The Disruptor Can Be Disrupted

In order to make a good argument you must do so plainly, without resorting to fallacies like the Appeal to Fear Fallacy, where you claim, “something bad might happen if you don’t do what I say”. This is true everywhere, including but not limited to Bitcoin.

The fact of the matter is that business models need to adapt to the market, no matter who they are or what their business is. Even what their business is is open to direct challenge, disruption and disintegration. I will explain this by analogy.

Lets say you run a software company. Its 1994, and your product runs very successfully on Windows 3.1.

Windows 3.1 desktop workspace

You have a large installed user base and are profitable. Then 1995 rolls around and so does Windows 95 with a screaming and dancing Steve Ballmer.

All of your customers are upgrading to Windows 95. They are doing this because their machines run better under Windows 95, and the other software vendors are abandoning Windows 3.1 versions of their products. What do you do?

Do you mount a campaign to keep everyone on Windows 3.1? Of course not; you re-write your application so that it runs perfectly on Windows 95, and then charge everyone to upgrade to the new version.

Adobe Photoshop 5 and 7 running on Windows 95 and Windows Vista respectively.

This is exactly what is happening in Bitcoin. In order to keep Bitcoin decentralized and free of coercion, the block size cannot increase. This is a fact. If you want to process more transactions per second in your service, you are going to have to find another way to do it; you can’t ask Bitcoin to change because your business model relies on Bitcoin doing something it can’t presently do.

In this analogy, Bitcoin is… Microsoft. Yes. I actually typed that.

Microsoft is only interested in running on the latest hardware, as fast as possible and securely as possible. They are not concerned with the needs of individual software developers, but software developers in general. Their software APIs make the best advantage of the Windows OS so that consumers get the best experience.

Now of course, if you know anything about operating systems, and Microsoft in particular, you know that they had secret APIs that were available only to Microsoft developers, giving software written by them an advantage over software written by third parties. But Bitcoin can’t suffer from this, because it is open source. All the API calls are public; there are no secrets in Bitcoin. Its up to you to develop your own methods of increasing capacity to your customers, and I have described how this can be done previously.

Bitcoin is a scarce resource. It is not like fiat currency that can be printed out of nothing and distributed for nothing. There is a cost to mining Bitcoin and creating it. You can’t simply increase the supply of a resource you need because your broken business model requires it at the expense of others; you have to change your business model to accommodate the reality of Bitcoin.

Scarcity is not artificial; it is a reality of life and economics. Before Bitcoin, the people who are now in it used to believe that only the government can (and should) produce money, and that it is entirely correct that the money supply should inflate at a rate set by the government. Now that these same men are in Bitcoin, they have abandoned the idea of inflation and Keynesianism because they have been educated by Bitcoin. They now understand the Austrian School is correct with respect to money supply needing to be strictly limited. What they do not yet accept is the core principle; that there is nothing that can be unlimited in supply without an economic consequence. This failure to understand the true nature of supply and demand shows these men have not yet completely absorbed Austrianism, or economics. Perhaps Praxgirl can help.

Your Feelings Do Not Matter

None of this is a matter of feelings. This is a matter of facts. If the block size is increased to 8mb and above, Bitcoin will become centralized. This is not a hunch or a feeling. It is a fact, and it is anti-Bitcoin. There is no such thing as “constrained growth” in a system with naturally limited resources. Bitcoin can only grow to a certain size while remaining pure Bitcoin. You can change Bitcoin to something else so it grows exponentially, like Keynesian money, but that is not Bitcoin, it is something else, and you are of course, free to design and deploy it and risk exposing it to the market. Someone has already tried this and the market has rejected it.

The real world is what Bitcoin Core is dealing with. They want Bitcoin to remain Bitcoin and to spread everywhere with its utility and character intact. They understand the reality that new software needs to be developed, and that there is no getting around this. They are facing reality head on, and doing the incredibly difficult and dangerous work of creating exactly what is needed to solve this problem. The people who are not offering software solutions, the only solutions that matter and that will be accepted by the market, are the ones who are not facing reality. Changing a parameter is not the same as developing a solution to a problem. Destroying Bitcoin because you can’t fit into it is not a solution either.

Bitcoin will always be useful for its users; that is why they use it. To say that Bitcoin will be less useful to its users if the block size does not increase is a pure Straw Man Fallacy. A mythological user that wants to buy coffee at Starbucks is held up as the typical user and then struck down because she can’t do that. No one that can think is accepting these arguments, and making them over and over doesn't change their fallacious character. Bitcoin’s true place in the market is still being discovered. Artificially setting the target as a fictional user who buys coffee at an American food chain, above all other users in the entire Earth, the majority of which have never seen a Starbucks, is parochial and ridiculous.

The fee market has started to develop. Software is being written to make a good guess at the level of fees that are needed to get a transaction through in a timely manner. Obviously, as a guide to setting the correct fee, this work is very beneficial, and even if this software is only partially accurate, you can always add as small insurance amount on top to make absolutely sure you are going to have your payment processed. This should be done to keep your customers happy and on your platform knowing that solutions to your problem are under way either in your company or outside it. This cost of doing business could be passed on to the customer, who in any case is not going to mind since they are already making huge savings over traditional fees in most business cases.

The Spam Argument

If a glass is 80% full filling it to 100% with spam costs little to some malicious man who wants to flood the network. With Big blocks, instead of sending a million messages, say you need to send a hundred million messages. To a well financed attacker, this difference doesn't mean anything. She simply sends one one hundredth the amount. Also, in that scenario the centralizing solution means everyone has lost Bitcoin, and is dealing with “Amazon Coin” or some other repugnant Bitcoin derivative where there are only three mega providers and all service providing companies are connected to them for Blockchain access. Even if this spam argument is sound (it isn't) spam attacks are always intermittent and never permanent; look at the LOIC attacks against PayPal for a real world example.

Low Orbit Ion Cannon (LOIC) demonstration

They lasted for a short amount of time, and then went away. PayPal is still operating smoothly. Who in their right mind wants to destroy Bitcoin to prevent a potential spam attack that can only last a few hours at most? This is a pure Straw Man Argument, where the Straw Man of a Spam attack is held up to be knocked down. It is also the Appeal to Fear Fallacy, where we are meant to be made frightened by the potential of a devastating Spam attack that lasts months or even years.

Dynamic Fees

Its easy to assert that Dynamic Fees are not the solution, when the software to manage this is in its infancy. The same arguments were made against Bitcoin that, “It will never work” despite it working perfectly in front of everyone who cared to look. The fact that it is being done means that it has potential; what that potential is is the unknown. Lets say that it is in fact a half-measure as some describe. A half measure that keeps Bitcoin as Bitcoin is better than changing Bitcoin into a centralized permissioned network run from a single country. The next argument offered is that dynamic fees currently only look backwards; is there any market analysis software anywhere on Earth that 100% accurately predicts markets IN ADVANCE? This is a very pure Straw Man Fallacy, but its an interesting one. In Bitcoin, because it is acting like money, when there is alot of usage data open to everyone, it may be possible to make very accurate predictions about what fees will be required, propagating in waves across the world as night follows day. Once again, no argument for centralizing Bitcoin as the only possible solution has been offered, only fallacies, and software that has never been and which can’t possibly exist. These fallacies really will not cut it.

The Fee Market is not a Real Market

Another objection put on the table is that the fee market is not a real time market. So what? This is the Moving the Goalposts Fallacy. Once again, the stock market and other markets are able to trade successfully (on a mechanical level) and there is no reason why those software methods can’t be superimposed on to the Bitcoin fee market. This is an argument one step backward from the complaint that the future can’t be predicted by software. If a company creates a tool to 90% accurately predict and then disseminate fees levels for consumption by Bitcoin software companies, they will make a fortune. Perhaps a company like Eliptic can pivot to an ethical model like that.

Conflating consumer confidence and the fee “problem” is another fallacy; Appeal to Popularity. If your business model doesn’t insulate your customers from fee fluctuations, your business model is broken and needs to change. If you are a big Bitcoin company, you should either bid for guaranteed block space at a fixed price with a miner so that your fees are a known factor, or group together with other big Bitcoin companies and build your own mining farm so that you can control this key process yourself. It simply is not reasonable to demand that the nature of Bitcoin changes by increasing the block size so that you do not have to do any work or innovation. To stay in Bitcoin you must build new software, you must come up with new ideas and it seems you must also own a mining operation. You can’t simply concentrate on consumer interfaces and other easy things. Owning a mining operation will also solve another problem some people have; Sinophobia. If you build your own Bitcoin mining pool that is large, then you will no longer have to worry about “Communist China taking over Bitcoin” as Mike Hearn invoked.

Two mining companies have already signed deals to process Bitcoin transactions. Knowing this, a rational man with the means would either build his own mining company or sign a contract for priority mining services. Whichever is cheaper and most effective long term is the best option. None of this by the way, is a “race to zero” (the correct phrase being “Race to the Bottom”) which is something that a Socialist thinks when they have free market competition unleashed on them. Bitcoin’s inherent limitations are a huge business opportunity for the mining industry, which will be set to expand to accommodate all the companies that want to have their transactions mined no matter what, on fixed terms.

Once again, Bitcoin has exposed people (by force) to the ideas of the free market and Austrian Economics, but the quivering vestiges of statism and the disturbing stench of Socialism is still wafting about, with men claiming that free market competition is a “race to the bottom”. Bitcoin will put pay to this bad thinking also eventually.

If predictability is important to customers, it is something they will be willing to pay for. Providing it is a market opportunity, just like any other customer need. It is not and should not be used as a pretext to centralize Bitcoin and no capitalist would ever suggest such a thing.

Block Space Scarcity Is Bad for the Openness of the Network

Finally we come to the most strange of all the arguments. It is clear that a centralized Bitcoin with big blocks will be a less open network, since the “Blockchain Providers” will be forced to force KYC/AML verification on all consumers of their API (take a look at the terms and conditions for some of the Bitcoin exchanges now. If you apply as a business, they are some of the most over the top and excessive requirements imaginable, and that is without any explicit written law requiring them to do so!. They want your entire business plan, projections and everything else).

The simple fact is that larger start ups can buy their way into a Big Block Bitcoin, and small developers will be priced out. Saying that small developers will not be able to code their platforms with a fee structure in place is completely false. Anyone can develop Bitcoin related software and test it against a testnet on their local machine; there will be no change in how software is developed on a test platform and saying otherwise is simply not true, and rather odd. Companies like Electrum will suffer more under Big Block Bitcoin, because the cost of running a full node to service their customers will be prohibitive. Instead with a fee market, they will simply pass the slightly bigger fees on to their users, who, once again, will be paying far less than they would be to send money globally with traditional services. They may not be incentivised to use Electrium to buy coffee, but that is a Straw Man use case as I have already described.

The barrier to entry into Bitcoin is low, because downloading the entire blockchain is doable for anyone who wants to; that is the true, present and very low barrier to entry, and is the real reason that small projects would be priced out of Big Block Bitcoin. Smaller start ups in a big block world will need to spend tens of thousands and even more if they want to run their own complete copy of the blockchain. That is far more of an impediment than tiny dynamically calculated fees being spread across millions of users, and from this comes the key insight;

“Big blocks concentrate the cost of being in a Bitcoin business benefiting incumbents and harming Bitcoin, small blocks push operating costs out into the network, benefiting everyone and Bitcoin.” — Beautyon

That is the whole matter in a nutshell.

Bitcoin will not “offer less value” if the block size is maintained to preserve the network’s distributed geometry; it will spread the operating costs fairly. Value is subjective, not objective, and there is no single ideal Bitcoin user or use case; the market decides what Bitcoin is for, not a single Bitcoin business.

Finally, disruption is not reserved for the banksteristas; it is for anyone who refuses to quickly adapt to the needs of the market. Freezing Bitcoin development is simply not going to happen. The market will continue to improve Bitcoin, without changing its essential nature, including adding bullet proof anonymity, and anyone who wants to come along, innovate and profit on it is welcome, and in fact, can’t be prevented from doing so.

And that is the best kind of disruption of all.

Wild mudroom omelette, spinach, fresh bread, fresh butter, Ruggeri, Vecchie Viti Brut, Valdobbiadene Prosecco Superiore 2010 ↴