Bitcoin (BTC) / Bitcoin Cash (BCH). Pt 2
By: Aleksandar Svetski
Tags: Investing, Bitcoin, Blockchain, Cryptocurrency, Crypto

The Definitive Guide. continued….

In the previous article, I attempted to set the stage for the arguments (on both sides), set down a couple of disclaimers, laid the foundations for what I believe Bitcoin is, and why it’s thus far succeeded, and then gone on to dispel some of the main arguments in the space.

Here is the link. You should definitely start there:

Continuing on from there, lets move straight into:

Part 3: Bitcoin Advantages

Bitcoin, in its current form and development trajectory has many, many advantages over BCH and other comparable crypto assets/currencies.

I’ll cover the main ones.

1. Segwit & Lightning

Despite all of the shit talk about both, they’re actually very elegant solutions to quite complex problems — and more importantly, they go hand in hand.

Let’s start with Segwit

Segwit solves an important problem (transaction malleability) that is a predicate for the successful implementation of Lightning.

In short, it separates the signatures from the total transaction data and therefore makes it impossible for an attacker to change the hash of an unconfirmed transaction (open channel is an example) and therefore creating problems for the network.

A side benefit is that there is also more room inside the block, so it’s actually a very elegant short term solution that increases Bitcoin’s capacity WITHOUT the need to raise the block size via a hard fork.

That’s killing 2 birds with the one stone. That’s also smart engineering, as opposed to brute force, band aid solutions.

Here’s a great video from Andreas M. Antonopoulos explaining Segwit better than I ever could:

and this one:

Lightning

The only arguments I see against Lightning come from either morons, conspiracy theorists or people who genuinely don’t understand simple engineering principles (or first principles, as Musk would call them).

Some people (some whom I really respect) have put forth some valid arguments around lightning solutions becoming hub & spoke in their path to liquidity, etc — but these are only issues if one confuses why the banks are “bad”.

I’ll leave expanding on this is for another article, but I’ll just say this quickly:

Banks are NOT bad because they are liquidity providers. Banks are bad because they have a license to both print money and value “assets”. They use those two powers irresponsibly in ways which distort markets, and negatively impact people’s lives.

If the bank’s role was limited to providing custodial services, investment services, liquidity, non-fractional or partially fractional lending — that would be great and would help the economy grow.

The problem is the fact that they are incentivized to take full advantage of the powers they have and the whole thing goes to shit…

Anyway — away from Banks and back to Lightning.

Lightning is THE MOST credibe solution for scaling Bitcoin.

It allows for complexity and frequency to be abstracted off chain, whilst maintaining a secure, single source of truth, core chain that is totally neutral.

This image should help you better visualise my point:

From my side chains talk…I should probably do an article on this too..

Lightning, if done right:

Is incredibly scalable (see graph below)

Increases the number of vested participants in the system.

participants in the system. Increases the crypto-economic guarantee of the system by creating more than one layer of verification / validation / participation, each with their own incentive model.

Maintains the integrity and security guarantee of the core chain

same previous slide deck.

**Note** Exponentially scalable doesn’t necessarily mean it will scale that way indefinitely. I read a great article on Network effects by Kyle Samani, and he’s spot on with respect to the S curve that network effects are subject to, at least mathematically speaking (and in terms of percentage growth). My point here is that we’re definitely on the LHS of the S curve, which, and with lightning, BTC has a shot at leveraging the SoV network effect and the transactional network effect, in a way that’s smarter, safer, and more technologically sound.

Here’s Kyle’s article:

______

Aside from all of the above….Lightning is an extremely elegant solution to the Blockchain Trillema.

Blockchain Trillema

Defined by Vitalik as per the image below, the trillema basically states that a decentralized system can’t just “have” all 3 elements. There is always going to be a trade-off, and in order to “solve” this problem, you need to reinvent how you architect a decentralized network.

From a previous presentation on Side Chains…

The Segwit + Lightning architecture being employed by Bitcoin is an example of a method proposing a solution.

Pardon the crappy drawing. I hope it makes sense.

So all in all, you have a more scalable solution, with a far better architecture, allowing for transactions that require throughput, to optimize for that, whilst the core settlement layer focuses on security.

Although implementation is easier said than done (hence the time it takes to build stuff like this), I see these elements as a massive advantage.

2. Multi-Layer Security

Not only is Lightning a brilliant scaling solution, but it’s also an extra layer of security.

Huh?

Cryptocurrencies have “value” because they have some form of crypto-economic guarantee of security.

The mechanism design / game theory in Bitcoin is such that the validators in the network help to secure the network via the pursuit of their own self interest. The incentive / disincentive model helps to align the self interested parties to the greater ‘good’ of the network (to a highly probabilistic degree) and thus creates an environment of strong, decentralized assurances, via vested participants.

BUT…there is a problem with a single layer of validation.

Miners, for example are self-interested parties who will perform the service as long as it pays, and despite not having direct control over the network, they do have influence and may steer it in directions that are non-ideal for users.

In that vein, wouldn’t it make sense to build more layers, with their own form of guarantee, where the different participants (users, validators / verifiers, miners, nodes, etc ) operate with their own degree of vesting in the network. Done right, you can create a more robust and secure overall network.

See my excerpt below:

Trends toward more decentralization.

Here’s an excerpt from an article by Elizabeth Stark of Lightning labs, which sums it up perfectly:

Bob, and Carol [users with open lightning channels] function as “nodes” on the network. Nodes on the Lightning Network are in some ways analogous to miners on the Bitcoin network. They function as the servers that process the transactions on the network in a decentralized manner. Like miners, they do not have control over the funds they help move. Bob cannot steal Alice’s funds, as he will only receive the sender’s incoming payment if he has already sent the outgoing payment to the recipient. Thus, receiving a payment is dependent on having already forwarded it. Lightning payments are conditional upon disclosure of a cryptographic secret, and knowledge of that secret allows for redemption from prior nodes (when Dave redeems from Carol, Carol can now redeem from Bob).

3. Strong Assurances (over throughput)

This is an advantage for Bitcoin’s use case. Although I probably sound like a broken record at this stage; Throughput is just simply not as important.

Thanks Spencer Bogart for his Magna Carta article. He expands on this concept further (link below), although I’ll sum it up here.

Why strong assurances matter

Strong assurances are a form of guarantee.

The US Government used to guarantee the redemption of gold for your paper dollar. These days it’s more because they have the biggest stick, along with the fact that it’s become a “reserve currency” for the world.

The problem is, that guarantee is rooted in the promise of a few — something we’ve seen throughout history as a not the best form, but the best we could do until now…

Bitcoin represents a form of guarantee rooted in math.

It’s far more secure, it’s objective, it’s clearly defined, it’s politically neutral and it’s enforced via the rules of the network, which are predicated on the consensus of the participants.

As a form of value storage and exchange, I cannot think of anything better!

This foundational assurance, that rarely (if ever) changes, is what gives Bitcoin it’s value.

The thesis (at least my interpretation) of Spencer’s article is that strong assurances like Bitcoins (or the US constitution, which which has remained largely unchanged) are what lay the foundation for economic, societal and technological growth. And if you get that right, everything else can flourish.

Excerpt from Spencer’s article:

Bitcoin network intentionally limits its scope to enforcing a minimal set of functions. This deliberately limited network scope offers participants greater predictability in the outcome and enforcement of network activity: Valid transactions are clearly defined, objectively identifiable, and unerringly enforced by the network.

Which brings me to my next point

4. Less is More.

This is very much inline with the previous section, but I do want to reinforce 2 key points:

The less complexity in the system, the less points of weakness. The more you do, the more you increase the number of attach vectors.

2. Tech products & Money, have different growth trajectories, and Bitcoin is at the intersection of both Money & Technology.

This creates a problem.

People get the two confused and begin to rationalise that Bitcoin somehow needs to continually change, at every “whim” of the market, and every time some new competitor coin comes out with some new iteration on block size, speed, shape, colour, flavour, or whatever.

And this is understandable. As technologists, we’ve been trained to adapt to the environment, build out new features, update, update, update.

The mandate is to move fast, break things, innovate, get more throughput, etc. And all of this is fine — for a tech product.

Money on the other hand is slower. Money is a social contract. It’s a shared fiction and it requires the “trust of the masses”. This trust takes time to build and you CANNOT build that trust by changing shit all the time.

The tech improvements in Bitcoin should be slow, calculated and focused on how to make it more secure, more robust, more decentralized, more censorship resistant and as a result, over time; more trusted.

Throughput, complexity, smart contracts, features, speed and everything else come second — and they can all be abstracted off chain, without hindering or complicating the core, settlement layer.

Again, the architecture being adopted on the BTC side optimises for this and in my mind is the superior strategy.

The networks that attract and retain builders in the medium to long-term will be the ones that deliver a track record of strong assurances — a track record of consistent and objective rule enforcement.

^^Quote from Spencer Bogart again..

5. Much smaller set of competitors

Unlike Bitcoin Cash, Bitcoin is only really competing with Gold — which it’s already a hell of alot better than.

One might also say the USD, but that would be wrong, because although many use the dollar is a store of value globally — it’s definitely NOT decentralized, or censorship resistant nor is it a bearer asset, nor much else except a currency backed by a really big military.

If we view this in light of previous section, Bitcoin cash is fighting the tech fight. They push throughput, features, forks and complexity on the main chain as the path to mass adoption.

On that battlefield, they wind up competing with a plethora of teams, organisations and forces they just cannot beat.

Bitcoin should have a narrow focus, and win the boring, slow but foundational game. It’s got the best chance to do so — and on that battlefield, it’s got the greatest advantage.

By choosing the right battle, at the right time, and in the right order, Bitcoin can win the store of value & medium of exchange game.

Part 4: My issues with BCH

At best, BCH supporters are naively incorrect. Their heart may be in the right place, but I just don’t think they’ve thought it through well enough. At worst, they’re a bunch of moronic liars. That’s not to say you don’t get that anywhere else — in fact, that’s the way of the world and in some ways you need that contrast — but perhaps this series of articles will help the good people see through the shit, and blunt the sword of the assholes…

In this section, I’m going to break down the issues I have with BCH. Broadly they’re 2 issues:

I don’t think it’s not the best place to put your money Their general approach / posture in the market is not the greatest

But there’s mutliple reason for each.

1. Trending toward centralisation.

The very architecture of BCH trends toward centralisation and a single layer of vaildation. Miners.

This, I believe is the number 1 flaw with the BCH model. It’s not something that’s taken large effect now, but will inevitably bite them in the ass.

Their trend toward increasing centralization inevitably leads to a situation where BCH loses its entire reason for existence as a permissionless platform with strong assurances. What left is a partially decentralized network, heavily influenced by a small group of validators, which more resembles today’s centralized networks — just built on less efficient infrastructure.

See below: