Tag: Bitcoin SV

The Bitcoin Trilemma

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Gabriel Cardona, creator of Bitbox developer tools recently tweeted a compelling question.

Of the three desirable properties of a blockchain, allowed two, which do you pick?

The question is compelling because it’s real. It’s easy to balance two, but a blockchain with all three is still theoretical.

Bitcoin Forks

Bitcoin has been forked innumerable times, but the Bitcoin community has only forked twice – creating three separate chains.

Each of these chains correspond to a position in the “blockchain trilemma.”

BTC

The fork of Bitcoin known as BTC chose security and decentralization.

By limiting the amount of transactions which could fit in a block, BTC ensures that miners will never get so large that they can be coerced by malicious actors.

BCH

Bitcoin Cash (BCH) forked over BTC’s decision to keep the blocks small, and transactions limited, because small blocks cause high fees, and high fees limit the potential user base – rendering Bitcoin (BTC) useless as cash.

The (short-term) sacrifice BCH made was security, and to some extent decentralization, but the community’s support of the coin is exercised through the market; if decentralization were to falter, the market would punish holders of BCH and therefore miners and developers.

Regarding the trilemma, BCH chooses decentralization and scalability.

BSV

That leaves one position for the third and final fork. Bitcoin Satoshi [sic] Vision (BSV) chooses scalability and security.

Conveniently, BSV supporters deny that the trilemma even exists. Nevertheless, it’s quite clear to everyone outside their cult why they’ve chosen this. It has to do with the political ideologies of those involved.

Solutions to the Trilemma

Between those forks which acknowledge the blockchain trilemma, third-party solutions to it have been suggested.

BTC’s solution is the Lightning Network, supposedly trustless and decentralized, but not so in practice. Without a trusted oracle to keep nodes aware of the state of the network, formation of centralized hubs is inevitable.

Pending its success in a testnet environment, Avalanche is one solution for Bitcoin Cash. Avalanche is similar to the theoretical Lightning Network in that it would shore up BCH’s weaknesses dictated by the trilemma.

It’s different in that Avalanche has a working product which doesn’t accidentally destroy users’ funds all the time.

We’ve linked the latest example, which just so happened to be yesterday – we Googled the recurrent problem and that came up.

Conclusion

This problem is not unique to Bitcoin forks. Every blockchain is trying to solve the blockchain trilemma – even BSV; the problem still exists.

This framework is helpful for contextualizing Bitcoin forks thus far, and may be helpful in predicting future Bitcoin forks.

While there are only three possible answers, according to the structure of the question posed by Gabriel Cardona, in practice, blockchains may include some level of each.

The extreme positions resulting from “pick two” are merely illustrative.

It’s possible that in the future, should the market call for further forks, that splits will be along these lines – for example, an emphasis on scalability over decentralization, or in varying degrees of all three.

Bitcoin forks have caused a financial bloodbath and vicious animosity between community factions, so we hope there are no further forks, but (thankfully) that’s not up to us – the market determines whether a fork is prudent or not.

The Goldilocks Principle and Bitcoin Forks

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This article is based on a Twitter conversation with Adrian X and Tao Jones, two of my favorite Bitcoiners.

I am consistently impressed with their creativity, open-mindedness, and articulation of arguments; they are worth following.

Transaction Volume and Decentralization

Each of Bitcoin’s three major forks can be summarized by their ideological preference for these two characteristics: transaction volume, and decentralization.

All of Bitcoin’s forks agree that censorship resistance is desirable. However, Bitcoin, Bitcoin Cash, and Bitcoin Satoshi Vision have different ideas of how to achieve it.

And to varying degrees, they’ve all lost sight of the original goal: a peer-to-peer electronic cash system.

Censorship Resistance

Bitcoin started as a way to make payments which couldn’t be censored. We call this quality ‘censorship resistance.’

Censorship resistance is achieved through Bitcoin’s incentives, which encourage a level of decentralization.

Bitcoin (BTC)

The fork of Bitcoin which kept the BTC ticker is mostly focused on decentralization.

BTC achieves decentralization at the base layer, but the community has become so fixated on decentralization, it’s forgotten the original goal.

Rather than peer-to-peer electronic cash, BTC is becoming a settlement layer – too expensive to use in daily transactions.

While the main chain is still ‘decentralized,’ using BTC for payments will soon require the trusted third parties Satoshi sought to eliminate.

The BTC community’s fetishizing of decentralization keeps forcing it further and further from its original purpose as a permissionless medium of exchange.

Bitcoin Satoshi Vision (BSV)

Bitcoin’s latest incarnation, Bitcoin SV aims for censorship resistance of everything.

BSV doesn’t limit censorship resistance to just transactions. It wants to include all types of data – photos, videos, documents – the whole internet on BSV.

This is entirely possible, but at the cost of significant levels of decentralization.

Bitcoin SV advocates frequently and aggressively assert that BSV can scale.

Of course it can – as can Facebook Coin, JP Morgan, and Hashgraph.

They all sacrifice decentralization.

Decentralization

Decentralization is necessary to offset systemic risk.

Unfortunately, in the hostile environment of the modern world, incentives within the protocol are not enough deter bad actors from outside it. Because all BSV miners will be known at scale, they could be forced to censor transactions.

Bitcoin Cash (BCH)

BSV sacrifices decentralization for censorship resistance of increased transaction volume.

BTC sacrifices its utility altogether.

BCH strives for sufficient levels of each in order to maximize its utility as a medium of exchange.

Decentralization exists on a spectrum; transaction throughput is high enough when all demand for payments is filled.

BCH is not perfect – it suffers from the same governance problems as the other forks.

But it’s the only fork of Bitcoin which has its priorities straight.

For different reasons, BTC and BSV miss the forest for the trees.

BCH is solving for Bitcoin’s intended use, as a medium of exchange.

Valuing Cryptocurrencies

BTC and BSV advocates also rationalize that their use cases will give their coin value.

These are topics for another post, but utility as a data store doesn’t make BSV very valuable, and Metcalfe’s Law is mostly relevant to BTC because it’s a pyramid scheme.

Currencies get their value from use as a medium of exchange.

This is not a unilateral endorsement of BCH; each of these three currencies could succeed in their own way.

However, BTC and BSV don’t create futures worth supporting.

Of the three major Bitcoin forks, only BCH can retain decentralization and censorship resistance at scale.

Furthermore, valuations of medium of exchange currencies far exceed utility token (BSV) or commodity (BTC) valuations.

A case can be for the success of other coins, but the cryptocurrency that dominates the market in the future will be the one which is used as a medium of exchange.