Lightning is doomed. High fees from Ordinals have killed all hope of scaling Bitcoin non-custodially, there is no chance at all that people will be able to cost effectively open channels or enforce hung payments on-chain when necessary. It's all over, pack it all up guys. Time to start shopping around and deciding whether Coinbase or Cashapp is a better platform for all of our Bitcoin needs now that we can't afford to do it directly on-chain in a high fee environment.
It was fun while it lasted. We'll always have the pixelated dick pics on the Lightning art site, the Lightning torch meme where everyone was scared to send it to people in countries the state told us is full of nothing but bad people, we'll still have the zapping sats from custodial account to custodial account. Into the era of walled gardens we go!
If you took any of that seriously on any level go look at yourself in the mirror, and then give yourself a good hard slap in the face.
The original Lightning Network whitepaper specifically defined in the conclusion to the paper that for 7 billion people to be able to open two channels a year Bitcoin would require 133 MB blocks.
There is an entire section of the whitepaper called "Risks" (Section 9), that spells out all of the major problems people think means Lightning is "doooooooooomed" because of high fees. The first section of the paper discusses timelock windows. "Improper Timelocks." This is essentially the dynamic of fee rates versus confirmation time that has become a large concern lately. When you route a payment over the network, you define a success path based on a hashlock preimage, and a clawback path based on the refund timelock window. If fees get higher, that timelock window needs to be longer to guarantee that a preimage spend (the transaction succeeded) doesn't fail to confirm before a refund transaction becomes spendable.
I.e. if you have to confirm a successful payment on-chain the timelock on the refund path has to be long enough that you can confirm the successful payment path before your channel counterparty can claim the funds through the refund path. How long that timelock window has to be increases the higher feerates get, because the transaction fee decided ahead of time for pre-signed channel closure transactions can be too low to confirm as fast as you expected when you signed them.
Many people are freaking out and losing their shit over this dynamic as if it is some new realization, and it spells the doom of the Lightning Network. This was literally described as a risk in the original whitepaper specifying the first version of the Lightning protocol. It explicitly even described the opportunity cost trade-off from an economic point of view: "There is a trade-off between longer timelocks and the time-value of money."
The next section is called "Forced Expiration Spam." It describes the general concept of the Flood and Loot Attack. An adversary opening a large number of channels and closing them all at once on-chain, specifically to take advantage of the fact that if the feerates got too high refund transactions could have a chance at double-spending success path transactions if something needed to be enforced on-chain. If you have a bunch of channels open with payments in mid-flight, and you close them all at once and drive fees up high enough, then every channel counterparty who has to confirm a successful payment on-chain could find themselves in a doublespend race if the fees are driven up high enough to let the timelocked transaction become valid before the successful one with the preimage is confirmed.
If you have enough channels open, and drive fees up high enough, you can profit from this. It was literally described in the whitepaper as an architectural concern. Depending on which version of the paper you count, this class of attack was described in 2015-2016. It wasn't formally modeled and introduced into the news cycle of this space until 2020.
The whitepaper described data loss, the situation of losing the pre-signed closure transactions and penalty keys for old states that would allow a malicious channel counterparty to steal your funds if they were aware of this. It brought up the situation of being incapable of broadcasting a penalty transaction, and the potential for watchtowers to solve this as a third party being paid to watch the blockchain and submit those transactions on your behalf. It literally described miners censoring channel penalty transactions as a risk, and suggested miner anonymity (and implicitly decentralization) as the mitigation for that risk.
But this is all new information. The Lightning Network is doomed to failure because no one saw any of these problems coming!!!!
Well, I guess we can just admit historical context is lost. Reason is lost. Logic and rationality is lost. We are in a reality where we are going to pretend like historical warnings don't exist, no one ever pointed out obvious problems destined to manifest in the future, and this is all just totally uncharted territory where no one ever thought about how things would play out.
What is the title of Section 9.6? Oh: Inability to Make Necessary Soft-Forks.
The original whitepaper explicitly spelled out the inability to coordinate soft forks as a risk to the success of the Lightning Network. Are you surprised? Have you never read any of this before? Personally I'm getting déjà vu.
I remember years and years ago, a large contingent of Bitcoiners screaming that the blockchain itself was hitting scaling limits, that it would fail unless we fundamentally altered the entire nature of the decentralization trade-offs of the system. Blockchains were fundamentally useless if people couldn't directly submit all of their transactions on-chain and have them cost effectively confirmed.
The entire foundation of the Bitcoin ecosystem was rocked to its core when people started arguing over the cost effectiveness of the blockchain at scale, that was literally the entire cause of the blocksize war. What was at the core of this disruption? People's expectations of what role the blockchain would play in the puzzle of Bitcoin's evolving ecosystem. Everyone is going to buy their coffee on-chain at a cost-effective feerate, or Bitcoin is a total failure.
Everyone with that mentality just completely misjudged the entire situation. They were trying to stuff a square peg into a round hole. It's the exact same thing with Lightning.
The blockchain was sorely misjudged, it was really just a place to put channel openings and closings, not a place to buy your coffee. There's no real chance that people misjudged Lightning though, that is surely the place to put your coffee payments. No one could possibly have misjudged that this time. See how silly that sounds when you put it like that in proper context? Lightning has issues with enforcing payments on-chain; if the value of the payment is less than the fee to submit the transaction to the chain, this is a problem. It makes no economic sense to try to enforce it on-chain. This was a very well known problem. It's essentially the exact same problem of low value payments happening directly on-chain, except in the optimistic case things just work because people cooperate off-chain. But when they don't cooperate, there are problems.
This problem was so well known that there was actually a good deal of debate years ago about a solution to it with different trade-offs, packetized payments. If an HTLC is too small to be able to enforce trustlessly on-chain, you can stream a payment sat by sat (or larger chunks of sats) in a trusted manner, and stop streaming and pick another route if someone in a hop decides they're going to steal a sat from you. The idea is that while it is a trusted payment routing mechanism, you can only lose a few sats to an attacker who steals a tiny piece of your payment, and if someone steals from you while routing a payment you just never route through those nodes again. The citation above is from 2019, but this idea was discussed earlier than that.
Lightning has a problem! (And also a solution to that problem most people reading probably never heard about). All of these issues people seem to think means the sky is falling are issues well understood from the very beginning of Lightning. This begs a question: were we wrong again?
Not wrong in the sense that Lightning is a doomed dead end, but wrong in the sense that Lightning is not going to be used long term in the way we thought it was initially, just like the blockchain itself. We already see Lightning dominated by custodial applications, and people are working on deploying things specifically designed to sit on top of Lighting. Chaumian ecash mints, Uncle Jim setups like LNBits where people are given a custodial account on someone's Lightning node. We even have proposals like Ark being built out in the proof-of-concept phase on Liquid, which can interact atomically with Lightning payments.
What if Lightning isn't going to be the killer protocol that consumers directly interact with in order to make their payments online? What if, just like the blockchain itself, it simply winds up being a piece of a settlement layer that other things are built on top of?
Would that be the end of the world? Would that be a failure of Lightning? I would argue absolutely not. From the very beginning of development on Lightning it was incredibly clear what its scaling limitation would be. The whitepaper literally brings up the issue of not getting support for softforks needed in the future as a limitation of Lightning's potential scalability.
Lightning is proving definitively right now that it can function as a layer for interactivity between different custodians, and that it works smoothly and very effectively for that. There is no reason at all Lightning cannot function as a similar connectivity layer for other layer twos that have superior trust models than a explicit custodian. If channels are not something individuals can cost effectively have for their daily spending activity, that doesn't mean they are not cost effective for LSPs who run new protocols in addition to Lightning to link between each other, allowing their users to interact with each other. Arks, Statechains, and whatever new ideas people develop over the coming years.
It can be a translator layer for other systems that scale the end users ability to onboard and transact on those layers, exactly like we wound up realizing the blockchain would have to be. And there is nothing wrong with that.
This is a guest post by Shinobi. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Bitcoin mining company DEMAND has announced today the world's inaugural Stratum V2 mining pool, according to a press release sent to Bitcoin Magazine. This pool, built on the open-source Stratum Reference Implementation (SRI), aims to usher in a new era for mining by introducing enhanced security, flexibility, and performance.
The Stratum V2 protocol marks a significant leap forward from its predecessor, according to the release, offering a suite of improvements that not only elevate mining capabilities but also champion a more decentralized mining landscape.
Alejandro de la Torre, DEMAND's co-founder and CEO, stated, "With Stratum V2 and our new solo mining pool, we aim to make home mining more attractive, which should in effect help decentralize the Bitcoin mining ecosystem and improve the health of the Bitcoin network overall."
A key feature of Stratum V2 is its empowerment of individual miners to construct their own block templates. Traditionally, mining pool operators wielded control over transaction selection, posing centralization risks vulnerable to potential regulatory pressures for transaction censorship. Stratum V2 now grants mining pool users the autonomy to select transactions for block inclusion, fostering a more decentralized network resistant to censorship.
"Because Bitcoin mining is overwhelmingly done through mining pools, transaction selection has become relatively centralized: only a few mining pool operators can essentially decide to collude and prevent that certain transactions ever confirm," DEMAND cofounder and SRI project lead Filippo Merli said. "Stratum V2 gives the power of transaction selection back to the individual miners, to make the mining ecosystem more decentralized and Bitcoin more censorship resistant."
To harness Stratum V2's capabilities, miners will need to run SVPool's translator proxy using the pool's config file alongside a job declaration client and set up a Bitcoin Core node to receive transactions via Bitcoin's peer-to-peer network. DEMAND plans to incentivize miners to create block templates by reducing fees for these users, promoting increased full node participation and bolstering the Bitcoin ecosystem.
Currently, DEMAND exclusively caters to solo miners, providing them with the opportunity to find blocks independently, ensuring the entire block reward accrues to the successful solo miner. Additionally, DEMAND facilitates hash power resale on a marketplace, ensuring users maximize their earnings either by participating in mining or redirecting hash power to the highest bidder.
Looking ahead, DEMAND anticipates expanding its services to encompass pooled mining, fostering a collaborative environment where users share profits among themselves.
Some fifty-odd years ago, I purchased a small pamphlet that promised to teach me the rudiments of "the international language" - Esperanto. The shirt-pocket sized booklet contained a half-dozen pages of grammar and a vocabulary of a few hundred words. The grammar was simple, with no exceptions, the pronunciation was easy, and the vocabulary, based largely on Romance languages, was familiar and easy to pick up.
I was hooked. In the coming years I would increase my knowledge of Esperanto, join a local Esperanto club, teach Esperanto on a local radio station, and produce an Esperanto textbook with accompanying cassette tapes. I met a number of interesting, not to say peculiar, people along the way.
Then life intervened - medical school, residency, family, work - and there was no time left for Esperanto. And, truth to tell, the language itself appeared to be going nowhere. It was no closer to widespread adoption than it had been when I first encountered it nor, indeed, than it had been a hundred years before.
Somewhat less than two years ago, I first began to pay serious attention to bitcoin. After a few months of research, I began to hodl, and continue to do so even through the bear market we are currently experiencing. I am convinced that bitcoin, if unlikely to become the global reserve currency within my lifetime, will nevertheless be a very important part of the world economy within the lifetimes of my four children and eleven grandchildren. It is primarily for them that I continue to buy and hold bitcoin.
And yet, as I listen to the hyperbolic claims of some of my fellow bitcoiners, I can't help but be reminded of the Esperanto movement and its fate. Is it possible that in a hundred years bitcoin will be, not the universal currency of mankind, but rather an obscure project, remembered only by a tiny but devoted minority?
To answer this question, let us take a look at the many parallels between bitcoin and Esperanto, as well as some of the key differences that might point to a very different outcome for bitcoin.
Bitcoin, as is well known, was far from the first attempt to create a fully digital and neutral form of currency - a "digital gold" - but it was the first to succeed in combining the features of decentralization, anonymity, immutability, and fixed supply that set it apart from all previous attempts.
Efforts to create a universal language date back at least to the Middle Ages, and a wide variety of systems were tried. Most were completely impractical as usable languages, however, and never achieved widespread adoption. Not until Esperanto appeared was a language constructed that was at one and the same time completely regular in its grammar but appealingly naturalistic in its overall impression. It was this combination of features that led to early and enthusiastic adoption of Esperanto all over the world.
Esperanto, like bitcoin, was introduced to the world in the form of a pseudonymous publication. On July 26, 1887, a book was published in Warsaw with the title (in n) International Language, by "Dr. Esperanto." In this book, the author set forth the simple grammar and phonology of his invented language, along with a basic vocabulary and instructions for its use.
This book, called unua libro ("first book") by Esperantists, could be seen as analogous to Satoshi Nakamoto's White Paper, which gave birth to bitcoin. The author's true name was Ludwig Lazar Zamenhof, and his pseudonym means "one who hopes." Zamenhof, a subject of the n Empire, knew that anything that smacked of internationalism was viewed with suspicion by the czarist ruling class. However, Zamenhof's "international language" quickly found a following both within and in Europe, and soon in the Americas and Asia as well, and Zamenhof soon dropped the pseudonym, and "Esperanto" then became the name of his creation.
Once Esperanto had achieved a measure of success, it did not take long for some of its adherents to take issue with certain features of the language that were felt to detract from its simplicity or its aesthetic appeal. Some prominent Esperantists began to propose reforms of the language, and when such reforms were rejected by the majority, broke away to found movements around their own reformed forms of Esperanto. These could be likened to the various hard forks of bitcoin (e.g. Bitcoin Cash, Bitcoin Classic, etc.) that have occurred in the course of bitcoin's development. The most successful of these Esperanto "forks," Ido, never achieved the popularity or reach of the original, and now has at most a few hundred dedicated speakers.
Aside from such "forks" or reformed Esperantos, there were also completely new projects that claimed to do what Esperanto aspired to do, only better. For example, Interlingua, basically a modification of Latin, shorn of grammatical complexity, has a still more naturalistic appearance than Esperanto, and for a while enjoyed a certain amount of credibility in the scientific community, before dwindling to obscurity. Projects such as these can be seen as analogous to altcoins - though none were developed out of the crass commercial interest that characterizes what many call "shitcoins."
If there is such a thing as a "bitcoin culture," it can be said with even greater certainty that there is an "Esperanto culture." Not only is there a Universal Esperanto Association, there is an Esperanto flag and an Esperanto hymn. For a time, there was even an attempt at an international currency (the "Stelo," with a value supposedly fixed at half a Dutch guilder). If bitcoiners, by and large, tend towards libertarian ideas, Esperanto, with its emphasis on universal brotherhood, appeals more to left-leaning individuals (though in neither case is this a hard and fast rule). Idealists of every stripe, religious or secular, are often to be met with in Esperanto circles.
Why has Esperanto Failed?
As a constructed language that is structurally simple, flexible, and easy to learn, Esperanto is an unqualified success. I am a language nerd who has spent decades studying languages ranging from German to Ojibwe, and from Italian to Japanese, and I can testify from my own experience that a few weeks of Esperanto study can yield a facility in the language equivalent to many months, if not years, of study in any natural language I have encountered.
But Zamenhof's ultimate goal was to create a universal language for international communication that would replace natural languages such as English and French, laden as they are with grammatical complexities, and fraught as they are with the baggage of imperialism and dominance. And in this respect, Esperanto is an abject failure. One hundred and twenty-six years after "Dr. Esperanto" published his International Language, the number of active Esperanto speakers is at best one or two hundred thousand - about the same number as those who speak Navajo or Basque.
Why, then, has Esperanto failed so signally? I believe there are several important factors.
First, the prevailing system for international communication was not broken, or even breaking. Cumbersome as it was and is, it functions. Let's face it: anyone doing serious diplomacy or making important financial transactions across languages will either invest the time to learn another language or two, or will have professional translators at hand when needed. As for tourists, for those of us who speak one of the major languages (e.g., English, French, Mandarin, etc.) it is generally not hard to find tourist information and guides in our own languages when we travel abroad. And those whose native tongues are not widely spoken (for example, Dutch, Korean, or Wolof) have generally learned enough of the current de facto international language - English - to get by reasonably well. The development of real-time translation apps using artificial intelligence has only made things easier. In short, Esperanto is not enough of an improvement over the current system to make it worth even the minimal time needed to learn it.
Second, Esperanto lacks backing from any major military or economic power. It is a common saying in linguistics that "a language is a dialect with an army." It could equally well be said that "a language is a dialect with a large trade network." No language has ever achieved regional or global importance without serving the interests of empire or trade, and generally they have served both. But the current world powers, whether military or economic, are already well served by the prevailing system.
The corollary to this is that Esperanto faces passive or active opposition from those powers whose languages are already dominant. The only time in its history when Esperanto came close to international recognition was in the 1920s, when Esperanto was proposed for adoption by the League of Nations. Only one delegate opposed the proposition - the delegate from France, who essentially vetoed it. Since that time, Esperanto has never again achieved enough popularity to pose a threat to the existing dominant languages - but history suggests that should it do so, it would be resisted forcefully and effectively.
Finally, the culture of Esperantism can be off-putting to those who, out of curiosity, begin to explore the language. Personally, I found the flag, the hymn, the millennial promises of world peace through Esperanto, and all the other cultural baggage to be a bizarre substitute for religion, far removed from the merely practical proposition of a common language for international communication. Indeed, Zamenhof himself proposed a world religion of his own - 'Homaranismo' (striving for a united humanity), and Esperanto has had enthusiastic support from the Baha'i World Faith since the 1920s. For those who need no ersatz religion (whether because they reject religion or because they already have a religious commitment), this might be reason enough to pass Esperanto by.
Is bitcoin the Esperanto of Money?
On the face of it, Bitcoin does, in fact, share some of the vulnerabilities that have led to the failure of Esperanto.
Most crucially, bitcoin poses a threat to those powers that benefit most from the prevailing financial system, insofar as it provides a means for ordinary people to bypass that system, and potentially to replace it. At present, those powers seem little inclined to view bitcoin as a serious threat, and for that we must be thankful. The moment those whose careers and fortunes depend on the distorted incentives of the fiat system recognize that bitcoin may destroy their cozy nests, they will respond with all the means they can command, and attempt to crush bitcoin one way or another.
Less crucially, but still a factor, is the bitcoin maximalist culture that confidently predicts not only that bitcoin will replace the fiat system in the near future, but that bitcoin "fixes this" - "this," apparently being pretty much everything that leads to human misery: poverty, war, inequality, injustice - the whole boiling lot. Apparently, there was some Edenic past before fiat was invented when everyone lived in prosperity and harmony, and justice was perfect. I exaggerate, of course - but not much. Isn't this just the same sort of substitute religion seen in Esperanto culture? How many potential bitcoiners reject the idea of bitcoin because of the unrealistic claims of the maxis?
However, one huge difference between bitcoin and Esperanto is the fact that the prevailing system is failing, or as Lyn Alden puts it, "broken." You do not have to be a bitcoiner to see this: more and more ordinary people who have never heard of bitcoin are looking at the staggering increase in the deficit, the billions of dollars conjured up and sent to foreign wars, and the heavy burden of their own increasing grocery, fuel, health care, and education costs, and realizing that the system simply isn't working any more. Or if it works, it certainly isn't working for them!
Moreover, bitcoin is already providing millions of people with the means, if not to replace the system, at least to limit its harmful effects on themselves and their families. For those in developed countries, it has already shown its value as part of a long-term savings plan. For those escaping authoritarian governments, it has already been a means of escaping with at least some of their accumulated wealth. For those in countries with high inflation rates, it has already shown its worth as a means of preserving value. The fact that an entire small country, San Salvador, has already used bitcoin to circumvent the system imposed by the IMF is of great significance. Even if the powers that be ultimately crush it, a precedent has been set.
Esperanto and bitcoin both represent an attempt to engineer a more rational replacement for a powerful natural system that had evolved over millennia. Both promise to remedy the frictions and distortions imposed by the natural systems, and the harms caused by them to ordinary people. To the extent that these engineered solutions pose a threat to the natural systems, both have been and will be strenuously opposed by the powers that benefit from the status quo.
Unlike Esperanto, however, bitcoin has established its utility beyond any doubt - a utility that will only increase as the prevailing system deteriorates.
It is still possible, of course, that a hundred years from today bitcoin will be thought of as a merely noble idea that came to nothing. But that will only be the case if bitcoin lacks the resilience to survive the inevitable attacks from the beneficiaries of the fiat system.
I am one hundred percent certain that such attacks will come. For obvious reasons, I cannot be that certain that bitcoin will survive. However, I have enough certainty to continue to buy and hold bitcoin, in the hope that for my children and grandchildren bitcoin will indeed be the future of money.
This is a guest post by Paul Fox. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Comparisons between the market capitalization of Bitcoin and publicly traded companies used to make me wince in frustration. Trying to contrast the world's first successful digitally native currency to a single industry is narrow minded, let alone a single company. However, as I continuously surrender to the process of meeting people where they are on their bitcoin journey, I realized I can use this comparison to illustrate Bitcoin's strengths in a different way.
Rather than trying to conceptually pull Bitcoin up to the level of global currencies, I suggest conceptually pulling global currencies down to the level of publicly traded companies. This temporarily negates the necessity of delving into the history of monetary theory when trying to explain Bitcoin.
In order to accomplish this, imagine that USD and BTC are tickers on a stock market. Each is a company with employees, management policies, price performance history, legal obligations, and publicly traded shares. Now that we are operating at the same conceptual level, let's take a look at the status of these two companies.
The board of USD has a long history of diluting its shares and more recently has been issuing new shares at a very alarming rate. Much of the dilution is benefiting the board while the employees are working their tails off for reduced pay. On the other hand, BTC does not have a board of directors. It is employee run and the employees maintain a collective agreement that the shares will be issued at a fixed, predictable, and declining rate with a maximum supply of 21 million. In order to work at the company you are required to adopt the steady issuance policy.
Company USD is clearly strong arming competition around the globe and forcing people to conform to their standards. They have been top dog for decades and have swallowed up most of the global market share. As a result, they hold tremendous leverage over their competition, but they've grown complacent and are losing their edge. Expenses to maintain overheads are growing more cumbersome by the day and debt loads are far past responsible levels. The price performance for investors holding USD stock is in the red approximately 90% since 1971 and is showing no signs of a serious rebound.
Company BTC is managing a grass-roots marketing campaign which is gradually gaining traction, but it has yet to go fully viral online. BTC is a disruptive tech company with fourteen years of volatile, but steady growth in value and adoption. Their share of the global market is extremely small in comparison to the incumbent; creating dramatic upside potential. The management structure is lean and overhead costs are shared by the employees while the organization itself holds zero debt. Price performance for investors holding BTC stock is in the green approximately 200,000% since 2013 and is showing no signs of slowing down.
Rational investors may bet on both horses, but weigh their allocation based on current events. Market conditions are transforming quickly as a new startup called BRICS is making pre-launch announcements. BRICS seems to be interested in stealing market share from USD. This will have a profound effect on USD as their business model relies on them being the sole provider of their service.
BTC investors tend to hold the stock tightly. Approximately 70% of the stock has not changed hands over the last two years despite tremendous volatility. There are some large stockholders in BTC who may be triggered to sell off their shares for one reason or another, but many of the smaller investors are passionately scooping up those discounted shares at every opportunity. Due to the entrenched nature of USD, it has some cards up its sleeve to attract new investors and slow competitor growth, but its days of true market innovation are in the past.
On the other hand, BTC is innovating at a consistent rate and is on track to continue taking market share regardless of competition. Their product has fundamental qualities which the competition won't be able to match. Ultimately, of the three companies, BTC is the only one which is digitally native. USD is running a hybrid brick-and-mortar/online system, but is not optimized for a strictly online model. BRICS does not have a working prototype yet, but its digital presence is unavoidable. Legacy customers will make more sober comparisons between the available options once they realize all global commerce will be migrating to a digital format.
Defined simply, every individual who adds value to the network could be considered a BTC employee. Under this definition, every investor is also an employee. As are miners, developers, manufacturers, and entrepreneurs who involve themselves with bitcoin software or hardware. Vendors accepting bitcoin for goods or services also add value to the network commensurate with the value of those goods and services. Investors who purchase bitcoin are in competition with each other, while also benefiting each other. Investor holdings add value to the network by reducing the circulating supply.
The resulting condition is one in which each participant in the network is working for every other participant in the network. Rewards are distributed relative to investor holdings. BTC is owned and operated by the employees. Examining the bitcoin circular economy through this lens; every bitcoin user is simultaneously an investor, an employee, and a business owner. Each user chooses their own level of involvement and all roles are accepted or rejected on a voluntary basis.
Cohesive teams outperform teams which struggle to reach consensus. Fortunately, the bitcoin community was constructed around a mathematical consensus machine. Despite continuous disagreement within the community, we are ultimately forced to reach a collective agreement every ten minutes. Each of us have taken unique paths to understanding the importance of bitcoin and we all support the network in a specialized way. Even those who attempt to attack bitcoin provide their own form of value. We can thank them for helping to educate us and to point out potential vulnerabilities in the protocol.
The Latin root of the word 'compete' is competere to "strive in common, strive after something in company with or together". As we compete we can all grow stronger together. To ignore the collective nature of Bitcoin would be to ignore the facts of reality. Millions of individuals are currently acting as a decentralized collective in order to run the bitcoin network based exclusively on the incentives of the protocol. Without them I would have nothing to write about.
Groups do not exist without individuals and individuals do not exist without groups. If we so choose, we can strive to live with compassion for other living beings. However, this is far from a prerequisite for employment by the Bitcoin network. Coercing anyone to behave ethically or compassionately completely negates the value of these virtues. Under this new paradigm there are no obligations, only offerings.
We all make choices regarding how we deploy capital and allocate our personal energy. Putting faith into the bankrupt fiat behemoth rather than taking a meeting with the fresh challenger in the market is a much greater risk than most realize. Luckily, Bitcoin will never have layoffs or a hiring freeze.
Viewing Bitcoin through this lens sets aside the ideological and moral arguments in favor of a sober look at the network in comparison to its competition. This approach may simplify the conversation or it may stifle a call to action, but not everyone is ready to face the atrocities of the fiat system. Some invest primarily with rationality; working to maximize profit above all else. Some invest more with their hearts; avoiding investments which don't align with them morally. Unfortunately in the fiat system, it is not possible to do both. Invest wisely.
This is a guest post by Source Node. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Belgrade, the capital of Serbia, welcomes the inception of HUB21, a pioneering non-profit association dedicated to education, fostering research, and creating networking avenues within the global Bitcoin design and development ecosystem, according to a press release sent to Bitcoin Magazine. The association's launch aims to bridge the gap in understanding and participation in Bitcoin within Serbia's burgeoning IT landscape.
Belgrade, known for its cultural vibrancy and historical innovation, is poised to attract foreign professionals, investors, and creative minds to engage with HUB21. While Serbia boasts a wealth of IT talent and has attracted international corporations, the absence of Bitcoin projects is apparent. Recognizing the transformative power of Bitcoin, HUB21 aims to train more aspiring programmers, artists, designers, and entrepreneurs to capitalize on the evolving interest in Bitcoin.
HUB21's agenda involves providing educational resources in Serbian, hosting regular meetups, workshops, seminars, and creating an inclusive space for industry novices and experts alike. The association's vision extends towards empowering local talent across various sectors to leverage Bitcoin and foster their initiatives.
Startups Primal.net and PeakShift have played pivotal roles in realizing HUB21's vision and by giving their support. The launch of HUB21's website offers a gateway to a diverse range of upcoming events, which can be viewed here.
In an exclusive interview with CNBC, Tom Farley, the former President of the New York Stock Exchange (NYSE) and current CEO of Bullish, shared his optimistic outlook on the future of cryptocurrency, particularly Bitcoin, upon the potential approval of a Bitcoin spot exchange-traded fund (ETF) by the Securities and Exchange Commission (SEC).
Farley's comments come amidst the ongoing speculation surrounding the SEC's decision on whether to approve a Bitcoin spot ETF, a move that could potentially open the floodgates for institutional investment in the Bitcoin market.
During the interview, Farley emphasized the significance of a spot ETF approval, asserting that it could be a game-changer for Bitcoin. He highlighted the appeal of a spot ETF, which would allow investors to gain direct exposure to the underlying asset, unlike futures-based ETFs currently available in the market.
"Everyone acknowledges Bitcoin is not a security, including the regulators," said Farley. "Money will flood into the industry with a Bitcoin ETF, it's just easy to buy it. People believe in Bitcoin. Bitcoin is a great invention. It is a store of value."
Farley, who recently spearheaded Bullish's acquisition of CoinDesk, expressed confidence in Bitcoin's long-term potential, predicting a substantial inflow of capital into the market once a spot ETF receives regulatory approval. He cited the increasing interest among institutional investors and the broader financial community in gaining access to Bitcoin through traditional investment vehicles.
"This guy ran the New York Stock Exchange, he's all in on Bitcoin and crypto now," said co-anchor of CNBC's Squawk Box Joe Kernen. "They use that as credibility for the asset class."
As the industry eagerly awaits the SEC's decision, the former head of the NYSE's bullish sentiment echoes the growing confidence in Bitcoin's future trajectory, signaling the potential for a significant influx of capital into the market upon the approval of a spot ETF.
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After a plane, a ferry, and a train had brought me to Manhattan, NY, we found ourselves with thirty-something minutes to set up for a sit-down interview with presidential hopeful Robert F. Kennedy, Jr., thirty-something floors high in a Hudson Yards' hotel. Captured by filmmaker Jeremy Poley, RFK answered our questions for about forty minutes. His responses were sharp and well articulated with an encyclopedic recall ability. He answered every single question I had prepared. Perhaps lost in the mainstream noise attempting to diminish his inarguable counterculture resonance is his general likability. But while Americans might love their Kennedys, the DNC sure doesn't. At least not while his campaign is putting an outside-yet-still-partisan pressure on the Democratic party, forcing the Biden reelection campaign to at least pretend to get their act together.
His entrance was hurried. His breathing controlled, but heavy like the hands of a prizefighter, wrapped around his tea cup. After a warm but truncated introduction, Jeremy gave us the green light and the interview started in earnest a few minutes after the middle of the hour.
Goodwin: If your father was around today, would he recognize the current state of the DNC? What is a Kennedy Democrat to you?
RFK: I would say Kennedy Democrats are the traditional Democratic Party which was the party of the working class, the working poor. It was a party that was very strong traditionally on the environment. Its tradition has been anti-war and skeptical of the military industrial complex, and also skeptical of Wall Street. I would say taking the position of preventing Wall Street from dictating policies that end up serving the American general interest of the corporate aristocracy and the corporate kleptocracy and stripping of the middle class, working people, and union members of their wealth and their power.
Goodwin: This doesn't sound like the DNC today.
Goodwin: How do you plan to take on the super monopolies that control our food, media, currency, and health?
RFK: For each sector you have to do something different. It's true that there's been this extraordinary consolidation where these three giant finance houses -- BlackRock, State Street, and Vanguard -- control 88% of the S&P 500 and they control virtually all of the military contractors. They control most of the U.S.-based agricultural sector, the big packing companies and seed companies, the pharmaceutical industry. For each sector, you have to do different things. And in each sector, those industries also have 20 or 30 years of developing methodologies for capturing and controlling the regulatory agencies -- that are supposed to protect the public from bad behavior by those companies. But instead those regulators have become sock puppets for the industries they're supposed to regulate. And in each case, you have to unravel corporate capture. I think that I'm probably the best person at this point, in this country, that's suited to do that because so much of my career has been litigating against those agencies and the industries that have corrupted them.
And when you bring litigation, you really almost get a PhD in corporate capture. You really understand the dynamics of it and understand, therefore, the methods for unraveling it. And I'll give you an example. When we brought the Monsanto case, we uncovered discovery documents that showed that the head of the pesticide division at EPA, a man named Jess Rowland, was secretly working for Monsanto and that his orders were being given to him by Monsanto executives who were instructing him to kill studies that they thought might link glyphosate -- the active ingredient in their flagship pesticide Roundup -- from links to non-Hodgkin's lymphoma and other cancers. And it was clear that although he was being paid by the American taxpayer, he was actually working for Monsanto. And this is true unfortunately throughout the agencies. This is more the rule than the exception. Because I've been so deeply involved in this kind of litigation, I actually know the names of people that I need to move as soon as I get into office.
Most politicians are very intimidated by these agencies because the agencies do have the capacity at many levels to commit civil disobediences to embarrass the president if you feel that they're coming under pressure. And I understand that dynamic and I understand what needs to be done to unravel this corrupt merger of state and corporate power.
Goodwin: A carousel of C-suite executives to regulatory positions. When you do take office, what actions would you take to ensure free speech, free press, and an open internet acting as a public square for discourse, especially for dissident voices against these kinds of propaganda machines?
RFK: Number one, my first day in office, I'll issue an executive order against any federal agency or any federal regulator encouraging or promoting censorship at any social media site. In addition to that, I will promote legislation to change the RICO Act, the Racketeering Act, which my father originally wrote, to include as a predicate offense government-dictated censorship of free speech. I'll also summon the heads of all of the major social media sites, including YouTube and Google, which continue to censor political speech in this country. And I'll tell them that they need to come up with a plan about how they're going to avoid censoring political speech. The sanction, ultimately, is to transform them into public utilities and recognize that they now have become the public square. And then I will put in legislation to amend the Communications Act, which includes Section 230, and I will, in that act, make the censorship of political speech illegal.
Goodwin: If democracy innately necessitates informed consent, can the U.S. government fairly call for the violent defense of democracy as a pillar of foreign policy while working with Big Tech to censor stories within its own country?
RFK: Can the government censor criticism of, for example, the war in e? That should be illegal. Individual media sites, of course, should be able to criticize the war, and they can either criticize it or they can choose not to allow criticism on their pages. That's their option. But if they're doing it at the direction of the government, then the First Amendment is implicated and it becomes illegal. And that's the way that I would treat it.
The idea that America promotes democracy worldwide is generally regarded as canard around the world. The CIA has participated, I think, in 87 coups between 1947 and 1997 -- a third of the nations on Earth. And most of them are democracies. And the USAID, which is a CIA front, spends $10 billion a year in efforts to overthrow democracies in various countries. They do a regime change operation. When you do a regime change operation, you're countervailing democracy in that country, because usually the regime has been put in place through some kind of consensus by the people who live in that country. Often this consensus is manufactured by projects like Operation Mockingbird. The CIA today is the biggest funder of journalism in the world. It's not supposed to fund journalism in the U.S., but it does. And if you look around the world, it owns newspapers, it runs newspapers, it pays editors, and it pays leading journalists in most of the developing world and in Europe.
Goodwin: Speaking of journalists, do you intend to pardon Julian Assange when you take office?
RFK: I will pardon Julian Assange on day one and probably Edward Snowden as well. And then I will look at other cases for pardon. I'm going to look at Ross Ulbricht's case to see if he was justly convicted and whether his conviction in his sentence reflects the seriousness of his crime, or whether he was being made an example of in order to discourage Bitcoin or the industry of cryptocurrencies. And if I find out that is the case, I will pardon him as well.
Goodwin: How is what Ross did any different than what AT&T executives did, allowing drug dealers and human traffickers to use their systems? Or JPMorgan Chase, allowing known human traffickers to utilize their bank services? How is what Ross did any different than that?
RFK: There are many ironies that accompany Ross' convictions. I think that's a really good point -- the things that he was accused of are things that are just part of the business structure and the business plan of these leading blue chip corporations. But he didn't have that power of the lobbying clout. And if I find that his sentence was unjust, I will reverse it.
Goodwin: Do you think if people knew that they would have their taxes raised and experience high inflation in order to expense the trillions of dollars needed for these wars, or for the COVID response, that there would be public support?
RFK: I don't think any of the wars that we fought at least since the Korean War, and maybe including the Korean War, would have been approved by taxpayers in advance. Fiat currency was created in order to enable nations to go to war without levying the taxes outright on populations. The population still pays through a self-tax called inflation. But fiat currency was invented long before the Fed. And it was invented at the outset, from the beginning, in order to fund the cause of war.
Goodwin: Speaking of fiat currencies, what initially sparked your interest in bitcoin and why are you interested in the Bitcoin voting bloc?
RFK: My interest in Bitcoin began when I saw the truckers and what happened in Ottawa. You had peaceful demonstrations for people who were exercising their right to protest, to petition public officials, for very good reasons. And they were silenced and punished by the government in an extraordinary way. The government used surveillance techniques to determine their identities, to determine the license plates of their cars, and then closed their bank accounts, depriving them of their access to their own money without any charges being filed, and certainly without any conviction. Simply to silence them. The government has the capacity to shut down your bank account to starvation. These are people who could not pay their mortgages. I talked to one trucker who couldn't pay his alimony and he was getting in criminal trouble with the courts. People couldn't pay for their children's clothing, medicine, and food. And of course they couldn't pay for gasoline to move their vehicles -- their credit cards no longer worked. And if the government has the capacity to do that, the government has the capacity to enslave us. If they can starve their critics, they can accomplish any atrocity. At that point, I began to understand that freedom of transaction is as important as freedom of speech. And that Bitcoin is this. I can also see the trajectory toward central bank digital currencies, and that will give nations this ultimate power over whether we live or die. And I understood that we need a currency that is a freedom currency -- a currency that is independent and that can't be controlled by the government.
Goodwin: You recently floated this very novel idea of, alongside other hard assets, backing the U.S. dollar with bitcoin. Are you concerned at all about government influence or restrictions with regards to Bitcoin or bitcoin mining?
RFK: I'm very concerned about all the government attacks on Bitcoin. But what I would like to do is to at least provide some issuance of Treasury bills that are backed by hard currency. And that could be a bucket that includes bitcoin, that includes platinum, gold, silver, and other hard assets. And that would not be completely covered, but maybe beginning with 1%. And the reason for that -- it's really a drop in the bucket -- but we can see if there's a market out there and if it would impose a kind of discipline on this out-of-control printing of money because the consumers would have access to an asset that at least had some basis in hard currency -- at least some immunity from runaway inflation. And if there's a preference for that, then we could increase the amount every year, 1% to 2%, 3%, and so on. And get back to at least some level of options for base currencies.
Goodwin: How do you see the future of the U.S. dollar developing as we're seeing CBDCs, stablecoins, and other kinds of dollar derivatives coming out? We're seeing a rapid globalization of the dollar at a very high velocity. Obviously, I think you can see this potential Bitcoin future, but how do you see the dollar developing?
RFK: I think the future of the dollar is uncertain. One of the big factors is the exponential growth of BRICs. BRICs, which, you know, began with just Brazil, , India, China, and South Africa, are now adding another six countries. They're offering an alternative to the dollar as a reserve currency and while they don't issue their own currency, they allow transactions to be settled in local currencies. Ultimately this is a threat to the position of the dollar as the world's reserve currency, and to American power, to American wealth. It's accelerating, and it's our own doing. It comes from the weaponization of currency, the use of military and even simply military posture from the United States. The unilateral bellicosity of our country, which has made many other countries wary of participating with us, or putting themselves within our power. When we freeze assets of people who are Vladimir Putin's friends or n oligarchs, who may or may not have anything to do with what's happening in , people say, "Why are we putting ourselves in a position where we can do that? Why don't we start our own markets?" and that's a very dangerous thing for the U.S. dollar.
Goodwin: Do you believe the U.S. government should directly issue a digital currency to citizens?
RFK: No, I'm against central bank digital currencies. I think they will become an instrument of power and control. And ultimately, they'll be used as an excuse to abolish cash currencies. And they give the government complete control over our lives. Even before the Ottawa event, I gave a speech in Milan warning the people of Italy because they were looking at vaccine passports and central bank digital currencies at that time and I said, "Here's what they're doing in China". If you don't meet a certain social credit score, if you show up on a mask day not wearing your mask properly, or you're not boosted, whatever your offense is, the government can turn off your capacity to spend money. They can program it so that your credit cards will only work, for example, at grocery stores within a half a mile radius of your home, but they won't buy you gasoline. They won't allow you to get an airplane ticket. They don't want to allow you to travel and buy items and foods in other parts of the country or abroad. And if the government has those kinds of powers over us, we're all in a lot of deep trouble.
Goodwin: Do you have any concerns with the update of the legacy system with the formation of FedNow and this kind of permissioned walled garden that already exists in the Federal Reserve System?
RFK: I think FedNow is the first step. It's not essentially a digital currency, but it's the first step. We're all on this slippery slope. It worries me.
Goodwin: Can you talk a little bit about the government's actions during COVID? Do you believe it was orchestrated similar to the 2008 crisis to shut down small businesses and regional banks in order to consolidate financial power within the super monopoly?
RFK: I don't think it was orchestrated specifically for that purpose. I think those same entities, powerful entities, will use any crisis as a pretext for removing public rights and for clamping down totalitarian controls.
Goodwin: Like 9/11 and the Patriot Act?
RFK: Every crisis throughout history becomes a pretext for powerful actors in the society to expand their power and to reduce public power and to subvert democracy.
Goodwin: Would you consider canceling debt or recovering ill-gotten gains from the super monopolies that stole wealth from the working class?
RFK: I would look at litigation against any type of fraud.
Goodwin: Why do you think Trump gets a free pass from the media for the lockdowns and disastrous monetary policy decisions made during his administration? Do you think he gets a free pass?
RFK: Yeah, I think the mainstream media were committed to that agenda. And so it's an area that they're not going to criticize him on. Probably because of a conflict of interest of similar investments in pharma. There's huge pharmaceutical ad revenues -- one of the primary advertising revenues going into the major media outlets. And those pharmaceutical companies also ultimately dictate content on the stations.
Goodwin: How do you hope to lead a movement against such a powerful, unified coalition? And what do you say to those that are demoralized and don't believe that the political system can be used to help citizens anymore?
RFK: I would tell them to watch me and watch what I do. I still believe that there's hope for democracy. And let's give it a chance. And, if I get in there, I also have absolute confidence that I can fix it.
Goodwin: Do you think that Bitcoin will play a big part of that? Do you think currency addresses the super monopoly head on?
RFK: I'm going to make sure that Bitcoin is protected and that people can keep their own wallets, and that the current White House's war on Bitcoin will be over, that transactions will be protected and encouraged. I'll look ultimately at treating it as a currency rather than a commodity. Particularly for smaller Bitcoin owners, for transactions made by owners. I don't want to provide a windfall for the billionaires who accumulated bitcoin, but I think smaller actors and their transactions should be protected. They should be able to exchange currencies the same way as when you go to Canada and you're using the Canadian dollar. You shouldn't have to pay for it in taxes if there's some appreciation in the Canadian dollar.
Goodwin: Do you see using something akin to the Section 230 protections or even an amendment that would protect such transactions?
RFK: I don't know how I would do it, but I can tell you the general tenure of my approach and my administration. I can't tell you the details about how I'm going to do it. I'm going to consult the smartest people in the industry, people like Stanley Druckenmiller and Paul Tudor Jones. And then Bitcoin specialists in order to figure out the best way to do it in ways that will protect our freedoms in ways that will encourage the re-industrialization of America and that benefits can accrue to working Americans.
Goodwin: Say right now you're sitting next to the best good faith representation of the Bitcoin community as possible, and I'm feeding you exactly what it is that should be done. How do you plan to work with a compromised Congress to get some of this regulation in place to protect Bitcoin?
RFK: I'm going to do everything that I can without having to go to Congress. I'm going to do it through my control over Treasury policy, even if it means bringing in the banks. A lot of the bad policies toward Bitcoin are not being driven by legislation. They're being driven by White House policies. I'm going to end the war.
Goodwin: Speaking of ending the war: The military industrial complex that Eisenhower warned about seems to be in full effect with the provocation of by NATO increasing its military presence in e. And yet there are some here back home that would say that this is good for the U.S. economy because they're buying U.S. arms. Would you say the war in e is actually an economic victory for Biden?
RFK: No. The war is a catastrophe for everybody. We've killed 400,000 ian kids and probably 70,000 to 100,000 ns. I know Mitch McConnell said that we shouldn't worry about the $140 billion that we're paying over there because it's all going back to U.S. arms makers. Who owns all those arms makers? It's BlackRock, State Street, and Vanguard, right? It's going to the richest people in our country. It's not helping the working poor. It's actually draining a lot of intellectual resources that could be used to re-industrialize our country at home, to build products that are actually valuable, that don't kill people, that make people's lives better, to rebuild our education system. With the $8 trillion that we've spent on war, we could make Social Security solvent for 30 years. We could pay for every American child's education up through university, and give them incredible education. We could pay for child care for every American. We could liquidate all the credit card debt in our country. So many of the problems we face could be solved if we kept that money at home. And that's what I'm going to do as president.
Goodwin: Can you maybe talk about the Weimar Republic and its consequences as an analog or metaphor to what's happening in the U.S. now? Could this inflation cause a revolution of sorts? And is there an alternative for the lower, middle, and working class that isn't a violent revolution?
RFK: I'm going to try to solve the problems, beginning with housing. Right now, you have these big companies -- again, BlackRock, State Street, and Vanguard -- that own so much of America already now trying to buy all the single-family homes. By 2030, just six and a half years from now, corporations will own 60% of the single-family homes. My kids can't buy homes. So many people, kids your age, my kids age, are still living in a home with their parents or they're living in rentals. There's very few of them that are actually purchasing homes. They go out to try to buy a home and somebody comes in at the last minute with a cash offer or some amorphous LLC with an ambiguous name that you can trace back to BlackRock. And it's not a good thing. Thomas Jefferson said American democracy has to be rooted in tens of thousands of independent freeholds owned by individual Americans. This is a colonial model; it's an aristocracy; it's a feudal aristocracy. If corporations own all the land in our country, Americans can't own a home. If they can't own it, they don't have equity. If you have a home and you want to start a business, you can take a second mortgage and take that risk. But if you don't own equity, you can't get access to capital. And that's where the power is -- access to capital. And those companies have access to capital at much cheaper rates because of their bank books -- and they're competing against our children to buy homes. We built prosperity in this country after World War II making sure Americans could get into homes. Now that promise within the American dream is being lost.
Goodwin: Do you think it's a coincidence at all that just moments after the Civil Rights Act passed that the Nixon shock happened and we got taken off the gold standard?
RFK: In 1971, the tipping point of getting taken off the gold standard was the Vietnam War, which was putting us in debt and they needed to print money. And they were frustrated. Kissinger and Nixon were frustrated that they may not be able to get support from the war, from Americans, and support for those appropriations from Congress. And so they changed the rules. They abandoned Bretton Woods. They divorced America from the gold standard. And they started this inflationary cycle that we've been dealing with ever since. There's definitely a choice made between, for example, the war on poverty and the Vietnam War. Martin Luther King said we can either go to war against poverty at home or we can go to war against yellow people in Vietnam. And we can't do both. We don't have the money. And I think those are connections that are clear.
Goodwin: I appreciate your time and your thoughtful answers to all these questions.
RFK: Thank you very much.
This article is featured in Bitcoin Magazine's "The Primary Issue". Click here to get your Annual Bitcoin Magazine Subscription.
When bitcoin adoption reaches a global scale, it is likely there will no longer be bitcoin podcasts, bitcoin conferences or even, sorry to say this, a need for a Bitcoin Magazine. However, until this point, people interested in bitcoin will be differentiated from those who are yet to begin their journey down the bitcoin rabbit hole. The question is then raised, how does a bitcoiner describe themselves to others, that may help bridge the chasm between their own understanding and those still plugged into The Matrix?
Given the inflationary policies of successive governments, globally (see Rune Østgård excellent book Fraudcoin for more information), nearly everyone with resources has had to become an "investor" simply to attempt to maintain purchasing power overtime.
People who want to own the place they live, have the ability to personalise where they spend their time, and (for the most part) not be concerned about eviction or be subjected to excessive costs of rental, should not have to view themselves as investors. However, due to monetary premia commanded by real estate, not only do people need to take risks by leveraging their assets to purchase homes (through mortgages), they may also need to speculate that in the future, the value of their home will have increased sufficiently to offset the costs incurred of purchasing, moving and cover the interest on their debt.
Alongside the need to build wealth through "hard assets" such as property, the non-bitcoiner will be directed and often supported in planning for the future through further investments in the form of a pension. While tax efficiency and, for those lucky enough, additional employer contributions help to increase benefits, the investment related risks are reduced. However, these benefits also need to be understood in relation to the counterparties involved, such as changes in government policy, changes in pension schemes or the worst-case scenario of the company providing the pension experiencing financial difficulties. Learning that the pension you have been paying into for 30 years now has no value through no fault of your own is quite simply heartbreaking to watch.
Since the public acknowledgement by Blackrock that bitcoin may not actually be an "index of money laundering", bitcoin as an investment grade asset is becoming an accepted narrative. This could mean that bitcoin can begin to be considered alongside equities, real estate and pensions as a means on maintaining purchasing power while also planning for the future. However, looking back, this perception may simply be a point on an ever changing journey, from its origins within a little known Cypherpunk mailing list that viewed it as a collectible, through the medium of exchange on the Silk Road to where we are today. With an eye on the future, it may be prudent to begin thinking of what description will come next for someone who owns bitcoin, that will make more sense in the future other than an "investor". The very nature of bitcoin also suggests that it is unlike other assets (either commodities or securities), meaning that it might be wrong to view it as either.
Unfortunately, consistent with awareness of bitcoin not being evenly distributed, publicly held views of the asset are also rather inconsistent. As recently as May, 2023, Harriet Baldwin MP, of the UK Parliament Treasury Committee recommended that "unbacked 'tokens'" (including bitcoin), should be regulated as "gambling rather than as a financial service". While this is largely true for "cryptoassets" more broadly, this is simply wrong in relation to bitcoin, given it is backed by the world's largest computer network running a protocol that is extremely resilient to change. The nature of the bitcoin protocol means that unlike real estate or pensions, changes in government, organisational policies or an organisation's performance cannot affect its operation or utility in the future. In combination with this, given the fixed supply of bitcoin, it is also not subjected to debasement through inflationary policies that affects the unit of account for other assets.
As a consequence, while past data shows the dollar value of bitcoin is highly volatile (impacted by supply and demand dynamics), the risks associated with the asset itself are actually extremely low. When this is combined with the ability to self-custody the asset, at low cost, further risks are removed when compared to the need for shares in companies or commodity certificates to be custodied by brokerage firms.
Standard definitions of investing focus upon an expectation that money invested will grow, even though any informed investor will do this by balancing the potential growth against any associated risks. From the treasury committee's viewpoint, the risks and returns associated with gambling would likely locate bitcoin beyond the top right corner of the figure below.
From the perspective of buying bitcoin being similar in nature of gambling, selling a fiat currency for bitcoin, with a chance, rather than an expectation of growth may then suggest that bitcoin may not actually be able to be classed as an investment.
To further question the above figure, times appear to have changed from when this well-established idea was developed, precipitating the need for reflections on previously held assumptions. Government bonds are no longer "risk free", illustrated by the global interest rates increases resulting in dramatic losses in the value of government bonds in 2022. This situation has then impacted the risks associated with bank deposits, leading to recent failures of large banks in the US. In comparison to both government bonds and bank deposits, the security of bitcoin is neither subjected to central bank interest rate policy risk nor third-party risks associated with the holders of government bonds (even if the short-term value may change). Given the fixed emission schedule of bitcoin, it is also not subjected to "money printing" and government deficits that have reduced the purchasing power of the underlying currency, as promoted by Modern Monetary Theory.
Fascinatingly, in a recent document from Blackrock, this contrarian viewpoint is supported, suggests a bitcoin allocation of 84.9% within an investment portfolio, representing a very different risk profile when compared to other assets (Thank you Joe). Aside from the volatility associated with markets attempting to price a new asset, this suggests that bitcoin is where Blackrock would recommend holding the majority of your wealth. The figure below thus suggests an alternative framing when comparing bitcoin to other assets, where instead of presenting returns on investment, attention is given to the risks of the underlying unit of account (fiat currency) against the business risk.
Within the current high inflation environment, currency and business related risks are heightened. History then provides a sobering perspective on the impact of inflation on the well-being of a population (see When Money Dies). During Weimar Germany, as a result of the issues with the currency, those who invested experienced periods of positive returns, but were later ruined as hyperinflation took hold. In this context, rather than investing in gold, those who simply saved in it could ride out the volatile price movements. In a fascinating echo, the same has been demonstrated in Argentina today with bitcoin. Investors or traders are likely to have lost money, but in the long term, saving in bitcoin has been a much better option for the average Argentinian.
So yes, I am a bitcoiner, but that does not mean I am an investor, speculator, gambler or a criminal and while I'd like to be, I'm also not a Cypherpunk. I am simply someone working towards a better future for myself, my family and maybe even their families. Bitcoin appears to provide a means of transferring the value of my work today into the future, without the risks of it being mismanaged (equities), legislated against (pensions), at risk of central bank policy (government bonds and fiat currencies) or struck by lightning (real estate). As a result, bitcoin may not be an investment and is only a speculation or gamble if you buy it without understanding it.
To return to the title, when asked about themselves and how they are planning for the future, a bitcoiner can simply say, "I'm staying humble, appreciating I have a lot to learn but saving the best asset I can find" (see Mickey's work for a macro viewpoint). Hopefully, this will pique their interest, so lead to the follow up question of "can you tell me more?". At which point, the orange pilling can begin.
This is a guest post by Rupert Matthews. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
The saying "government will ban Bitcoin" is one of the most frequently used pieces of FUD. It is something that every Bitcoiner intellectually wrestles with on their journey down the Bitcoin rabbit hole. It is a frequently cited reason by those skeptical of Bitcoin to justify their reluctance to explore further education. Thankfully many excellent writers have written extensively debunking this piece of FUD. Bitcoiners often emphasize the logistical challenges, intense resource costs, game-theoretical complexities, and the sheer implausibility of any attempt by the State to outlaw Bitcoin. While Bitcoiners hail these writings as compelling evidence of the inevitable advent of hyperbitcoinization, the subsequent logical question is frequently unexamined or hastily dismissed: If the government's ability to ban Bitcoin is constrained, what alternative strategies might it employ to undermine or co-opt the network?
What if, instead of a direct ban on Bitcoin, the State employed subtle and indirect strategies to manipulate or even co-opt it, ultimately achieving the same goal of rendering it ineffective or worse, a tool for State control? Bitcoin poses an existential threat to the State's monopoly on money. To be more precise, it is Bitcoin's attributes of decentralization, self-sovereignty, censorship resistance, and pseudonymity that challenge the State's control over individual liberty. What if, rather than outright banning Bitcoin, the State could neutralize its disruptive properties by integrating and endorsing it? What if the government could harness Bitcoin's "Number Go Up" (NGU) technology to enforce its objectives and undermine the very ethos that defines Bitcoin today?
The initial users of Bitcoin were pioneers fueled by their convictions. To many of these early adopters, Bitcoin encapsulated their ideological principles stemming from the cypherpunk movement and free market anarchism. They perceived the technology as the realization of their dreams for emancipation from government oversight and the fruition of financial independence. Over time, the reasons for joining the network shifted from ideological to practical motivations. A growing number of users turned to Bitcoin solely for pragmatic purposes, viewing it primarily as a superior monetary asset for economic activity compared to contemporary fiat currencies. Moreover, the allure of potential exponential growth in purchasing power (NGU) became a significant draw for many newcomers, sparking curiosity and speculation about when such growth might occur. As the Bitcoin network expands, ideological motivations among users will naturally diminish, giving way to a greater focus on seeking improved, more sound money rather than a strong emphasis on separating money from government control for preserving individual freedoms. This pragmatic shift unveils a vulnerability that the State might leverage to influence against the network. To delve deeper, separating money from the State empowers Bitcoin to operate independently, ensuring freedom from direct governmental intervention, and emphasizing financial autonomy and user privacy. This strategic approach aims to completely remove the currency from centralized authority, bolstering individual liberty. Conversely, the state adopting Bitcoin involves the government acknowledging and integrating Bitcoin into its existing financial structure, potentially instituting regulations while retaining a degree of control over individual freedoms.
The State's ultimate advantage lies in what's known as the ratchet effect--a social mechanism used to diminish individual freedoms during crises by implementing supposedly temporary measures of authority that frequently persist long after the crisis has passed. This technique serves as the blueprint for unchecked growth in State power. Recently, the conflict in the Middle East prompted FinCEN to seek expanded powers under the PATRIOT Act. Their aim was to enforce stringent regulations and effectively outlaw privacy tools within the realm of Bitcoin, all in an effort to strip users of their ability to attain privacy within the network. Despite the lack of substantial evidence linking Bitcoin to funding nefarious activities in this particular case, the State's intentions have become transparent. Whether these measures will be fully implemented remains uncertain at present. However, the ominous reality remains: the groundwork has been laid, and a similar agenda could easily resurface in the face of the next crisis. Throughout history, one thing remains evident: the State requires only a crisis of catastrophic proportions to rally overwhelming public support. By doing so, the State might endeavor to bifurcate the network into two factions: a white-market and a black-market Bitcoin. These actions could provide institutions and State entities with the regulatory clarity needed to embrace the network in a politically viable manner. As "Institutions finally arrive" prepared to invest their capital, it's bound to trigger a significant surge in price, fueling the frenzy around NGU. At this juncture, it'll become quite evident who desires to separate money from the State and who desires better money for the State.
If the State aimed to divide and take control of the network, what additional objectives might it pursue? One such objective would involve the ossification of the network. To be fair, the discussion surrounding Bitcoin network ossification is intricate, philosophical, and highly debated. In my view, it would be a targeted outcome sought by the State. The economic reality of scaling poses significant and potentially insurmountable technical hurdles for self-custody long term. As the network ossifies sooner, the necessity for custodianship intensifies among an increasing number of network participants. Increased custodianship facilitates the State's ability to enforce censorship, even for individuals who still hold their private keys. Any business seeking to function within the State's jurisdiction must adhere to its censorship requirements, regardless of its proclaimed ideology. Consider a scenario where privacy tools are banned due to a crisis, leading the State to establish a sanctioned ledger of approved addresses (users). Every business in the economy would be obliged to uphold the State's directive to operate legally. Even for individuals who hold their keys, compliance with the State's mandates and censorship would become imperative to participate in legal economic exchanges. This showcases how the State could censor the Bitcoin network, not directly at the protocol level but indirectly through regulatory societal enforcement.
If the State aimed to ossify the network, what strategies might it employ to socially encourage this outcome? To begin with, it could strive to render the consensus upgrade process resource-intensive and contentious. There's a school of thought suggesting that Bitcoin's absence of a formal upgrade protocol serves as an advantage, preventing potential system manipulation by attackers. While this notion holds merit, it also adds complexity and risk to coordinating upgrades among users and miners. Due to the absence of a formal upgrade protocol, network participants like node operators and miners lack a precise method to signal their support for specific upgrades. Consider this example scenario: I support BIP 119 and would readily and programmatically upgrade my node if a defined percentage of the global hash rate or network nodes signaled their intention to coordinate an upgrade as well. However, without an upgrade protocol in place, accurately quantifying market sentiment for potential upgrades relies solely on social signals, which are challenging to measure accurately. This situation elevates the risk associated with any upgrade, as it holds the potential to fragment the network. Relying solely on social signals for upgrades as the network expands will hasten ossification, arriving sooner rather than later.
Bringing together the threads of this thought experiment paints a rather sobering picture of a potential future landscape for Bitcoin. Let me be clear, this thought experiment doesn't chart a definitive course for what's ahead. However, the reality remains: a significant amount of State power is tightly interwoven with the stability of its fiat currency. As interventionist policies persistently erode the value of fiat currency, the State, grappling with an existential threat, will fiercely endeavor to maintain its facade of authority. This will involve heightened efforts to shape public perception and resorting to draconian measures to retain control. During crises, the State historically manufactures consent, and in its desperation, even co-opting Bitcoin to serve as a tool for State control might emerge as a conceivable outcome. We should not be so quick to cheer on the State's adoption of Bitcoin if it comes with strings attached.
Rather than readily acquiesce, we must scrutinize state adoption of Bitcoin to ensure it does not betray founding principles. The tempting carrot of mainstream approval and Number Go Up could conceal the stick of attempted centralized control. If integrating Bitcoin requires compromising aspects of its censorship resistance or the peer-to-peer structure, we must unflinchingly refuse, no matter the supposed financial benefits. Amidst such critical circumstances, it becomes crucial to not just withdraw our consent, but actively participate in non-violent civil disobedience while rallying behind those developers dedicated to making the tools at our disposal more accessible for ordinary individuals. This multifaceted approach stands as a pivotal course of action in times of urgency. The war against State capture is a battle on multiple fronts and every individual plays a role in ushering in Bitcoin's future. With each passing day, Bitcoin's resilience and antifragility grow deeper into mainstream society. But without tireless vigilance upholding its ideological vision, the Bitcoin our grandchildren inherit may be unrecognizable - neutered and leashed, stripped of its liberating potential through regulatory capture. We must be steadfast guardians, uncompromising in the face of those who would erode its emancipatory promise. Though the road is arduous, our principles today can secure financial sovereignty for generations to come. Let us carry the torch of individual liberty so its light may one day illuminate a just world, where Bitcoin fulfills its purpose as independent, peer-to-peer money for all, unfettered by censorship or authoritarian control. Our actions today shape the economic emancipation of tomorrow.
This is a guest post by Michael Matulef. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Bitcoin miners provide a valuable service to the ecosystem. In exchange for the work they do securing the network, they are rewarded by the same network they protect. This sound and elegant design by Satoshi is surely one of the most remarkable aspects of Bitcoin.
What is increasingly being forgotten, however, is that there is more to mining than merely hashing.
A person engaging in the entire process must run a node to get reliably updated on the most recent state of the blockchain, then begin construction of a new block. This involves verifying the validity of the previous block, discovering unconfirmed transactions and usually selecting the most lucrative of them, constructing a generation transaction in which they pay themselves, building multiple merkle trees of these transactions, and finally hashing to actually solve this block. The transactions within the block template will constantly change as new ones get broadcasted to the network and when a new block is found by someone else, the miner must switch to building on top of that along with dumping all the transactions now already in the blockchain to populate a new template.
As you can see, hashing to actually solve the block is just one part of this process. A Bitcoin mining ASIC is also only capable of hashing. In the current environment, all other aspects of mining are generally delegated to mining pools. This has spawned some confusion. For example, in any circumstance where there is a discussion about activation of soft forks via version bit flipping within block templates, people will refer to this process being a MASF - "Miner Activated Soft Fork'' - and someone will always have to clarify that this responsibility falls solely to pools and that pools are not miners. They may also point out that miners are still ultimately in charge as if they desire the upgrade and the pool they are mining with doesn't, they can simply switch pools. [For clarity, in the rest of this article I will refer to those only participating in hashing and leaving all other aspects of mining to pools as "hashers".]
Back to soft forks - in the current environment where >99% of blocks are constructed by the same dozen entities, it becomes more accurate to call these "Pool Activated Soft Forks" which no one does, contributing to a dangerous illusion: that mining can be considered decentralized merely due to distribution of hashrate. This claim is simply not credible when all the hashrate is beholden to a tiny group of pools and thus the contents of Bitcoin's blockchain going forward ultimately will not include anything these few entities consider unacceptable, as well as a whole host of other issues.
By not engaging in any other aspect of mining beyond hashing blocks constructed by pools, Bitcoin miners have largely abdicated a critical component of their role. The fact that this is not only possible but also the path of least resistance indicates that we have a systemic issue.
The implications of merely hashing and having a pool do everything else stretch far beyond soft fork activation. For example, miners presently are entirely unaware of what blocks will look like once solved, meaning that a miner performs work while blindly trusting that the block contains only desirable transactions. But you have a blatant violation of that trust in blocks such as this one - this is the famous block that kicked off the "ordinals" craze. Notice how the transaction fees the miners who worked on this block would actually enjoy amount to a measly ~$200 in BTC, in contrast to the blocks either side of it both averaging ~$5,000 in BTC.
Block space is valuable - that's part of what makes Bitcoin work in the long term - but in a world where just a handful of players can have a template they construct end up in the blockchain, those same entities have near-exclusivity to sell this space and be paid out of band in exchange for it. Are they obligated - or even likely - to be forthright with their miners that they are doing this? Certainly not in this case as the intention was to surprise everyone. Going forward will they forward on to their hashers payments they receive for selling blockspace out of band?
Simply put, while the incentives for a pool and its hashers typically align with regard to maximizing profit, a pool has the option of selling blockspace for things other than regular Bitcoin transactions, while a miner's income is more limited unless the pool chooses to be transparent and agrees to share revenue. Even if they do, verification requires the pool's permission as opposed to verifying money earned from subsidy and transaction fees (also tricky with FPPS pools, more on that later).
Further implications of pools being Bitcoin's centralized constructors of block templates stem from the fact that - on a more fundamental level, there are twelve "super nodes" with their own "super mempools".
This cascades into people dealing directly with pools and ignoring mempools altogether. Some contend that the mempool is doomed regardless - and that the current state of centralized template construction is merely accelerating this, but it's certainly not desirable in any case and it would be overly pessimistic to make this assumption in a world where genuinely decentralized template construction is somehow made realistic. Then out-of-band payments must make their way to a larger group of people if whoever is purchasing the block space wishes to make it into the chain in the same time frame. This would likely be more transparent and reminiscent of the way things currently work. Conversely, "super nodes" would hopefully be broken up into smaller pieces and thus no longer be able to offer the same guarantees.
To deviate from this aspect of mining let's shift focus to how payouts are currently handled.
Nearly all pools pay their hashers via FPPS (Full Pay Per Share) or something similar. One exception is ViaBTC offers PPLNS (Pay Per Last N Shares) in addition to FPPS. Antpool also offers PPLNS but hashers must forfeit all transaction fee revenue - this speaks to the point that I will soon endeavor to make - essentially that FPPS is not a model that works well in a world where transaction fee revenue is what is of relevance rather than subsidy. It should be mentioned that Braiins pool (formerly Slushpool) uses a system referred to as "score" which in practice is quite similar to PPLNS.
What is the reason for this overwhelming preference for FPPS? From the hasher's perspective, they get paid no matter what happens on the blockchain. This is congruent with the purpose of pooled mining - greater consistency of income. FPPS offers more consistent payouts because the pool pays based on projected revenue and settles-up with the blockchain independently.
This makes life extremely easy for miners who want to minimize issues resulting from cash flow disruption, but there are of course drawbacks - major ones that I hope to highlight here.
FPPS first and foremost requires that the pool become the custodian of all freshly mined bitcoins. These cannot be forwarded on to miners for a minimum of 100 blocks as freshly mined bitcoins are unspendable until after this and in practice, the mined coins can have nothing to do with what the miners are ultimately receiving when making withdrawals from the pool. The risks of third party custody should be obvious to almost everyone reading this article so I'll skip it and move on to other issues with FPPS.
The next concern comes from the fact that more generally, an FPPS pool is a significant intermediary between hashers and the network itself. We have already established that hashers aren't privy to what the blocks they are working on will ultimately look like until after they are solved. FPPS means that they are now also unconcerned with whether blocks are even found or not, it's the pool's problem. Ignoring the increased predictability of payouts (should a pool never decide to rug its hashers) we must acknowledge the tradeoffs of doing this.
Miners getting paid directly by Bitcoin itself - possible in alternative schemes like PPLNS or of course solo mining - can expect to be fully rewarded for their contributions including transaction fees. An FPPS pool can only do this as a post-hoc calculation because there is simply no way to predict what fees will amount to when establishing what hashers actually receive per share. A pool cannot simply assume that fees will be some value greater than 0 and credit miners with this as they mine because should fees drop below this value, they would simply be paying the miners out of their own pocket. They must periodically divide up fees and attribute them to miners once actually in the pool's custody.
From the hasher's perspective, complete trust in the pool is required since verification is next to impossible without the pool's full transparency and cooperation. Previously, as alluded to above, this was less of an issue since most mining revenue came from subsidy with only a sprinkling of sats in transaction fees - but this increasingly isn't (and indeed cannot be) the future of Bitcoin mining. Going forward, miners will earn primarily from transaction fees and those are simply harder to predict and monitor when using a pool than the subsidy.
Contrasted with a payout scheme like PPLNS where hashers accept increased variability (the pool's luck becomes the hasher's luck too), we see that the mining ecosystem has overwhelmingly elected to prioritize consistency of payouts over the ability to verify what is received. More perversely, some hashers actually prefer this -- wishing to present themselves to governmental authorities as a kind of "hashing service" entirely disconnected from Bitcoin-some proudly so. This is because FPPS is such a radical deviation from the ideal miner/pool dynamic that it's once again hard to describe what the hasher is even doing as "bitcoin mining".
In effect, the FPPS pool is a large solo miner paying hashers to solve its blocks. After which they have an internal and opaque process by which they figure out what to pay their hashers. To really illustrate the point the hasher could (and in some not-so-hard to imagine scenarios would) even be paid its fees in something other than Bitcoin.
Why not? If you don't care if any blocks get found let alone what they look like before construction, why not just get paid fiat by a solo miner to point your ASICs at them in whatever the most convenient currency is? Bitcoin is not always the most frictionless option, but even if it were, it's reasonable to imagine continuing down a path where "hashing" may be performed by as many entities as you like, but all done on behalf of a tiny group of "pools" whose permission the entire network needs to get anything into the actual blockchain.
Let's look at this in a wider context. We have already mentioned that some larger players wish to distance themselves from Bitcoin as far as possible, thus happily delegating as much Bitcoin related activity to their pool as possible. The pools are wide open to regulation, and a large amount of their hashrate is only too happy about it.
This again introduces economic irrationality from the perspective of the network itself, manifesting in behavior such as the mining of blocks that meet certain arbitrary standards. When this occurred in the past, it didn't last long due to backlash from the community, and the absurdity of trying to aggressively appease a jurisdiction's shifting regulatory scheme without even being asked to do so. But the fact that that it was an option betrays the risk of having centralized construction of block templates. Will miners in one jurisdiction try to ban or refuse to process transactions stemming from another? Will miners simply be an extension of a government or influential bad actor? There are concrete examples of pools declining transaction fees to profiteer out of band, at times simply to comply with regulatory pressure. This once again appears economically irrational from the perspective of the network.
The most extreme recent example of this was the 19 BTC transaction fee paid in a transaction in a block ultimately found by F2Pool, ostensibly in error. As a FPPS pool, they became the custodian of the 19 BTC mining fee and chose to give it back to the person who made the mistake. This demonstrates perfectly the price of placing too large an intermediary between your miner and the Bitcoin network. In a PPLNS pool this would be less likely to have happened. Not because PPLNS pools are necessarily trustless or non-custodial, but by virtue of it being possible to monitor and verify fee revenue at the exact moment blocks come in, this would possibly have been harder for the pool to attempt having likely already credited miner's accounts internally with their share of the mined funds causing greater backlash. Although nothing is in principle different until you contrast what would have happened should a pool make payouts to its miners in the coinbase/generation transaction itself. In that scenario the money would have already been in the miner's custody and interception of fee revenue by the pool would have been impossible. So in this example a pool's desire to seem generous or fair cost its miners $500,000 in fee revenue making a decision on behalf of them it should not have been in a position to make.
This should be simple to explain: at this point everyone knows what a 51% attack is. What is far less understood though is that (up until the network routes around it,) 51% is the requirement for this style of attack to be a guaranteed and perpetual success rather than merely disruptive.
In reality, any entity that has more than 20% of the network can cause issues via a multitude of attacks, some being executed in the wild and only rarely discussed, which I will get into later. But before we do that, we can stare aghast at the network which has a pitiful two entities with a combined hashrate reliably greater than 51%. Worse yet, one of the largest pools not-so-carefully disguises that it is responsible for another 10% of blocks found through yet another large pool with whom the parent company maintains a strategic partnership. The fact that this pantomime persists does not inspire confidence.
There are two usual responses to this. Firstly, people point out that hashers can simply vote with their feet and switch pools if they ever combined forces to 51% attack. Secondly, that any pool would be insane to attempt it for the simple reason that disrupting bitcoin would cause the price to fall and no one invested in the ecosystem would ever want that. The second argument ignores human history and further assumes that people can never be coerced into behaving destructively and thus causing disruption simply for disruption's sake or other nefarious purposes. (It also doesn't take into account the fact that the market is often not necessarily a good indicator that there are issues with Bitcoin, see the forkwars of 2017.)
The first argument however makes a more solid assumption that hashers would always switch in a scenario where one pool does indeed get too large. Indeed, if pools tried to do this reality would kick in and we'd realize that despite constructing 99% of our block templates, pools aren't actually miners. We also have a case study of Ghash.io which famously death-spiraled having spooked everyone by exceeding 40%.
Great, so we've demonstrated that this isn't really an issue, hashers can be relied upon to just hop to another pool. (In reality, if large mining operations are all tied up in red tape it's a far less reliable assumption but let's at least proceed as though we're fairly confident that this attack isn't likely.)
Unfortunately, awareness of the fact that hash power will migrate away from any pool that exceeds a scary threshold leads to them self-regulating - but not in a way that helps because they do not need to genuinely maintain a hashrate below a threshold, they simply need to make it appear that way. This essentially amounts to accepting all the hash power they can get while forwarding it on to other pools as necessary to avoid alerting the world to their ability to wreak havoc.
So this leaves us with an unknowable picture of the network. 30% of blocks can be overtly found by the largest pool and be acceptable to everyone, while a further 10% of total network hashrate is still pointed at that pool and just secretly being directed to one or multiple smaller pools. The hashers responsible for that 10% are unlikely to realize it's being used this way (and it gets even harder to detect with stratumV2 - more on this later).
This already less-than-ideal scenario gets far worse when you take into account the fact that this redirected hashrate can be used to harm smaller pools via the block withholding attack.
This is as follows - the attacker engages in the mining process mostly as a normal user of the victim pool. As a result, they get a share of the reward from any block the pool finds as expected. The rewards then ultimately end up with the attacker who can then pay the actual hasher without having to lose any money. So far the only harm caused is the incorrect impression of the pool's hashrate as being smaller than it actually is but the smaller pool remains unharmed.
Now the harm occurs if they decide to not tell the victim pool when they find a block. This has the effect of making the victim pool appear unlucky. They appear to simply be finding fewer blocks than they should be and are paying out a reward split among more participants than are actually honestly mining - i.e necessarily running at a loss assuming they don't make up the losses some other way.
If an FPPS pool is attacked this way, they must burn revenue paying miners out of pocket to make up for the difference. If they are PPLNS their miners wonder why they aren't getting what they're supposed to be getting. Either way, block withholding is anticompetitive and can destroy the victim pool by giving it a bad reputation.
From the attacking pool's perspective, let's say they make up 5% of the victim pool's hashrate. This means they still make 95% of the revenue expected and the pool looks 5% less lucky than expected. This is easily enough to kill the pool whilst the 5% loss on the redirected hashrate will be of far less significance to the bigger pool. If it only represents 1% of the bigger pool's total hash power then the attacker is only losing 5% of 1% of its expected rewards - 0.05%. This is a no brainer advantage to any malicious, significantly sized mining pool that is just prepared to act unethically.
The smaller the pool, the more vulnerable they are to this attack. The larger the pool, the more likely they are to block withhold a competing, smaller pool. This risk increases as large pools approach levels where their total hashrate begins to scare the community, which further motivates them to at least stash hashrate in smaller pools, even if they don't actually attack with it or execute attacks infrequently enough for the problems to ultimately get dismissed as variance. Indeed - decreased variability is already enjoyed by larger pools due to more consistent payouts from the network which translates into being able to operate within tighter margins and thus be in a position to charge their hashers less. From the perspective of every miner/pool that isn't under attack this attack means that they will enjoy lower difficulty as the Bitcoin network adjusts for there being fewer overall blocks.
Is block withholding merely theoretical? Absolutely not. Several mining pools were attacked in this exact way even as early as 2015. It is extremely difficult to thwart as a pool must monitor all workers and make a calculated decision to kick them off the pool and/or withhold payments to them should they be unlucky to a point of statistical impossibility and the pool able to reasonably assume they are acting maliciously. Attacks of this nature also incentivize pools to want to "know their hasher'' and custody payments which of course makes life harder for those wishing to mine permissionlessly.
Regardless, the overall effect from all this is that people will prefer mining with larger pools for yet another reason.
We have publicly seen statements from large miners declaring that they are switching away from smaller pools due to getting payments that did not meet expectations.
This is extremely undesirable as larger pools and the larger hashers that use them are more easily encumbered with regulatory burden and thus prone to engaging in behavior that damages Bitcoin, going beyond even centralization of block templates and temporary custodianship of all block rewards.
The pools become effectively deputized, enforcing bureaucratic nonsense on "behalf of" their hashers. The two largest pools currently require that their users jump through a ton of hoops, including identity-exposing processes that should not and must not become necessary for someone to be able to mine bitcoin outside of solo mining.
To make one final point on block withholding beyond it threatening to make life harder for smaller pools and anyone wishing to hash with them, I say to anyone who might still be tempted to dismiss it as purely theoretical (even though its demonstrably happened in the past) - do we think it's normal for pools to remain a consistent and apparently tolerable size organically? This would imply new hashrate coming online always somehow managing to distribute itself at least somewhat evenly. We must believe a pool can spring into existence, grow prodigiously and then just....stop....at right around the threshold needed before people get spooked. Do we see pools begging people to stop mining with them or straight up limiting account creation and kicking miners offline that exceed a permitted hashrate within existing accounts? We of course do not.
The two more probable scenarios are that either hashers are collectively self-regulating (unlikely, as mining with smaller pools now famously means earning less bitcoin even if the reasons I've presented in this article don't entirely account for why - not to mention that examples of mass exodus from a pool were extremely noticeable the few times they have happened) - or - pools are simply misrepresenting the amount of hashrate they have pointed at them.
To add to all this, smaller pools have yet another issue: they can go days without finding blocks. A larger pool won't go longer than a few hours. This is a question of resolution - the higher your hashrate, the closer you are to expectations over the short term, and this unfortunately results in a minimum threshold below which a pool cannot expect to make up for periods of bad luck at which point it just becomes impossible to compete.
The two-week periods between difficulty epochs means a reasonable number of blocks must be found within that two-week period so that any bad luck has a shot at being balanced out by subsequent good luck. If not, if - for example - the pool has a projected block rate of 1 block every 13 days and doesn't find a block before the difficulty adjusts upwards causing them to drop to a projection of 1 in every 15 days, that prior window has closed forever. If it's a PPLNS pool, the hashers have earned less than they otherwise might have. If it's an FPPS pool, the pool has burnt a lot of cash and/or become bankrupt.
This means there are only so many pools that can exist, at least ones that operate the way today's pools operate. There simply cannot be hundreds, because many of them would keep collapsing in periods of bad luck due to having less than 1% of the network hashrate and therefore potentially not even being able to reliably find one block per day, encountering potential periods of weeks without blocks. This is a limitation placed on us by Bitcoin itself.
The protocol by which miners and pools communicate is Stratum (slowly but surely being superseded by StratumV2). StratumV1 is both ancient and deeply flawed. Firstly, all communication is done in plaintext. This means ISPs are not only privy to the fact that you're mining but also the scale to which you are doing so, and they - along with anyone else that can snoop traffic on your network - can perform MITM attacks resulting in you using your machines and power on someone else's behalf. This has been abused before by unknown attackers to hijack hashrate away from the intended pools.
Aside from a number of inefficiencies, StratumV1 also fails to offer miners a practical way to construct their own block templates and still enjoy mining in a pool. All these issues are addressed with the extremely desirable StratumV2 (originally "GBT", then "Better Hash") which we will return to later.
Before getting to the solutions, we'll deviate from discussing pool/miner dynamics - as this article would be incomplete if we failed to bring up the fact that there are only two companies manufacturing ASICs at any meaningful scale - Bitmain and MicroBT. There are others, but realistically almost all hashing is occurring on machines manufactured by those two companies.
This is not good for obvious reasons and essentially stems from the fact that chip fabrication is extremely difficult to do and thus hyper-centralized.
It's outside the scope of this article to go into solutions here, but there are folks working on making home mining something far more practical (in North America the main issue being the requirement for 220-240v and dealing with the obnoxious noise). The contention among those working on these pleb-mining projects being that if it becomes doable for enough every-day bitcoiners, they can start to represent a significant percentage of the total hashrate of the network, which is preferable to most mining operations operating at a scale where they are wide open to regulatory interference.
This task is made far harder by the fact that the firmware is closed source. Even custom firmware that can "jailbreak" an ASIC tends to be closed source in order to ensure those using it pay dev fees (i.e the cost for your awesome aftermarket firmware is mining on behalf of the team making the firmware.)
The stock firmware on ASICs - particularly Bitmain's - is a great indication of how comfortable they have become with their dominance of the market. Beyond being closed source, it's clearly malicious. You are forced to mine on their behalf upon powering up an Antminer - though a miner can at least prevent this from happening by blocking the connection (or installing aftermarket firmware, but then you pay dev fees instead and those can't be blocked without the miner refusing to mine at all.) Bitmain has also been caught several times adding malicious backdoors to the firmware for their miners (see Antbleed), and actively works to lock out aftermarket firmware developers.
The fact that stock firmware does this is frankly outrageous and clearly highlights the dire need for competition in ASIC manufacture.
Would anyone feel comfortable if the rules of the network were enforced by closed source bitcoin nodes? Further, imagine those nodes caused users to lose BTC to the developers of that software - and we all knew that was happening. Would anyone accept that? When it comes to mining, almost no regard is paid to the sovereignty of its participants. Of course node software and ASIC firmware are not of equivalent importance and we of course place more scrutiny on the former as we should, but the latter is not immaterial and is certainly being unacceptably neglected.
With all that said, let's move on to some of the solutions, focusing in particular in increasing the scope of what's possible as a miner and improving on existing models.
There is not much to say on this beside the fact that it decentralized basically every aspect of pooled mining. While this does many desirable things at a small scale, it requires that every user download, verify, and track the shares of every other user and prove to each other that they are accounting for everything correctly in their templates. Achieving this in an adversarial environment at any scale is essentially an impossible task. Due to the fundamental nature of pooled mining, far more resources are required than what is needed to run a Bitcoin full node, not to mention making things more complicated for the miner.
For these reasons it has been ignored by most, and used only by more technical users or idealists who - understandably - cannot bring themselves to mine with the alternatives.
This is most certainly the lowest hanging fruit. It offers practical remedies for many of the issues mentioned in this article.
Firstly, by allowing encrypted communications between pools and hashers, ISPs and any other entity with access to your network traffic will no longer become trivially aware of the fact that you are mining (or the extent to which you're doing so). "MITMing" you into hashing on an attacker's behalf consequently also becomes impossible, or far less trivial.
Secondly and perhaps most significantly, it's also capable of allowing hashers to construct their own block templates, so while pools would remain trusted coordinators of reward splits, and likely still custodians of block rewards - this would nonetheless represent a shift in power away from pools towards miners and be unequivocally a good thing.
Lastly, there are a few other improvements that I encourage you to check out here.
A world in which StratumV2 is the norm, along with enthusiasm from miners to actually construct their own templates (ideally a pool would offer an incentive to miners who did this) would enjoy a far more resilient Bitcoin.
The community is essentially unified in working towards upgrading the mining ecosystem to StratumV2, but historically miners have generally avoided using these solutions due to additional effort (albeit trivial compared to p2pool) and no incentive to do so.
There is great room for improvement with or without StratumV2. What's needed is a pool that offers miners the ability to take direct custody of their coins while mining. This requires that a pool (or its hashers) construct block templates in which miner's rewards are paid out directly in the coinbase/generation transaction contained within every block. The fact that this is impractical under the FPPS system means any pool doing this would face reluctance from some miners, but those who switched would enjoy greater transparency as Bitcoin itself would - above some threshold - be paying them directly with an easy to verify split of subsidy and fee revenue. This can be coupled with pools - pre-stratumV2 - at least making miners aware of block templates constructed on their behalf prior to blocks being solved, and post-stratumV2 simply needing to verify that all miners are constructing templates that accurately reflect reward splits without the scaling implications of all miners having to do this continuously.
The pool can also address the reluctance of miners to make their own block templates by offering incentives for miners who do so, by - for example - charging them lower fees. It seems that if miners are unwilling to take on the burden of doing this even once it becomes practical again, then this additional incentive might become necessary.
The above suggestions would dramatically improve things.
Many initiatives and announcements are coming up regarding ASIC manufacture and pool infrastructure that hopefully should be welcome developments for anyone interested in ensuring mining trends towards greater decentralization.
This is a guest post by Bitcoin Mechanic. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.