The debate of 2024 has been about scaling bitcoin self-custody versus ossification, with the presupposition that an ossified bitcoin protocol as it is today is imperfect – but its sound monetary properties alone are enough to change the world for the better, so changes would introduce unacceptable risk. This article will discuss why in fact NOT scaling bitcoin also puts those same monetary properties at direct risk.
Trying to give a neutral overview, the pro-change arguments are about increasing transaction throughput in a way that doesn’t burden nodes (unlike a block size increase). Various proposals exist for tactical extensions to Script, the toolkit all wallets employ to lock up bitcoin so only the 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 one UTXO can have many owners, each with a claim to part of its value but in a way that they cannot steal from the others, and that they can redeem at any time without permission, then bitcoin sovereignty can support orders of magnitude more users on chain as well as on Lightning and other as-yet-unrealized higher layers.
Meanwhile, the ossification stance is that the protocol as it exists today works and changing anything at all opens the door to potentially catastrophic unintended consequences. Digital, permissionless sound money is already revolutionary, and rather than accepting any risk at all we are better to achieve scaling needs through human institutions like bitcoin banks. Most people are intimidated by personal responsibility, and even worse there is a technical overhead to self custody, so they prefer a trusted third party anyway – even today. The belief is that market forces will keep these institutions in check organically, resembling the free banking era on the gold standard. Hal Finney famously envisioned this world in the very early days of bitcoin.
This is, to be frank, short-sighted, almost naive. Whilst bitcoin has some similar qualities to gold, it is not gold. Not to mention, free banking failed: over many years it was captured, subdued, chained up out back and finally shot dead. Regardless of which valuable assets the banking system custodies, the incentives, actors and forces are the same, and so the same outcome should be assumed. At the extreme, the capacity for 10-minute final settlement is entirely unrelated to the state’s strong incentive to profit without recourse by exerting control over banks. Worse, that time period started with gold as the incumbent: today, sound money is the outlier, and multiple generations have grown up using government paper tokens as money, unaware of their inflationary nature – but even worse, unaware even of the problems.
Bitcoin is not gold. Gold’s monetary properties are set by the laws of physics, which nobody can change. If you possess a coin, and you’ve verified it’s truly made of gold atoms, then you’re set. Bitcoin is not so simple: you possess a secret which grants the ability to spend a UTXO, if there are any in your address, and you can get the spending transaction mined, on your preferred chain. That last point is critical: your ability to select which chain you transact on is the only thing that protects Bitcoin’s monetary properties for you. Then, the only thing that gives your bitcoin a market value is that other people appreciate those same properties, and we expect their numbers to increase with time, which means the price trends upward.
Gold was captured by paper gold, and bitcoin is similarly threatened by paper bitcoin. Debasement, as with gold, is one risk. Lack of sovereignty, the basic “withdrawal request denied” scenario, is another. But far more pernicious 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 hold your own keys, if someone else is deciding which chain you’re checking balances on and broadcasting transactions to, you still have no idea what monetary properties you’ve subscribed to. So if the majority of users for practical reasons are exclusively using L2 and above, never touching the chain themselves, even in the honest belief they’re using trustless solutions and not just using a custodian – then almost nobody is even aware what rules they are truly subscribed to.
For bitcoin to succeed, we need to scale sovereign usage. Not just as an egalitarian dream, not to help commerce, but in mutual defense. Every user subservient to a custodian makes no meaningful impact on preserving the monetary properties. But every user at least monitoring the chain – completely independently, out of their own self interest, and making economic decisions based on their findings – serves as another guardian of the monetary properties, which benefits everyone. If this becomes entrenched, trying to subvert the system is untenable. A Japanese Admiral is famously attributed the quote: “You cannot invade the mainland United States. There would be a rifle behind every blade of grass”, and though it is likely apocryphal, the sentiment is undeniable – and makes particular sense in bitcoin.
To make this less abstract, an analogy using gold: you knew that paper gold has serious debasement risk, so you decided to transact only in physical, hallmarked gold. You used some coins for transacting, and buried the bars in the garden. You even checked a handful of each for purity, by having them chemically analysed by a professional. Buried for safekeeping, it might be years before they’re ever audited 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. Even worse, the hallmarker does the same scam before him, setting aside some “good” units for clients they know will audit most thoroughly. This might not even be their own choice, but forced upon them by the state.
Now realize that, if almost no gold holder does their own verification personally – because it is complex and costly – then the incentive is for ALL authenticators to do this, since each profits individually and the shared racket benefits them all collectively. Even if one breaks rank and gives honest reports, his business will expand based on that demonstration of trustworthiness, which over time puts him in even more of a position to abuse it for profit. You are dependent on the moral integrity of someone who directly benefits from screwing you, knows you probably won’t notice, and are powerless to do anything about it even if you did. Worth noting: this also describes world politics.
Even if you take every reasonable step, and only use hallmarked gold and reputable paper gold issuers, you are still not actually verifying the gold is authentic. Worse, the average person operates only with bank notes 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 with and selfish verification of the valuable asset, the market becomes dependent on third parties with their own incentives, and individuals have no idea what they hold – what rules they are truly subscribed to. The market naturally detaches from the value-providing base layer.
Imagine if you could buy a magic wallet that instantly verified every molecule of gold you put into it. You’re checking the validity of each and every transaction, as it happens, and can immediately respond if something is amiss. You’re in full control of this tool, which is totally passive, meaning it can only serve your interests. The wallet manufacturer has no incentive to make it lie to you, since they can’t gain anything by doing so. Their personal profit can only come from providing the best possible tool for protecting their customers’ interests.
A bitcoin node is that magic wallet. Paper gold users are like those who trust their bitcoin to a custodian, and they hopefully understand the risk. Paper IOUs can’t be validated by the node, so it’s irrelevant whether they have one or not. The hallmarked gold transactor with no magic wallet thinks he’s protecting himself, yet being swindled all the same – that’s a bitcoin user who holds their own keys, but does not have their own node. What seemed like independent entities that should be held in check by the market, are actually united by incentives into an “us versus them” alliance, in an entirely predictable nightmare scenario of systematic abuse.
Stretching the analogy to breaking point, what about when verification equipment is too expensive for the individual? In this case we’re thinking ahead to when block space is extremely costly, rather than the node itself. We’ve already established that outsourcing verification altogether just incentivizes systematic exploitation. The only solution without trust is cooperation: multiple parties pooling resources to buy verification as a group. In bitcoin, this is scaling via UTXO sharing: we’re still offloading some of the burden, but maintaining sovereign control of our funds, in so doing having an active interest in maintaining the consensus rules, and thus contributing to defending them for everyone.
If we work to technologically facilitate extremely broad access to and interest in sovereignty, via keys and nodes, we can entrench a broad, distributed collection of opposing interests that makes subverting the monetary properties untenable. If we fail to technologically provide for highly distributed, direct interests in the happenings on L1, then most people will inevitably lose access to those monetary properties, as they did with gold. Scaling isn’t about increasing capacity to help commerce: it’s actually increasing defense.
This is a guest post by Owen Kemeys. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.