneur Erik Voorhees would later write:
Unfortunately I think the [Bitcoin Maximalists] made Bitcoin pretty unwelcoming to experimentation and app developers, they all went to Ethereum, and the network effect now exists clearly there. I don’t think the Maxis care though, they have their gold 2.0 narrative, for better or worse.9
Molyneux might have been prescient. Regardless of whether malice was involved, we can say with confidence that the Bitcoin of 2024 is far less threatening to existing powers than the Bitcoin of 2014. It is a cumbersome network that pushes users to secondary, controlled layers to have a better experience. Custodial wallets are also easy to control and inject the need for trusted third parties back into the system. In the big picture, Bitcoin’s re-design looks remarkably similar to the existing monetary system, where everyday users do not have ultimate control over their own funds and require companies to provide financial services for them. The benefits of this new system are primarily enjoyed by early adopters who benefitted from the enormous price appreciation.
From the perspective of the original design and purpose of Bitcoin, Blockstream’s influence over the protocol has been disastrous. BTC looks nothing like the original Bitcoin, and it’s unlikely to in the future. Fortunately, Blockstream does not have a monopoly over all cryptocurrency development, and Bitcoin Cash developers successfully routed around them in 2017—though the process was not easy and involved an enormous amount of pain and drama.
14
Centralizing Control
The centralization of control over Bitcoin’s software did not happen overnight. It took a few years, and during that time, dissenting views were common. Criticisms of Bitcoin Core and Blockstream were everywhere, especially after Gavin Andresen stepped down as the Lead Maintainer of Core. In hindsight, while it seems clear that Bitcoin’s development was compromised, the process was unclear as it was happening. Outright accusations of development capture were less common, because most of the important actors in the industry were desperately trying to keep the network together. Also, since Blockstream’s business model was not revealed until a few years after its creation, the glaring conflicts of interest could only be speculated about. Though, the curious absence of a clear business model was noticed immediately in a Wall Street Journal article about the company’s investors in 2014:
Blockstream has no clear roadmap on how it will turn an open-source software engineering project into a corporate money-maker. Instead, investors took a leap of faith, mostly based on the reputations of the company’s co-founders… [T]he indeterminate nature of Blockstream’s business model made it a complicated investment for many venture capitalists, who typically must justify returns to their investors.
The manager of one fund said he turned down the pitch because he couldn’t invest in such a vague plan. Mr. Hoffman said he invested via his personal not-for-profit foundation… because he felt strongly that Blockstream’s first funding round “had to be invested in the development of the bitcoin ecosystem and not have, as its primary focus, economic returns…”
[S]ome commentators have worried that a private company with such intellectual clout could have undue influence in a bitcoin network that’s supposed to be community-owned and decentralized. [Co-founder Austin Hill] said that’s why it was paramount that Blockstream was set up in a transparent way, as “a public utility, and not a way to hijack bitcoin.”1
Regardless of Austin Hill’s personal intent, Blockstream ultimately did turn into a way to hijack Bitcoin. Hindsight provides us with 20/20 vision, but when reconstructing Bitcoin’s history, it’s important to be aware of the lack of clarity at the time. It took years before the Liquid Network was openly promoted as an alternative to the Bitcoin blockchain—a smart strategy by Blockstream, since if they immediately advertised their proprietary network as a scaling solution, they would have been met with laughter and overwhelming resistance.
Instead, Bitcoin Core and Blockstream’s centralization of power was somewhat slow and methodical. They took advantage of small opportunities to give themselves more control over the network. They took advantage of Van der Laan’s weak leadership and desire to avoid controversy. Perhaps most importantly, they leveraged the idea of “developer consensus” to effectively give themselves veto power over the software—even if their veto radically changed the structure and economics of the entire system. Jeff Garzik warned about this in a public email about their refusal to increase the blocksize limit, saying:
This is an extreme moral hazard: A few Bitcoin Core committers can veto [an] increase and thereby reshape bitcoin economics, price some businesses out of the system. It is less of a moral hazard to keep the current economics (by raising block size) and not exercise such power.2
Programmable Money or Spam?
From the perspective of the original design and purpose of Bitcoin, Blockstream’s influence over the protocol has been disastrous. BTC looks nothing like the original Bitcoin, and it’s unlikely to in the future. Fortunately, Blockstream does not have a monopoly over all cryptocurrency development, and Bitcoin Cash developers successfully routed around them in 2017—though the process was not easy and involved an enormous amount of pain and drama.
14
Centralizing Control
The centralization of control over Bitcoin’s software did not happen overnight. It took a few years, and during that time, dissenting views were common. Criticisms of Bitcoin Core and Blockstream were everywhere, especially after Gavin Andresen stepped down as the Lead Maintainer of Core. In hindsight, while it seems clear that Bitcoin’s development was compromised, the process was unclear as it was happening. Outright accusations of development capture were less common, because most of the important actors in the industry were desperately trying to keep the network together. Also, since Blockstream’s business model was not revealed until a few years after its creation, the glaring conflicts of interest could only be speculated about. Though, the curious absence of a clear business model was noticed immediately in a Wall Street Journal article about the company’s investors in 2014:
Blockstream has no clear roadmap on how it will turn an open-source software engineering project into a corporate money-maker. Instead, investors took a leap of faith, mostly based on the reputations of the company’s co-founders… [T]he indeterminate nature of Blockstream’s business model made it a complicated investment for many venture capitalists, who typically must justify returns to their investors.
The manager of one fund said he turned down the pitch because he couldn’t invest in such a vague plan. Mr. Hoffman said he invested via his personal not-for-profit foundation… because he felt strongly that Blockstream’s first funding round “had to be invested in the development of the bitcoin ecosystem and not have, as its primary focus, economic returns…”
[S]ome commentators have worried that a private company with such intellectual clout could have undue influence in a bitcoin network that’s supposed to be community-owned and decentralized. [Co-founder Austin Hill] said that’s why it was paramount that Blockstream was set up in a transparent way, as “a public utility, and not a way to hijack bitcoin.”1
Regardless of Austin Hill’s personal intent, Blockstream ultimately did turn into a way to hijack Bitcoin. Hindsight provides us with 20/20 vision, but when reconstructing Bitcoin’s history, it’s important to be aware of the lack of clarity at the time. It took years before the Liquid Network was openly promoted as an alternative to the Bitcoin blockchain—a smart strategy by Blockstream, since if they immediately advertised their proprietary network as a scaling solution, they would have been met with laughter and overwhelming resistance.
Instead, Bitcoin Core and Blockstream’s centralization of power was somewhat slow and methodical. They took advantage of small opportunities to give themselves more control over the network. They took advantage of Van der Laan’s weak leadership and desire to avoid controversy. Perhaps most importantly, they leveraged the idea of “developer consensus” to effectively give themselves veto power over the software—even if their veto radically changed the structure and economics of the entire system. Jeff Garzik warned about this in a public email about their refusal to increase the blocksize limit, saying:
This is an extreme moral hazard: A few Bitcoin Core committers can veto [an] increase and thereby reshape bitcoin economics, price some businesses out of the system. It is less of a moral hazard to keep the current economics (by raising block size) and not exercise such power.2
Programmable Money or Spam?
As if the mysterious John Dillon wasn’t enough fodder for conspiracy theories, Bitcoin’s history also includes a real connection to the Bilderberg group. For decades, the Bilderberg group has been controversial, due to its highly secretive meetings and their attendance by some of the most powerful people in the world—a who’s-who of elites from across political, financial, academic, and media industries. The organization has been operating since the 1950s and includes far too many powerful attendees to name, ranging from heads of state like Tony Blair and Bill Clinton, to European royalty like the kings of Belgium, Norway, and Spain, business magnates like Bill Gates and Jeff Bezos, and a long list of CEOs and founders of large companies, banks, and news outlets across the world.19 Naturally, when a large number of powerful people get together and hold secretive meetings, conspiracy theories are inevitable, whether or not they are justified. We know from history that some conspiracies are real, and it’s naive to think meetings like this are not influencing world affairs to some extent—that’s why they hold them in the first place! Their real-world impact is unknown, but it is definitely greater than zero.
Ultimately, it is impossible to know the significance of these connections. It could be a delightful coincidence that Blockstream was funded by a venture capital firm whose parent company is one of the largest financial companies in the world, whose CEO is the chairman of the Bilderberg group. I truly do not know, but at the very least, the connection is too intriguing not to mention here and is another part of Bitcoin’s colorful history.
Researchers have tried to follow the money flowing into Blockstream over the years, and while there are plenty of interesting connections and possible conflicts of interest, nothing is unambiguous. For example, the Digital Currency Group is another venture capital firm which has raised suspicions after investing in a huge range of cryptocurrency projects, Blockstream included. When the firm was created in 2015, their initial funding came from establishment financial companies, including MasterCard—a direct competitor of Bitcoin.20 Yet, there’s nothing definitive that links MasterCard to a nefarious plot to capture Bitcoin’s development. While they undoubtedly knew about Bitcoin’s potential for disruption, it’s impossible to know the intentions behind their investment. Perhaps they just wanted to ride the wave of cryptocurrency investment and innovation, or perhaps they wanted influence over the company with the most control over Bitcoin’s code. I can easily imagine both scenarios.
Blockstream’s largest fundraising round came in 2021, when it raised over $200 million in Series B funding, bringing its valuation to $3.2 billion.21 This enormous haul came several years after the capture of key Bitcoin Core developers, a significant loss of total market share of BTC, the Bitcoin Cash split in 2017, and multiple network failures which saw skyrocketing transaction fees and dramatically increased confirmation times. One interpretation, from a purely business perspective, is that investors believe Blockstream’s alternative network will generate significant revenue in the future by competing with the main BTC network for transactions. A less charitable interpretation is that Blockstream received a large payoff for crippling Bitcoin’s development at a critical time and fundamentally changing it to resemble the existing financial system. A few hundred million dollars is nothing compared to what the banks might lose if Bitcoin were running at its full potential.
Early Bitcoin adopter and internet personality Stefan Molyneux had this concern as early as 2014, when he predicted that existing financial and political interests would recognize Bitcoin as a threat and try to slowly capture it. He said:
It’s really important for people to understand how big the behemoth is that Bitcoin is facing. There will be efforts on the part of the financial-government complex to keep the technology at bay… [by saying] ‘Let’s not kill it outright, because it’s big enough now that people will see what we’ve done…’
Instead, what they’re going to try to do is throw little bits of sand in it until most people find it too cumbersome to use, and then say ‘Well, it was an interesting idea, but it didn’t quite work out the way people wanted.’ I think that is the great danger.22
Ultimately, it is impossible to know the significance of these connections. It could be a delightful coincidence that Blockstream was funded by a venture capital firm whose parent company is one of the largest financial companies in the world, whose CEO is the chairman of the Bilderberg group. I truly do not know, but at the very least, the connection is too intriguing not to mention here and is another part of Bitcoin’s colorful history.
Researchers have tried to follow the money flowing into Blockstream over the years, and while there are plenty of interesting connections and possible conflicts of interest, nothing is unambiguous. For example, the Digital Currency Group is another venture capital firm which has raised suspicions after investing in a huge range of cryptocurrency projects, Blockstream included. When the firm was created in 2015, their initial funding came from establishment financial companies, including MasterCard—a direct competitor of Bitcoin.20 Yet, there’s nothing definitive that links MasterCard to a nefarious plot to capture Bitcoin’s development. While they undoubtedly knew about Bitcoin’s potential for disruption, it’s impossible to know the intentions behind their investment. Perhaps they just wanted to ride the wave of cryptocurrency investment and innovation, or perhaps they wanted influence over the company with the most control over Bitcoin’s code. I can easily imagine both scenarios.
Blockstream’s largest fundraising round came in 2021, when it raised over $200 million in Series B funding, bringing its valuation to $3.2 billion.21 This enormous haul came several years after the capture of key Bitcoin Core developers, a significant loss of total market share of BTC, the Bitcoin Cash split in 2017, and multiple network failures which saw skyrocketing transaction fees and dramatically increased confirmation times. One interpretation, from a purely business perspective, is that investors believe Blockstream’s alternative network will generate significant revenue in the future by competing with the main BTC network for transactions. A less charitable interpretation is that Blockstream received a large payoff for crippling Bitcoin’s development at a critical time and fundamentally changing it to resemble the existing financial system. A few hundred million dollars is nothing compared to what the banks might lose if Bitcoin were running at its full potential.
Early Bitcoin adopter and internet personality Stefan Molyneux had this concern as early as 2014, when he predicted that existing financial and political interests would recognize Bitcoin as a threat and try to slowly capture it. He said:
It’s really important for people to understand how big the behemoth is that Bitcoin is facing. There will be efforts on the part of the financial-government complex to keep the technology at bay… [by saying] ‘Let’s not kill it outright, because it’s big enough now that people will see what we’ve done…’
Instead, what they’re going to try to do is throw little bits of sand in it until most people find it too cumbersome to use, and then say ‘Well, it was an interesting idea, but it didn’t quite work out the way people wanted.’ I think that is the great danger.22
Within the small-block vision, banks continue to play a critical role in the future financial system by being the primary entities that access the blockchain. So, it makes sense for Blockstream to position themselves as key players in that system, offering technical services, consultation, and their own proprietary network as an alternative to Bitcoin. This strategy has worked so far. Avanti recently announced they were entering the lucrative digital asset market by issuing tokens (“Avit”) that they claim will be redeemable for one US dollar, though not fully backed by dollars. A Coindesk article explains:
While Avit would not be pegged one-to-one to the U.S. dollar – because it’s a new digital asset, not a digital representation of a real-world asset – the currency would be 100% backed by a reserve of traditional U.S. assets.14
In other words, Avanti Bank will issue tokens that are redeemable for a dollar without actually being backed by dollars. The real assets backing their token will provide them with yield instead. While there is nothing inherently wrong with this business model, it’s another example of cryptocurrencies being assimilated into the traditional financial system without taking advantage of crypto’s unique properties. Bank tokens backed by “a reserve of traditional U.S. assets” are not inflation-proof, censorship-resistant, or disruptive to the status quo. Because they provide yield, they even come with risk of default. If the bank issuing the tokens goes bankrupt, users will end up losing money, once again demonstrating why currencies that do not require trusted third parties are so attractive.
Considering that the narrative surrounding Bitcoin is that it’s disruptive to the established financial industry, there is some irony in the fact that Blockstream is integrating with banks to help them issue digital dollars. In addition, they are even starting to integrate directly with governments and help them with fundraising. In El Salvador, Blockstream has helped to create a “Bitcoin Bond” to help the state raise a billion dollars, paying out an annual dividend to holders. Both the Bitcoin Bond and Avit Tokens will be built on the Liquid Network, diverting even more traffic from BTC to Blockstream’s sidechain.15
The conflict of interest between Bitcoin Core developers and Blockstream is easy to see. With such perverted incentives, it’s no surprise that Satoshi’s vision of cheap, peer-to-peer transactions on the base layer was abandoned; big blocks would kill their business model. By contrast, on Bitcoin Cash, anybody can create tokens and transact them on-chain with minimal fees. Sidechains and custodial wallets are not needed to scale, since the base layer can handle a much higher transaction throughput. Though, if desired, sidechains and custodial wallets still work with big blocks and would perform better.
Conspicuous Fundraising
The details of Blockstream’s multiple rounds of fundraising have not helped their image nor quelled the conspiracy theories surrounding the company. To date, they have raised around $300 million from investors. Nearly a third of a billion dollars is a substantial amount for any company to raise, but especially for one working on open-source software.
In early 2016, eyebrows were raised when Blockstream completed a $55 million round of Series A funding.16 One of the primary investors was a venture capital firm called AXA Strategic Ventures, a branch of the French multi-national firm AXA—the eleventh largest financial services company in the world according to Fortune Global 500.17 At the time, the CEO of AXA was Henri de Castries, a magnate of the international financial system. In a 2015 news article, The Guardian newspaper described De Castries as follows:
Henri de Castries might just be the most powerful man in the world. He is chief executive and chairman of one of the world’s biggest insurers, Axa, and a member of France’s illustrious noble house of Castries. But De Castries is also chairman of the Bilderberg group, a collection of political and business leaders from Europe and North America that meets in private every year to debate “megatrends and major issues facing the world” – or which is secretly running the world if you are a conspiracy theorist.18
While Avit would not be pegged one-to-one to the U.S. dollar – because it’s a new digital asset, not a digital representation of a real-world asset – the currency would be 100% backed by a reserve of traditional U.S. assets.14
In other words, Avanti Bank will issue tokens that are redeemable for a dollar without actually being backed by dollars. The real assets backing their token will provide them with yield instead. While there is nothing inherently wrong with this business model, it’s another example of cryptocurrencies being assimilated into the traditional financial system without taking advantage of crypto’s unique properties. Bank tokens backed by “a reserve of traditional U.S. assets” are not inflation-proof, censorship-resistant, or disruptive to the status quo. Because they provide yield, they even come with risk of default. If the bank issuing the tokens goes bankrupt, users will end up losing money, once again demonstrating why currencies that do not require trusted third parties are so attractive.
Considering that the narrative surrounding Bitcoin is that it’s disruptive to the established financial industry, there is some irony in the fact that Blockstream is integrating with banks to help them issue digital dollars. In addition, they are even starting to integrate directly with governments and help them with fundraising. In El Salvador, Blockstream has helped to create a “Bitcoin Bond” to help the state raise a billion dollars, paying out an annual dividend to holders. Both the Bitcoin Bond and Avit Tokens will be built on the Liquid Network, diverting even more traffic from BTC to Blockstream’s sidechain.15
The conflict of interest between Bitcoin Core developers and Blockstream is easy to see. With such perverted incentives, it’s no surprise that Satoshi’s vision of cheap, peer-to-peer transactions on the base layer was abandoned; big blocks would kill their business model. By contrast, on Bitcoin Cash, anybody can create tokens and transact them on-chain with minimal fees. Sidechains and custodial wallets are not needed to scale, since the base layer can handle a much higher transaction throughput. Though, if desired, sidechains and custodial wallets still work with big blocks and would perform better.
Conspicuous Fundraising
The details of Blockstream’s multiple rounds of fundraising have not helped their image nor quelled the conspiracy theories surrounding the company. To date, they have raised around $300 million from investors. Nearly a third of a billion dollars is a substantial amount for any company to raise, but especially for one working on open-source software.
In early 2016, eyebrows were raised when Blockstream completed a $55 million round of Series A funding.16 One of the primary investors was a venture capital firm called AXA Strategic Ventures, a branch of the French multi-national firm AXA—the eleventh largest financial services company in the world according to Fortune Global 500.17 At the time, the CEO of AXA was Henri de Castries, a magnate of the international financial system. In a 2015 news article, The Guardian newspaper described De Castries as follows:
Henri de Castries might just be the most powerful man in the world. He is chief executive and chairman of one of the world’s biggest insurers, Axa, and a member of France’s illustrious noble house of Castries. But De Castries is also chairman of the Bilderberg group, a collection of political and business leaders from Europe and North America that meets in private every year to debate “megatrends and major issues facing the world” – or which is secretly running the world if you are a conspiracy theorist.18
Let’s take an example to make the concept of sidechains clearer. Imagine a new blockchain designed for nanopayments of a millionth of a penny or less—smaller than even the original Bitcoin was designed for. Let’s call it “NanoBits” or “NBT.” Instead of being a totally isolated blockchain, NanoBits could have a sidechain integration with the Bitcoin blockchain, allowing users to lock up their Bitcoin in exchange for NBT. For example, by locking up 0.001 BTC, you could unlock a billion NBT. Then, if users want to trade their coins back to the BTC blockchain, they could swap the billion NBT back into BTC. If done correctly, this type of system would allow for more innovation, since the sidechains can operate with totally different rules, allowing different development teams to experiment without needing to persuade the entire community to add their changes. Plus, this innovation can occur without fear of breaking the main chain, since any new failures and flaws would be isolated to the sidechain. That’s how it might work in theory. In practice, it’s a different story.
The idea of sidechains has always appealed to me, and I have personally funded their development on BTC with the DriveChain project, led by Paul Sztorc. Like any software project, creating a working implementation has proven much more difficult than creating a nice-sounding idea.
Done correctly, sidechains should not require any trust in centralized authorities in order to work, which is what the DriveChain project is trying to do. Blockstream has released their version of a sidechain called the “Liquid Network,” but it works very differently. The Liquid Network is a “federated” sidechain, which is better understood as a centralized sidechain or even an altcoin. The basic security of their network requires trust in a small, hand-selected group they call the Liquid Federation. According to their website:
The Liquid Federation is a group of cryptocurrency businesses, including exchanges, trading desks, infrastructure companies, game developers, and more. The federation fulfills a number of tasks that are integral to the Liquid Network’s operation.10
There are currently only fifteen members of this federation, and if more than a third of them became dishonest, the security of the network would break and users could lose their money. Not only is the network centralized, but after swapping your BTC for Liquid tokens, you are no longer using the Bitcoin network. Instead, you are using Blockstream’s proprietary Liquid Network, and every single transaction fee goes to a wallet controlled by them.11 It’s a lucrative system. Liquid is a sidechain, which means transaction fees are not paid to Bitcoin miners; they are paid directly to Blockstream.
Why would somebody choose to swap their BTC for Liquid tokens? One reason is quite simple: the fees on BTC are too high! Adam Back, the CEO of Blockstream, has brazenly advertised his Liquid Network as a solution to the problem of high fees on the main network, saying on Twitter:
If you are actively trading and don’t like high fees, use exchanges with [Liquid] integration, or complain to an exchange that doesn’t. Pay 1-2c to clear in 2 min final, while others are paying 50c—$2.50 for 1hr+ transfer… Be part of the solution.12
To be clear, this is the CEO of Blockstream—the company that employed a majority of the most powerful Bitcoin Core developers during its most critical time period—directing people to his proprietary blockchain to “be part of the solution” to high fees and network congestion. Meanwhile, the BTC network only has poor performance because the Bitcoin Core developers refused to increase the blocksize limit in the first place. The conflict of interest is enormous. It certainly looks like Blockstream is selling a paid solution to problems they caused, and it’s not even clear whether the Liquid Network would have a reason to exist if Bitcoin had big blocks.
A Banker’s Dream
Capturing all the transaction fees from the Liquid Network is not the only way that Blockstream profits from it. They also charge a monthly fee to companies integrating Liquid and are releasing tokens on their network. In 2020, Blockstream announced that they had become technical partners with a new startup called Avanti, which is trying to be a cryptocurrency-friendly bank. According to their website:
Avanti is a new breed of bank — a software platform with a bank charter, built to connect digital assets with the legacy financial system. Our team is deeply experienced in both. We’re not just a bank — we’re a depository institution, which means we’re eligible to become a U.S. dollar clearing bank at the Federal Reserve.13
The idea of sidechains has always appealed to me, and I have personally funded their development on BTC with the DriveChain project, led by Paul Sztorc. Like any software project, creating a working implementation has proven much more difficult than creating a nice-sounding idea.
Done correctly, sidechains should not require any trust in centralized authorities in order to work, which is what the DriveChain project is trying to do. Blockstream has released their version of a sidechain called the “Liquid Network,” but it works very differently. The Liquid Network is a “federated” sidechain, which is better understood as a centralized sidechain or even an altcoin. The basic security of their network requires trust in a small, hand-selected group they call the Liquid Federation. According to their website:
The Liquid Federation is a group of cryptocurrency businesses, including exchanges, trading desks, infrastructure companies, game developers, and more. The federation fulfills a number of tasks that are integral to the Liquid Network’s operation.10
There are currently only fifteen members of this federation, and if more than a third of them became dishonest, the security of the network would break and users could lose their money. Not only is the network centralized, but after swapping your BTC for Liquid tokens, you are no longer using the Bitcoin network. Instead, you are using Blockstream’s proprietary Liquid Network, and every single transaction fee goes to a wallet controlled by them.11 It’s a lucrative system. Liquid is a sidechain, which means transaction fees are not paid to Bitcoin miners; they are paid directly to Blockstream.
Why would somebody choose to swap their BTC for Liquid tokens? One reason is quite simple: the fees on BTC are too high! Adam Back, the CEO of Blockstream, has brazenly advertised his Liquid Network as a solution to the problem of high fees on the main network, saying on Twitter:
If you are actively trading and don’t like high fees, use exchanges with [Liquid] integration, or complain to an exchange that doesn’t. Pay 1-2c to clear in 2 min final, while others are paying 50c—$2.50 for 1hr+ transfer… Be part of the solution.12
To be clear, this is the CEO of Blockstream—the company that employed a majority of the most powerful Bitcoin Core developers during its most critical time period—directing people to his proprietary blockchain to “be part of the solution” to high fees and network congestion. Meanwhile, the BTC network only has poor performance because the Bitcoin Core developers refused to increase the blocksize limit in the first place. The conflict of interest is enormous. It certainly looks like Blockstream is selling a paid solution to problems they caused, and it’s not even clear whether the Liquid Network would have a reason to exist if Bitcoin had big blocks.
A Banker’s Dream
Capturing all the transaction fees from the Liquid Network is not the only way that Blockstream profits from it. They also charge a monthly fee to companies integrating Liquid and are releasing tokens on their network. In 2020, Blockstream announced that they had become technical partners with a new startup called Avanti, which is trying to be a cryptocurrency-friendly bank. According to their website:
Avanti is a new breed of bank — a software platform with a bank charter, built to connect digital assets with the legacy financial system. Our team is deeply experienced in both. We’re not just a bank — we’re a depository institution, which means we’re eligible to become a U.S. dollar clearing bank at the Federal Reserve.13
Blockstream would end up being the most influential company in Bitcoin’s history. Its co-founders were Adam Back, Gregory Maxwell, Pieter Wuille, Matt Corallo, Mark Friedenbach, Jorge Timón, Austin Hill, Jonathan Wilkins, Francesca Hall, and Alex Fowler. Unlike the Bitcoin Foundation, Blockstream was founded as a for-profit company—a fact that made other Bitcoiners immediately curious about their business model. Greg Maxwell was asked about it during an “Ask Me Anything” session on Reddit and provided a handwavy answer:
[W]e believe there is a vacuum in the industry (not just Bitcoin, but computing in general) for cryptographically strong trustless technology… We think there is a tremendous business potential in building and supporting infrastructure in this space, some connected to Bitcoin and some not. E.g. by acting as a technology and services provider for other businesses in helping them migrate to a more Bitcoin-like way of doing business.
Right now our focus is on building out the base infrastructure so that there is actually a place to build the revenue producing business we’d like to have, and then we hope to circulate that back into building more good technology.6
Blockstream was successful in creating a revenue-producing business, but it turned out to be a serious conflict of interest. Instead of building out the base infrastructure, it crippled the base infrastructure and now offers paid solutions to the problems it created. The fact that Maxwell would be employed to work on critical infrastructure is ironic, given his admission that he previously thought the key technological mechanism used by Bitcoin was not even possible:
When bitcoin first came out, I was on the cryptography mailing list. When it happened, I sort of laughed. Because I had already proven that decentralized consensus was impossible.7
When Blockstream was initially formed and raised their first round of fundraising, I initially thought it was a good sign that more investors were discovering Bitcoin. But as time went on—and it was revealed that their biggest investors came from the establishment banking industry—I became more skeptical, along with countless other Bitcoiners. Now, in hindsight, I consider the founding of Blockstream the beginning of the Civil War era. Shortly after its formation, the culture shifted, disagreements turned hostile, and the most radical small-block position—which hardly anybody had taken seriously—became more vocal and aggressive. Blockstream engineers started to insist that Bitcoin could not scale the way it was originally designed, while censorship began in the online forums. The passivity of the lead developer Van der Laan, who wanted to avoid conflict, started to be exploited in favor of the status quo. The Core developers became adamant that “consensus” was needed among them in order to raise the blocksize limit, effectively giving them a complete veto over scaling the protocol.
Why would a group of developers form a company to take over a project and then prevent it from scaling? The answer turns out to be simple: their business model depends on Bitcoin not scaling its base layer. The less Bitcoin can do, the more Blockstream can do for a fee.
The Business Model
Blockstream raised suspicions soon after it was founded and has been the subject of innumerable conspiracy theories, some more plausible than others. For years, people have speculated that the bizarre behavior of the Core developers is best explained by a conflict of interest—if either Blockstream or their investors profit by throttling Bitcoin. But today, we no longer have to speculate, because they speak openly about it. In a Forbes interview, CEO Adam Back shared one part of their monetization strategy, saying, “Blockstream plans to sell sidechains to enterprises, charging a fixed monthly fee, taking transaction fees and even selling hardware.”8
What are “sidechains”? The company’s whitepaper explains the general idea:
We propose a new technology, pegged sidechains, which enables bitcoins and other ledger assets to be transferred between multiple blockchains. This gives users access to new and innovative cryptocurrency systems using the assets they already own. By reusing Bitcoin’s currency, these systems can more easily interoperate with each other and with Bitcoin, avoiding the liquidity shortages and market fluctuations associated with new currencies. Since sidechains are separate systems, technical and economic innovation is not hindered.9
In other words, sidechains are an attempt to link different blockchains together by connecting entries on one ledger with entries on another. It’s a neat idea, and in theory it could allow for more creative experimentation. Different rules and networks could operate on different ledgers but remain interoperable with Bitcoin. This is why sidechains have been proposed as an alternative method for scaling Bitcoin, since different projects can still be pegged to the Bitcoin blockchain without being directly built on top of it.
[W]e believe there is a vacuum in the industry (not just Bitcoin, but computing in general) for cryptographically strong trustless technology… We think there is a tremendous business potential in building and supporting infrastructure in this space, some connected to Bitcoin and some not. E.g. by acting as a technology and services provider for other businesses in helping them migrate to a more Bitcoin-like way of doing business.
Right now our focus is on building out the base infrastructure so that there is actually a place to build the revenue producing business we’d like to have, and then we hope to circulate that back into building more good technology.6
Blockstream was successful in creating a revenue-producing business, but it turned out to be a serious conflict of interest. Instead of building out the base infrastructure, it crippled the base infrastructure and now offers paid solutions to the problems it created. The fact that Maxwell would be employed to work on critical infrastructure is ironic, given his admission that he previously thought the key technological mechanism used by Bitcoin was not even possible:
When bitcoin first came out, I was on the cryptography mailing list. When it happened, I sort of laughed. Because I had already proven that decentralized consensus was impossible.7
When Blockstream was initially formed and raised their first round of fundraising, I initially thought it was a good sign that more investors were discovering Bitcoin. But as time went on—and it was revealed that their biggest investors came from the establishment banking industry—I became more skeptical, along with countless other Bitcoiners. Now, in hindsight, I consider the founding of Blockstream the beginning of the Civil War era. Shortly after its formation, the culture shifted, disagreements turned hostile, and the most radical small-block position—which hardly anybody had taken seriously—became more vocal and aggressive. Blockstream engineers started to insist that Bitcoin could not scale the way it was originally designed, while censorship began in the online forums. The passivity of the lead developer Van der Laan, who wanted to avoid conflict, started to be exploited in favor of the status quo. The Core developers became adamant that “consensus” was needed among them in order to raise the blocksize limit, effectively giving them a complete veto over scaling the protocol.
Why would a group of developers form a company to take over a project and then prevent it from scaling? The answer turns out to be simple: their business model depends on Bitcoin not scaling its base layer. The less Bitcoin can do, the more Blockstream can do for a fee.
The Business Model
Blockstream raised suspicions soon after it was founded and has been the subject of innumerable conspiracy theories, some more plausible than others. For years, people have speculated that the bizarre behavior of the Core developers is best explained by a conflict of interest—if either Blockstream or their investors profit by throttling Bitcoin. But today, we no longer have to speculate, because they speak openly about it. In a Forbes interview, CEO Adam Back shared one part of their monetization strategy, saying, “Blockstream plans to sell sidechains to enterprises, charging a fixed monthly fee, taking transaction fees and even selling hardware.”8
What are “sidechains”? The company’s whitepaper explains the general idea:
We propose a new technology, pegged sidechains, which enables bitcoins and other ledger assets to be transferred between multiple blockchains. This gives users access to new and innovative cryptocurrency systems using the assets they already own. By reusing Bitcoin’s currency, these systems can more easily interoperate with each other and with Bitcoin, avoiding the liquidity shortages and market fluctuations associated with new currencies. Since sidechains are separate systems, technical and economic innovation is not hindered.9
In other words, sidechains are an attempt to link different blockchains together by connecting entries on one ledger with entries on another. It’s a neat idea, and in theory it could allow for more creative experimentation. Different rules and networks could operate on different ledgers but remain interoperable with Bitcoin. This is why sidechains have been proposed as an alternative method for scaling Bitcoin, since different projects can still be pegged to the Bitcoin blockchain without being directly built on top of it.
Bitcoin development is yet another open-source project with an awkward business model. Given its world-changing importance, scale, and complexity, every setup that has been tried has caused controversy—for good reason, since the integrity of the entire system depends on the mechanism by which the developers get paid. Funding and governance go hand-in-hand, and potential conflicts of interest among developers are a critical threat, as the most straightforward way to corrupt a project is to corrupt its funding mechanism.
The Bitcoin Foundation
Unlike many of the development groups today, Bitcoin started out as a project among volunteers. As it grew in popularity, questions about compensation naturally arose. The earliest attempt to create a more formal organization around the maintenance of the software came in 2012, with the creation of the Bitcoin Foundation, which modeled itself on the Linux Foundation. The Bitcoin Foundation accepted donations from large companies and other interested parties. I myself donated to it and was a founding board member. Its most important goal was to provide funding for Gavin Andresen as the Chief Scientist and Lead Maintainer for Bitcoin Core. In an interview with The New Yorker, Andresen explained:
The Linux Foundation provides a bit of a center for Linux, and to pay the lead developer, Linus Torvalds, so that he can do nothing but concentrate on the kernel… It’s a tricky thing, once you get to be a certain size as an open-source project, how do you sustain yourself? Linux is the most successful open-source project in the world, so we thought it would make sense to use that as a model.1
Another goal of the Foundation was to improve the reputation of Bitcoin with regulators and the general public, since it was frequently smeared as a currency for criminals at that time. Andresen stepped down as Lead Maintainer in early 2014 to focus more on scientific research and duties with the Bitcoin Foundation. That April, he wrote:
A few years ago I created a Google Scholar alert for “bitcoin.” And I was happy if I got one alert per month. Today, I find it harder and harder to keep up with all of the great Computer Science or Economics papers related to bitcoin and other crypto-currencies; in just the last week Mr. Google told me about 30 new papers I might be interested in reading…
To be clear: I’m not going to disappear; I’ll still be writing and reviewing code and offering my opinions on technical matters and project priorities. I enjoy coding, and I think I’ll be most effective as Chief Scientist if I don’t lose touch with engineering reality and make the mistake of building huge, beautiful, theoretical castles that exist only as whitepapers.2
Unfortunately, Andresen did not have much time before the Foundation started to fall apart due to bad management, a lack of transparency, and a series of petty scandals. By the end of 2014, the organization was dysfunctional, with some board members getting into trouble with the law. In April 2015, it was announced that the Foundation was effectively bankrupt and would not be able to raise enough money to continue funding development.3 So later that month, Andresen joined a new project at MIT’s Digital Currency Initiative, where he would continue to develop Bitcoin along with two other Core coders, Wladimir van der Laan and Cory Fields.4
With the failure of the Bitcoin Foundation, and with Van der Laan as the Lead Maintainer, Bitcoin would slowly be transformed into a different project over the next three years. In a different world, if the Foundation had succeeded, it’s unclear whether this transformation could have ever happened. Reflecting on this question, Mike Hearn would later write:
One of the problems with cryptocurrency, philosophically, is that the commitment to decentralisation tended to be interpreted as (or spun as) a general rule against institutions and processes of any kind. Both me and Gavin were involved in setting up the Bitcoin Foundation early on, but it sputtered out. Partly due to being set up too fast and too many rum characters getting involved, but mostly because the pseudo-libertarians bent themselves towards the goal of wrecking it on the grounds that Bitcoin shouldn’t have a foundation or a formalised development process.
This left the community not with a decentralised utopia but rather with a vague, informal and cliquey development process driven by back channel dealing, manipulative attempts to define individual positions as “consensus” and the purchasing of developers. If the community had rallied around Gavin’s attempt to organise the community with a set of institutions, things might have worked out differently, as it’d have had greater built in resistance to being hijacked.5
While the failure of the Bitcoin Foundation was significant, the most important changes to the software development structure came in late 2014, when some Core developers formed their own company called Blockstream.
Blockstream is Founded
The Bitcoin Foundation
Unlike many of the development groups today, Bitcoin started out as a project among volunteers. As it grew in popularity, questions about compensation naturally arose. The earliest attempt to create a more formal organization around the maintenance of the software came in 2012, with the creation of the Bitcoin Foundation, which modeled itself on the Linux Foundation. The Bitcoin Foundation accepted donations from large companies and other interested parties. I myself donated to it and was a founding board member. Its most important goal was to provide funding for Gavin Andresen as the Chief Scientist and Lead Maintainer for Bitcoin Core. In an interview with The New Yorker, Andresen explained:
The Linux Foundation provides a bit of a center for Linux, and to pay the lead developer, Linus Torvalds, so that he can do nothing but concentrate on the kernel… It’s a tricky thing, once you get to be a certain size as an open-source project, how do you sustain yourself? Linux is the most successful open-source project in the world, so we thought it would make sense to use that as a model.1
Another goal of the Foundation was to improve the reputation of Bitcoin with regulators and the general public, since it was frequently smeared as a currency for criminals at that time. Andresen stepped down as Lead Maintainer in early 2014 to focus more on scientific research and duties with the Bitcoin Foundation. That April, he wrote:
A few years ago I created a Google Scholar alert for “bitcoin.” And I was happy if I got one alert per month. Today, I find it harder and harder to keep up with all of the great Computer Science or Economics papers related to bitcoin and other crypto-currencies; in just the last week Mr. Google told me about 30 new papers I might be interested in reading…
To be clear: I’m not going to disappear; I’ll still be writing and reviewing code and offering my opinions on technical matters and project priorities. I enjoy coding, and I think I’ll be most effective as Chief Scientist if I don’t lose touch with engineering reality and make the mistake of building huge, beautiful, theoretical castles that exist only as whitepapers.2
Unfortunately, Andresen did not have much time before the Foundation started to fall apart due to bad management, a lack of transparency, and a series of petty scandals. By the end of 2014, the organization was dysfunctional, with some board members getting into trouble with the law. In April 2015, it was announced that the Foundation was effectively bankrupt and would not be able to raise enough money to continue funding development.3 So later that month, Andresen joined a new project at MIT’s Digital Currency Initiative, where he would continue to develop Bitcoin along with two other Core coders, Wladimir van der Laan and Cory Fields.4
With the failure of the Bitcoin Foundation, and with Van der Laan as the Lead Maintainer, Bitcoin would slowly be transformed into a different project over the next three years. In a different world, if the Foundation had succeeded, it’s unclear whether this transformation could have ever happened. Reflecting on this question, Mike Hearn would later write:
One of the problems with cryptocurrency, philosophically, is that the commitment to decentralisation tended to be interpreted as (or spun as) a general rule against institutions and processes of any kind. Both me and Gavin were involved in setting up the Bitcoin Foundation early on, but it sputtered out. Partly due to being set up too fast and too many rum characters getting involved, but mostly because the pseudo-libertarians bent themselves towards the goal of wrecking it on the grounds that Bitcoin shouldn’t have a foundation or a formalised development process.
This left the community not with a decentralised utopia but rather with a vague, informal and cliquey development process driven by back channel dealing, manipulative attempts to define individual positions as “consensus” and the purchasing of developers. If the community had rallied around Gavin’s attempt to organise the community with a set of institutions, things might have worked out differently, as it’d have had greater built in resistance to being hijacked.5
While the failure of the Bitcoin Foundation was significant, the most important changes to the software development structure came in late 2014, when some Core developers formed their own company called Blockstream.
Blockstream is Founded
Dillon was not just any enthusiastic small-blocker. He was apparently having extensive conversations with some Core developers, and at one point, Gavin Andresen remarked, “I’ve started to suspect jdillon is a very sophisticated troll with the ulterior motive of destroying bitcoin.”16
Gavin’s suspicions might have been correct. In November 2013, Dillon was apparently hacked by some angry Bitcoiners, when his Bitcointalk account posted its own thread entitled, “‘John Dillon’ We can leak things too you trolling piece of shit.” The post contained a single link to an archive of private correspondence from Dillon, as well as conversations about him from other developers. The authenticity of the leak has not been disputed. Dillon appears to be coordinating with Todd and funding multiple projects that supported transforming Bitcoin into an expensive settlement system. Peter Todd himself was apparently aware that people had become suspicious of his connection to Dillon. In an IRC chat, Todd and Greg Maxwell wrote:
<petertodd> Everyone knows John and I “know” each other, if anything I’d like my PGP signature on his key to make the nature of that relationship understood.
<gmaxwell> (I think half the people think you and John are the same person. :P )
<petertodd> ha, I know, I’ll admit he kinda creeps me out a bit sometimes... he’s admitted he reads all my posts religiously.
But by far the most interesting exchange is an email between Dillon and Todd, in which Dillon claims to be involved with the intelligence community, saying:
Just so you know this stuff about Tor has me worried... Please don’t make this public, but my day job involves intelligence, and I’m in a relatively high position.
You know, I went into the job years ago with very different thoughts about it than I do now. The last, well, decade really has changed a lot of minds in this field, in totally different ways. Myself I am on the side of Snowden and Assange, but... lets just say when you have a family your willingness to be a martyr diminishes. The same is true of many of my colleagues.
Hopefully my support for Bitcoin can help undo some of the damage we’ve done, but I do have to be careful and it’s tough to take all the precautions I need to be able to communicate. If it was found out that I was involved with Bitcoin that way I have been, let’s just say there would be consequences…
To which Todd seems to respond concerned:
I mentioned your status to a friend of mine who is a former spook and well aware of the dangers of the business to anyone with a sense of ethics.
He told me to tell you this, word for word: “An old crow strongly advises you to consider the risks to yourself and your family, and stop what you are doing.” I trust his judgement, and just as importantly, his ethics.
Be careful. Myself, I suggest you think hard about whether or not what you are doing has had enough of an impact on your goals to be worth it - I can’t answer that question for you.17
These emails read like something out of a spy novel. It’s impossible to know whether Dillon was telling the truth, but it’s worth noting how suspicious the whole situation is. “John Dillon” is the pseudonym of an unknown person who paid Peter Todd, a Core developer, to produce a video promoting the restriction of Bitcoin’s throughput to seven transactions per second. He offered a bounty to develop replace-by-fee, which was intended to “break zero-conf security now”—that is, to break the functionality of instant transactions. Gavin Andresen publicly speculated that Dillon had an ulterior motive to destroy Bitcoin, and later it turns out, in leaked emails, that Dillon claimed to be in a high position within an intelligence agency. (But not to worry, because he also claimed to have a change of heart and really wanted Bitcoin to succeed!) All of this happened around the most revolutionary financial invention in history, which directly challenges established governmental, financial, and banking powers around the world. Readers can come to their own conclusions, but in my mind, by late 2013, Bitcoin had already been targeted for capture.
13
Blocking the Stream
Open-source software development is notorious for lacking a straightforward business model. It’s often unclear how programmers should get paid for their work when their final product is free and open to the public. Some projects will ask users for voluntary donations. Others will offer premium support for companies and institutions. Cryptocurrency projects are especially tricky because the software is a financial product. Any mistakes can directly affect the wallets of millions of people. Different groups have tried different strategies to finance their own development. A simple donation model has worked for some. Others will set aside a large pile of coins at their genesis to create a foundation that oversees development. Some projects will give a percentage of the block reward straight to the programmers. Lots of creative models have been tried.
Gavin’s suspicions might have been correct. In November 2013, Dillon was apparently hacked by some angry Bitcoiners, when his Bitcointalk account posted its own thread entitled, “‘John Dillon’ We can leak things too you trolling piece of shit.” The post contained a single link to an archive of private correspondence from Dillon, as well as conversations about him from other developers. The authenticity of the leak has not been disputed. Dillon appears to be coordinating with Todd and funding multiple projects that supported transforming Bitcoin into an expensive settlement system. Peter Todd himself was apparently aware that people had become suspicious of his connection to Dillon. In an IRC chat, Todd and Greg Maxwell wrote:
<petertodd> Everyone knows John and I “know” each other, if anything I’d like my PGP signature on his key to make the nature of that relationship understood.
<gmaxwell> (I think half the people think you and John are the same person. :P )
<petertodd> ha, I know, I’ll admit he kinda creeps me out a bit sometimes... he’s admitted he reads all my posts religiously.
But by far the most interesting exchange is an email between Dillon and Todd, in which Dillon claims to be involved with the intelligence community, saying:
Just so you know this stuff about Tor has me worried... Please don’t make this public, but my day job involves intelligence, and I’m in a relatively high position.
You know, I went into the job years ago with very different thoughts about it than I do now. The last, well, decade really has changed a lot of minds in this field, in totally different ways. Myself I am on the side of Snowden and Assange, but... lets just say when you have a family your willingness to be a martyr diminishes. The same is true of many of my colleagues.
Hopefully my support for Bitcoin can help undo some of the damage we’ve done, but I do have to be careful and it’s tough to take all the precautions I need to be able to communicate. If it was found out that I was involved with Bitcoin that way I have been, let’s just say there would be consequences…
To which Todd seems to respond concerned:
I mentioned your status to a friend of mine who is a former spook and well aware of the dangers of the business to anyone with a sense of ethics.
He told me to tell you this, word for word: “An old crow strongly advises you to consider the risks to yourself and your family, and stop what you are doing.” I trust his judgement, and just as importantly, his ethics.
Be careful. Myself, I suggest you think hard about whether or not what you are doing has had enough of an impact on your goals to be worth it - I can’t answer that question for you.17
These emails read like something out of a spy novel. It’s impossible to know whether Dillon was telling the truth, but it’s worth noting how suspicious the whole situation is. “John Dillon” is the pseudonym of an unknown person who paid Peter Todd, a Core developer, to produce a video promoting the restriction of Bitcoin’s throughput to seven transactions per second. He offered a bounty to develop replace-by-fee, which was intended to “break zero-conf security now”—that is, to break the functionality of instant transactions. Gavin Andresen publicly speculated that Dillon had an ulterior motive to destroy Bitcoin, and later it turns out, in leaked emails, that Dillon claimed to be in a high position within an intelligence agency. (But not to worry, because he also claimed to have a change of heart and really wanted Bitcoin to succeed!) All of this happened around the most revolutionary financial invention in history, which directly challenges established governmental, financial, and banking powers around the world. Readers can come to their own conclusions, but in my mind, by late 2013, Bitcoin had already been targeted for capture.
13
Blocking the Stream
Open-source software development is notorious for lacking a straightforward business model. It’s often unclear how programmers should get paid for their work when their final product is free and open to the public. Some projects will ask users for voluntary donations. Others will offer premium support for companies and institutions. Cryptocurrency projects are especially tricky because the software is a financial product. Any mistakes can directly affect the wallets of millions of people. Different groups have tried different strategies to finance their own development. A simple donation model has worked for some. Others will set aside a large pile of coins at their genesis to create a foundation that oversees development. Some projects will give a percentage of the block reward straight to the programmers. Lots of creative models have been tried.
Repeating past statements, it is acknowledged that Peter’s scorched earth replace-by-fee proposal is aptly named, and would be widely anti-social on the current network.9
Gavin Andresen said flatly:
Replace-by-fee is a bad idea.10
Even Adam Back, who later played a big role in derailing Bitcoin agreed:
I agree with Mike & Jeff. Blowing up 0-confirm transactions is vandalism.11
Yet, in late 2015, RBF was successfully added to Bitcoin Core. At present, RBF transactions are created with a flag, so merchants can refuse to accept them if they are careful, but developers are currently debating whether to change this default setting. If the flag is ever removed, zero-conf payments on BTC will effectively have zero security. Zero-conf payments are understood to be an essential feature in Bitcoin Cash, and developers have been actively working on ways to further improve their security and reliability.
Sheer Propaganda
Despite the controversy surrounding RBF, if you try to research it today, you will undoubtedly encounter misleading information. On the Bitcoin Core website, there is a Q&A section on RBF. One question reads:
Was the opt-in RBF pull request controversial?
Not in the slightest. After extensive informal discussion stemming back months, the PR was opened on October 22nd [2015]. It was subsequently discussed in at least four Bitcoin development weekly meetings…
In the PR discussion, 19 people commented, including people working on at least three different wallet brands, and 14 people explicitly [agreed with] the change, including at least one person who had been very outspoken in the past against full RBF. No clearly negative feedback was provided in the PR, or elsewhere that we are aware of, while the PR was open.12
This section is carefully worded so the casual reader walks away thinking RBF was not controversial. Notice the question is about the “pull request” (PR), not the overall concept of RBF—that is, if you only look at the comment section for that particular action on Github, the majority of people on that thread agreed with it. But that’s only because an enormous amount of debate simply took place in other venues. The dates involved are also misleading. They claim the informal discussion stretched back “months” from the end of 2015, but as the Bitcointalk.org forum thread demonstrates, RBF was being hotly debated as early as 2013.
The Q&A says, “No clearly negative feedback was provided in the PR, or elsewhere that we are aware of, while the PR was open.” (My emphasis.) But the pull request was opened in October 2015! Mike Hearn wrote an extensive dissenting article on his own website criticizing replace-by-fee in March 2015,13 seven months prior.
In a different section, the Q&A asks, “I heard Opt-in RBF was added with little or no discussion,” and it answers with a list of a dozen links to “Recent RBF discussions going back to May 2015.” It entirely omits the fact that RBF was a bubbling controversy only two months earlier. This careful control of information is designed to mislead newcomers about Bitcoin, and it makes it exceptionally difficult to discover the truth about its history.
Who Was John Dillon, Anyway?
The history of Bitcoin is intertwined with mysterious figures, starting with its unknown creator, Satoshi Nakamoto. But Satoshi is not the only shadowy figure. John Dillon is another, and not much is known about him. Dillon was the man who offered to pay $1,000 to develop the replace-by-fee patch proposed by Peter Todd. As it turns out, Dillon also supported and paid Todd for his work creating the infamous 1mb-forever animated video. When Todd announced he was working on the video, Dillon wrote:
It is so important that you are taking this message to the people. Bitcoin is much bigger than this little forum…I suspect there is a lot more Bitcoin activity going on that doesn’t give a damn about Bitcoin as a payment system. Peter mentioned Silk Road which is brilliant I think. It is an off-chain transaction system already.
As a serious Bitcoin investor I also care about the store of value, not stupid micropayments, and I know my partners feels [sic] the same way. We also know that Bitcoin’s value has very little to do with being a payment system...14
Once the infamous animation was produced, Dillon wrote:
I finally got a chance to see your new video. It’s solid professional work, you have done a great job. You’ll soon get another 2.5BTC from me by the same method I used before. Nice to see that big 10BTC donation you got, and from an address with 125BTC! It really says something how many of the donations you have been getting all come from addresses with large balances of Bitcoins, about 250BTC and counting right now. It just goes to show how the people most heavily invested in Bitcoins are the ones with the most to lose from centralization and regulation. Keep up the fight.15
Gavin Andresen said flatly:
Replace-by-fee is a bad idea.10
Even Adam Back, who later played a big role in derailing Bitcoin agreed:
I agree with Mike & Jeff. Blowing up 0-confirm transactions is vandalism.11
Yet, in late 2015, RBF was successfully added to Bitcoin Core. At present, RBF transactions are created with a flag, so merchants can refuse to accept them if they are careful, but developers are currently debating whether to change this default setting. If the flag is ever removed, zero-conf payments on BTC will effectively have zero security. Zero-conf payments are understood to be an essential feature in Bitcoin Cash, and developers have been actively working on ways to further improve their security and reliability.
Sheer Propaganda
Despite the controversy surrounding RBF, if you try to research it today, you will undoubtedly encounter misleading information. On the Bitcoin Core website, there is a Q&A section on RBF. One question reads:
Was the opt-in RBF pull request controversial?
Not in the slightest. After extensive informal discussion stemming back months, the PR was opened on October 22nd [2015]. It was subsequently discussed in at least four Bitcoin development weekly meetings…
In the PR discussion, 19 people commented, including people working on at least three different wallet brands, and 14 people explicitly [agreed with] the change, including at least one person who had been very outspoken in the past against full RBF. No clearly negative feedback was provided in the PR, or elsewhere that we are aware of, while the PR was open.12
This section is carefully worded so the casual reader walks away thinking RBF was not controversial. Notice the question is about the “pull request” (PR), not the overall concept of RBF—that is, if you only look at the comment section for that particular action on Github, the majority of people on that thread agreed with it. But that’s only because an enormous amount of debate simply took place in other venues. The dates involved are also misleading. They claim the informal discussion stretched back “months” from the end of 2015, but as the Bitcointalk.org forum thread demonstrates, RBF was being hotly debated as early as 2013.
The Q&A says, “No clearly negative feedback was provided in the PR, or elsewhere that we are aware of, while the PR was open.” (My emphasis.) But the pull request was opened in October 2015! Mike Hearn wrote an extensive dissenting article on his own website criticizing replace-by-fee in March 2015,13 seven months prior.
In a different section, the Q&A asks, “I heard Opt-in RBF was added with little or no discussion,” and it answers with a list of a dozen links to “Recent RBF discussions going back to May 2015.” It entirely omits the fact that RBF was a bubbling controversy only two months earlier. This careful control of information is designed to mislead newcomers about Bitcoin, and it makes it exceptionally difficult to discover the truth about its history.
Who Was John Dillon, Anyway?
The history of Bitcoin is intertwined with mysterious figures, starting with its unknown creator, Satoshi Nakamoto. But Satoshi is not the only shadowy figure. John Dillon is another, and not much is known about him. Dillon was the man who offered to pay $1,000 to develop the replace-by-fee patch proposed by Peter Todd. As it turns out, Dillon also supported and paid Todd for his work creating the infamous 1mb-forever animated video. When Todd announced he was working on the video, Dillon wrote:
It is so important that you are taking this message to the people. Bitcoin is much bigger than this little forum…I suspect there is a lot more Bitcoin activity going on that doesn’t give a damn about Bitcoin as a payment system. Peter mentioned Silk Road which is brilliant I think. It is an off-chain transaction system already.
As a serious Bitcoin investor I also care about the store of value, not stupid micropayments, and I know my partners feels [sic] the same way. We also know that Bitcoin’s value has very little to do with being a payment system...14
Once the infamous animation was produced, Dillon wrote:
I finally got a chance to see your new video. It’s solid professional work, you have done a great job. You’ll soon get another 2.5BTC from me by the same method I used before. Nice to see that big 10BTC donation you got, and from an address with 125BTC! It really says something how many of the donations you have been getting all come from addresses with large balances of Bitcoins, about 250BTC and counting right now. It just goes to show how the people most heavily invested in Bitcoins are the ones with the most to lose from centralization and regulation. Keep up the fight.15
Then he gets to the real point: in his mind, zero-conf transactions aren’t safe enough, and uninformed users just don’t realize it. So, to prevent people from getting attached to zero-conf transactions, RBF would break their functionality once and for all—because, in his words, if the miners decided to implement something like RBF, zero-conf would break anyway. In other words, Bitcoin’s instant payment functionality needed to be broken by developers at the software level, so that miners wouldn’t end up breaking it in the future. That is, unfortunately, not an exaggeration of their position. John Dillon, the mysterious financier of this patch, explained:
I’m not offering this reward because I think an undo button is important… The problem is people like… Mike Hearn will be more than happy to screw up Bitcoin in a desperate attempt to stop double spends when it becomes a big issue… By breaking zero-conf security now there won’t be pressure to implement [his centralized] crap. The most badly affected will be Satoshidice and they should not be using the blockchain the way they do.4
And in 2015, while this debate was still ongoing, the well-known programmer Bram Cohen agreed:
To say that zeroconf doesn’t work is an oversimplification. Zeroconf works okay… for now. But if it’s used at any meaninful [sic] scale an unstoppable conspiracy will inevitably emerge to exploit those relying on it. Rather than wait for disaster to strike, Bitcoin development should plan to cease zeroconf support in a scheduled and orderly manner, with the changeover happening before either the conspiracy gets built or harm is done to the functionality which zeroconf support conflicts with.5
Solutions Outside Code
It shouldn’t be surprising that software developers try to solve problems with software. But this tendency can turn into myopia if left unchecked, or as Gavin Andresen put it, “Engineers are great at not seeing the forest for the trees. They get stuck on details and lose track of the bigger picture.”6 The bigger picture, in this context, is the world outside Bitcoin’s code. Entrepreneurs have been solving problems with less-than-perfect payment security for thousands of years, using far inferior technology than cryptocurrency. A great insight into this was written by Justus Ranvier, an engineer with real-world experience, who replied to Peter Todd’s forum post about RBF by saying:
Security in this context is being inappropriately treated like a binary concept. There’s an entire consumer economy out there based around charge cards which, in bitcoin terms, take 90 days to confirm transactions. Trillions of dollars are being transacted out in the real world via payment methods that are no less insecure than zero-confirmation Bitcoin transactions. Accepting zero-conf transactions is an issue of risk management and business planning, not a case of “secure” vs “insecure”.
And elsewhere writes:
You’ve spent too much time playing The Sims and forget that both merchants and pool operators are sentient, intelligent beings instead of automatons. If the risks of zero conf double spends are worth expending resources to reduce or eliminate then the merchants will find a way to get it done.7
Indeed, cryptocurrency payment processors are well-aware of the risks of double-spending and have various options for managing it. The simplest option is for the payment processor to take on the risk for their customer in return for a fee—payment insurance, essentially. Or they can require customers to use a particular wallet app to pay for goods, which makes it more difficult to execute a double-spend. Without RBF, pulling off a double-spend is difficult and not worth the hassle to steal small amounts, but for large purchases it might be expected that customers have to wait for a confirmation or two. In fact, companies like SatoshiDice that were providing gambling services on Bitcoin had already implemented a system that allowed instant transactions for small amounts, but large amounts required confirmations.
Zero-conf transactions are especially important for brick-and-mortar payments. Given that only a tiny percentage of customers try to steal from businesses in-person, some merchants might simply accept the risk of double-spends themselves. Traditional options for mitigating the risk of fraud or theft still work. If they already have security systems in place, for example, they might be able to get footage of the criminal. These are just a handful of ideas to address zero-conf security concerns. I’m sure even better solutions would have been found if double-spends ever became a real problem. Markets are exceptionally good at discovering and managing risk.
Replace-by-fee prompted many people to speak out against it. Charlie Lee, who was the engineering manager at Coinbase said:
Coinbase fully agrees with Mike Hearn. RBF is irrational and harmful to Bitcoin.8
Jeff Garzik, an early Bitcoin Core developer agreed:
I’m not offering this reward because I think an undo button is important… The problem is people like… Mike Hearn will be more than happy to screw up Bitcoin in a desperate attempt to stop double spends when it becomes a big issue… By breaking zero-conf security now there won’t be pressure to implement [his centralized] crap. The most badly affected will be Satoshidice and they should not be using the blockchain the way they do.4
And in 2015, while this debate was still ongoing, the well-known programmer Bram Cohen agreed:
To say that zeroconf doesn’t work is an oversimplification. Zeroconf works okay… for now. But if it’s used at any meaninful [sic] scale an unstoppable conspiracy will inevitably emerge to exploit those relying on it. Rather than wait for disaster to strike, Bitcoin development should plan to cease zeroconf support in a scheduled and orderly manner, with the changeover happening before either the conspiracy gets built or harm is done to the functionality which zeroconf support conflicts with.5
Solutions Outside Code
It shouldn’t be surprising that software developers try to solve problems with software. But this tendency can turn into myopia if left unchecked, or as Gavin Andresen put it, “Engineers are great at not seeing the forest for the trees. They get stuck on details and lose track of the bigger picture.”6 The bigger picture, in this context, is the world outside Bitcoin’s code. Entrepreneurs have been solving problems with less-than-perfect payment security for thousands of years, using far inferior technology than cryptocurrency. A great insight into this was written by Justus Ranvier, an engineer with real-world experience, who replied to Peter Todd’s forum post about RBF by saying:
Security in this context is being inappropriately treated like a binary concept. There’s an entire consumer economy out there based around charge cards which, in bitcoin terms, take 90 days to confirm transactions. Trillions of dollars are being transacted out in the real world via payment methods that are no less insecure than zero-confirmation Bitcoin transactions. Accepting zero-conf transactions is an issue of risk management and business planning, not a case of “secure” vs “insecure”.
And elsewhere writes:
You’ve spent too much time playing The Sims and forget that both merchants and pool operators are sentient, intelligent beings instead of automatons. If the risks of zero conf double spends are worth expending resources to reduce or eliminate then the merchants will find a way to get it done.7
Indeed, cryptocurrency payment processors are well-aware of the risks of double-spending and have various options for managing it. The simplest option is for the payment processor to take on the risk for their customer in return for a fee—payment insurance, essentially. Or they can require customers to use a particular wallet app to pay for goods, which makes it more difficult to execute a double-spend. Without RBF, pulling off a double-spend is difficult and not worth the hassle to steal small amounts, but for large purchases it might be expected that customers have to wait for a confirmation or two. In fact, companies like SatoshiDice that were providing gambling services on Bitcoin had already implemented a system that allowed instant transactions for small amounts, but large amounts required confirmations.
Zero-conf transactions are especially important for brick-and-mortar payments. Given that only a tiny percentage of customers try to steal from businesses in-person, some merchants might simply accept the risk of double-spends themselves. Traditional options for mitigating the risk of fraud or theft still work. If they already have security systems in place, for example, they might be able to get footage of the criminal. These are just a handful of ideas to address zero-conf security concerns. I’m sure even better solutions would have been found if double-spends ever became a real problem. Markets are exceptionally good at discovering and managing risk.
Replace-by-fee prompted many people to speak out against it. Charlie Lee, who was the engineering manager at Coinbase said:
Coinbase fully agrees with Mike Hearn. RBF is irrational and harmful to Bitcoin.8
Jeff Garzik, an early Bitcoin Core developer agreed:
Let’s say we wanted to game the system by taking advantage of zero-conf transactions. Imagine that we have $200 worth of BTC. There are two stores in front of us, Alice’s and Bob’s, and we want to scam one of them. So, we walk into Alice’s store, purchase $150 worth of goods and pay a $40 transaction fee. Our transaction is seen on the network, but it has not yet been added into a block. So, we immediately walk into Bob’s store, spend the same $150 of BTC. Since the same coins are trying to be spent twice—a “double spend”—both transactions cannot be added into a block. Only one will be accepted and included in the blockchain, which means either Alice or Bob will be defrauded $150. The way Bitcoin is designed, this is theoretically possible, and occasionally double spends do happen. Does this mean the system is broken? Of course not.
The simple, elegant solution has been part of Bitcoin’s design from the beginning. It’s called the “first-seen rule.” Miners and nodes keep a running list of zero-conf transactions that are waiting to be added into a block. The first-seen rule says that whenever there are two conflicting transactions, whichever one was seen first wins. So, in our previous example, after sending the $150 to Alice, the Bitcoin network would already know about this transaction and simply reject the attempt to double spend it with Bob.
The first-seen rule was not mandatory or enforced at the protocol level. It was a simple, sensible policy for miners and nodes to abide by, since it allowed for instant transactions. However, it also allowed for elaborate theoretical schemes to defraud merchants, say, by collaborating with corrupt miners. Despite there being social and economic incentives which discourage this corruption, and despite the ability of entrepreneurs to manage these risks as they already do with other payment methods, some developers thought that any theoretical insecurity was a design flaw that needed to be fixed at the code level. So, they came up with the idea of an undo button.
The Undo Button
Instead of the first-seen rule, Peter Todd proposed the “replace-by-fee” (RBF) patch, which said that when two conflicting transactions are seen, the one with the higher fee wins. So, after sending Alice the $150 transaction with a $40 fee, we could walk into Bob’s store, spend the same $150 with a $50 fee, and the network would accept the second transaction as valid. Such a policy makes double spending easy, effectively breaking the reliability of zero-conf—which was the explicit goal of Todd. In the online forums, Peter Todd posted a thread entitled, “Reminder: zero-conf is not safe; $1000USD reward posted for replace-by-fee patch,” in which he wrote:
Someone by the name of John Dillon emailed the bitcoin-development email list earlier this morning offering a $500USD reward [later increased to $1000] to anyone who implements a transaction replacement-by-fee patch. That’s an idea I posted on the email list two days ago:
In any case, the more pressing issue… is changing fees attached to transactions after they have been broadcast…
The more I think about the issue the more I think we should nip this zero-conf madness in the bud: change the relay rules so that transactions are replaced based on fees regardless of how that changes transaction outputs. Of course, this does make double-spending an unconfirmed transaction trivial. On the other hand… it lets us implement a limited ‘undo’ button for when people screw up….
We keep saying over and over again to stop accepting zero-conf transactions, but people do it anyway because it seems secure. It’s a very dangerous situation…
Like it or not, zero-conf is dangerous when you don’t trust the other party. I wrote the above replace-by-fee idea because I really think we run a risk if we lull people into complacency. The blockchain and the proof-of-work system is how Bitcoin comes to a consensus about which transactions are or are not valid; trusting anything else is dangerous.3
It’s worth walking through the logic of Todd’s argument. He starts with the supposed problem of users getting their transactions stuck, which was only an issue for transactions with extremely low or zero fees. Though ironically, stuck transactions did become a real issue when the blocks became full and fees spiked in 2017. When users’ transactions were stuck, sometimes for days or even weeks, RBF was indeed used to “unstick” those transactions. So with small blocks, high fees, and unreliable transactions, RBF starts to make more sense.
The simple, elegant solution has been part of Bitcoin’s design from the beginning. It’s called the “first-seen rule.” Miners and nodes keep a running list of zero-conf transactions that are waiting to be added into a block. The first-seen rule says that whenever there are two conflicting transactions, whichever one was seen first wins. So, in our previous example, after sending the $150 to Alice, the Bitcoin network would already know about this transaction and simply reject the attempt to double spend it with Bob.
The first-seen rule was not mandatory or enforced at the protocol level. It was a simple, sensible policy for miners and nodes to abide by, since it allowed for instant transactions. However, it also allowed for elaborate theoretical schemes to defraud merchants, say, by collaborating with corrupt miners. Despite there being social and economic incentives which discourage this corruption, and despite the ability of entrepreneurs to manage these risks as they already do with other payment methods, some developers thought that any theoretical insecurity was a design flaw that needed to be fixed at the code level. So, they came up with the idea of an undo button.
The Undo Button
Instead of the first-seen rule, Peter Todd proposed the “replace-by-fee” (RBF) patch, which said that when two conflicting transactions are seen, the one with the higher fee wins. So, after sending Alice the $150 transaction with a $40 fee, we could walk into Bob’s store, spend the same $150 with a $50 fee, and the network would accept the second transaction as valid. Such a policy makes double spending easy, effectively breaking the reliability of zero-conf—which was the explicit goal of Todd. In the online forums, Peter Todd posted a thread entitled, “Reminder: zero-conf is not safe; $1000USD reward posted for replace-by-fee patch,” in which he wrote:
Someone by the name of John Dillon emailed the bitcoin-development email list earlier this morning offering a $500USD reward [later increased to $1000] to anyone who implements a transaction replacement-by-fee patch. That’s an idea I posted on the email list two days ago:
In any case, the more pressing issue… is changing fees attached to transactions after they have been broadcast…
The more I think about the issue the more I think we should nip this zero-conf madness in the bud: change the relay rules so that transactions are replaced based on fees regardless of how that changes transaction outputs. Of course, this does make double-spending an unconfirmed transaction trivial. On the other hand… it lets us implement a limited ‘undo’ button for when people screw up….
We keep saying over and over again to stop accepting zero-conf transactions, but people do it anyway because it seems secure. It’s a very dangerous situation…
Like it or not, zero-conf is dangerous when you don’t trust the other party. I wrote the above replace-by-fee idea because I really think we run a risk if we lull people into complacency. The blockchain and the proof-of-work system is how Bitcoin comes to a consensus about which transactions are or are not valid; trusting anything else is dangerous.3
It’s worth walking through the logic of Todd’s argument. He starts with the supposed problem of users getting their transactions stuck, which was only an issue for transactions with extremely low or zero fees. Though ironically, stuck transactions did become a real issue when the blocks became full and fees spiked in 2017. When users’ transactions were stuck, sometimes for days or even weeks, RBF was indeed used to “unstick” those transactions. So with small blocks, high fees, and unreliable transactions, RBF starts to make more sense.
We have an alternative to increasing the blocksize: off-chain transactions…you’ll still use the blockchain for large transactions, but small exchanges will be handled by payment processors, which means small purchases like your morning coffee don’t clog the whole system up…
In other words, the alternative to using Bitcoin is not using Bitcoin. Relying on third-parties to handle small payments is antithetical to the idea of digital cash. Small purchases do not “clog up” the system; the system was purpose-built for them. Restricting on-chain transactions to large amounts is restricting Bitcoin to wealthy users. Regular people cannot afford to pay an additional $5 for every cash transaction, much less $50 or $500+ dollars, and most countries around the world lack the infrastructure for cryptocurrency payment processing.
Large transactions are also more likely to be controlled and regulated by financial authorities, especially when people are forced to use custodial wallets. The blockchain would offer no significant improvement over existing systems, since most people are not going to be purchasing a car, a house, or cashing out part of their retirement without government oversight. If Bitcoin can’t be used for cash, most of the world won’t use it at all. The script continues:
Unlike a completely public blockchain where you can’t pick who mines your transactions, or who you trust to do validation, off-chain transactions can be both instant, truly private, and you have complete control over who to trust.
Credit must be given to the creators for producing a truly impressive piece of propaganda! They create a problem out of a non-problem, then offer their novel solution, which is to not use Bitcoin in the first place. 99.9% of users have no reason to care who mines or validates their transactions. As long as their transactions are put into a block, that’s what matters. And remember, users themselves can validate their own transactions without being a full node; they just can’t validate the transactions of other people. Claiming that off-chain transactions are truly private is also false. In practice, the two off-chain solutions currently implemented—the Lightning Network and supposed “sidechains”—are both heavily centralized for regular users. The failures of both these technologies are discussed later.
Peter Todd’s slick, misleading video was a milestone in Bitcoin’s history, and it wasn’t the only thing he did in 2013 that raised suspicions.
Instant Transactions? Too Risky
Digital cash needs to have instant transactions. It’s unrealistic to imagine any successful cryptocurrency being used as cash if its transactions take more than a few seconds to process. By design, Bitcoin allowed for instant transactions from the beginning, and I used them every day in my business and when evangelizing about Bitcoin. But despite the obvious importance of this feature, some Core developers decided that instant transactions were “too risky” and intentionally broke Bitcoin’s functionality to discourage them.
As explained in Chapter 2, Bitcoin transactions get bundled into blocks by miners. Each block builds on the one before it, adding more security with each additional block. Imagine a transaction has just been added to a block; we’ll call the first block “Block 1.” At that point, we would say the transaction has “one confirmation.” When Block 2 gets produced, it adds to the security of all the transactions in Block 1, and we’d say our original transaction now has “two confirmations.” The same is true for Blocks 3, 4, 5, and so on. Traditionally, in order to have extremely secure transactions, the rule-of-thumb is to wait until six blocks have been created, or six confirmations, which takes on average one hour.
What about transactions that have been created but have not yet been added to a block? These are called “zero-confirmation” transactions, or “zero-conf” for short. Zero-conf transactions take only seconds to send and receive, though they are inherently less secure. Less-than-perfect security is not a difficult concept to grasp, nor is it a unique idea to any entrepreneur, but some developers apparently thought it was unacceptable.
In other words, the alternative to using Bitcoin is not using Bitcoin. Relying on third-parties to handle small payments is antithetical to the idea of digital cash. Small purchases do not “clog up” the system; the system was purpose-built for them. Restricting on-chain transactions to large amounts is restricting Bitcoin to wealthy users. Regular people cannot afford to pay an additional $5 for every cash transaction, much less $50 or $500+ dollars, and most countries around the world lack the infrastructure for cryptocurrency payment processing.
Large transactions are also more likely to be controlled and regulated by financial authorities, especially when people are forced to use custodial wallets. The blockchain would offer no significant improvement over existing systems, since most people are not going to be purchasing a car, a house, or cashing out part of their retirement without government oversight. If Bitcoin can’t be used for cash, most of the world won’t use it at all. The script continues:
Unlike a completely public blockchain where you can’t pick who mines your transactions, or who you trust to do validation, off-chain transactions can be both instant, truly private, and you have complete control over who to trust.
Credit must be given to the creators for producing a truly impressive piece of propaganda! They create a problem out of a non-problem, then offer their novel solution, which is to not use Bitcoin in the first place. 99.9% of users have no reason to care who mines or validates their transactions. As long as their transactions are put into a block, that’s what matters. And remember, users themselves can validate their own transactions without being a full node; they just can’t validate the transactions of other people. Claiming that off-chain transactions are truly private is also false. In practice, the two off-chain solutions currently implemented—the Lightning Network and supposed “sidechains”—are both heavily centralized for regular users. The failures of both these technologies are discussed later.
Peter Todd’s slick, misleading video was a milestone in Bitcoin’s history, and it wasn’t the only thing he did in 2013 that raised suspicions.
Instant Transactions? Too Risky
Digital cash needs to have instant transactions. It’s unrealistic to imagine any successful cryptocurrency being used as cash if its transactions take more than a few seconds to process. By design, Bitcoin allowed for instant transactions from the beginning, and I used them every day in my business and when evangelizing about Bitcoin. But despite the obvious importance of this feature, some Core developers decided that instant transactions were “too risky” and intentionally broke Bitcoin’s functionality to discourage them.
As explained in Chapter 2, Bitcoin transactions get bundled into blocks by miners. Each block builds on the one before it, adding more security with each additional block. Imagine a transaction has just been added to a block; we’ll call the first block “Block 1.” At that point, we would say the transaction has “one confirmation.” When Block 2 gets produced, it adds to the security of all the transactions in Block 1, and we’d say our original transaction now has “two confirmations.” The same is true for Blocks 3, 4, 5, and so on. Traditionally, in order to have extremely secure transactions, the rule-of-thumb is to wait until six blocks have been created, or six confirmations, which takes on average one hour.
What about transactions that have been created but have not yet been added to a block? These are called “zero-confirmation” transactions, or “zero-conf” for short. Zero-conf transactions take only seconds to send and receive, though they are inherently less secure. Less-than-perfect security is not a difficult concept to grasp, nor is it a unique idea to any entrepreneur, but some developers apparently thought it was unacceptable.
The remainder of Part II is primarily focused on the time period in which Bitcoin’s largest transformations took place: the Civil War, which lasted roughly from 2014 to 2017.
12
Warning Signs
It would be naive to think that a project as world-changing as Bitcoin would go unnoticed forever. International financial powers, whether public or private, have a lot to lose if cryptocurrencies succeed and remain outside their influence. Despite the optimism and unity within the Bitcoin community during the early days, there were signs early on that things were not idyllic or free from internal disruption. I remember as early as 2011, when the price shot up to $30, the main discussion forum Bitcointalk.org was flooded with spam, with bots suddenly posting endless threads of gibberish, making it impossible to use that forum to communicate. Somebody was paying attention and wanted to disrupt information flows, though it’s not clear who.
Animation Information Manipulation
Perhaps the first undeniable sign of trouble came in May 2013. The blocksize debate had already started, but even the most conservative developers agreed that the 1mb limit had to be increased. The question was when and to what level. Various schemes were proposed. Some wanted a gradual increase to 2, to 4, then to 8mb. Others proposed an adjustable blocksize limit that automatically adjusted itself based on the average size of recent blocks, and still others wanted to remove the limit altogether. But nobody thought that a maximum throughput limit of seven transactions per second was a good idea. That is, not until the developer Peter Todd put out an animated video entitled “Why the blocksize limit keeps Bitcoin free and decentralized.”
I consider Peter Todd’s animation to be the first example of well-funded, blatant propaganda. It’s so outrageous that it stretches credulity to think it was created from a mere difference in philosophy. The narrator explains how, in the name of decentralization, Bitcoin should cap itself to 1mb blocks forever:
We have an alternative to increasing the blocksize: off-chain transactions… you’ll still use the blockchain for large transactions, but small exchanges will be handled by payment processors, which means small purchases like your morning coffee don’t clog the whole system up…
Unlike a completely public blockchain where you can’t pick who mines your transactions, or who you trust to do validation, off-chain transactions can be both instant, truly private, and you have complete control over who to trust.
What can you do to keep bitcoin decentralized? If you’re a miner, only mine in pools that support keeping the blocksize limit, and ask your pool to publicly say so. If you are a user, ignore anyone trying to change the Bitcoin software you use to increase the 1mb blocksize, and tell people you transact with that you support keeping bitcoin decentralized and out of the hands of the existing corporate system.1
The absurdity of this proposal at the time cannot be overstated. While it sounds like something you might hear today, it was considered ridiculous in 2013, even by vocal small-blockers like Greg Maxwell, who wrote:
I do cringe just a little at the over-simplification of the video... and worry a bit that in a couple years it will be clear that 2mb or 10mb or whatever is totally safe relative to all concerns—perhaps even mobile devices with tor could be full nodes with 10mb blocks on the internet of 2023, and by then there may be plenty of transaction volume to keep fees high enough to support security— and maybe some people will be dogmatically promoting a 1MB limit because they walked away from the video thinking that 1MB is a magic number rather than today’s conservative trade-off.2
Other Bitcoiners expressed anger and contempt for the animation throughout the online forums. Not only was the content of the video ridiculed, but the disturbing fact that it came from an insider—the influential developer Peter Todd—also raised eyebrows. The feelings of the Bitcoin community were made clear in the comment section of the video:
“I hope these morons don’t ruin bitcoin by convincing people to keep the blocksize small. What better way to make sure that bitcoin remains a tiny and irrelevant transactional medium…”
“Went from information to disinformation at 0:55, full cringe at 1:28, and straight up Orwell at 2:28.”
“This video is dangerous propaganda and marketing hogwash. You’re being misled, wake up!”
“What kind of shit lies is this!? It’s ok up to 0:45 The rest describes a Bitcoin network that goes against the scaling abilities that Satoshi described, so keeping this limit would break that social contract with the users.”
To understand the vitriol directed at the creators of this video, it’s worth dissecting the script a little further, to see how it advocated the exact opposite of everything Bitcoin stood for. Consider this section:
12
Warning Signs
It would be naive to think that a project as world-changing as Bitcoin would go unnoticed forever. International financial powers, whether public or private, have a lot to lose if cryptocurrencies succeed and remain outside their influence. Despite the optimism and unity within the Bitcoin community during the early days, there were signs early on that things were not idyllic or free from internal disruption. I remember as early as 2011, when the price shot up to $30, the main discussion forum Bitcointalk.org was flooded with spam, with bots suddenly posting endless threads of gibberish, making it impossible to use that forum to communicate. Somebody was paying attention and wanted to disrupt information flows, though it’s not clear who.
Animation Information Manipulation
Perhaps the first undeniable sign of trouble came in May 2013. The blocksize debate had already started, but even the most conservative developers agreed that the 1mb limit had to be increased. The question was when and to what level. Various schemes were proposed. Some wanted a gradual increase to 2, to 4, then to 8mb. Others proposed an adjustable blocksize limit that automatically adjusted itself based on the average size of recent blocks, and still others wanted to remove the limit altogether. But nobody thought that a maximum throughput limit of seven transactions per second was a good idea. That is, not until the developer Peter Todd put out an animated video entitled “Why the blocksize limit keeps Bitcoin free and decentralized.”
I consider Peter Todd’s animation to be the first example of well-funded, blatant propaganda. It’s so outrageous that it stretches credulity to think it was created from a mere difference in philosophy. The narrator explains how, in the name of decentralization, Bitcoin should cap itself to 1mb blocks forever:
We have an alternative to increasing the blocksize: off-chain transactions… you’ll still use the blockchain for large transactions, but small exchanges will be handled by payment processors, which means small purchases like your morning coffee don’t clog the whole system up…
Unlike a completely public blockchain where you can’t pick who mines your transactions, or who you trust to do validation, off-chain transactions can be both instant, truly private, and you have complete control over who to trust.
What can you do to keep bitcoin decentralized? If you’re a miner, only mine in pools that support keeping the blocksize limit, and ask your pool to publicly say so. If you are a user, ignore anyone trying to change the Bitcoin software you use to increase the 1mb blocksize, and tell people you transact with that you support keeping bitcoin decentralized and out of the hands of the existing corporate system.1
The absurdity of this proposal at the time cannot be overstated. While it sounds like something you might hear today, it was considered ridiculous in 2013, even by vocal small-blockers like Greg Maxwell, who wrote:
I do cringe just a little at the over-simplification of the video... and worry a bit that in a couple years it will be clear that 2mb or 10mb or whatever is totally safe relative to all concerns—perhaps even mobile devices with tor could be full nodes with 10mb blocks on the internet of 2023, and by then there may be plenty of transaction volume to keep fees high enough to support security— and maybe some people will be dogmatically promoting a 1MB limit because they walked away from the video thinking that 1MB is a magic number rather than today’s conservative trade-off.2
Other Bitcoiners expressed anger and contempt for the animation throughout the online forums. Not only was the content of the video ridiculed, but the disturbing fact that it came from an insider—the influential developer Peter Todd—also raised eyebrows. The feelings of the Bitcoin community were made clear in the comment section of the video:
“I hope these morons don’t ruin bitcoin by convincing people to keep the blocksize small. What better way to make sure that bitcoin remains a tiny and irrelevant transactional medium…”
“Went from information to disinformation at 0:55, full cringe at 1:28, and straight up Orwell at 2:28.”
“This video is dangerous propaganda and marketing hogwash. You’re being misled, wake up!”
“What kind of shit lies is this!? It’s ok up to 0:45 The rest describes a Bitcoin network that goes against the scaling abilities that Satoshi described, so keeping this limit would break that social contract with the users.”
To understand the vitriol directed at the creators of this video, it’s worth dissecting the script a little further, to see how it advocated the exact opposite of everything Bitcoin stood for. Consider this section:
Even though core says they are ok with a hard fork to 2MB, they refuse to prioritize it… They view themselves as the central planners of the network, and protectors of the people. They seem ok with watching bitcoin fail, as long as they don’t compromise on their principles… In my opinion, perhaps the biggest risk in bitcoin right now is, ironically, one of the things that has helped it the most in the past: the bitcoin core developers.2
Armstong’s judgment was shared by the vast majority of large economic players at the time, including the miners. I recall attending one of these conferences and pleading with the biggest miners to raise the blocksize limit. They strongly agreed it should be raised, but because they wanted to avoid controversy, they ultimately deferred to Core. Many of them have since become huge Bitcoin Cash supporters.
During this period of extreme division, the general public remained mostly unaware, and in late 2017, another enormous wave of investment caused prices to spike amidst the chaos. One BTC eventually reached $20,000, while the average transaction fee spiked to more than $50, and average transaction confirmation times exceeded two weeks! For the first time in Bitcoin’s history, anti-adoption happened, as various companies dropped support due to high fees and unreliable payments, and the narrative quickly started to shift to Bitcoin being a “store of value only” that did not require low fees. Instead of being a tool for regular people—especially helpful for those in the developing world with unstable currencies—the focus shifted towards appealing to central bankers and encouraging Wall Street to speculate. Blockstream executive Samson Mow captured this sentiment by flatly declaring that “Bitcoin isn’t for people that live on less than $2 a day.”3
4) The Fourth Era: Mainstream ✏ From ~2018 to present
The fourth era started during the first run to $20,000, when the news started to cover Bitcoin non-stop. The hype was so extreme, I remember seeing a running ticker symbol in the corner of CNBC broadcasts that would track the price, even during unrelated segments or commercials—as if the most important financial news in the world was the price of one BTC. After almost a decade, the secret was finally out. Bitcoin hit the mainstream. Other cryptocurrencies, too, were enjoying the feverish Wall Street speculation. A new fundraising model allowed a wave of fresh startups to raise millions through ICOs (Initial Coin Offerings)—some with plausible business models, but many without.
The new narrative started to solidify with books like The Bitcoin Standard, which, despite making blunders on several critical concepts, has enjoyed widespread popularity. The same ideas have been uniformly repeated on all the most important discussion channels, making the small-block philosophy the only perspective that newcomers encounter when learning about Bitcoin. The original vision of big blocks and universal access to the blockchain was successfully demonized and its history obfuscated.
The culture is obsessively focused on the price of BTC, regardless of its underlying utility or usage. Every event, no matter how significant, gets judged based on its potential effect on price, rather than its potential to improve human freedom or wellbeing. For example, when the El Salvador government announced that BTC was going to become an official currency, there was almost no mention of the fact that their government was setting up purely custodial wallets for their citizens—meaning, the government will be able to track and censor transactions made through their app, freeze accounts, or easily confiscate coins if they decide to. State integration is great from the perspective of price appreciation and hype, but it’s unclear whether the average El Salvador citizen will benefit at all.
One bright spot of the present era is the huge breadth of projects in the cryptocurrency industry. Investors from all over the world recognize that this technology is the future of finance. The credibility problem has finally been resolved. Even if BTC is no longer a decentralized project, the industry is decentralized, and people can choose from many competing options. No matter which projects are compromised in the future, so long as the freedom to choose remains, the market will sort out which coins are the best to use.
Despite Bitcoin’s universal fame, the Mainstream Era has a similar feeling to 2011: there remains a serious awareness problem. The general public is aware of BTC, but they remain unaware of the original design and what’s possible with big-block Bitcoin. I find myself once again evangelizing for the same technology that got me excited more than ten years ago! Except this time, the problem is not a complete lack of information, but rather an overwhelming amount of bad information. Amidst all the hype and celebrity endorsements, the basic concepts are still not understood.
Armstong’s judgment was shared by the vast majority of large economic players at the time, including the miners. I recall attending one of these conferences and pleading with the biggest miners to raise the blocksize limit. They strongly agreed it should be raised, but because they wanted to avoid controversy, they ultimately deferred to Core. Many of them have since become huge Bitcoin Cash supporters.
During this period of extreme division, the general public remained mostly unaware, and in late 2017, another enormous wave of investment caused prices to spike amidst the chaos. One BTC eventually reached $20,000, while the average transaction fee spiked to more than $50, and average transaction confirmation times exceeded two weeks! For the first time in Bitcoin’s history, anti-adoption happened, as various companies dropped support due to high fees and unreliable payments, and the narrative quickly started to shift to Bitcoin being a “store of value only” that did not require low fees. Instead of being a tool for regular people—especially helpful for those in the developing world with unstable currencies—the focus shifted towards appealing to central bankers and encouraging Wall Street to speculate. Blockstream executive Samson Mow captured this sentiment by flatly declaring that “Bitcoin isn’t for people that live on less than $2 a day.”3
4) The Fourth Era: Mainstream ✏ From ~2018 to present
The fourth era started during the first run to $20,000, when the news started to cover Bitcoin non-stop. The hype was so extreme, I remember seeing a running ticker symbol in the corner of CNBC broadcasts that would track the price, even during unrelated segments or commercials—as if the most important financial news in the world was the price of one BTC. After almost a decade, the secret was finally out. Bitcoin hit the mainstream. Other cryptocurrencies, too, were enjoying the feverish Wall Street speculation. A new fundraising model allowed a wave of fresh startups to raise millions through ICOs (Initial Coin Offerings)—some with plausible business models, but many without.
The new narrative started to solidify with books like The Bitcoin Standard, which, despite making blunders on several critical concepts, has enjoyed widespread popularity. The same ideas have been uniformly repeated on all the most important discussion channels, making the small-block philosophy the only perspective that newcomers encounter when learning about Bitcoin. The original vision of big blocks and universal access to the blockchain was successfully demonized and its history obfuscated.
The culture is obsessively focused on the price of BTC, regardless of its underlying utility or usage. Every event, no matter how significant, gets judged based on its potential effect on price, rather than its potential to improve human freedom or wellbeing. For example, when the El Salvador government announced that BTC was going to become an official currency, there was almost no mention of the fact that their government was setting up purely custodial wallets for their citizens—meaning, the government will be able to track and censor transactions made through their app, freeze accounts, or easily confiscate coins if they decide to. State integration is great from the perspective of price appreciation and hype, but it’s unclear whether the average El Salvador citizen will benefit at all.
One bright spot of the present era is the huge breadth of projects in the cryptocurrency industry. Investors from all over the world recognize that this technology is the future of finance. The credibility problem has finally been resolved. Even if BTC is no longer a decentralized project, the industry is decentralized, and people can choose from many competing options. No matter which projects are compromised in the future, so long as the freedom to choose remains, the market will sort out which coins are the best to use.
Despite Bitcoin’s universal fame, the Mainstream Era has a similar feeling to 2011: there remains a serious awareness problem. The general public is aware of BTC, but they remain unaware of the original design and what’s possible with big-block Bitcoin. I find myself once again evangelizing for the same technology that got me excited more than ten years ago! Except this time, the problem is not a complete lack of information, but rather an overwhelming amount of bad information. Amidst all the hype and celebrity endorsements, the basic concepts are still not understood.
Other early investments were in companies like Blockchain.info, which let users spend and receive Bitcoin without downloading any software by creating an online wallet that was accessible with a web browser. Kraken, BitInstant, and Shapeshift made it far easier for the public to acquire Bitcoin, while Purse.io allowed them to spend their coins on Amazon. Though the nickname “Bitcoin Jesus” has stuck, I like to think my role in Bitcoin’s history is closer to being “Bitcoin Johnny Appleseed” for helping to seed many of the earliest companies with funding.
Perhaps the most fun problem to solve from this era was the simple lack of awareness about Bitcoin. Everywhere I traveled, I would ask people if they accepted it. Most of them, of course, had no idea what I was talking about. So I pitched it to them. I would try to persuade every business owner to accept the currency of the future—and enjoy the benefits of a popularity boost. If they announced that they were accepting Bitcoin online, they would immediately get a wave of new patrons who wanted to spend their coins. Early Bitcoiners were often eager to spend their new currency in commerce, since we all knew that if Bitcoin succeeded as a new form of money, we would all succeed. If a well-known company started accepting it, the community would celebrate as if our team had just won the World Cup. Nowadays, if a big company announces that they accept cryptocurrency for payment, it barely makes the news. But back then, Bitcoin was battling for credibility, as its public reputation shifted between “obscure novelty for nerds” and “currency for criminals.” So, it was a real cause for celebration—and a serious milestone for the industry—when giants like Newegg or Microsoft decided to accept it.
The community was generally harmonious and unified around the same vision for Bitcoin as digital cash, built for low-fee transactions, accessible to anybody with an internet connection, and able to scale to reach mass adoption. Gavin Andresen was the lead programmer, and Mike Hearn became an influential technical leader—both of them shared the same vision. If you visited one of the many Bitcoin meet-up groups around the world, you would have heard the same story from all of them. If you spoke with the most influential entrepreneurs, you would have heard the same thing. But despite the broader industry unification, factions did start to emerge among the developers, with a small minority wanting to take Bitcoin in a different direction.
3) The Third Era: Civil War ✏ From ~2014 to ~2017
The most important time in Bitcoin’s history was the Civil War Era. In fact, the entire present-day cryptocurrency industry is still defined by the events that took place between 2014 and 2017. This era was the ugliest of them all, filled with personal attacks, mass censorship, propaganda, social media engineering, failed conferences, broken promises, and eventual network failure and split into Bitcoin Cash. Shortly after Andresen made Van der Laan the Lead Maintainer of Bitcoin Core, the internal factions became more entrenched and hostile towards each other, and the blocksize debate went nuclear. Several key Core developers formed their own company called Blockstream—which has been, by far, the most influential company involved with Bitcoin’s software development and plays a central role in its capture. If you visited the biggest companies during that time, you would have heard near universal criticism of the Core developers for stalling Bitcoin’s growth and handicapping its utility. Several prominent developers even publicly warned that BTC was being hijacked while it was happening.
During this time, the industry tried desperately to keep the community together and scale the technology, with multiple attempts being made to bypass the Core developers, but these attempts were ultimately unsuccessful. Several conferences were organized to try and agree on a solution. In 2016, Brian Armstrong attended one of these conferences and wrote an article about his impressions:
I think the organizers of the conference were hoping for some sort of consensus, however it became clear by the end that the divide was too great. The conversations initially focused on various compromises to kick the can down the road on scalability. But as the conversations went on, I became less and less concerned about what short term solution we pick because I realized we all had a much bigger problem: the systemic risk to bitcoin if Bitcoin Core was the only team working on bitcoin.
The core team contains some very high IQ people, but there are some things which I find very concerning about them as a team after spending some time with them last weekend… They prefer ‘perfect’ solutions to ‘good enough’. And if no perfect solution exists they seem ok with inaction, even if that puts bitcoin at risk. They seem to have a strong belief that bitcoin will not be able to scale long term, and any block size increase is a slippery slope to a future that they are unwilling to allow.
Perhaps the most fun problem to solve from this era was the simple lack of awareness about Bitcoin. Everywhere I traveled, I would ask people if they accepted it. Most of them, of course, had no idea what I was talking about. So I pitched it to them. I would try to persuade every business owner to accept the currency of the future—and enjoy the benefits of a popularity boost. If they announced that they were accepting Bitcoin online, they would immediately get a wave of new patrons who wanted to spend their coins. Early Bitcoiners were often eager to spend their new currency in commerce, since we all knew that if Bitcoin succeeded as a new form of money, we would all succeed. If a well-known company started accepting it, the community would celebrate as if our team had just won the World Cup. Nowadays, if a big company announces that they accept cryptocurrency for payment, it barely makes the news. But back then, Bitcoin was battling for credibility, as its public reputation shifted between “obscure novelty for nerds” and “currency for criminals.” So, it was a real cause for celebration—and a serious milestone for the industry—when giants like Newegg or Microsoft decided to accept it.
The community was generally harmonious and unified around the same vision for Bitcoin as digital cash, built for low-fee transactions, accessible to anybody with an internet connection, and able to scale to reach mass adoption. Gavin Andresen was the lead programmer, and Mike Hearn became an influential technical leader—both of them shared the same vision. If you visited one of the many Bitcoin meet-up groups around the world, you would have heard the same story from all of them. If you spoke with the most influential entrepreneurs, you would have heard the same thing. But despite the broader industry unification, factions did start to emerge among the developers, with a small minority wanting to take Bitcoin in a different direction.
3) The Third Era: Civil War ✏ From ~2014 to ~2017
The most important time in Bitcoin’s history was the Civil War Era. In fact, the entire present-day cryptocurrency industry is still defined by the events that took place between 2014 and 2017. This era was the ugliest of them all, filled with personal attacks, mass censorship, propaganda, social media engineering, failed conferences, broken promises, and eventual network failure and split into Bitcoin Cash. Shortly after Andresen made Van der Laan the Lead Maintainer of Bitcoin Core, the internal factions became more entrenched and hostile towards each other, and the blocksize debate went nuclear. Several key Core developers formed their own company called Blockstream—which has been, by far, the most influential company involved with Bitcoin’s software development and plays a central role in its capture. If you visited the biggest companies during that time, you would have heard near universal criticism of the Core developers for stalling Bitcoin’s growth and handicapping its utility. Several prominent developers even publicly warned that BTC was being hijacked while it was happening.
During this time, the industry tried desperately to keep the community together and scale the technology, with multiple attempts being made to bypass the Core developers, but these attempts were ultimately unsuccessful. Several conferences were organized to try and agree on a solution. In 2016, Brian Armstrong attended one of these conferences and wrote an article about his impressions:
I think the organizers of the conference were hoping for some sort of consensus, however it became clear by the end that the divide was too great. The conversations initially focused on various compromises to kick the can down the road on scalability. But as the conversations went on, I became less and less concerned about what short term solution we pick because I realized we all had a much bigger problem: the systemic risk to bitcoin if Bitcoin Core was the only team working on bitcoin.
The core team contains some very high IQ people, but there are some things which I find very concerning about them as a team after spending some time with them last weekend… They prefer ‘perfect’ solutions to ‘good enough’. And if no perfect solution exists they seem ok with inaction, even if that puts bitcoin at risk. They seem to have a strong belief that bitcoin will not be able to scale long term, and any block size increase is a slippery slope to a future that they are unwilling to allow.
My enthusiasm got me into trouble. While my mind loved learning about Bitcoin, my body did not. I wasn’t eating enough food or getting enough sleep, and that pesky scratch in my throat kept getting worse. After ten days of this, my health deteriorated to the point where it couldn’t be ignored. I was completely exhausted and couldn’t even drive myself to the doctor. So I called my friend Kevin, and he took me to the hospital. Doctors are familiar with cases of binge-drinking, but I might be the first person admitted to a hospital for binge-reading! They told me that I needed to calm down and sleep. They gave me a sedative, and after sleeping for almost twenty hours straight, I felt much better. I left the next day and decided to resume my research (at a slightly slower pace, of course). That was the beginning of my journey with Bitcoin.
While the early pioneers were careful to not be overly optimistic about the new technology, I was not so careful. I thought Bitcoin was going to change the world and was convinced it would improve the lives of billions of people. I knew I needed to buy some, since such a valuable invention was practically guaranteed to increase in price. But in those days, it was difficult to purchase any. Bitcoin was almost unheard of, and only a few enthusiasts were trading coins on obscure websites.
The first major Bitcoin exchange was actually a re-purposed website that was originally created to trade Magic: The Gathering playing cards. Compared to modern cryptocurrency exchanges, the user experience wasn’t exactly smooth. To purchase my first Bitcoins, I couldn’t use PayPal, an ACH deposit, or a credit card. Instead, I had to send a wire directly to the personal bank account of Jed McCaleb, the website owner. Fortunately, he came through, and I successfully acquired my first Bitcoin for less than a dollar each.
At the time, I couldn’t really use my Bitcoin, since nobody accepted it as payment. So, I decided that my company MemoryDealers.com would be the first. We sold computer parts online, and to my knowledge, we became the first retailer to accept Bitcoins for payment. I knew from my experience with eCommerce that there was a huge demand for online currency that could be used anywhere with minimal fees—and the more that Bitcoin could be used in commerce, the more valuable it was going to become, and the more freedom it would bring to the world.
Selling our products for Bitcoin turned out to be a good decision, because Bitcoiners from around the world were eager to spend their new digital currency. Not only did our sales increase, but it was also a great way to accumulate more Bitcoin. Instead of sending personal bank transfers, I was simply selling goods online in exchange for Bitcoin. Shortly afterwards, we put up a now-famous sign in Silicon Valley proudly advertising that “We Accept Bitcoin.” I’m sure 99.9% of the people who saw it had never heard of Bitcoin, but that was the point.
Figure 4: Our billboard declaring “We Accept Bitcoin”
For most of the first era, Satoshi provided the main ideological and technological leadership. In the early forum posts, he received many questions about Bitcoin’s design, especially about scaling, and he provided compelling answers which framed the vision that attracted so many people into the project.
2) The Second Era: Growth and Optimism ✏ From ~2011 to ~2014
The second era was defined by the growth of a brand-new industry and the infectious optimism throughout the entire Bitcoin community. The foundations of a new financial system were being constructed, and I got to lay some of the bricks. It was one of the most exciting times in my entire life. We Bitcoiners were a small group, but we had something special. Not only was there money to be made, but we all knew there was a huge opportunity to change the world in a positive direction.
At that time, there was no real commercial infrastructure; we were starting from scratch. We needed more merchants to accept Bitcoin, more exchanges to trade it, and easier tools for its usage. We needed new companies to be created, but in 2011, the venture capital industry hadn’t yet discovered Bitcoin. So, I ended up being the world’s first investor in Bitcoin startups. The market was so young that almost any successful investment benefitted everybody, especially if it tackled the basic problems we were all facing. For example, price volatility was a notorious issue that made merchants hesitant to accept Bitcoin for payment. So, I jumped at the opportunity to provide seed funding for BitPay, a startup that allowed merchants to accept Bitcoin and immediately convert it into fiat, eliminating the volatility risk. Their service proved crucial to gaining mainstream adoption, and BitPay has since become one of the most important companies in the entire cryptocurrency world.
While the early pioneers were careful to not be overly optimistic about the new technology, I was not so careful. I thought Bitcoin was going to change the world and was convinced it would improve the lives of billions of people. I knew I needed to buy some, since such a valuable invention was practically guaranteed to increase in price. But in those days, it was difficult to purchase any. Bitcoin was almost unheard of, and only a few enthusiasts were trading coins on obscure websites.
The first major Bitcoin exchange was actually a re-purposed website that was originally created to trade Magic: The Gathering playing cards. Compared to modern cryptocurrency exchanges, the user experience wasn’t exactly smooth. To purchase my first Bitcoins, I couldn’t use PayPal, an ACH deposit, or a credit card. Instead, I had to send a wire directly to the personal bank account of Jed McCaleb, the website owner. Fortunately, he came through, and I successfully acquired my first Bitcoin for less than a dollar each.
At the time, I couldn’t really use my Bitcoin, since nobody accepted it as payment. So, I decided that my company MemoryDealers.com would be the first. We sold computer parts online, and to my knowledge, we became the first retailer to accept Bitcoins for payment. I knew from my experience with eCommerce that there was a huge demand for online currency that could be used anywhere with minimal fees—and the more that Bitcoin could be used in commerce, the more valuable it was going to become, and the more freedom it would bring to the world.
Selling our products for Bitcoin turned out to be a good decision, because Bitcoiners from around the world were eager to spend their new digital currency. Not only did our sales increase, but it was also a great way to accumulate more Bitcoin. Instead of sending personal bank transfers, I was simply selling goods online in exchange for Bitcoin. Shortly afterwards, we put up a now-famous sign in Silicon Valley proudly advertising that “We Accept Bitcoin.” I’m sure 99.9% of the people who saw it had never heard of Bitcoin, but that was the point.
Figure 4: Our billboard declaring “We Accept Bitcoin”
For most of the first era, Satoshi provided the main ideological and technological leadership. In the early forum posts, he received many questions about Bitcoin’s design, especially about scaling, and he provided compelling answers which framed the vision that attracted so many people into the project.
2) The Second Era: Growth and Optimism ✏ From ~2011 to ~2014
The second era was defined by the growth of a brand-new industry and the infectious optimism throughout the entire Bitcoin community. The foundations of a new financial system were being constructed, and I got to lay some of the bricks. It was one of the most exciting times in my entire life. We Bitcoiners were a small group, but we had something special. Not only was there money to be made, but we all knew there was a huge opportunity to change the world in a positive direction.
At that time, there was no real commercial infrastructure; we were starting from scratch. We needed more merchants to accept Bitcoin, more exchanges to trade it, and easier tools for its usage. We needed new companies to be created, but in 2011, the venture capital industry hadn’t yet discovered Bitcoin. So, I ended up being the world’s first investor in Bitcoin startups. The market was so young that almost any successful investment benefitted everybody, especially if it tackled the basic problems we were all facing. For example, price volatility was a notorious issue that made merchants hesitant to accept Bitcoin for payment. So, I jumped at the opportunity to provide seed funding for BitPay, a startup that allowed merchants to accept Bitcoin and immediately convert it into fiat, eliminating the volatility risk. Their service proved crucial to gaining mainstream adoption, and BitPay has since become one of the most important companies in the entire cryptocurrency world.
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.
11
The Four Eras
There will never be a single, authoritative history of Bitcoin because the story is too complex for any one person to see the whole truth. I can share my own perspective, memories, and personal experiences, which I know are similar to other early adopters and businessmen that worked with the technology from the beginning. In my mind, Bitcoin has gone through four different eras, each with its own culture, leadership hierarchy, level of industry development, and relationship to the general public. These eras blend into each other and do not have precise start or end dates, but they are still a helpful tool for reconstructing history to better understand the present moment.
1) The First Era: Obscurity
From ~2009 through ~2011
The first era was defined by obscurity. With all the constant news coverage and hype today, it might be hard to believe that Bitcoin was virtually unknown for years. The entire community existed within a few online forums, cryptography mailing lists, and niche libertarian circles. It took several years before it gained any serious public attention. In the earliest days, it wasn’t clear that Bitcoin would even work, let alone become an international sensation. Even the original pioneers saw it as a technology with an uncertain future. Gavin Andresen warned on his blog in 2012:
DISCLAIMER: I’ve been saying this for a couple of years now, but it is still mostly true: Bitcoin is an experiment-- only invest time or money in it that you can afford to lose!1
My experience of the first era began in late 2010, when I first heard about Bitcoin on the radio show Free Talk Live. The technology sounded too good to be true—fast, cheap, digital money that wasn’t issued by a central bank or controlled by political forces. I knew if it worked as advertised, it could usher in a new era of global prosperity and freedom. So, I had to find out more. The next ten days were intense, as all my free time was spent learning about Bitcoin. I scoured the internet for every new piece of information—articles, blog posts, forum conversations, anything that discussed the new technology. My nights got later, and eventually my sleep turned into short naps. I would wake up and immediately continue researching.
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.
11
The Four Eras
There will never be a single, authoritative history of Bitcoin because the story is too complex for any one person to see the whole truth. I can share my own perspective, memories, and personal experiences, which I know are similar to other early adopters and businessmen that worked with the technology from the beginning. In my mind, Bitcoin has gone through four different eras, each with its own culture, leadership hierarchy, level of industry development, and relationship to the general public. These eras blend into each other and do not have precise start or end dates, but they are still a helpful tool for reconstructing history to better understand the present moment.
1) The First Era: Obscurity
From ~2009 through ~2011
The first era was defined by obscurity. With all the constant news coverage and hype today, it might be hard to believe that Bitcoin was virtually unknown for years. The entire community existed within a few online forums, cryptography mailing lists, and niche libertarian circles. It took several years before it gained any serious public attention. In the earliest days, it wasn’t clear that Bitcoin would even work, let alone become an international sensation. Even the original pioneers saw it as a technology with an uncertain future. Gavin Andresen warned on his blog in 2012:
DISCLAIMER: I’ve been saying this for a couple of years now, but it is still mostly true: Bitcoin is an experiment-- only invest time or money in it that you can afford to lose!1
My experience of the first era began in late 2010, when I first heard about Bitcoin on the radio show Free Talk Live. The technology sounded too good to be true—fast, cheap, digital money that wasn’t issued by a central bank or controlled by political forces. I knew if it worked as advertised, it could usher in a new era of global prosperity and freedom. So, I had to find out more. The next ten days were intense, as all my free time was spent learning about Bitcoin. I scoured the internet for every new piece of information—articles, blog posts, forum conversations, anything that discussed the new technology. My nights got later, and eventually my sleep turned into short naps. I would wake up and immediately continue researching.
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:
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:
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:
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:
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 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 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
10
Keys to the Code
Bitcoin is often spoken about as if it exists beyond the reach of human influence, as incorruptible as the laws of physics. The network is supposedly too large and decentralized for any group to control, no matter how powerful. According to The Bitcoin Standard:
Bitcoin’s value is not reliant on anything physical anywhere in the world and thus can never be completely impeded, destroyed, or confiscated by any of the physical forces of the political or criminal worlds. The significance of this invention for the political realities of the twenty-first century is that, for the first time since the emergence of the modern state, individuals have a clear technical solution to escaping the financial clout of the governments they live under.1
This is a beautiful concept, and I truly wish Bitcoin worked this way, but unfortunately, history demonstrates otherwise. Bitcoin is very much a human project and is not immune from individual and institutional corruption. Social and political factors are overwhelmingly important and have been since the beginning.
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.
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
10
Keys to the Code
Bitcoin is often spoken about as if it exists beyond the reach of human influence, as incorruptible as the laws of physics. The network is supposedly too large and decentralized for any group to control, no matter how powerful. According to The Bitcoin Standard:
Bitcoin’s value is not reliant on anything physical anywhere in the world and thus can never be completely impeded, destroyed, or confiscated by any of the physical forces of the political or criminal worlds. The significance of this invention for the political realities of the twenty-first century is that, for the first time since the emergence of the modern state, individuals have a clear technical solution to escaping the financial clout of the governments they live under.1
This is a beautiful concept, and I truly wish Bitcoin worked this way, but unfortunately, history demonstrates otherwise. Bitcoin is very much a human project and is not immune from individual and institutional corruption. Social and political factors are overwhelmingly important and have been since the beginning.
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 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
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
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.
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.