The Three Tiers of Investor Control over Bitcoin

Zangelbert Bingledack

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Daniel Krawisz's article Who Controls Bitcoin is a must-read for anyone wanting to understand how Bitcoin is governed.

This post builds on Krawisz's point - that investors hold all the cards - by describing in more detail how investors can exercise their control through a tiered or layered structure of increasing radicalness and increasing directness of how investor muscle is flexed to exert market influence.

Tier 1: Expression of Intent

Investors simply make it known, in a credible way, that they support some change (say bigger blocks), meaning they intend to buy more BTC if the change is made in good time, and sell BTC if it is not. Then there are three levels of ways the ecosystem can react:

(i) Core Capitulates: Core is pressured to up the blocksize cap and does so in a way that satisfies investors.

(ii) Competing Implementations Arise: If Core refuses or raises the cap too slowly, other implementations like XT spring up and miners - keen on getting the additional gains through a higher BTC price - adopt it.

(iii) Bitcoin Unlimited Renders the Previous Two Moot: Miners - especially if it is easy for them, such as through a pulldown menu - will up the size of the blocks they mine as tx demand grows, and as long as they do so conservatively other miners and nodes (all interested in seeing the BTC price rise) will approvingly build on and propagate these blocks.

In a BU world, this messy set of sub-levels is replaced by just the preceding paragraph. Investors announce, ideally through a prediction market or futures market but cruder measures should also work, and miners and nodes react through the pulldown menu to get those juicy profits.

Tier 2: Fork Arbitrage on Exchanges

This case is more radical, but it is only required if a change is too controversial for something like XT's 75% threshold to be relied upon. Here, several weeks/months before the fork is to occur, Bitcoin exchanges prepare futures contracts for, say, coins in Core and coins in XT, and let investors effectively sell coins in Core to buy more coins in XT, or vice versa.

In almost all conceivable cases a definitive winner emerges (and if not, no other method is going to do any better at determining the winner), and the other fork either dies or becomes a niche alt-protocol coin (not really an "altcoin," since it shares Bitcoin's ledger). The niche coin would likely only arise and persist if there truly were a key tradeoff being made, as some small block adherents argue. In any case, hodler purchasing power is completely preserved by default if they choose not to bet in the "forkbitrage" process, even in the event of a persistent split.

This forkbitrage process represents a more direct expression of investor will than in Tier 1. (Also, it may be possible that this process starting up would kick off Tier 1 effects that would allow the more radical measure of forbitrage to be halted early, with the exchanges returning investors' money.)

Tier 3: Spinoff with New Hashing Algorithm

This is the most radical, because it is only required in the scenario where "miners go insane" and do something ridiculous like upping the block reward or refusing to implement obvious necessary changes like blocksize cap increases, despite investor support, and where the miners would threaten to 51% attack the investors' chosen fork in the above forkbitrage process. Of course this can only be a short term threat, since the fork winning the Tier 2 forkbitrage process would soon have far more hashpower, but short term matters when you could be 51% attacked.

Here the Bitcoin ledger is copied over to the investors' chosen protocol, so that all holders have the same number of coins (and same percentage of all outstanding coins) in the "new" coin, say a larger blocksize cap coin. The World Wide Ledger is preserved, which is all that should matter to investors, and the "old" Bitcoin is again sold off to nothing or goes niche. Hodler purchasing power is preserved, etc.

This is the very purest expression of investor will. Miners can be called a kind of investor, but with some complications. Spinoffs allow investors to circumvent even the miners - a radical measure for outlandish scenarios.

Tier 1 lets investors deal with attempted developer control, Tier 2 lets investors deal with controversy, and Tier 3 lets investors deal with pervasive miner irrationality. This is how investors rule the roost.
 
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cypherdoc

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this post from /u/Noosterdam captures the essence of the debate.

miniblockists go on and on about the need for decentralization and the need for trustless interactions throughout the Bitcoin network and protocol. yet when the discussion gets down to the very central and key positioning of core dev within the the community and protocol control, their discussion breaks down so badly that it's actually makes me want to laugh and cry at the same time from the hypocrisy. their discussion suddenly goes like this: trust us, we've been good stewards (ahem) of the protocol all these years therefore nvm that nine of us have formed a for profit company. we've rewritten 99% of satoshi's terrible code. we're cypherpunks and should be admired and respected (right). and just in case we do do something wrong (damaging) we've got these year long severance contracts in place that allow us to exit from BS allowing you to continue to trust us.

there's more where that comes from but i won't go on:
 
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Peter R

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An interesting development has occurred over that past few days, related to Noosterdam's post above: some of the small-blockers are acknowledging that Bitcoin should not be governed from the "bottom up," in favour of a "top down" approach instead. (I found some explicit quotes yesterday saying "top down" but can't find them today.) If we can move the debate to a place where the small-blockers will acknowledge that they favour "top-down" governance because "the people will make poor choices if given the freedom" then I think we would have made progress.

Here are some examples:

#1. Question: You are saying that people should not have this freedom because you think they will abuse it?

"I don't "think" this, it's an observable fact."

#2.

"If you let users vote on those things with their bitcoin nodes, I predict "Bad Things". The consensus rules are chosen carefully by the developers because of the effect they have on Bitcoin's monetary properties, your suggestion to allow an open vote on those rules is just an invitation to bad actors to promote self-destructive rules."

#3.

"...the software itself in the nodes should make the determination, not the node's human operators."

#4.

"The market balance mechanisms were also set up by developers. You blow up the stability of these mechanisms and you have made Bitcoin utterly pointless. The very system is made so that users running arbitrary protocols just doesn't work for them."

#5.

"Bitcoin was designed so that its code-defined parameters couldn't be redefined by users ("bottom up") and this is a feature."
 

Zangelbert Bingledack

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They seem to ultimately subscribe to (b) in the Forkology 101 quiz:

How do we really know there will never be more than 21 million bitcoins?

Choose the best answer from the following:

(a) Because Bitcoin is a consensus system. Any node breaking with the issuance schedule would be out of consensus and ignored.

(b) Because it was set in stone by Satoshi and software ossifies over time as the governance system of the Bitcoin Core implementation gets ever more conservative, protected by cypherpunk libertarian devs who abhor inflation.

(c) We don't. But we can be pretty darn sure of it because the market would be very unlikely to support a fork that messes with the 21M coin limit, since the hardness of that limit is a tremendous source of investor confidence.
However, I've taken some wrong turns before by assuming that forum posters' views seemingly handed down from the Core/Blockstream devs are a faithful distillation of their views. Seeing what Greg, Adam, Pieter, Wlad, Mark, and Matt actually have to say on this would be interesting, as well as statements from Gavin, Mike, Jeff, and other figures, including Satoshi.
 

cypherdoc

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Adam, numerous times in his podcast with Gavin, flat out states he doesn't want to sound elitist when in fact he is.
 

Zangelbert Bingledack

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Elitism may or may not be a good idea, when it is able to be put into practice, but in Bitcoin it simply can't be. The market will view it as damage and route around it. Forkology 101 answer (b) is centralization that will force (c) to dispel it.

The market takes the advice of wisemen and the precedents of history into account without being bound fetishistically by them.
 
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Peter R

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@Justus Ranvier :

I actually ran the experiment

https://en.wikipedia.org/wiki/Keynesian_beauty_contest#Subsequent_theory

with a Physics 101 class I was teaching and for p = 1/2. The winning student picked "9" IIRC (and won $2). I was surprised to observe that students actually picked numbers like "75." I picked "4" myself, clearly overestimating the number of recursions the group would make.
[doublepost=1447531555][/doublepost]
Adam, numerous times in his podcast with Gavin, flat out states he doesn't want to sound elitist when in fact he is.
Don't believe a rumour until it's officially denied.
 

cypherdoc

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Shower thought:

The process of discovering which one out of a set of competing forks is supported by the economic majority is a Keynesian Beauty Contest.:

https://en.wikipedia.org/wiki/Keynesian_beauty_contest
Great example JR.

The most extreme example of this imo is FOMC day when for weeks prior everyone is trying to front run the Fed's interest decision. Once that decision comes, the market starts whipping around like a stuck pig.
 

Zangelbert Bingledack

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@Peter R

No answer so far, but reading through some of the messages I get a sense that they cannot really answer because they have no coherent theory of how governance actually works, only an ad hoc bunch of word-associations with ill-defined terms like "valid chain," "consensus," and "economic majority."

What makes something valid? Consensus among whom? 95%? Why not 98% or 90% depending on what suits Blockstream's needs today? How is "economic majority" defined? Luke says miners aren't part of the economic majority? Why are investors apparently never mentioned among the stakeholders or the economic majority, when they have almost all the power to effect changes?
 
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cypherdoc

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@Zangelbert Bingledack

speculators/investors have always been despised by a certain Bitcoin-sect. i would have long debates with these guys back at the end of 2011 at the depths of that bear mkt b/c those same guys were blaming ppl like me for the crash. of all ppl. w/o ppl like me back then the price probably would've gone to zero. i'd hear the same allegations that /u/eragmus threw out just yesterday, "you're just interested in getting rich". these guys are naive, oblivious, self righteous geek anarchists who have no real life experience and fail to acknowledge they are so miserable and angry b/c they aren't getting rich. And they certainly don't understand who's funding their lunch.

what is really interesting is that i'm beginning to hear more thought leaders like Daniel & Barry Silbert talking about the need to get the price up. that is exactly right. the price lag is causing problems for businesses and mining. not to mention the investors who are getting impatient. this is just a variation on my bucket theory. the price has been oversold the last year or so. the price bucket is almost empty and it's time to refill it up to overflowing. there's been too much investment into startups and businesses that the current price cannot support. this is why we are starting to see the price climb as speculators at looking for the most oversold bucket:

 
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Zangelbert Bingledack

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@cypherdoc

I didn't fully realize until now how little respect investors get from most of the devs. I've been thinking a visualization of the your three buckets idea and concepts like these are needed:

The Societal Role of Investors

and


Visualizations have immense bang for the buck. I've been continually surprised that the 10 minutes I spent slapping this ugly little diagram together in MSPaint years ago resulted in me seeing polished up versions like the one below it all over the place, to this day, with either Andreesen Horowitz or Pantera Capital referring to it as the "six-sided network effect":





@Justus Ranvier was noting on reddit recently that memes propagate based on stickiness rather than nuance. I was thinking that what makes visuals so high-leverage is that, unlike with text, a fair amount of detail and some nuance can be packed into them without making them un-sticky.
 
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Peter R

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@Peter R

No answer so far, but reading through some of the messages I get a sense that they cannot really answer because they have no coherent theory of how governance actually works, only an ad hoc bunch of word-associations with ill-defined terms like "valid chain," "consensus," and "economic majority."

What makes something valid? Consensus among whom? 95%? Why not 98% or 90% depending on what suits Blockstream's needs today? How is "economic majority" defined? Luke says miners aren't part of the economic majority? Why are investors apparently never mentioned among the stakeholders or the economic majority, when they have almost all the power to effect changes?
Well we now have our answer: such discussions are off-topic for bitcoin-dev:

http://lists.linuxfoundation.org/pipermail/bitcoin-dev/2015-November/011769.html
 

Zangelbert Bingledack

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@Peter R

They really don't seem to like meta-discussion, maybe because it could lead to a shakeup or changes in their comfortable position. It reminds me of how the mainstream media effectively control the range of conversation by not entertaining meta-questions. But at least now you have a moderator statement in writing that it would be on-topic for the other mailing list.
 
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