The 2024 debate has been about scaling Bitcoin self-custody versus ossification, with the premise that a fossilized Bitcoin protocol as it stands now is imperfect – but its solid monetary properties alone are enough to change the world for the better, so any change would come with unacceptable risks. This article discusses why in fact NOT bitcoin scales Also directly endangers those same monetary properties.
To provide an unbiased overview, the pro-change arguments revolve around increasing transaction throughput in a way that doesn’t burden nodes (as opposed to increasing block size). There are several proposals for tactical extensions to Script, the toolkit that all wallets use to lock up bitcoins so that only their owner can spend them. These extensions are new building blocks that can be used, among other things, to share UTXOs without having to trust a third party. If a single UTXO can have multiple owners, each with a claim to a portion of its value, but in a way that doesn’t steal from the others and can exchange them at any time without permission, then Bitcoin sovereignty could support orders of magnitude more users on the blockchain, as well as on Lightning and other as-yet-unrealized higher layers.
Meanwhile, the view of ossification is that the protocol as it exists today works and that changing anything opens the door to potentially catastrophic unintended consequences. Digital, permissionless sound money is already revolutionary and rather than accept any risk, we are better off meeting the needs of scale through human institutions like bitcoin banks. Most people are intimidated by personal responsibility and worse, there is the technical overhead of self-custody, so they prefer a trusted third party anyway – even today. The belief is that market forces will organically rein these institutions in, resembling the era of free banking on the gold standard. Hal Finney envisioned this world in the early days of bitcoin.
This is, to be honest, shortsighted, almost naive. While bitcoin has some similar qualities to gold, it is not gold. And that’s not to mention the fact that free banking failed: it was hijacked, subjugated, chained down, and ultimately shot dead for years. Regardless of what valuable assets the banking system holds, the incentives, actors, and forces are the same, and so the same outcome must be assumed. At its most extreme, the capacity for a final settlement within 10 minutes has nothing at all to do with the state’s strong incentive to make profits without recourse by exercising control over banks. Worse, that era began with gold as the incumbent bank: today, sound money is the outlier, and multiple generations have grown up using government-issued tokens as money, unaware of their inflationary nature—but worse, unaware of the problems.
Bitcoin is not gold. The monetary properties of gold are determined by the laws of nature, which no one can change. If you own a coin and you have verified that it really consists of gold atoms, then you are set. Bitcoin is not that simple: you own a secret that the skill to issue a UTXO, as there are some in your address, And you can have the spending transaction mined, on your preference chain. That last point is crucial: your ability to select which chain you transact on is the only which protects the monetary properties of Bitcoin for you. The only thing that gives your bitcoin a market value is that other people value those same properties, and we expect their numbers to increase over time, which means the price will go up.
Gold was conquered by paper gold, and bitcoin is similarly threatened by paper bitcoin. Devaluation, as with gold, is one risk. Lack of sovereignty, the base case of “withdrawal request denied,” is another. But far more damaging is chain selection—by which I mean the integrity of the consensus rules, such as the 21m supply, not bitcoin vs altcoin chains. Even if you have your own keys, if someone else decides which chain you check balances on and broadcast transactions to, you still have no idea what monetary property you’re subscribing to. So if the majority of users are for all practical purposes using L2 and above exclusively, never touching the chain itself, even in the honest belief that they’re using trustless solutions and not just a custodian—then almost no one even knows what rules they’re really subscribing to.
For Bitcoin to succeed, we need to scale sovereign use. Not just as an egalitarian dream, not to help trade, but for mutual defense. Any user subordinate to a custodian has no meaningful impact on the preservation of monetary properties. But any user has at least monitoring the chain – completely independent, self-interested, and making economic decisions based on their findings – acts as another guardian of monetary property, which benefits everyone. If this becomes entrenched, it is untenable to undermine the system. A Japanese admiral is famously attributed with the quote, “You cannot invade the mainland of the United States. There would be a gun behind every blade of grass,” and while it is probably apocryphal, the sentiment is unmistakable – and makes particular sense in bitcoin.
To make this less abstract, an analogy with gold: you knew that paper gold had a serious risk of depreciation, so you decided to only deal in physical, hallmarked gold. You used some coins to trade and buried the bars in the yard. You even checked a handful of each for purity by having them chemically analyzed by a professional. Buried for safekeeping, it could be years before they are ever checked again. What you never realized is that during the analysis, the professional shaved off 1%, replaced the missing weight with tungsten, and kept the shavings for himself. Worse yet, the hallmarker is committing the same scam as he did, by setting aside a few “good” units for customers who they know will check them the most thoroughly. This may not even be their own choice, but forced upon them by the state.
Now realize that if almost no gold holders do their own verification personally – because it is complex and expensive – the incentive is for ALL authenticators to do so, since everyone benefits individually and the shared racket benefits them all collectively. Even if someone breaks ranks and gives honest reports, their business will expand based on that demonstration of trustworthiness, which over time puts them in an even greater position to abuse it for profit. You are depending on the moral integrity of someone who directly profits from screwing you over, knows you probably won’t notice, and is powerless to do anything about it even if you did. It’s worth noting: this also describes world politics.
Even if you every reasonable step, and only use hallmarked gold and reputable paper gold issuers, you are still not really verifying that the gold is authentic. Worse yet, the average person is only dealing with banknotes instead of gold. What is the quality of the bank’s gold reserves? Do they even have any? How many people care? Without direct contact and selfish verification of the valuable assets, the market becomes dependent on third parties with their own incentives, and individuals have no idea what they adhere to – what rules they really subscribe to. The market naturally detaches itself from the value-creating base layer.
Imagine if you could buy a magic wallet that instantly verifies every molecule of gold you put into it. You check the validity of every transaction as it happens, and can react immediately if something is wrong. You have complete control over this tool, which is completely passive, meaning that it can only serve your interests. The wallet manufacturer has no reason to lie to you, as they have nothing to gain from it. Their personal profit can only come from providing the best possible tool to protect the interests of their customers.
A bitcoin node is that magic wallet. Paper gold users are like those who entrust their bitcoin to a custodian, and hopefully they understand the risk. Paper IOUs cannot be validated by the node, so it is irrelevant whether they have one or not. The validated gold transaction without a magic wallet thinks they are protecting themselves, but still gets ripped off – that is a bitcoin user who has their own keys, but does not have their own node. What seemed like independent entities that should be kept in check by the market are actually united by incentives into an “us versus them” alliance, in a completely predictable nightmare scenario of systematic abuse.
If we take the analogy to the breaking point, what if verification equipment is too expensive for the individual? In this case, we are thinking ahead to the time when block space is extremely valuable, rather than the node itself. We have already established that outsourcing verification entirely only encourages systematic exploitation. The only solution without trust is cooperation: multiple parties pool resources to buy verification as a group. In Bitcoin, this is scaling via UTXO sharing: we still offload some of the burden, but we retain sovereign control over our funds, and thus have an active interest in upholding the consensus rules, thus contributing to defend them for everyone.
As we work technologically to facilitate extremely broad access to and interest in sovereignty, via keys and nodes, we can embed a broad, distributed set of conflicting interests that makes undermining the monetary properties untenable. If we fail to technologically provide for highly distributed, direct interests in the events at L1, then most people will inevitably lose access to those monetary properties, as they did with gold. Scaling is not about increasing the capacity to facilitate trade: it is about defense.
This is a guest post by Owen Kemeys. The opinions expressed are entirely his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.