In any new and developing space, there is bound to be a lot of noise. New solutions both compete for a new market against existing monopolies — who currently own the market, and against other technologies trying to displace them. Hard to understand This is especially true in those breakthrough innovations/discoveries that change our world and force us to use a new lens to understand it. Prior biases make us less likely to investigate the new innovations on a first principles basis. Data is a legacy of our existing models — not these new ones. New ones need to be intuited to predict what will happen instead of forecasted using historical data. We simplify the models in our brains to save time and as a result, most people fall into the trap of predicting their future behavior by looking back at their past.
Excellent work, as always. I genuinely look forward to reading your work and gaining insight into your mental models. You clearly communicate complex ideas using rigorous logic and concise, easily-digestible language. Thank you for your efforts in improving the world, you are making a distinct difference for the better.
I would love to talk to you, but won't pursue that. I have no medium of communications to the public, nor necessarily any input that would be of value to you, thus not a valuable use of your time. But let me just try and briefly say that your words are life changing for me. I am an engineer and dove down the WTF is wrong with the world rabbit who several years after the 08 crash, and an accelerating focus since which is now about 3 years of 4 hours of day of reading, and another 4 in just milling through Youtube listing to many smart people including you and those in your crowd. Your craft at explaining your thesis has gotten quite good. I have shared your book with about 20 people, including a few Youtubers. Sam Alexander who does a "the media lies" channel with a heavy focus on Tesla read it and even called your book out (and shout out to me) on his Patreon page. He has become quite the red-pill buy since. Its getting around. Anyway, I just wanted to say thank you, and some encouragement to keep up the good fight for BTC, and doing everything we can to make sure when we revisit the creation of a new system that as many people know what went down as possible in hopes we build it back right.
Jeff, what do you recommend as best sources to read for lay people to really understand the nitty gritty of BTC and it’s impact? I’ve read and appreciate your book and have shared it many times. Not investigating things oneself these days is downright dangerous, yet the information is not easy to learn or understand as technology carries us further and further from the natural world that we belong to and naturally relate to.
Excellent work - and nice comments too. Ron needs to look at the Signal a little more. ;-)
Also learned you have a wake boat? Love it - we have one too at the lake house. So much fun with the fambam.
Can't wait for the next book integrating Bitcoin into The Price of Tomorrow. World After Bitcoin Adoption? How you think could make this a read of the century! Dream BIG!
Great article Jeff. So much to unpack and dig into there. I hope you are right about bitcoin. It's not perfect, but I agree it's still the key breakthrough achievement of block-chain technology, and does stand a chance of moving us in a better direction long term.
If only more people could see that energy is central to everything, harness enough of it and all problems can be tackled. I like how you tied money to information and ultimately energy with the bitcoin block-chain protocol.
Our current over leveraged and by necessity inflationary financial system is, as you say, creating misinformation in our actions and priorities and squandering precious wealth. Wealth we will need to solve the never ending procession of problems that come with the new progressive knowledge and innovations we create.
You say: "Bitcoin (on layer 1) solved (a) Decentralization and (b) Security."
This was mostly correct in the first few years that Bitcoin existed and now flat out wrong.
(a) ASICs have led to severe centralisation. There are only a few ASIC manufacturers, and a modest number of large scale Bitcoin mining operations. These are all legal corporate entities and vulnerable to coercion and cooption.
(b) Security. BTC has the very best technical (record keeping) transaction security in existence. BUT zero privacy. That makes personal security related to your BTC financial transactions completely broken.
You also say: "Bitcoin remains decentralized and secure because of its design. Two critical design elements led to this outcome. 1) A limited block size and 2) using energy to secure the network through proof of work."
I can agree with 2) .. but that is a characteristic of all POW coins.
1) limited blocksize is unrelated to security.. it definitely constrains the utility value of the technical network. It is compensated for by the first mover advantage, and then the strong marketing which happened after 2013. You may recall the mass of political panic in 2013 - senate hearings etc. And then the financial incumbents noticed the weak points that BTC had ... one of them is the pathetic transaction arbitrary limit. So then traditional coopt, coerce and disinformation tactics emerged.
And you say: "You will see from a long history of competing blockchains that they all either become centralized (through a council or a small number of people/nodes who make decisions for everyone) or become vulnerable to hacks/outages as they scale."
If you said "almost all" you would be correct, but "all" is wrong. Monero is fairly old. Well established. 4th highest on chain transaction load behind BTC, ETC and LTC (LTC is frequently used as a bridge coin for XMR to access centralized exchanges for on/off ramp currency conversions). But still run by the community at large and a chaotic but effective (large) group of anonymous developers. It is still scaling very well and can easily sustain transaction loads well beyond the artificial limitations that BTC has.
BTW: even BTC has a centralized 'council' - Blockstream - unofficially but effectively controls any technical improvements by having the GitHub keyholders as part owners.
You said this: "if one sacrifices decentralization for scalability, a blockchain must eventually become useless for economic reasons"
I sort of agree.
You could make it simpler. ""if one loses decentralization for any reason, a blockchain must eventually become useless for economic reasons" - and that is why BTC is already useless - but supported as a distraction by the incumbents. ASIC's and centralised exchanges have made BTC less useful to people than cash or even normal bank accounts.
In your "deeper dive section" you talk about validating nodes being a check on mining nodes.. only in the weakest of senses is that true.
Miners can implementation any change they like if they have 51% of the hash power... and the validating nodes can only rebut that using social communications about a 'bad change'. So the validating nodes are always faced with fait-acompli. If the changes are small, financial inertia will prevent each change being overturned ... the frog gets boiled slowly.
This really has happened in the past. According to the protocol (which has not changed for this), you can insert a transaction with a zero fee. At one time a (small) portion of each block was reserved for zero fee transactions. That requirement was silently dropped a long time ago. The miners from then on simply chose to not include zero fee transactions, and then without discussion, one of the releases changed things to that a zero fee transaction would be entered, but simply not broadcast. So the validators never even saw the changes made .. and you cant reject something that you dont see... I noticed because I tried to replay a failed transaction that was very old .. and had a zero fee. Most of the client software now will not even submit a zero fee transaction even though it remains completely valid according to the protocol.
If some of the mining groups under sanctions or pressure start censoring transactions (like SWIFT does), the validators will not notice that happen either.
BTC as a base layer is flawed .... but the POW concept blockchain if you fix the privacy aspect (for security reasons), and the technical decentralisation of mining IS a foundation for the things you talk about.
As an aside .. Lightning network has many design weaknesses... and not just technical in nature either. At the very least it promotes centralisation into nodes with many open channels. It also requires the public to stake funds into channels in advance of using them - like you would do with PayPal or your bank, whereas Visa/MasterCard offers you debt and has most of the world hooked on debt.
There are other possible approaches to scaling that dont have the intrinsic routing problem that Lightning does ... I found a dead project (may be just stalled) with a good explanation of how to scale Monero using atomic swap to side chains .. merge mining not required and could coopt ALL other crypto mining resources via economic incentives. I think I archived a copy of their stuff ... I will try to find it for you.
Last thing:
"It is early, and not everything will work out as planned, but each success scaling in layers reinforces and brings more talent and capital to the ecosystem. Some of these pieces of the puzzle (like Lightning, Taro, and Fedimint) will work together in ways not yet completely understood — accelerating adoption. All of them will build upon a layer 1 foundation that is rock solid. In doing so, many of the long-term “use cases” of alternative coins will disappear and one by one, they will fail."
Mostly correct - but BTC (Bitcoin) is not that rock solid foundation - too many weaknesses. It is just the original invention of POW ... We are seeing the explosion of many (mostly useless) alternatives. Most will disappear. Many will attempt 'non currency' functions - like ETH does. Some will offer specialised payment rails which are very fast but not like BTC at all - things like XRP which is a pure 'company coin'. Some like Monero (XMR) correct the weaknesses of BTC and remove the things not needed for a currency (you dont need a scripting language for that function)
Overall though, we are witnessing a genuine marketplace for ideas about how to implement the concept of money. This time it has been instigated by multiple inventors rather than the warrior/king class.
Despite the fact I think a lot of that article is correct, you are making some mistakes...
On the network front, TCP/IP is not the base (logical) layer of the internet.. that is IP ...both TCP and UDP layer on top of IP ... and IP can be transported by many different physical layers... including the funny but proven Avian Carrier transport layer. https://en.wikipedia.org/wiki/IP_over_Avian_Carriers
As well as that, you are presuming that IP was simply the first and greatest packet technology. Not so.
Even older is the IBM HDLC protocol .. VTAM is the equivalent layer for the 3270 family of devices, and all of these (and now IP as well) support the SNA environment of the OS/390 mainframes
Other manufacturers than IBM had their own protocol attempts too - many of which were packet switching and multiplexing protocols ... for example Hyperchannel... https://en.wikipedia.org/wiki/HYPERchannel
I must quote you: "With that as a backdrop, I will provide a simple framework to explain why Bitcoin is without equal in its design so others can use that framework to decide for themselves."
Mind you, that triangle diagram is good, but it says 'blockchain' not Bitcoin ... which is what makes it pretty good.
You are presuming that because Bitcoin made the breakthrough of using Proof of Work to create a trustless consensus mechanism, that it will automatically be the actual implementation which ends up as the base layer of all systems needing that technology. That is a rash assumption, though there are a lot of incumbent players that would love that to happen because it is an implementation with many many shortcomings that allow it to be constrained and hence not be a threat to the incumbents.
Obvious weaknesses are:
- unwilling to accept improvements (of to correct limitations) if it is not 'backward compatible' ... this is a political choice .. and prevents both simple improvements, and generates accumulation of technical debt.
- strangled capacity.
- Added 'Replace By Fee' to make zero-conf transactions unsafe <<< this prevents it competing with Visa/MasterCard Point Of Sale.
- Developers coopted by via Blockstream - shareholders include major financial incumbent personnel
- No longer decentralised. Mining allows transaction censorship - ASIC's are only manufactured by a small number of legally vulnerable entities
- Public (not opaque) ledger facilitates financial tracking - Big Brother. So this can never be 'secure' money - some violence can ruin your day if they can see your finances.
- Unproven concept of 'fee market' providing sufficient incentive to maintain transaction security in the long term.. and when under load the same fee market makes low value transactions unworkable.
Of all of these, the lack of financial privacy is the worst - though limited transaction capacity (and staying that way because of ossified development) is a close second.
Taking the same view as evidenced from the start of the Internet .. there are other implementations of Proof Of Work which are better - but most are not. Others often have one or more of these failings (and other problems too):
- premined to create a wealthy insider group
- master nodes or oracles which are privileged (and paid) insiders
- not open source - so not auditable
- different non Austrian monetary policy (Doge is the best example - unlimited money printing .. almost as bad as the Fed)
- No longer decentralised. Mining allows transaction censorship - ASIC's are only manufactured by a small number of legally vulnerable entities
- Public (not opaque) ledger facilitates financial tracking - Big Brother.
- Unproven concept of 'fee market' providing sufficient incentive to maintain transaction security in the long term.. and when under load the same fee market makes low value transactions unworkable.
But there are some POW coins which do claim to resolve the lack of privacy ... but most only support 'opt in' privacy which simply means people that 'opt in' also identify themselves as a 'person of interest' to governments
Default privacy where you personally control whether you 'opt out' and disclose you financial transaction(s) is far better.
A couple of coins take this approach, but in terms of user base, the standout leader is Monero (XMR). It also corrects most of the other issues that BTC has:
- network upgrades that are not backward compatible are normal (hard fork).... one is due shortly on 12th August 2022 .. so the technical protocol evolves - though the core functionality itself remains unchanged
- dynamically self-adjusting transaction capacity, but has algorithmic and economic constraints to resist spamming attacks yet keep transaction fees modest and consistent.
- monetary policy that is Austrian in a similar fashion to BTC, but not quite as harsh. Tail emission operates as an analogy to gold mining - money supply always increases but is always limited at any given time.
- blockchain is opaque - hides the sender, receiver and amount of each transaction from 3rd parties. All XMR are interchangeable - fungible. BTC are not.
- Proof-Of-Work is truly decentralised - specialised hardware (ASICs) can not outperform standard CPU hardware. Every computer can be a miner so there is not target for transaction suppression (and no visible information to allow suppression anyway)
- developers are all anonymous. A couple of the early developers are known but no long involved .. and still get persecuted using lawfare tactics !
Jeff,
Excellent work, as always. I genuinely look forward to reading your work and gaining insight into your mental models. You clearly communicate complex ideas using rigorous logic and concise, easily-digestible language. Thank you for your efforts in improving the world, you are making a distinct difference for the better.
I would love to talk to you, but won't pursue that. I have no medium of communications to the public, nor necessarily any input that would be of value to you, thus not a valuable use of your time. But let me just try and briefly say that your words are life changing for me. I am an engineer and dove down the WTF is wrong with the world rabbit who several years after the 08 crash, and an accelerating focus since which is now about 3 years of 4 hours of day of reading, and another 4 in just milling through Youtube listing to many smart people including you and those in your crowd. Your craft at explaining your thesis has gotten quite good. I have shared your book with about 20 people, including a few Youtubers. Sam Alexander who does a "the media lies" channel with a heavy focus on Tesla read it and even called your book out (and shout out to me) on his Patreon page. He has become quite the red-pill buy since. Its getting around. Anyway, I just wanted to say thank you, and some encouragement to keep up the good fight for BTC, and doing everything we can to make sure when we revisit the creation of a new system that as many people know what went down as possible in hopes we build it back right.
Jeff, what do you recommend as best sources to read for lay people to really understand the nitty gritty of BTC and it’s impact? I’ve read and appreciate your book and have shared it many times. Not investigating things oneself these days is downright dangerous, yet the information is not easy to learn or understand as technology carries us further and further from the natural world that we belong to and naturally relate to.
Dear Jeff, Is it possible to invest in your fund?
Excellent work - and nice comments too. Ron needs to look at the Signal a little more. ;-)
Also learned you have a wake boat? Love it - we have one too at the lake house. So much fun with the fambam.
Can't wait for the next book integrating Bitcoin into The Price of Tomorrow. World After Bitcoin Adoption? How you think could make this a read of the century! Dream BIG!
Great article Jeff. So much to unpack and dig into there. I hope you are right about bitcoin. It's not perfect, but I agree it's still the key breakthrough achievement of block-chain technology, and does stand a chance of moving us in a better direction long term.
If only more people could see that energy is central to everything, harness enough of it and all problems can be tackled. I like how you tied money to information and ultimately energy with the bitcoin block-chain protocol.
Our current over leveraged and by necessity inflationary financial system is, as you say, creating misinformation in our actions and priorities and squandering precious wealth. Wealth we will need to solve the never ending procession of problems that come with the new progressive knowledge and innovations we create.
.../continued
Ok ... following up
You say: "Bitcoin (on layer 1) solved (a) Decentralization and (b) Security."
This was mostly correct in the first few years that Bitcoin existed and now flat out wrong.
(a) ASICs have led to severe centralisation. There are only a few ASIC manufacturers, and a modest number of large scale Bitcoin mining operations. These are all legal corporate entities and vulnerable to coercion and cooption.
(b) Security. BTC has the very best technical (record keeping) transaction security in existence. BUT zero privacy. That makes personal security related to your BTC financial transactions completely broken.
You also say: "Bitcoin remains decentralized and secure because of its design. Two critical design elements led to this outcome. 1) A limited block size and 2) using energy to secure the network through proof of work."
I can agree with 2) .. but that is a characteristic of all POW coins.
1) limited blocksize is unrelated to security.. it definitely constrains the utility value of the technical network. It is compensated for by the first mover advantage, and then the strong marketing which happened after 2013. You may recall the mass of political panic in 2013 - senate hearings etc. And then the financial incumbents noticed the weak points that BTC had ... one of them is the pathetic transaction arbitrary limit. So then traditional coopt, coerce and disinformation tactics emerged.
And you say: "You will see from a long history of competing blockchains that they all either become centralized (through a council or a small number of people/nodes who make decisions for everyone) or become vulnerable to hacks/outages as they scale."
If you said "almost all" you would be correct, but "all" is wrong. Monero is fairly old. Well established. 4th highest on chain transaction load behind BTC, ETC and LTC (LTC is frequently used as a bridge coin for XMR to access centralized exchanges for on/off ramp currency conversions). But still run by the community at large and a chaotic but effective (large) group of anonymous developers. It is still scaling very well and can easily sustain transaction loads well beyond the artificial limitations that BTC has.
BTW: even BTC has a centralized 'council' - Blockstream - unofficially but effectively controls any technical improvements by having the GitHub keyholders as part owners.
You said this: "if one sacrifices decentralization for scalability, a blockchain must eventually become useless for economic reasons"
I sort of agree.
You could make it simpler. ""if one loses decentralization for any reason, a blockchain must eventually become useless for economic reasons" - and that is why BTC is already useless - but supported as a distraction by the incumbents. ASIC's and centralised exchanges have made BTC less useful to people than cash or even normal bank accounts.
In your "deeper dive section" you talk about validating nodes being a check on mining nodes.. only in the weakest of senses is that true.
Miners can implementation any change they like if they have 51% of the hash power... and the validating nodes can only rebut that using social communications about a 'bad change'. So the validating nodes are always faced with fait-acompli. If the changes are small, financial inertia will prevent each change being overturned ... the frog gets boiled slowly.
This really has happened in the past. According to the protocol (which has not changed for this), you can insert a transaction with a zero fee. At one time a (small) portion of each block was reserved for zero fee transactions. That requirement was silently dropped a long time ago. The miners from then on simply chose to not include zero fee transactions, and then without discussion, one of the releases changed things to that a zero fee transaction would be entered, but simply not broadcast. So the validators never even saw the changes made .. and you cant reject something that you dont see... I noticed because I tried to replay a failed transaction that was very old .. and had a zero fee. Most of the client software now will not even submit a zero fee transaction even though it remains completely valid according to the protocol.
If some of the mining groups under sanctions or pressure start censoring transactions (like SWIFT does), the validators will not notice that happen either.
BTC as a base layer is flawed .... but the POW concept blockchain if you fix the privacy aspect (for security reasons), and the technical decentralisation of mining IS a foundation for the things you talk about.
As an aside .. Lightning network has many design weaknesses... and not just technical in nature either. At the very least it promotes centralisation into nodes with many open channels. It also requires the public to stake funds into channels in advance of using them - like you would do with PayPal or your bank, whereas Visa/MasterCard offers you debt and has most of the world hooked on debt.
There are other possible approaches to scaling that dont have the intrinsic routing problem that Lightning does ... I found a dead project (may be just stalled) with a good explanation of how to scale Monero using atomic swap to side chains .. merge mining not required and could coopt ALL other crypto mining resources via economic incentives. I think I archived a copy of their stuff ... I will try to find it for you.
Last thing:
"It is early, and not everything will work out as planned, but each success scaling in layers reinforces and brings more talent and capital to the ecosystem. Some of these pieces of the puzzle (like Lightning, Taro, and Fedimint) will work together in ways not yet completely understood — accelerating adoption. All of them will build upon a layer 1 foundation that is rock solid. In doing so, many of the long-term “use cases” of alternative coins will disappear and one by one, they will fail."
Mostly correct - but BTC (Bitcoin) is not that rock solid foundation - too many weaknesses. It is just the original invention of POW ... We are seeing the explosion of many (mostly useless) alternatives. Most will disappear. Many will attempt 'non currency' functions - like ETH does. Some will offer specialised payment rails which are very fast but not like BTC at all - things like XRP which is a pure 'company coin'. Some like Monero (XMR) correct the weaknesses of BTC and remove the things not needed for a currency (you dont need a scripting language for that function)
Overall though, we are witnessing a genuine marketplace for ideas about how to implement the concept of money. This time it has been instigated by multiple inventors rather than the warrior/king class.
Despite the fact I think a lot of that article is correct, you are making some mistakes...
On the network front, TCP/IP is not the base (logical) layer of the internet.. that is IP ...both TCP and UDP layer on top of IP ... and IP can be transported by many different physical layers... including the funny but proven Avian Carrier transport layer. https://en.wikipedia.org/wiki/IP_over_Avian_Carriers
As well as that, you are presuming that IP was simply the first and greatest packet technology. Not so.
The IBM SDLC protocol is similar in purpose to IP and predates it. https://en.wikipedia.org/wiki/Synchronous_Data_Link_Control
Even older is the IBM HDLC protocol .. VTAM is the equivalent layer for the 3270 family of devices, and all of these (and now IP as well) support the SNA environment of the OS/390 mainframes
Other manufacturers than IBM had their own protocol attempts too - many of which were packet switching and multiplexing protocols ... for example Hyperchannel... https://en.wikipedia.org/wiki/HYPERchannel
I must quote you: "With that as a backdrop, I will provide a simple framework to explain why Bitcoin is without equal in its design so others can use that framework to decide for themselves."
Mind you, that triangle diagram is good, but it says 'blockchain' not Bitcoin ... which is what makes it pretty good.
You are presuming that because Bitcoin made the breakthrough of using Proof of Work to create a trustless consensus mechanism, that it will automatically be the actual implementation which ends up as the base layer of all systems needing that technology. That is a rash assumption, though there are a lot of incumbent players that would love that to happen because it is an implementation with many many shortcomings that allow it to be constrained and hence not be a threat to the incumbents.
Obvious weaknesses are:
- unwilling to accept improvements (of to correct limitations) if it is not 'backward compatible' ... this is a political choice .. and prevents both simple improvements, and generates accumulation of technical debt.
- strangled capacity.
- Added 'Replace By Fee' to make zero-conf transactions unsafe <<< this prevents it competing with Visa/MasterCard Point Of Sale.
- Developers coopted by via Blockstream - shareholders include major financial incumbent personnel
- No longer decentralised. Mining allows transaction censorship - ASIC's are only manufactured by a small number of legally vulnerable entities
- Public (not opaque) ledger facilitates financial tracking - Big Brother. So this can never be 'secure' money - some violence can ruin your day if they can see your finances.
- Unproven concept of 'fee market' providing sufficient incentive to maintain transaction security in the long term.. and when under load the same fee market makes low value transactions unworkable.
Of all of these, the lack of financial privacy is the worst - though limited transaction capacity (and staying that way because of ossified development) is a close second.
Taking the same view as evidenced from the start of the Internet .. there are other implementations of Proof Of Work which are better - but most are not. Others often have one or more of these failings (and other problems too):
- premined to create a wealthy insider group
- master nodes or oracles which are privileged (and paid) insiders
- not open source - so not auditable
- different non Austrian monetary policy (Doge is the best example - unlimited money printing .. almost as bad as the Fed)
- No longer decentralised. Mining allows transaction censorship - ASIC's are only manufactured by a small number of legally vulnerable entities
- Public (not opaque) ledger facilitates financial tracking - Big Brother.
- Unproven concept of 'fee market' providing sufficient incentive to maintain transaction security in the long term.. and when under load the same fee market makes low value transactions unworkable.
But there are some POW coins which do claim to resolve the lack of privacy ... but most only support 'opt in' privacy which simply means people that 'opt in' also identify themselves as a 'person of interest' to governments
Default privacy where you personally control whether you 'opt out' and disclose you financial transaction(s) is far better.
A couple of coins take this approach, but in terms of user base, the standout leader is Monero (XMR). It also corrects most of the other issues that BTC has:
- network upgrades that are not backward compatible are normal (hard fork).... one is due shortly on 12th August 2022 .. so the technical protocol evolves - though the core functionality itself remains unchanged
- dynamically self-adjusting transaction capacity, but has algorithmic and economic constraints to resist spamming attacks yet keep transaction fees modest and consistent.
- monetary policy that is Austrian in a similar fashion to BTC, but not quite as harsh. Tail emission operates as an analogy to gold mining - money supply always increases but is always limited at any given time.
- blockchain is opaque - hides the sender, receiver and amount of each transaction from 3rd parties. All XMR are interchangeable - fungible. BTC are not.
- Proof-Of-Work is truly decentralised - specialised hardware (ASICs) can not outperform standard CPU hardware. Every computer can be a miner so there is not target for transaction suppression (and no visible information to allow suppression anyway)
- developers are all anonymous. A couple of the early developers are known but no long involved .. and still get persecuted using lawfare tactics !