One of our findings are in the paper,
which I think is a very positive finding,
is that self-custodied holders have a lot more influence
than those really big collective entities,
because they can generally act faster.
And especially in a hard fork scenario,
where investors do have a significant amount of power,
acting quickly is very impactful.
It's very hard to come back from behind,
then no compare to start out strong and then stay strong.
And so if there's a hard fork that occurs,
people that are self-custodied in their own coins
can literally act within the hour, within the day.
They can either do nothing,
they can choose to do nothing,
that's kind of the default choice,
but they could actively, right as soon as it happens,
begin selling the coin that they don't prefer
and buying more of the coin that they do.
Whereas the larger and more complex of an entity that you are,
there's a general principle
that you're gonna have to go through more checks
before taking any action on that given hard fork.
If you're just self-custodying,
you just on the spot can make that call,
and the only consequences are for you
and those that are financially connected to you in some way.
And so you can act quickly and more decisively.
And I think that's one of the positive findings
from our paper is that that's actually,
I'd rather I'd say anti-fragile aspects of the network
that some of the most committed and smaller entities
actually have kind of a disproportionate impact
compared to some of those larger entities.
The larger institutions on an absolute level
have a lot more Bitcoin today than they did before.
And over time, that's likely to continue to grow.
And so it's more than many self-custody investors.
But specifically in the scenario of a hard fork,
I really do think self-custody investors
have a big leg up here, even if they have less Bitcoin.
Because I think it's undeniable
that they will be able to act much quicker
and prices set in the margin.
One Bitcoin from a self-custody investors
is basically infinitely more valuable
than setting the price than thousands of Bitcoin
held elsewhere if they aren't able to sell that fork,
if they're just holding both sides of the fork.
And if you put yourself in the position of a BlackRock
or large ETF or MicroStrategy,
if the price on the market already is like 10 to one
in favor of fork A versus fork B,
it makes it even more legally risky
and like from a fiduciary standpoint
to actually sell the fork that is currently losing
in terms of market price.
So I think there's tremendous power there.
["The Bitcoin Podcast"]
Greetings and salutations, my fellow plebs.
My name is Walker and this is The Bitcoin Podcast.
The Bitcoin time chain is 870321
and the value of one Bitcoin is still one Bitcoin.
Today's episode is Bitcoin Talk
where I talk with my guests about Bitcoin
and whatever else comes up.
Today, my guests are Lynn Alden and Steve Lee.
Together with their co-author, Ren,
they just released a report called
Analyzing Bitcoin Consensus, Risks in Protocol Upgrades.
As the name implies, this paper analyzes the process
and risks of how Bitcoin upgrades its consensus rules
over time from a technical and economic perspective.
It's also a fully open source living,
breathing repository on GitHub
that you can actively contribute to.
If you've ever had questions
about how Bitcoin consensus actually works,
like what even consensus means,
gotten confused by terms like economic nodes,
wondered about who the real stakeholders are
when it comes to Bitcoin upgrades,
been curious about the game theoretical implications
of large institutions and governments getting into Bitcoin
or wondered what would cause a chain split
and how the heck would that actually even work these days?
This episode is going to answer all your questions and more.
If you're relatively new to Bitcoin like I am
and you weren't around for the block size wars,
this conversation is going to give you some great perspective
on the past, present and future of the Bitcoin protocol.
You can find the link to the paper on GitHub
in the show notes and also make sure to follow Lynn and Steve
and their co-author, Ren.
Before we dive in, do me a favor
and subscribe to the Bitcoin podcast.
Wherever you're watching or listening,
check out bitcoinpodcast.net for episodes
and additional resources.
Head to the show notes to grab discount links
for my sponsor, Bitbox,
or just go directly to bitbox.swiss slash walker
and use the promo code walker for 5% off
the fully open source Bitcoin only Bitbox O2 hardware wallet.
Then get your Bitcoin off the exchange
and into your own custody.
Please send an email to hello at bitcoinpodcast.net
if you have feedback
or if you're interested in sponsoring the Bitcoin podcast.
And if you find this show valuable,
consider giving value back by giving it a zap on Noster
or a boost on Fountain.
I truly appreciate it.
Without further ado,
let's get into this Bitcoin talk with Lynn Alden and Steve Lee.
["The Last Song of the Year"]
Thanks for reaching out about this.
I was very eager to dig into this
because I saw some people very, very excited
about this report and understandably
because we're dealing with Bitcoiners.
I saw some people who perhaps had some things to say about it,
but that's great, right?
Consensus around consensus is messy as well.
Exactly.
Yeah.
And that's also why we open sourced it.
So everybody who views things differently
is welcome to contribute to it.
Yeah, I think that's honestly awesome.
I hope that that just is kind of more
of a standard going forward here
because it just, I mean, it makes sense, right?
You don't, then people can't have the excuse,
well, I'd like to give input on this,
but I just can't say, you know, this is closed off to me.
It's like, no, no, please feel free.
Anyone's welcome.
Yep.
I love it.
Okay, we are good to go now.
Well, welcome.
Good to have you guys here.
Excited to dig into this.
I am debating where to start with it
because there is a lot of meat in this report.
Fair to call it a report.
Is that the correct nomenclature there?
I've been referring to it as a project
because of this sort of, it's a living document,
it's a living project.
It's impossible to capture an analysis
of Bickling Consensus at one moment in time.
It's always evolving.
But yeah, but it's also a report and a paper as well.
So yeah, it's a living breathing report.
Well, I suppose that's the,
and maybe a good place to start out
because I think from the outside looking in,
Bitcoin consensus can seem kind of insane to people.
Like, what do you mean there's nobody in charge
that just makes the decisions and makes the rules?
And you know, like, where does the buck stop?
And it's kind of like, well, with everyone sort of.
But I loved this paper.
So analyzing Bitcoin consensus risks and protocol upgrades.
And there is a lot to this.
I'm gonna link this and I'll drop it in the chat
as well for people.
And I highly recommend people read it.
But maybe a good place to start out with this
is just kind of, well, first maybe we can,
for Lynn folks, I think, know you pretty well.
But Steve, maybe you could just give a quick introduction
for folks and Lynn, you're welcome to as well.
But I think at this point,
you know, you're ubiquitous in the industry.
But Steve, maybe people aren't as familiar with you.
Sure, yeah, thanks for having me
on my first time on your show.
So appreciate it.
My name's Steve Lee.
I've been working full time on Bitcoin for eight years now.
So I've been around, I lead an organization called Spiral,
which is Block Corporation's open source Bitcoin initiative.
So employed by Block, but get to work on,
I'm on Team Bitcoin and my whole team is on Team Bitcoin.
So we largely work on open source software projects
to improve Bitcoin.
But we have complete latitude and independence
on what we work on.
So one of the things I've worked on recently
is this project we're about to talk to.
And so I've been collaborating with Lynn
and we had another collaborator, Ren,
who in the three of us put this together.
We also have over a couple dozen people
have reviewed it to this point.
And in the state of it, it's an open source project.
So moving forward, it's everyone's project.
We want this to be, this is not just Lynn in my view
of things, you know, we started it,
but it's really just the beginning, not the end.
I love that.
Yeah, I think the work that you all are doing
at Spiral is just really cool.
And it's pretty great that that's a,
you're giving that latitude to kind of go out there
and do cool things on top of Bitcoin.
And perhaps Lynn, for anybody who for some reason
has been under a rock and is unaware of you,
how did you end up working on this paper, perhaps,
is a good question.
Because people may know you as a macro analyst,
you know, queen of memes, nothing stops this train,
but how did this group get together to begin
kind of this analysis and to create this living,
breathing consensus report?
Steve spearheaded it.
Like a lot of things in Bitcoin,
there are technical and economic aspects to consensus.
And so I mainly viewed it through a more economic lens.
To the extent that I understand the technicals,
I try to understand them enough
to know their economic implications,
rather than get really in the reads on the technical side.
So I tried to provide economic input to it.
And we've been chipping away at it for months.
It's been a background project for us.
But it's something that, you know, consensus is,
it's a tricky area because it's hard even to find it,
at least in terms of how it comes together.
You can define it software-wise easier
than you can define it socially.
So I found the problem fascinating.
In addition, part of what drew me in the Bitcoin
in the first place was the last time
there was kind of disagreement around consensus,
which was 2017.
My first public article on Bitcoin was in 2017.
And that was right when like Bitcoin and Bitcoin Cash
were splitting out.
And then so watching that
and then watching the aftermath of it
and seeing how difficult it is to change Bitcoin,
like appealed to me.
It was kind of like a test of,
like I already knew Bitcoin,
but that was kind of a test to see how it fared.
And what I like about this project
is we kind of start from blank sheet of paper.
We don't assume that things worked out in 2017
and worked the same way in 2025 or there later.
There's kind of like how 2017 was different than 2009
in terms of how updates are made, right?
So back in 2009, Satoshi almost unilaterally
just kind of made updates.
And it just kind of, it was so central around him
that it just went like that.
Whereas 2017 was obviously much more decentralized,
complicated environments.
And so we now we're years in the future
and we also look toward even further ahead and say,
what lessons could we learn from the past
and what issues could we see in the future?
And so we kind of put this paper together
to kind of analyze how does consensus work in the past?
How does it likely seem to work now?
And what are some of the challenges
that could happen in the future
if there's some sort of contention around that consensus?
Can we start out with a couple of like very basic questions
here that I think will help set us up well,
which is, can we first start out with just,
what is consensus in Bitcoin?
Like what does that mean?
Yeah, there's a simple answer and there's a complex answer.
The simple answer is the actual software code
for what is consensus.
And that's just, it's a set of objective rules
for what is a valid transaction
for like me to send you Bitcoin.
There's just certain things that you gotta cross the T's
and dot the I's and if it doesn't do that,
it's considered an invalid transaction by the software.
And then similarly with a block of transactions,
what makes a valid block?
So that is quite simple.
People can, anyone can look at those rules.
I mean, people who can read code can look at the code,
but someone can also create a layman's version
of what those rules are.
Where it gets complicated is that software can be changed.
So you might run software and Lynn and myself,
but we might start with the same version of the software,
but what if I change my code
and I change the rules on my side?
I have complete, I can do that unilaterally.
You can't stop me from doing that.
So that's where it gets really, really interesting
in terms of game theory and like,
why do each of us behave the way we do?
Well, yes, I can change the rules on the software
on my computer, but if I change them in a way
that's incompatible with however everyone else
is acting right now, I can do that,
but I find myself on my own little island.
And the value of the network effects of Bitcoin
are obviously very powerful.
So that's one of many forces which sort of dictates
why people stay, why they're motivated
to stay in consensus.
But as you've seen in this paper,
it's very complicated.
There's a lot of different types of entities
and they each have different powers and motivations.
And so one thing I find fascinating about this project
is it's not just looking at like, how do we change Bitcoin?
It's looking at how does Bitcoin not change?
It's both.
Like, I think something that draws all of us to Bitcoin
is it is really hard to change.
It's decentralized.
There can't be a small group of people
or powerful people or entities that change it
if it's gonna be successful.
Well, how does that actually work?
So that's what this project's trying to address.
So, Lynn, is there anything you'd add to that?
I think that pretty much covers it.
Yeah, there's a simple rules of what consensus is
at the current time based on the software.
And then the tricky part about consensus is
even knowing if you have consensus,
that's another complicated part.
If there's, you can say that there's consensus
or there's not consensus to make a change
for what the consensus rules are.
And that's basically how soft forks
or in some cases, hard forks work.
And there's no formal measure to know
that you've reached like a sufficient consensus for change.
There's no like Bitcoin council
and you get a certain threshold of votes
and there's no formal governance.
And so it's instead almost process of elimination.
And even what makes it complicated is that
in addition to people debating what changes should
or should not be made, there's even debate around
how those changes, should they even be agreed on,
how should they be activated?
And how do you know that they have sufficient consensus
to be activated?
And almost everyone is activated in a different way,
which makes analyzing the past interesting
and of course makes predicting the future hard.
Yeah, there seems to be like meta layers
of consensus around consensus there,
which is kind of beautiful and also, I guess,
kind of confusing, which is why it's very nice
that you guys have laid this out.
A couple of more like basics
at this thing up type questions.
I think that people when they hear,
like I agree with you, Steve,
that one of the reasons we're all drawn to Bitcoin
is because it's not easy to change.
And people hear the word changing Bitcoin
or doing anything on Bitcoin.
And that kind of sends up red flags,
which I think is a good thing, right?
People have their guards up.
But I think there's also for, let's say,
the lay person who may not be as technical,
there's often some confusion around change,
what changing Bitcoin means.
And that often gets confused with maintaining Bitcoin.
Can you maybe kind of draw the distinction between,
okay, this is what changing Bitcoin is versus,
this is what core developers do to maintain Bitcoin.
And here's why that is necessary on an ongoing basis.
Yeah, I'm glad you asked that question.
Because I do think it gets lost on a lot of people
who are not in the nitty gritty day-to-day software.
And there's enormous differences
between the kind of change we're talking about
in this project and on this podcast today,
which is changing the consensus rules
compared to 99.9% of the other software changes
that are made daily on Bitcoin that aren't consensus rules.
Like, I think if you look at like a number of lines of code
or number of like commits on GitHub for code changes,
the percentage that aren't consensus changes
has got to be like 99.99%.
So what are those types of changes?
Those changes are they improve the security of Bitcoin,
the performance of Bitcoin, the privacy of Bitcoin,
all these characteristics that do have user benefits
and that people, anyone can relate to.
Most of the changes that are done
and there's many changes that can improve those pillars
that don't require consensus changes.
So they're obviously much easier changes to make
because you don't have to have everyone agree to them.
So, and that occurs not only within the Bitcoin Core project,
but there's dozens of other projects,
open source projects within the Bitcoin space
that are infrastructure projects
or mining software protocol projects
that do improve Bitcoin and those pillars
of security, decentralization, scaling, et cetera.
And like my organization, Spiral,
we fund about a dozen different projects in this space
and we've never written code that changes consensus.
So for over five years, we've been working every day.
We support a dozen full time developers
and like over 70 grantees,
none of whom have needed to change the consensus rules
to Bitcoin to improve Bitcoin.
Yeah, and I think it's one of those things
where people need to realize
that Bitcoin does not exist in a vacuum,
even as it relates to maintenance,
like the environment around Bitcoin changes
and thus there are some maintenance,
like if you don't do certain maintenance tasks,
there are going to be problems with compatibility.
And I think that's like,
I wanted to set that up a little bit just because,
again, people here changing Bitcoin and they think,
okay, if you're writing any kind of code around it,
that must be changing it, but it's like, no,
we're talking about a direct distinction here.
And Lynn, anything else you wanted to add
on just that to alleviate any confusion
that folks may have on that?
Sure, I'd point out that changes are pulled
rather than pushed.
So when Bitcoin Core or other open source software
when they publish a new change,
it is then voluntary for people to update to that change.
And one thing, a chart we show in the paper
is that it actually, it takes entities a pretty long time
to update their nodes on average,
something around a year.
And I think in recent years, it's closer to two years.
From a recollection, that on average,
they wait to update.
And so at any given time, there's a bunch of nodes
on the network that are running different versions
of how updated they are.
Generally over a long enough timeline,
you eventually have to update it.
It's gonna keep working with modern operating systems
unless you're running kind of a vintage system.
And that's like Steve said, a lot of the change is there.
And whereas consensus changes, especially in the post-Satoshi
environment are few and far between.
Yeah, I appreciate that clarification.
Sorry, Steve, was there something you wanted to add on there?
Just one more thing to add to that too.
So there's definitely a variety of views
on changing Bitcoin as well.
Specifically, consensus changes.
But in general, changing Bitcoin,
anywhere from extremely conservative,
ossification to very progressive
and making quite a few changes
to improve the functionality of Bitcoin
and then everywhere in between.
This project doesn't take a view on that.
It's not biased in any of those views.
So if anyone spots any framing or language used
in this project that does imply a position on that spectrum,
let us know.
We wanna correct that.
A non-goal is for the project to take a position on that.
And it's also a non-goal of this project
to advocate for any particular change.
Or to...
It's a non-goal to create a blueprint
for how consensus changes.
We're not trying to dictate and say,
codify this is how it works, everyone follows suit.
It's more just like it's really chaotic and complex
and impossible to fully model.
But it's important for everyone to understand
as best as we can how it does work.
And then it also changes over time,
the dynamics change over time.
So keeping this up to date, this modeling of it,
that just observing how it works
is really the goal of this project.
Yeah, and maybe one more piece of clarification
that I think may trip people up.
But you guys were very clear with the language, I think,
and offered a good explanation of this in the paper.
But when people hear Bitcoin nodes,
I think there's often this idea
that maybe all nodes are kind of created equal,
but you guys talk about economic nodes.
Can you maybe just explain a little bit what that means
and why that distinction is important
when talking about consensus?
Sure, so in the paper, we broke the stakeholders up
into six different types of groups.
So it's probably best to start at that high level.
And that's because there's no one type of entity
that has all the power in Bitcoin.
It's kind of...
It's delegated out and there's different actors
with different powers and different incentives
that are operating as part of this consensus mechanism.
And so the six groups are...
The first one is economic nodes, like you mentioned.
The next one is investors,
so people that hold significant amounts of it
or many people that hold smaller amounts of it.
Then there's miners, then there's influencers,
anyone with a significant audience within the space.
And then there's two types of developers.
There's protocol developers
and then there's application developers.
And for economic nodes, we made that distinction
because even though you could be running
the same node software as someone else,
some nodes are more impactful for the network
than others by orders of magnitude.
And it's largely related to how much volume
that they're doing and how much impact they're having
on what people define as Bitcoin,
when they exchange one coin for Bitcoin
or feed it for Bitcoin,
those economic nodes, whether it's exchanges, brokers,
payment processors, they're playing
a pretty significant role.
So for example, what software,
Coinbase or Binance are running matters more
than what my node is running,
especially if I'm not doing very many transactions.
If it's just kind of running in the background,
not doing much, those two nodes
have different levels of impact on the network.
So for that one stakeholder group, economic nodes,
we kind of go into their different types of powers.
And when we broke these like six groups up
to kind of identify what are the groups even are,
we could have landed on different numbers.
Like we could have found that there are five groups
or seven groups.
The way we went about this was saying,
every group has a power and every group has,
we're a set of powers and every group has a set of incentives
to use those powers. And we define groups differently
if they have a sufficiently different set
of powers and incentives.
And so economic nodes,
they have a different set of powers than miners.
Investors have a different set of powers and incentives
than both of those groups and so forth.
And so then the paper kind of explores the interplay
between those six groups
and how their powers might be different
in the case of a soft fork versus a hard fork.
And their powers could also be different
as a fork progresses.
So the kind of the proposing of a fork
versus the implementation of the fork
versus potentially a rollback of the fork,
that kind of whole life cycle of how a fork could go.
Those different groups have different levels
and types of power throughout the process to change.
It's pretty incredible that this open source protocol
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When you go to bitbox.swiss slash walker
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but you also help support this Bitcoin podcast.
So thank you.
And that's kind of a perfect transition here
to talk about these groups a little bit
because that as I was going through this,
that's kind of the real,
seemed to me the central piece that people need to understand
to actually understand what happens in consensus.
What does this actually mean?
Well, it's all based on these different groups.
They're different motivations.
You introduced this concept of state of mind as well
that I'd like to get into.
But maybe we can, you know,
thanks for the explanation on the economic nodes.
I think that was perfect to set it up.
I hope people have a clear view of that now.
Can you guys talk a little bit more about these other groups
and kind of, you know, how that interplay works a little bit?
Right. So I mean, for investors,
they're arguably the most powerful group of all the groups.
If there's one that has kind of full control
in the long run, it's eventually them.
And that's especially true for a hard fork.
So for example, when Bitcoin and Bitcoin cash split,
investors can sell the coin that they don't like
and use it to buy more of the coin they like.
They can also even participate in futures markets
if exchange just set them up ahead of a potential fork,
which can determine whether a fork even occurs
or set up the probability of how that's going to go.
During a soft fork, we found that investors,
their power is quite delayed.
So when a soft fork is being proposed,
when it's being activated by nodes and miners
and that whole process, investors are only able to access
indirect power.
You know, they can fund developers,
they can fund advocacy,
but their coins are not yet impactful
during a soft fork process or lack thereof.
And so that's basically one big power block right there.
Miners are obviously a pretty big power block.
They have the ability to determine what transactions
go into a block as long as they're meeting consensus rules.
They have the power to implement soft forks,
a fairly small set of mining pools could implement a soft fork,
even if the node don't agree with it.
It would be a, and we'll probably get into that later,
that'll be a fragile soft fork.
It's almost like a, you know, majority, it's a filtering.
It's not in a fully adopted soft fork,
but they have the power to basically either adopt one
or not adopt one.
And of course they have a set of incentives.
They want stability in the network.
They want to maximize the value of what they're mining
and a whole other set of powers and incentives.
Influencers, you know, especially during 2017
when there was a lot of contention around soft forks
and hard forks,
influencers can play a pretty big role
because they can shape opinion of whether consensus change
should be made or should not be made.
They can amplify some of the more technical voices
that have smaller audiences or they can counter amplify them.
They can basically not amplify them.
They can not bring them on there
or kind of show them to their audience.
So they can shape the probability or the outcome
of how consensus moves forward
and determining, kind of helping determine
whether there has been sufficient consensus
on the network yet to move forward with a change or not.
And then the two developer groups,
even though they both write codes,
so there's protocol developers and application developers,
they have different powers and incentives.
So protocol developers focus on, you know,
maintaining Bitcoin itself.
They also generally their incentives
are going to be more aligned towards stability and security.
Kind of like Steve mentioned,
almost all changes are keeping it performant as it is,
not actually implementing consensus changes.
Application developers, you know,
they're building things like wallets or other layers
or things that can fit on top of Bitcoin in various ways.
Their power is different because they're not changing
the protocol, they're not merging changes into the protocol,
but they are generally more inclined on average
toward benefiting from more features of the network
because that gives them a bigger design surface
to build or to improve whatever it is that they're working on.
And one of the things we observed in the paper
is that the protocol developers,
specifically the maintainers,
their main power is in vetoing rather than proposing.
So I mentioned before that updates can't be pushed to the user,
they can only be put out there,
and then the user can choose to pull them to their notes.
They can update their note or not,
or on what timeline they want.
And one of the frustrations that exists out there
when people determine what changes they want to make or not make
is that if changes are just not looked at
or not implemented by the maintainers,
then those changes have a much lower chance of going through.
So they have kind of like direct or indirect veto authority
to some extent over what changes go in,
but there are ways around that,
which I assume we'll explore later.
Thank you for that breakdown,
because I thought it was really nice to see it explicitly set out like this
and all in one place.
I'm very glad you guys put this together.
I think it's going to be a wonderful resource for people,
because again, I think this is something that especially if you're,
maybe if you're not technical,
or if you haven't been around Bitcoin for a while,
you weren't around in the block size wars.
A lot of this stuff, like I was not, you know, just 2020.
So I haven't been through one of those fork wars there.
So things are a little bit, it's not as tangible
to try and understand some of these.
If you went through that, yeah, okay,
you were a part of the conversations,
you saw some of this interplay go down.
And maybe it's also worth just clarifying here
as far as hard forks versus soft forks.
If Steve, can you just kind of break that down a little bit
for people who may be kind of confused about,
okay, what constitutes a hard fork?
Sure, I'll answer that.
But you said something right before that,
that I'd love to comment on too,
because it actually gets to the,
another motivation for this project
was at the beginning of this year, I noticed,
I observed that there's a lot of consensus change proposals
that are being worked on by developers
and there are certain champions and advocates
for different proposals.
And notice that it's trending towards a little bit
of like popcorn and drama, like on Twitter.
And it just made me realize it's been a long time
since the Bitcoin space has had a content,
a very contentious fork and it was back in 2017.
And so I thought, two thoughts, one,
my knowledge on all of this forking
and how all this stuff works was very rusty.
Like I learned it well back then
because there's a lot of content created
and a lot of smart people describing it.
And that's when I really went deep.
But I hadn't thought of it for seven years.
So my knowledge is rusty and I'm thinking,
probably most other people who are around then,
their knowledge is probably rusty too,
because they haven't thought about it for a long time.
Secondly, like you just said yourself,
like 95% of people on Bitcoin
or what are some extremely large percentage of people
on Bitcoin today were not around in 2017.
It's grown tremendously.
So of course they don't have that knowledge and wisdom,
at least from firsthand experiencing it.
So that was a big motivation for this project as well.
But to get to your question about hard fork versus soft fork,
yeah, so a hard fork is a change
that is not backwards compatible on the network.
So if you change consensus rules
and for everyone to stay in the same network,
all nodes have to enforce
and embrace and enforce those new rules
at the same block height, at the same time basically.
Soft fork is the opposite in the sense
that it's a consensus change that is compatible.
Only a portion of the network can
or needs to upgrade and others don't.
The other nodes that don't upgrade
will just sort of silently accept
the new consensus rules and otherwise be unaffected.
So as you can imagine, a hard fork is harder to coordinate
because literally everyone running the Bitcoin software
has to update at the same time.
And but it has clarity because you're either on that,
you have to explicitly agree to these new rules.
Like you're saying, I'm upgrading my software
to support these new rules
and taking that action is an explicit approval.
Whereas a soft fork is much easier to coordinate,
but there might be a lot of people in the network
that aren't even really aware of a change
or don't really care too much about it.
And they just sort of have to accept it
if that soft fork has been,
has support from mining hash rate
and a sufficient amount of economic nodes.
And that's one scenario we actually go into
a future potential scenario in the BCAP project,
which is what if varying degrees of economic nodes
support and enforce rules changes.
And can we wind up in a situation
which creates a fragile network,
which I believe all of us would want to avoid.
Most definitely.
And I'm curious too, can you elaborate a little bit
on user activated soft forks
and then user resisted soft forks
because it's something you kind of dig into
in the in the report as well.
Yeah. Well, let me to probably conduct,
so let me start with how changes have historically been made.
So Bitcoin's really hard to change the consensus rules,
but they have been changed.
And we look at some of those in the paper.
What's true about all the changes that have been done,
one, every consensus change that has been activated
has been merged into the Bitcoin Core project,
which is the dominant,
it's just one implementation of Bitcoin,
there's several,
but it's the dominant one on the network.
Almost everyone on the network runs the Bitcoin Core software.
So every consensus change that has been activated
has been merged into that project
and then people are on the network
upgrade to a new version of the Bitcoin Core software.
Secondly, I believe this is true.
I believe every change was,
or at least certainly like the past eight or so,
post Satoshi changes were minor activated soft forks
in the sense that miners went through some form of signaling process
where the signaling is simply like,
hey, I'm ready to support these new rules.
And once there's a sufficient threshold of signaling support
that can lock in a change,
and then the rest of the economic nodes
are heavily advised to upgrade
and to be able to enforce those rules.
So that's sort of been the pathway towards change.
Having said that,
I believe every single change has had some variable
tweaked or change in terms of how it's activated.
There's no cookie cutter.
There's no recipe that's always been used for change.
Every single time it's a little bit different.
Let's see.
Okay. Yeah.
So now to answer your direct questions,
what is the user-assisted software?
That would be where there's
hesitance or resistance or just the mining hash rate
isn't complying to change the rules of Bitcoin.
Again, that could be explicit.
They don't agree.
Or it could be that it's just not a priority for them.
They're unaware.
It could be all these different states of mind.
But if users are disgruntled and frustrated
and want to see change,
they can update their own Bitcoin software
to start enforcing those new rules
and make it so that sort of force the hands of miners.
And it's a game of chicken
because I mean, there's different ways you can configure this.
But if you configure it so that
these new rules have to be enforced by BlockHeightX
some point in the future.
And if miners don't do that
and you're running those rules,
you will fork off from whatever the miners are producing.
So if there's a sufficient economic node support for that,
miners are likely to comply
because they don't want to spend money and energy
producing blocks that are going to be rejected
by most of the network.
They're just wasting their money.
So at some threshold,
they sort of have to bend the knee and comply.
But if it's a small percentage of economic nodes
or if it's just a handful of people running Bitcoin Core
on their laptop, it doesn't actually really have...
I mean, I think their voice has power.
If they're making a point about something,
that can have power influence people.
That's more the media influence
or stakeholder group that we've identified.
But if just like 100 people running Bitcoin Core
on a Raspberry Pi or laptop
that actually isn't really transferring much money,
run a USF, I don't think that that in itself
has much power.
And then the resistant, the USF,
I don't think that's ever been...
That's like a concept that came onto my radar
at least maybe two, three years ago.
And I believe that would be like,
if there is a change made by miners and some economic nodes,
like it's sort of partially supported.
But if users, if some users meaning some subset of nodes
don't want it, they could run software.
They could run software to sort of unwinder undo it.
Okay, okay.
I appreciate the explanation there.
Because again, I think all of this,
for people that are maybe hearing this for the first time,
I think it's really good to kind of have
a little bit of this background in history.
And Lynn, I would love if you could kind of...
One of the sections in here is about the game theory around this.
And I think Steve started to kind of hint at some of this
in this last answer about basically,
okay, it's this iterative process, right?
And in terms of your strategy for this,
if you're trying to get a change through
or you don't want to change through,
it's this constant interplay between all of these
six stakeholder groups that you guys have identified.
Can you talk a little bit about that game theory
and just use the example of Segwit in the paper?
Sort. So basically what we identified
is that as a change occurs, there are different levels of powers
that happen. And hard forks, the soft forks
are very different in that regard.
So hard fork pretty much gives power to investors right away,
even potentially before the fork occurs.
Whereas a soft fork, because there's so many moving parts
kind of going into that, minor activation,
whether or not nodes are enforcing it,
whether or not developers are emerging it into software
that nodes can pull to themselves, whether influencers
are supporting it or not.
We analyze the different levels of powers
that change over time.
So for example, in the beginning of that process,
investors start out relatively underpowered.
They don't really have much influence one way or another,
other than indirectly through supporting
the other stakeholder groups.
Whereas developers, economic nodes, miners,
they start with more power.
And then as you kind of go through that process,
you have a rising power from investors,
and you have diminishing power from the other
stakeholder groups as that goes through.
And we also identified states of mind
that are very relevant in this process.
And so a lot of changes or resistances,
whether it's Bitcoin or pretty much any other social phenomenon,
tend to happen from the most committed people.
And so we identified six different identifiable states of mind.
There are two that are in for it.
So one would be strongly for it and willing to expend resources
to make it happen.
Another would be for it, but more passively.
Like you support it, you'll say you're supported,
but you're not really doing anything.
You're not really willing to expend resources to support it.
And then on the other side of the spectrum,
there's two that are against it.
One is actively against it, willing to expend resources
to try to prevent that change from happening.
Then there's passively against it,
which is you don't like the change, you'd voice your opinion,
but you're not really expending resources to try to prevent it.
And then there's two in the middle.
One is that you're aware of the change
and you don't have a conviction on it one way or another.
Maybe you're not technical, you don't have a firm view.
Maybe you haven't taken time to look into it,
but you're not going to lose sleep either way
if it's changed or not changed.
And then the other one in the middle is unaware
that you're not even aware that the change
is being proposed and that it's maybe in the process
of potentially going through consensus and activation.
And it might be something that if you did know,
you would care quite a bit.
And it's just that you happen to be unaware
because the vast majority of Bitcoin users
are not hanging out on Bitcoin Twitter daily.
And so they're either often just completely unaware
of changes that could be happening
or maybe only vaguely aware and not aware of the progress
that certain changes might or might not have.
And maybe Steve can go into more detail
around Segwit game theory itself.
Or I happen to do that or even Taproot,
which is the last change that was actually,
I mean, I would argue, and it was much simpler
and cleaner relative to the drama around Segwit.
But I think Taproot to me highlights
an example of a soft fork where it occurred
and investors really didn't have much input or say on it.
Unclear how much awareness there was.
I mean, I think a lot of investors probably heard Taproot.
Maybe they read one article on it, kind of understood it.
But, yeah, I didn't see like a lot of deep engagement
from the investor stakeholder group on Taproot.
My speculation on that is that they, you know,
like as an investor, you look for like,
is there disagreement?
Are people yelling and screaming?
And who's against that change?
Are they credible developers
or credible thinkers in the space?
What are their reasons?
Do they seem sensible?
Do they impact me?
That's probably the mindset a lot of investors go through
as opposed to like deeply understanding the technical change.
And with Taproot, there wasn't really a lot of change
and there was essentially no technical concerns
from any developers.
The only small amount of drama on Taproot
was how to activate it as opposed to like,
should we activate it?
And there's a little bit of drama, but it wasn't that bad.
But I think that's just, and I think if you look at
every change to Bitcoin except for Segwit,
that holds true for investors.
So it just sort of, that's like, those are examples
of lending themselves to what Lynn said about,
for a soft fork, investors tend to have less power
until it reaches, until it becomes contentious.
And it can get as contentious as actually
creating a chain split and having a fork,
which is a dramatic, which is very dramatic in Bitcoin.
And generally, I think moving forward, Bitcoin's so big now,
we wanna do our best to avoid a chain split.
It hurts the credibility of Bitcoin.
There's actually, I think, even technically,
like with Lightning and a lot of like, Layer 2s,
it's unclear actually how they would perform in a fork.
There might be risks there.
I don't think there's been sufficient technical analysis
of that, so it's just, it's a situation best avoided
if we can't.
Yeah, I mean, is it, with where we're at right now
in the adoption cycle, obviously, there,
it's kind of a new period, right,
where you have large-scale institutional adoption,
potential kind of government adoption or real,
in the case of country like El Salvador
or Kingdom of Bhutan, but potentially
from very large nations as well.
And I kinda wanna get into some of the game theory
about that later, but in terms of these states of mind
for the various stakeholder groups,
with where we're at right now,
with also a lot of Bitcoin being gobbled up by the ETFs.
I mean, is it fair to say that most folks who own a Bitcoin
ETF in terms of their state of mind
are probably either gonna be in the unaware,
or probably in the unaware or apathetic
or undecided category, like that they're,
they probably don't have super strong feelings about it
if they just have, you know,
iBit in their retirement account.
Is that, how do you guys think about that in terms of,
like, is the landscape changing in terms of,
it's not just a small group of people
who are really passionately debating this,
there's a lot more holders of Bitcoin,
but also through different vehicles.
And is there any apathy risk
when you have very large interests
controlling the Bitcoin of a huge number of people,
but those people themselves really don't have
any sort of a say in it,
if they're holding like, you know, ETF Bitcoin, for example.
So that was part of our motivation,
is that the landscape has changed since 2017,
since the past contentious hard fork,
oh, soft fork, and hard fork actually.
And so we wanted to analyze how some of these players
could affect that differently than what we're used to
from looking at the past or living through the past.
And, you know, I think it's generally true
that the average ETF holder is gonna be more passive
than the, you know, self-custodied holder.
They're not even necessarily mutually different groups though.
Some people will self-custodied coins,
and then they'll hold coins in a retirement account
through an ETF.
And that was actually one of the points of feedback
from one of our large ETF reviewers,
is that they wouldn't, you know,
from what they're understanding is that there are
significant percentage of fairly sophisticated holders
of those ETFs that hold that ETF for any number of reasons,
either in choosing not to self-custody
or in addition to self-custody.
And one of our findings are in the paper,
which I think is a very positive finding,
is that self-custodied holders have a lot more influence
than those really big collective entities
because they can generally act faster.
And especially in a hard fork scenario
where investors do have a significant amount of power,
acting quickly is very impactful.
It's very hard to come back from behind
than, you know, compared to start out strong
and then stay strong.
And so if there's a hard fork that occurs,
people that are self-custody of their own coins
can literally act, you know, within the hour,
within the day.
They can sell the, you know, they can either do nothing,
they can choose to do nothing,
that's kind of the default choice,
but they could actively, right as soon as it happens,
begin selling the coin that they don't prefer
and buying more of the coin that they do.
Whereas the larger and more complex of an entity that you are,
there's a general principle that you're gonna have to go
through more checks before taking any action
on that given hard fork.
So whether it's a corporate treasury or an ETF,
there's no like one unilateral person
that can just do it that hour, right?
It could be a board of directors that ask for proof,
it could be a set of a portfolio manager
and then maybe their manager
and then they work with their custodian
and sponsor and there's a whole number of layers
of things that have to occur,
in addition to them being very, in many ways, conservative
because they have significant legal requirements,
you know, it would be utterly disastrous
if a large ETF were to like sell, you know, one coin
and then that coin ends up becoming the dominant network.
And so for example, a Bitcoin ETF ends up turning into
the equivalent of like a Bitcoin cash ETF
and loses a lot of its value for millions
of holders potentially.
Whereas, you know, if you're just self-custiding,
you just on the spot can make that call
and the mainly the only consequences are for you
and you know, those are that are financially connected
to you in some way.
And so you can act quickly and more decisively.
And I think that's one of the positive findings
from our paper is that that's actually,
I'd rather I'd say anti-fragile aspects of the network,
that some of the most committed and smaller entities
actually have kind of a disproportionate impact
compared to some of those larger entities.
Is, I mean, just to play devil's advocate here,
I would agree that they have the ability to move more quickly.
But do you think, I mean, if we're talking about,
you know, in terms of like actual economic power,
yes, those small holders may be able to make a decision
literally, you know, immediately.
But it also takes a lot of them to equal the same
sort of economic power as a micro strategy, for example,
or as, you know, Coinbase or the ETFs.
So is it, I'm kind of curious of both of your thoughts
on just the where we're at in the game theoretical stage of,
okay, we have big institutions on board,
that's not just some pipe dream anymore,
and it's not hope you know, it's micro strategy
is buying up all the Bitcoin they can.
ETFs are having record inflows compared to, you know,
any other ETFs in history.
I feel bad for Peter Schiff on this with the gold ETFs,
but you know what, he's just gonna have to let this one slide.
And you have nation states who are talking
about strategic Bitcoin reserves, you know,
in the US, Lummis has put out a bill.
El Salvador has been just kind of humbly stacking
a Bitcoin a day for a long time.
So it's, we're not just in this era of little, you know,
maybe some whales, but you know,
mostly just little, little hoadlers anymore.
Do the incentives and perhaps the stakeholder dynamics
start to change in a meaningful way
in terms of how you guys have laid them out?
You did do a lot of, I think, future proofing
with the way you laid out this report,
but do you see that there's potential for, you know,
bad influence, for lack of a better expression,
on let's say the media influencer class,
on behalf of the investor class, for example,
how do you guys look at that interplay as we go forward,
kind of into a bit of an unknown territory
in Bitcoin's adoption cycle?
Yeah, so I think what you say is undeniable and true
that the larger institutions on an absolute level
have a lot more Bitcoin today than they did before
and over time that's likely to continue to grow.
And so it's more than many self-custody investors.
And I'll get to where, I'll give some examples
of where that can be powerful,
but specifically in the scenario of a hard fork,
where you have 4K and 4KB,
or a futures market for 4K and 4KB,
as Lynn walked through,
I really do think self-custody investors
have a big leg up here, even if they have less Bitcoin,
because I think it's undeniable that they will be able
to act much quicker and prices set in the margin.
So even though the, you know,
so one Bitcoin from a self-custody investors might be,
you know, is basically infinitely more valuable
in setting the price than thousands of Bitcoin
held elsewhere if they aren't able to sell that fork,
if they're just holding both sides of the fork.
And if you put yourself in the position of a BlackRock
or large ETF or MicroStrategy,
if the price on the market already is like 10 to one
in favor of 4KB versus 4KB,
it would, it makes it even more legally risky
and like from a fiduciary standpoint
to actually sell the fork that is currently losing
in terms of market price.
So I think there's tremendous power there.
But having said that, yeah,
you allude to other powers that they could do
and because they'll have big pockets,
and I mean, institutions and corporations
that have it in their treasury have big pockets,
own a lot of Bitcoin, it does seem like, you know,
they're gonna leverage media influencers,
become media influencers.
Some of them already are media influencers
and invest a lot of money there.
And there's no doubt that has a lot of power.
It can shape, it can create narratives,
shape and influence how people think about things.
It can shape and influence the self-custody investors
who are choosing between 4K and 4KB.
Like if, I mean, imagine yourself,
if you're self-custodying Bitcoin and this occurs,
like yes, you have the opportunity to sell one
and double down, double your stack.
That sounds attractive.
What if you're wrong though?
So you're gonna have to go through that own count,
even though you can act swiftly,
you have to go through that own calculus yourself.
You're gonna look lots of information and sources.
A lot of that could be funded by institutions.
And even if you disagree with it,
you're not just choosing a fork that you like,
but you also need, your calculus should be as an investor
to choose the fork that you think others will too,
or else it's a pretty poor investment decision.
So yeah, so I do think we should definitely
continue monitoring the impact that large institutions
can have on Bitcoin consensus.
Yeah, I think numbers and ratios matter.
So I think that on a per coin basis,
individually held coins are a lot more impactful
in terms of hard fork outcomes.
But of course, there's a different world where,
20% of coins are held by big entities
versus 80% of coins held by big entities.
And as it stands now, the majority of coins
are out in the wilds, a lot of whales and smaller investors.
And even the big ETF inflows, I mean,
you had over 600,000 coins in GBTC,
and a lot of those diffused out and then into the other ETFs.
And of course, they were net inflows,
but and they're up to something like a million plus coins now.
But that's a 400,000 coin gain, which is not nothing,
but it's not as though they're gobbling up
vast amounts of the network.
So I think that's where ratios do matter
at the end of the day.
I think that's an important clarification.
And I appreciate the explanation from both of you on that,
because I think that's the concern
that a lot of people have voiced that,
okay, great number go up, fantastic.
All these institutions and governments hopping on board,
but what does that actually mean in terms of the potential
future decentralization and security of this network?
Because the number go up is also tied to that.
It's not gonna be, Bitcoin's not valuable
if it's not decentralized and secure.
And so I'm curious what your thoughts on,
just to take this one step further,
what do you think is kind of the biggest,
is there a biggest risk to Bitcoin that you see right now
as it relates to consensus?
Is there something that you guys are looking at saying,
yes, we're good right now,
we're still decentralized and secure,
but this is what could potentially change that.
This is what could negatively impact Bitcoin in that way.
Yeah, I'll start there.
Yeah, to me, a much bigger risk to Bitcoin
and centralization concern is mining
and less, much more so than institution buying
and customing Bitcoin.
With Bitcoin mining, there's pools and there's miners,
and anyone who's looked at any kind of like pie chart
for the mining pool distribution,
over the past like seven plus years,
it's never good or healthy.
It's typically like one to three mining pools
have over 50% of the hash rate.
Now, a few points on that.
One, we learned within the past year
that even those pie charts that you might be looking at
are painting a rosier picture than it actually is,
because several prominent mining pool brands
are really just proxies for Bitmain and Ant Pool.
Ant Pool is actually doing the block template construction,
like which transactions go in a block
and also handling the Bitcoin reward.
Yeah, so it's worse than that.
Like Bitmain controls approximately half of the hash rate.
So there's really three entities,
F2 Pool, Foundry and Bitmain are around 95% of the hash rate.
So it's very centralized, that's concerning.
The reason we don't need to be absolutely freaking out
is that it still remains true that the switching costs
for a miners to go from one pool to another remain low.
So that's good and healthy.
So if you wanna switch to MeriPool or Ocean or Demand
or some other pool, you can do that
at basically no cost to your business.
But nevertheless, there's several reasons
for why there's the centralization.
One is that technically miners have not been able
to select their own transactions historically.
There's now protocols and technology available
to make that happen, so hopefully that gets adopted.
That's just a software improvement,
but there's also financial incentives at work here.
There's a payout mechanism by pools to miners called FPPS
and that has strong centralization forces
and that's what's at work.
Like why are these other pools sort of capitulating
and using ant pools?
Because of the financial pressure they're under,
the pools are taking the financial risk
of getting unlucky and not finding a block
within a certain period of time
and they have to have a lot of liquidity
because with FPPS, they're guaranteeing their customers,
the miners payouts on a schedule.
So they have to have a lot of extra liquidity
as you can imagine that just trends towards
more centralization, bigger financial players.
So that needs to be addressed long-term
and there's some projects and some ideas to do that,
but there's no clear concrete answer.
That's kind of-
I'm curious on your take.
That's somewhat orthogonal to this project,
but it is that, I mean, that's my answer to your question.
No, no, no, no.
It actually leads into a scenario we walk through
in the project, which we'll get to in a second,
but yeah, let's hear from Lynn.
Yeah, I have similar concerns.
I think one thing I noticed in macro and technical stuff
is that concerns are often smaller in practice than feared
because there are response mechanisms.
So for example, if that concentrated pools
became a problem, there'd be responses to it.
And now, of course, the question is,
would those responses be effective?
It's still, it's basically, it is a significant risk,
but that's something that I observe in general
is that theory crafting is one thing
and then actual snares when they occur
and people have to make decisions is a response to those.
I am, you know, some extent concerned
around supply chains of mining as well
because as centralized as the pools are,
the chip making is also quite centralized.
And then even the foundries that are capable of making
a variety of different semiconductors are fairly centralized.
And that's something that's not just true for Bitcoin.
That's true for semiconductors in general.
That's a national security thing at the end of the day,
geopolitical.
And, you know, apart from that,
it's just, you know, keeping the network secure.
I'm not that concerned around the concentration of coins
in ETFs and corporations,
unless it should hit some alarmingly high level
because the more they accumulate,
the more the price goes up
and then it's harder for them to get more and more coins.
So there's kind of a self-limiter there.
One of the things that say some of the people
that want changes of the network
that they want say Covenants, for example, will argue,
because when people debate on should you make a change,
should you not make a change, is it risky or not risky?
One of the arguments they will generally use
is that it's in some ways risky not to make a change
if there's insufficient ability to self-custody
and therefore it helps coins move
into a big consolidated pool.
That's an argument that they would make.
I'm not necessarily making it myself,
but it is an argument that's out there.
And those are the types of things I think about and monitor
when I'm say providing analysis on Bitcoin
for like, you know, investors that follow my work.
And you mentioned, Steve, that there was a scenario
that you guys kind of walked through
that was related to this.
Now a good time to kind of get into that a little bit maybe.
Yeah, let's do it.
A little bit complicated, but it's also, you know,
as I said, every change in the past was activated
in a different way.
So as we look to the future, none of us know
whether Bitcoin's ever gonna change again,
how it will be changed.
So this is just, what I'm gonna walk through
is just one possible scenario.
We chose to highlight it, even if it's,
hopefully a low probability of occurring,
just to highlight how a soft fork can lead
to a fragile network and get us to a point
where probably no one wants us to get to.
So to set the stage here, let's assume,
let's assume there's a group of people
who want to change consensus and add a new feature or rule.
As I mentioned earlier, every consensus change historically
that's been activated has been done
through the Bitcoin Core project.
You got merged into Bitcoin Core
because basically everyone runs Bitcoin Core,
that has been the path.
Let's assume though that there,
I mean, Lynn mentioned covenant changes.
So there's like eight or 10 different proposals
right now for covenant changes.
So let's just say one of those covenant changes,
there's a group that's so passionate about it,
they wanna make it happen.
It's not getting the attention
of the Bitcoin Core project, let's say.
So what can be done?
Well, a useful tool in Bitcoin
is that alternative clients can be created.
So we're not beholden to one project.
Like if we, Bitcoiners,
don't like what the Bitcoin Core project is doing for us,
then it can be forked.
It can be, there can be other,
and there are other implementations.
But in this case, the group that wants a consensus change
can fork Bitcoin Core, add that change,
and then market that software client
and try to get people to adopt it.
This has been done in the past.
It was done with like Bitcoin Unlimited
and Bitcoin XT back in like 2016.
There was an alternative client to activate CTV
two or three years ago that was created and lightly marketed.
None of these were successful,
but that doesn't mean it's not gonna be tried again.
And that doesn't mean that in the future,
maybe it does get stronger adoption.
So let's imagine an alternative client
is created with some covenant change.
As I mentioned earlier, you can do UASF
and get some people rah-rah,
like I'm gonna run the software
and try to create a movement.
But if it's really just like a hundred advocates
running it on the Raspberry Pi,
that's not gonna change Bitcoin.
But, you know, I just mentioned that Bitcoin mining
is very centralized right now.
So it's absolutely possible to get like
three, four suits in a room.
And if there is an agreement among the people in that room,
those mining pools, they have unilateral control
over changing the software they're running
when they're producing Bitcoin blocks.
So if like three CEOs can make a decision
on 95 plus percent of the hash rate
on what blocks they produce,
if there's an incentive for them to do so,
they can do it.
Now, if the hash rate supports a change,
that's one step in a change occurring,
but it's really only partial support.
So in the scenario we walk through,
we assume that hash rate does support the change
and then a varying degree of economic nodes support it.
But let's walk through a scenario
where a small percentage of economics nodes support it.
Let's say like some new startups
that have a product or service
that depend on that consensus change.
If those services offer,
or if those companies offer services to customers
who then lock up Bitcoin in scripts
that use this new consensus rule,
that's very, very dangerous.
Like it should not happen.
People should not do that.
But you can imagine a scenario where they do.
If there's a customer base
who really finds that service attractive,
they think it's gonna make them rich
or they're getting value out of it,
they might be unaware of the risks they're taking
or they don't care,
or they accept the risks
because of whatever service they're getting.
And to the extent that Bitcoin are locked up in these scripts
that only a small percentage of economic nodes
enforce in the network
and most of the network
hasn't upgraded to this alternative software,
it creates a bounty.
Because the rest of the network,
when they see these transactions go through their nodes
that are locking up Bitcoin with this new rule,
what they see is anyone can spend.
Meaning anyone can spend those coins,
not just the private key holder.
So it creates a,
now the reason why like pass-off forks
haven't been vulnerable in this way
or taken advantage of,
it's because mining hash rate fully supports the change
and never produces a block
that unwinds these new rules.
But if there's a large bounty created,
let's say like a billion dollars,
miners, it becomes very attractive to miners
and at some threshold,
miners will be like, let's collude, capture all that money,
unwind the rules.
And because all those transactions are anyone can spend,
the money, they can just send it to their own wallet.
Because most of the network has not upgraded
and enforcing these new rules,
they fully accept that.
But if that were to occur, it is a hard fork
because the few economic nodes
that do support the new rules
would break off into their own fork.
So it would be a hard fork, it would be a chain split,
it would obviously be dramatic and chaotic.
What would happen at that point?
Who knows?
It would obviously be a total shit show.
One side would be like, these people stole our money.
The other side would be like,
we never agreed to those rules.
You're running software on rules
that the rest of the network didn't agree to.
So we'd get wind up in a situation where there's two forks,
there'd be a free market on deciding which one's Bitcoin.
So let's avoid that, let's not do that.
Yeah, that does not sound like a situation
that anyone really wants to go through, I would think.
When is there anything you wanted to add on to that
in terms of how that could play out
or kind of what the, I guess,
maybe with the downstream impacts of something like,
I mean, is that like catastrophic for Bitcoin
or is that just a, I mean, okay, yeah, it would be terrible,
but if it happens, it happens and the dust will settle
eventually and the better chain will win ultimately
as has happened in past splits.
I think part of why we analyze it is that
even though it's on its own,
it's a relatively improbable scenario,
we analyze it and write about it
to make it even less probable.
That, because our concern is that prior discussion
on state of mind, we would want to pull more and more people
out of the unaware state of mind
and more into being aware of these risks.
And for example, locking up coins in soft forks
that are not well adopted by economic nodes
would be one of those.
The way that I generally view it is that I think
in most snares, it'd be messy, but not catastrophic
because you probably, my expectation would be
that the legacy rules would probably win in that snare
because that's the majority of economic nodes
and the miners have now rolled back the change.
So that's kind of the new ongoing status quo.
But there are scenarios where you could,
this could back to our prior point about investors
having kind of the final say,
if some of those really big entities come in
and if a lot of smaller entities decide to go
with the new rules, that could be more damaging
overall to Bitcoin's brand.
If a contentious hard fork wins, for example,
that could be quite contentious.
Or if it's just, it's meaningful enough
that a lot of people lose money,
even if the older rules win,
that could also be damaging for the reputation.
So I think the way I would categorize it is
it's a relatively low probability risk
and then the outcomes that can come from it
probably aim toward not being network-wide catastrophic,
but it's non-zero, which is why we wanted to discuss it
and bring it up as a tangible example
of why we did this report.
If there wasn't a risks around a consensus,
then there wouldn't be that many reasons
to do a report like this,
whereas identifying some of the risks that can occur,
and this is by no means the only one,
is a way to kind of, I think, get people more aware of them
so that we hopefully avoid those types of things
in the future.
I have two kind of follow-ups on that.
The first would be, is there,
out of the current proposals that are out there
for upgrades, changes to Bitcoin,
now that hopefully everyone listening understands
the difference between a maintenance and a change,
but out of some of those proposals that are out there,
are there any that you think are contentious enough
to actually create this kind of scenario,
or are these more, we're talking about potentially
like a large block size increase,
or adding tail emissions,
like is there kind of a threshold where you think,
okay, there's no way that people are,
shouldn't say no way, but there's a low probability
that people are going to create a potential
chain-split scenario over these particular upgrades,
but if they go to tail emissions or block size increases,
that's certainly going to create this scenario.
Yeah, I mean, you already named several that are like,
clearly in the category of they're going to be contentious
tail emission, you didn't meant, like KYC,
if someone wants to add a KYC,
baked into the protocol change,
that would obviously be contentious.
Even adding privacy on chain would be very contentious,
and the people who would be against it,
a lot of them wouldn't, aren't necessarily against privacy,
but there's just hard trade-offs there.
If you add like confidential transactions
at the base layer, you lose the auditability of it,
which is a huge characteristic of Bitcoin.
So I think that type of change would be extremely contentious.
But you asked about, you know, what's currently on Slate.
Well, let me start with, there's a change that is very,
is very technical in the weeds,
and not a lot of people are aware of it,
but one that I think will not be contentious,
it's called the great consensus cleanup.
It's just a set of bug fixes to the protocol.
And I think most people aren't aware
that there's actually bugs in the consensus layer
that could be, could be taken advantage of,
and the consequences would be extremely severe.
It's severe, such as mining the rest of the Bitcoin
that have not been mined in a matter of a few months.
That sounds outrageous, right?
I'm sure most of your audience has never even heard of that.
Probably thinks it's preposterous that I'm saying that,
because if you can do that, why is it not happening?
This particular attack, it's well known,
it's been known for over 10 years.
If it were conducted, it requires majority hash rate,
51% or more, which again, it's a little concerning,
because one entity now basically has that power,
but even if one entity has that power,
it would be public information.
The attack occurs between a difficulty adjustment epoch,
so about two weeks, and it would become evident
that the attack was underway at the beginning of an epoch,
and it wouldn't actually be realized until the end.
So we'd have this two week window to frantically fix Bitcoin,
get everyone to upgrade.
That sounds like chaos to me,
especially now that Bitcoin's so much bigger.
So I think people will be convinced once those changes
are ready from the software developers,
they're all buttoned up,
there's broad consensus from developers
that there's no risks with these fixes.
I think that'll be a change that actually will get made,
but we're not there yet.
We'll see.
It's actually a great litmus test
to see can Bitcoin change again,
when it's just bug fixes that everyone should care about.
Even if you are an investor,
and all you hear about is store value number go up,
and you don't care about any scalability,
you don't care about payments,
features, currency, nothing else,
you should care about fixing these bugs.
As far as the covenant proposals,
are any of them contentious, you know,
there's not overwhelming consensus from developers
on any of these proposals yet.
There's different groups of developers
that are champions for different proposals.
Some developers who really want covenants
prefer one proposal,
but are willing to accept others just to get covenants.
But there's still some developers that are worried about,
most of the covenant changes
about sort of unintended consequences and risks,
and there just hasn't been enough analysis of that
to really be confident,
but then you can make the argument that like,
you can't prove a negative,
and like, I mean, what's the bar to be satisfied
of not having unintended consequences?
So that's sort of an unending debate and battle.
But if there's not, you know,
if any of those changes gets pushed for activation
by like non-developers, other stakeholders,
and a lot of marketing is put behind that,
that creates contention,
because the more conservative voices in Bitcoin,
whether they be developers or investors or anyone,
that might make them feel uneasy.
So I do think there's the potential
for that type of contention,
and more around the activation.
And those covenants are the types of things
that can create that bounty claim
that Steve walked through before.
Is anything that lets you lock coins to a script
or like an example would be an L2
that that covenant enables
that was not previously workable?
That could be drained.
It could be for DeFi and trading.
It could be for more payment throughput
or more private payment throughput.
There are a variety of reasons people might be using
that new feature, that new layer,
which then can create this like locked bounty
that the mining group could then roll back.
If specifically in this scenario,
where a relatively small percentage of economic nodes
have updated to that change,
the more obviously the more economic nodes
that also agree with that consensus,
and it becomes a broader amount of consensus,
it becomes obviously much more challenging to roll back.
You guys had a great couple of sentences in this paper
that basically said, I'll just read it here for folks,
because it was about determining consensus.
And I thought it was helpful,
but assessing whether a proposed change
has achieved consensus can be challenging
due to Bitcoin's decentralized nature.
Consensus is not formalized through votes,
but is instead gauged by the absence
of strong sustained opposition
and the overall sentiment in the community.
And then you give a list of indicators there,
but I thought that was just a really nice way to frame it.
You're looking for the negative more so than the positive
in terms of, okay, does this have consensus?
Is there anyone who is really loudly saying,
no, heck no, I don't agree with this,
I will not support this,
I'm gonna keep railing against it.
Can either of you just kind of elaborate on that a little bit
because you mentioned a number of things
between mailing list discussions, GitHub, Bit processes,
tech conferences, workshops, podcasts are on there too.
Miner signaling node adoption, economic node statements,
community sentiment, and the list continues to go all the way
and the list continues to go on.
There's a lot of stuff there.
So I mean, it almost seems like,
can you ever, is there ever a single point
or is it just kind of this process of,
okay, we just, again, we're iterating, we're iterating,
we're seeing, is anyone being loudly against this?
Yeah, yes, and I mean, just to add to that,
because Bitcoin is software and technical,
any change, even if a non-developer wants a change,
it has to start with developers
because you need to actually spec it out technically,
you need to write the software, you need to write tests
and all of that's code.
So there needs to be a protocol developer involved.
And so that's sort of where it starts.
And then from there, the happy path are like,
a path that's proven successful in the past
is then share that idea and that code
and the benefits and risks with other developers
and ultimately get developer consensus.
And then if you reach that point,
then you can start spreading it
to other stakeholder groups and the rest of Bitcoin,
like, hey, here's this proposed change,
here's the benefits, here's the risk,
here's all the work that's been done,
here's the risks that have been analyzed,
all the work done to minimize risks.
And if there's, yeah,
if there's no one yelling and screaming saying no
and they're not, it's not just yelling no,
but like to take someone seriously if they're yelling no,
you wanna like what?
What's the rationale?
If there's no solid rationale being provided
with it, someone yelling no, then yeah,
it typically proceeds and that's what we saw with Taproot.
And basically every change historically except for,
except for Seigwit.
But as we're seeing today,
there definitely could be groups of developers
who feel really strongly about a change
and they have consensus within their bubble,
but they don't have all developers
or at least developers who have weighed in in the past
or respected developers and like,
where do you even draw the line?
And there, you know, it's so many of these proposals
have been getting stuck at that stage.
And then if you're a champion of a change
and you're frustrated because not all the developers
that people would typically look to to support something
are supporting it, then you can start to go
to other stakeholder groups in the broader community
saying, hey, we want this, don't let this set of developers
who are against it or aren't taking the time to look at it,
stop us, like we wanna make those change.
So there's no right or wrong answers.
It's not like we can clearly say like,
one group's right or wrong or this change is good or bad
or the method is good or bad.
I mean, there's certainly some paths and methods
that are reckless, which we try to identify and avoid,
but, you know, no one's in a position to say
this is the only path, this is the correct path.
That's not how Bitcoin works.
And Lynn, I'm curious too,
because you, you know, I think a lot of people may,
hopefully after this conversation, we'll come out saying,
okay, I have a better understanding of this,
but like, what does this mean for me?
How should I approach it?
Like, and you guys identify some kind of questions
that stakeholders should ask.
Can you go into that a little bit?
Just when people from who are maybe, especially, you know,
if you're, whether maybe you're non-technical, let's say,
but even if you are like, what are the steps
you should go through to say, okay,
how do I actually make sense of whether or not
this proposed consensus change is something
that I should be for or against?
Sure, and it obviously will depend
on what stakeholder group that you're in.
For a lot of people, really like watching this podcast,
I've probably disproportionate in the investor group,
but I'm sure they're across the spectrum
of all the different groups.
And so you'd ask, you know, things like,
what are the specific benefits of this change
that I would have?
What additional features or safety or other aspects
would I have that I didn't have before the change?
That's kind of the key thing you start out with.
You can ask things like more broadly,
even if it doesn't affect me, how does it affect,
you know, Bitcoin stability, security
for other stakeholder groups that are, of course,
indirectly relevant for me because we want a stable
functioning appreciating network,
because that'll, you know, hopefully increase adoption.
Then you can ask like, who are there groups
that are disproportionately benefited
or harmed by the change?
Or is it pretty much everybody's kind of improved
pretty similarly, which I think would be fairly rare.
Then you also ask things like, what are the risks
or what are the downsides?
Has the proposal been sufficiently, you know,
risk analysis, both from the code itself?
Like is the code itself solid?
But then also, even if the code works as intended,
are there economic perturbations that could occur?
So for example, a developer like Matt Corallo
might point out that it could create problematic
or centralizing types of MEV, maximal extracted value
that could be centralizing for mining, for example.
So there's both technical and economic risks to consider.
And then you kind of go down the list of, you know,
what are the, is the activation method itself fair?
So if I agree with the change, is the activation method safe
or is the activation method reckless?
And therefore potentially sets up one of these risks
that we discussed, like a bounty claim.
Then if you're looking at things like alternative clients,
which, you know, to Steve's point,
has not really been a path forward in the past,
but could in theory be in the future,
you'd want to ask things like, okay,
this software exists now,
but am I convinced that it's going to be
well maintained in the future?
Because once you switch to it, you now have an obligation
to have that software be functional and maintained
and minimizing bugs.
And so it's not as easy as just, you know,
adopting this, you know, change that,
that maybe some anonymous people made,
and you're like, you know, coin based,
deciding what version of Bitcoin you're going to run.
You generally want to have assurances
that there are very competent and committed people
that are going to continue to update the software
that you're using over time,
which helps keep you safe when you choose
to follow their updates.
Yeah, I think that that's, it's really helpful
because again, if you're new and coming into the Bitcoin space,
all this stuff may seem a bit kind of overwhelming.
And I'm sure for a lot of people, it's just like,
you know what, I'm just not going to worry about it,
especially if you're not running your own node
or anything like that, maybe,
and you don't feel that you have much of a voice.
Okay, just see where the chips fall
and let them fall where they may.
But for people who do, you know,
who have gone deep enough down the rabbit hole
where they're like, I really care about this,
I want to know what's happening.
I think that this report that you guys have put together
is super, super useful.
And I want to be conscious of both of your times here.
First of all, is there anything that we kind of didn't get
a chance to dig into enough or anything
that you felt should be emphasized
from what we've gone over today?
Or did we do a decent job of kind of covering
the scope of this report?
Yeah, I think we covered all the important points.
I would just want to remind folks
that it is an open source project.
And as we discussed, it's not static.
This is a dynamic system.
And so we welcome contributors to that project.
So if anyone finding themselves passionate about this,
we would love to hear your voice and see your contribution.
Yeah, we consider this the first draft of the project.
Basically, our initial attempt to model this,
and we got a lot of, it wasn't just us,
we got a lot of reviews and feedback that was very helpful
in coming up with this first version one draft,
but it's only the start.
So anything that people either disagree with
or I think could be clarified or improved
on the current paper would be great.
And then as Bitcoin changes,
even if the paper is fairly accurate now,
it could fall out of date if it's not updated.
So we certainly invite contributors, it's on GitHub.
So if you Google like GitHub eCAP,
you'll be able to find it.
And we welcome contributions.
I'll link this in the show notes as well for folks
because it's nice.
This is something you do not need to be
highly technical to contribute to.
You can still push or have set on a pull request
just with some nice text
if you have something you'd like to add.
I'm sorry, Steve, was there something you wanted
to throw in on top of that?
I just wanted, I mean, for your audience,
as you mentioned, this can be overwhelming.
And especially if you're at the start of your Bitcoin journey,
feels overwhelming, maybe you just are like,
let the chips fall as they may.
But one suggestion would be identify different people
in the space that you trust
or at least you like their takes.
Like some people are like fairly balanced in their takes.
Like someone like Lynn, I think.
Others have really hot takes in their extreme
on some end of the spectrum.
All of that's valuable as long as you weight it properly.
But, and then, yeah, so I would suggest
just identifying people from developers to investors,
these different groups, different points of view,
and then use that to help make your own decisions,
including are we in a situation where I actually need
to allocate time out of my life to know
whether we're in a train wreck or not,
and then like do I need to take action?
Or yeah, is it just all being handled fine
by everyone else?
And I'm curious too, if we zoom out a little bit on this,
we're at a really interesting point.
Like it's an amazing time to be alive right now.
First of all, we're alive during Bitcoin.
That is a blessing on all of us.
But we're also, there seems to be sort of this
bit of a phase shift happening
and a shift in the Overton window.
Bitcoin is not some niche, you know,
magic internet money for magic internet nerds anymore.
The magic internet money is still there.
The nerds are still there building incredible things.
Thank you to all the people who do build things.
But now there's this whole wide swath of the world
that has been opened up to Bitcoin,
has been exposed to Bitcoin.
Still a very small minority owns Bitcoin,
but I think that's kind of rapidly changing.
And I'm just curious, predictions are hard.
This is not asking for a price prediction at all.
More of just like an adoption wise.
Where do you think we're at?
Now, do you think we're at a,
still in kind of that, we haven't yet crossed the chasm,
but we're getting close.
Where do you think we're at in this adoption cycle?
Where do we go next?
What do you think the next, you know,
next Bitcoin, you know, having cycle,
but maybe, you know, let's,
let's extend it out a couple of cycles from that.
Where do you think we go in the next decade?
What does the state of Bitcoin adoption look like to you?
Steve, do you want to talk to that?
Do you want me to talk about it?
Yeah, no, it's a big question.
Oh, so I mean, to me, like Bitcoin as store,
I mean, there's different curves.
So if we're talking about Bitcoin as a store of value
as an asset class, obviously the progress,
the past 10 plus years is tremendous.
And I think it's only going to keep growing.
It's just, to me, it's inevitable.
Like there is product market fit,
it's an incredible product.
And it's just a matter of time,
because education awareness,
and we've seen the pattern repeat over and over again.
It takes a while for someone,
each individual needs multiple touch points,
typically with Bitcoin, until they finally take it seriously
and finally allocate time out of their busy life.
And then they will allocate a little bit,
and then they learn more, and then they allocate more.
And so that pattern will keep being repeated.
So I think that's inevitable.
But another type of adoption of Bitcoin
is peer-to-peer money, using it as currency.
And so I mean, personally,
I strongly believe in that potential as well.
A lot of what Spiral does is building out tools
and infrastructure to facilitate that.
That's far less inevitable though.
I mean, even though it's in the white paper,
it's in the title, will it actually become real?
We don't know.
I'm optimistic.
We're working, we're doing our part to work on it.
But that adoption curve, even if it does become real,
that sort of phase shifted it out
from adoption of the asset itself.
And I think even if all the technical
and software and design problems were solved
for Bitcoin as a currency,
it would still be delayed after adoption of store value.
I think like VJ Boyapati wrote an article,
yeah, actually, and then turned it into a book.
Many years ago about this, and I subscribed to that,
I think just, it makes logical sense that it will start,
I mean, the kind of volatility and number go up
that we see with any emergent store value,
it's gonna limit its usefulness as currency.
That doesn't mean it, not zero,
but it's just like not going to be broadly used currency
until that sort of played out.
Yeah, and that's kind of the milestones that I'm watching.
So right now the network's worth over a trillion
and a half dollars.
And so I think the milestones ahead are one,
can you become bigger than any stock,
which is currently over three trillion,
then it's, can you be bigger than any monetary base,
which would put you over five or six trillion.
And then it's, can you start approaching gold's market size?
And then after that, it's, then you get to really high levels
of like things like broad money supply
and things like that.
And I agree with Steve's point that
medium of exchange is somewhat limited,
even if technically, you know, workable
in that earlier emergent phase,
because generally people are gonna use something
that's more stable or that's kind of Gresham's law
and action as well.
And there's also things like external things
like capital gains taxes that create a kind of
a Gresham scenario where there's more frictions
for using the harder type of money
and less frictions for the softer type of money.
And therefore people will gravitate
to hoarding Bitcoin spending fiat until such a time
that people have large enough Bitcoin balances
and more and more people accept Bitcoin
and probably the volatility is reduced.
And that's where I think that, you know,
assuming it's technically working well
and there's enough throughput and scalability
that people can then start using it
for those other abilities more.
And I think it, but in the meantime,
it's an option that exists,
it's a power user option that exists.
And I think that's even important for the store of value.
Like part of what makes Bitcoin valuable to me
compared to like a stock I own in a brokerage
is that I can literally take it with me
and any number of urban centers in the world,
I can find a way to exchange it for local value
one way or another,
whether it's converting it into their fiat
or converting it to good and services or online.
And that's one of the, that's that optionality,
even if I'm not doing a lot of volume with it,
that optionality increases my kind of perception
and usability of the investment.
And meat of exchange was used really on, you know,
for WikiLeaks, basically when other payment methods fail,
that's what Bitcoin's already there for
even when it's volatile.
So I think that, I generally view it similarly.
I think the store of value is catching on,
I think it's gonna continue to catch on.
And I'm also hopeful about the other attributes
of Bitcoin as well.
And I just, I think it takes patience to some extent
to see those overall other use cases increase.
Yeah. And I may think it's, what's the expression?
You know, the future's here.
It's just not evenly distributed yet.
I think very much rings true in this case
because depending on how you as an individual
are using Bitcoin, you have already, you know,
crossed that chasm, you've already made the phase shift.
You're already using it, you know,
not just as a store of value, but as a medium of exchange,
you're, you know, using it as your own unit of account
as well, perhaps to, you know, measure everything else.
But that's not everyone, you know, it's some people,
but the future happens one person at a time, I guess.
But I wanna thank both of you
and the co-authors well-ren, correct?
I'll link all of your, your Noster and Twitter
and this paper and the show notes.
Is there anywhere else you wanna send people
or anything else you want to leave folks with?
I'm just thankfully at a thought.
I think it was a great discussion
and hopefully, hopefully listeners got something out of it.
Yeah, thank you.
Thank you, Argo.
Well, thanks so much for being on here.
I know you guys are doing a circuit
and so I hope you can keep this stamina up,
but I think that you've had a lot of really great
information to share and this is super,
super useful for folks.
Myself very much included to actually make sense
of some of this stuff that can often seem a bit out of reach
and you're too scared to ask questions about it
because you don't wanna seem stupid.
Well, now you've answered pretty much all of them
both here and in the report itself.
So again, wanna encourage anyone who is listening to this
to go and check out the report.
It's linked in the show notes
and to also, if you feel like it,
contribute to this ongoing living, breathing report.
So, Lynn, Steve, thank you both so much for your time.
I really appreciate it.
Thank you.
And thank you to folks in the live stream
I'm cutting you off right now.
["The Bitcoin Podcast"]
And that's a wrap on this Bitcoin Talk episode
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