How to deal with Bitcoin’s issues of scope

Often, the greatest ideas take quite a while to really take off due to this fun thing called “Scope creep”. It’s when the scope of an idea often escapes the person who came up with it and the full logistics and consequences of implementing the idea begin to creep into existence, inhibiting its growth. This is something that Bitcoin seems to be having some issues with at the moment. Here’s how some people have called to deal with Bitcoin’s growing future. 

Kristov Atlas is a network security and privacy researcher who studies cryptocurrencies. He is currently a security engineer for bitcoin wallet provider Blockchain and co-founder of the Open Bitcoin Privacy Project. 

In this opinion piece, Atlas discusses bitcoin’s ongoing block size debate, arguing that the economic analysis of potential changes to the system has been largely ignored by network developers.

diagram, chart

As many writers have proffered their short-term suggestions for addressing bitcoin’s transaction throughput, I’d like to take a step back and explore how we think about, discuss, and plan the future of bitcoin.

To date, much of the discussion around Bitcoin’s scalability has suffered from two major problems:

    1. We lack a systematic process to set and achieve goals with respect to security, censorship resistance and the overloaded term “decentralization”.
    2. We have a poor understanding of the relationship between engineering decisions and their economic consequences (“cryptoeconomics”). By “we,” I mean myself foremost, but I can fairly include many stakeholders in the ecosystem including some protocol developers, wallet providers, miners, exchange operators, writers, and enthusiasts.

Because we lack these tools, we are ill-equipped to make protocol decisions and to plan bitcoin’s software future.

In this post, I’d like to focus on the second deficit in the list: economics.

What is crypto-economics?

I define crypto-economics as the study of the production, distribution and consumption of goods and services in cryptographic consensus networks. In particular, it is the study of the economic implications of cryptographic design choices in such networks (like bitcoin).

For example, suppose you created a cryptocurrency that did not have a predetermined supply algorithm for the currency units, but was instead determined on a month-to-month basis by majority vote among a few human keyholders.

How would this system compare to bitcoin?

Another example. A wallet client sending a bitcoin transaction must communicate the transaction data to bitcoin miners to be included in a block. What incentive do uncompensated nodes have to relay this data from the client to a miner?

These are questions for cryptoeconomics.

The snooze button

First, I want to acknowledge that economics, like other fields of study, can be very boring. I can appreciate those who would prefer to avoid the topic and focus on other aspects of cryptocurrencies. These systems are so complicated that, less than a decade after their birth, we require specialization.

I would recommend, however, that avoiders of cryptoeconomics get a taste, simply so that they can remain aware of the boundaries of the subject they wish to avoid.

Austrian economist Murray Rothbard said this best:

“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”

Economics, to date, has been a very odd realm of study. It is a study of human action, but one conducted by a society deeply in denial about the profound impact of a few economic planners on the decisions of the many.

Economists are like doctors of medicine charged with studying and optimizing the health of a room full of lepers, and then advising the rest of the world on how best to maintain health.

The minority of economists who have dared to challenge preconditions of central planning have had few opportunities to test their theories because there is nowhere in the world to find humans who trade in its absence. This long-standing state of scientific befuddlement has damaged technologists’ trust in the study.

Still, economists have had several centuries to construct basic principles and models of economic interaction, such as the laws of supply and demand, elasticity and marginal utility.

Although the many hours wasted by economists on how best to direct the power granted to human central planners will be useless to bitcoin, many of the fundamental principles of economics will act as lighthouses in efficiently allocating resources in bitcoin.

Why now?

Bitcoin creator Satoshi Nakamoto set a powerful precedent for bitcoin by making economic thought a centerpiece of its design.

For example, Satoshi improved on the design of fiat currencies by establishing a predictable currency supply. However, he also created many points of economic rigidity into the initial design.

These points of rigidity have worked well enough, but will increasingly reveal themselves as the number of participants in the system grows. One of the points of rigidity, introduced as a temporary security mechanism, has been repurposed as an economic control. In spite of Satoshi’s legacy of holding economic considerations as a primary value, this has not persisted with all of his successors.

Prior to 2009, practically everyone in history who made decisions about the design of other people’s currency arrived there through a political process.

Bitcoin was the first successful software project that allowed economically meaningful interaction according to rules set in an open-source software ecosystem. This advent is not just an opportunity – but a mandate – to apply free market principles to software consensus rules.

Other currencies can compete with bitcoin at a historically low cost; any currency that fails to apply efficient market mechanisms will underperform and eventually become defunct.

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