Bailey Reutzel is a veteran finance reporter, most recently covering the intersection of tech and finance for PaymentsSource.
Her latest project Moneytripping is a Gonzo-style journalism project focused on exploring money, politics and finance in America.
Should bitcoin be a more democratic online payment system accessible to everyone or a resistance tool for the lucky few who were in on the gold rush?
That may be the most pressing question facing the bitcoin network after developer Mike Hearn "quit" the open-source project in an open letter last week. Maybe these ideas aren’t exclusive, but the way the industry has banded together to discredit Hearn, one of its more active developers, seems to indicate that the bitcoin evangelists have lost the plot.
Hearn's arguments align with the idea bitcoin should aspire to be a faster, cheaper payment system to help consumers that have been exploited by banks and legacy payment providers for years. On the other side, he painted his antagonists as overly focused on keeping bitcoin "decentralized' and "censorship resistant".
"The idea that Bitcoin is inherently doomed because more users means less decentralisation is a pernicious one. It ignores the fact that despite all the hype, real usage is low, growing slowly and technology gets better over time," Hearn wrote in his much-covered criticism.
And Hearn's view is not without merit. Most of the bitcoin white paper focuses on the cost of initiating financial transactions online. Eliminating intermediaries or trusted third parties seems, on further reading, is only positioned as a way to reduce costs.
Satoshi Nakamoto writes in the bitcoin white paper:
But what about the message encoded within the genesis block, the first block on the bitcoin blockchain? “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
Many bitcoin enthusiasts will tell you this message gives credence to their assertions that bitcoin was created as a stateless currency, for anarchy, because of the bank’s misuse of power.
But was Satoshi aiming his barbs at the government or big banks?
Sure, both groups work closely, but the government is a public entity, whereas banks are for-profit. Both played a role in the financial crisis, but I'd argue governments were largely trying to stem the bleeding caused by the private sector.
While Satoshi has yet to come out and tell us exactly what that message means, it does seem he or she was taking a pessimistic political jab aimed at the banks. Depending on how you read that message, however, you could be convinced Satoshi was disparaging governments.
To lend credit to the former, Satoshi writes in the white paper:
My emphasis added. Why would Satoshi give a pass to physical currency here if he created bitcoin as a currency to disrupt the state? That’s rhetorical.
It could be argued that the very idea of bitcoin as a censorship-resistant payment method came to prominence at least two years after the software was released.
WikiLeaks released thousands of classified documents in 2010 and sometime thereafter, supporters began sending bitcoin, since major payment providers had blocked transfers to the site. Around that time, the added advantage or disadvantage (depending on where you sit) of bitcoin as censorship resistant became the focal point.
Now, with all that in mind, Hearn, alongside several other Bitcoin Core developers, wrote a piece of code, branded Bitcoin XT that would raise the block size limit so that more transactions could be handled on the bitcoin network.
This would not only allow bitcoin to scale, as defined by adding new customers, but also means miners are doing more work for the same reward. You can start to see the adverse incentives for increasing the block size here.
When Hearn released Bitcoin XT, any mention of Bitcoin XT was censored from several forums and he and others who mentioned the code were banned from those forums. DDoS attacks, which Hearn (at least in Nathaniel Popper’s New York Times profile) claims were a hack for hire, soon followed for all nodes that supported Bitcoin XT.
One such attack was perpetrated on Coinbase, the largest Bitcoin exchange in the US, pushing them offline for a period of time.
But opponents of the code say that’s for the better, since Bitcoin XT could have centralized mining (more so than it already is) since handling bigger blocks would require more energy, meaning only those with considerable money to put behind CPU power could mine.
But this is already a problem, a side effect of proof-of-work.
Sorry Satoshi. Because proof-of-work is competitive, interested parties will either throw money at mining or band together in mining pools if that gives them an advantage.
One could even go so far as to claim the current banking system is more decentralized than bitcoin at this point. The Federal Reserve is composed of 12 banks across the country which then lend money to the nearly 7,000 banks in the country, not to mention the thousands of credit unions as well.
On the other hand, bitcoin (although still in its infancy) is currently managed primarily by four large mining pools, all out of China. While these pools are networks of many individual miners, there is uneasiness about this predisposition.
But maybe Hearn’s Bitcoin XT idea proposed changes to the young protocol that were too fast, too soon. Changes must happen slowly so the protocol doesn’t break, again, because there’s nearly $6bn tied up in it.
Remember how the bitcoin industry attacked the banks on their snail’s pace in adopting new technology?
Banks move slow for various reasons, but they're the same as the bitcoin industry's newfound baby steps. Banks work with a large and diverse customer base under regulatory and risk-based pressures in an effort not to lose their customer’s money.
But in bitcoin, this influx of money might eventually make bitcoin unreliable and nothing more than a rehash of the current financial system.
Because Bitcoin was hawked to the masses and very wealthy investors and stakeholders got involved, the experimentation stopped.
These stakeholders don’t want to lose their money. Of course not.
Although, the rallying cry every time the price of bitcoin dips and the media declares bitcoin dead, bitcoiners parade around with: "The price of bitcoin has no bearing on its utility."
It was an excuse, but also the truth, at one time. Bitcoiners, including myself, held bitcoin because we believed in its mission. Now people hold bitcoin to speculate. Theoretically, we should be OK losing money as long as it betters bitcoin’s utility.
But the ecosystem's stakeholders seem unwilling.
Miners want to mine more bitcoin and collect more fees for their efforts. Sure, they need to do so to stay in operation and keep securing the blockchain, but there must be measures to ensure they're not becoming entrenched interests with too much control.
Likewise, bitcoin firms like Coinbase or Circle should want to transact on chain. If they don't, what the fuck's the point? Off-chain transactions create an incentive for new middlemen on the blockchain, and middlemen are something the project sought to erase from the traditional financial system.
These companies have created nothing more than the P2P systems, like clearXchange or even Venmo, of financial institutions.
Breakdown in discourse
Bitcoin was interesting when it was an experiment, when it ran. It’s crawling now, crawling toward instability.
When someone brings up an issue with bitcoin, there isn’t civil, educated discourse, there’s death threats, ostracization and elaborate conspiracy theories.
Hearn nails it on the head here:
Yes, overall Hearn’s post was passive aggressive and sensational. Bitcoin isn’t dead and Hearn didn’t quit Bitcoin; he took at job with R3, a company developing blockchain infrastructure (public, hybrid and private) for the financial industry, which wouldn’t exist were it not for bitcoin.
But the fact remains, he brought up good points about a coup d'état, an overthrow by those with money and power.
Are we interested in having a discussion about the issues with bitcoin? Or should we keep pretending it’s infallible?
Are we interested in a discourse about the conflicts of interest now present? Or will I now be ostracized because I don't think censorship resistance is bitcoin's most interesting feature?
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