Crypto Market Commentary 

11 November 2019

Doc's Daily Commentary

 

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Checkmate's Corner

Orange Coin Bad? Bitcoin Is Not Perfect

PART 2

Reliance on Nodes

The UASF movement was a key moment in Bitcoins history where SegWit was activated by user nodes against the will of miners and many economic nodes (exchanges and businesses). Miners and economic nodes had pushed for bigger blocks and scrapping SegWit in the New York Agreement which ultimately created Bitcoin Cash.

 

The true motivations behind this was the benefit to BitMain’s ASIC boots technology that SegWit nullified. Bitmain bribed many parties to oppose SegWit. Coinbase was also motivated by the lowering of fees to help the company to consolidate millions dollars in dust transactions as a result of poor management of UTXOs.

 

So the people implemented a user activated soft fork to enable SegWit and start invalidating miners who did not support SegWit, cutting off their income. This is viewed as a win for Bitcoins resilience (and it was) but I question how many of these fork wars we are willing to subject peoples savings and money to before we deem it instable and unacceptable.

 

A chart that circulated Twitter the other day showed the number of Bitcoin nodes which currently run older versions of Bitcoin which contain vulnerable code. That is protocol code which has known bugs and thus is exploitable. These nodes will allow anything that passes the consensus rules they follow even if they are bugged out.

 

Now if vulnerable nodes were in the minority (<50%) the upgraded nodes would reject bad blocks that exploited the bugs and eventually the network would agree on the correct chain. The more vulnerable nodes there are, the longer it will take to reach consensus and the more accidental forks will occur. This has impact on the network security and efficiency.

 

What we see in the chart above is that only 29% of nodes are updated (green) to the latest Bitcoin code and 52.7% (red) of them currently run code with vulnerable exploits. Not great.

 

If there was an accidental inflation bug in that particular vulnerable code base, Bitcoins 21M cap is at risk. I don’t know the extent or form of the actual vulnerabilities but there have been two inflation bugs to date and no doubt there will be more in the future. Solving this would require an emergency fork (maybe hard or soft, not quite sure) with all the economic nodes, miners and users away from the current chain to invalidate the bugged out code. What on earth does that coordination effort look like?

 

I’m also 100% positive you and I will not be contacted to have a say in the matter.

 

This is the reality of rough consensus and one CPU one Vote. How many of these updated nodes are going to be around if another UASF movement rolls around if they can’t even update vulnerable software? Also, I question the logistics of supporting out-dated software indefinitely to protect old mate in a coma. Bitcoin has no choice as they cannot force updates to nodes automatically as this defeats the purpose of rough consensus. Users must upgrade of their own volition.

 

Seems cumbersome and insecure right. Bitcoiner’s call it a strength, I disagree. It will cause calcification as more and more businesses have an interest and financial incentive to support particular upgrades, features and bugs. The only outcome is a stalemate culminating in a fork war. I think it is a real problem long term.

 

Miner centralisation

UASF taught us that user nodes have power over miners as they can invalidate a miners income. The stealth risk in the background is that without security your node and coin ownership is worthless. Lets play out the block halving scenario long term where miners income continues to reduce and eventually does start to impact security.

 

Who will support a tail emission first, the miners who need income or users who value scarcity? Sure nodes may not support inflation introduced by miners but if all the miners choose to support a new fork due to necessity of seeking income, the whole system breaks down.

 

Couple this with the reality that PoW always tends towards centralisation, this cannot be avoided. We know that over 50% of the mining is coming out of China and thus it is possible that blanket censorship could reign over the protocol. Bitcoiners will claim that game theory and profitability protect the chain, its more expensive to attack than mine honestly. Well long term, that assumes a higher price and we know price cannot tend to infinity.

 

Crunch time will come and there will be a miner vs user fork war as a result of this. Whether it is China or the need for a sustainable income, miners vs nodes is a delicate balance and not one I consider stable.

Technology and Privacy

Amidst all the above constraints, Bitcoin still needs to upgrade. Right now, the privacy on the base layer is poor and relies on users with technical know-how doing coinjoins via third part services. Upgrades are essential and the protocol needs to adapt.

 

Despite what Bitcoiners claim where the code can never change, it has changed many times. What is hilarious is that Bitcoin SV is the closest thing to OG Bitcoin, and it is clearly a worthless venture. Thus Bitcoin is worthless without its upgrades and progression.

 

When the asset is worth trillions, change becomes less likely that changes will be supported and the uncertainty and risks begin to compound. In a hyperbitcoinisation scenario, nation states will operate mining operations and the stakes get very high on what is and is not acceptable as an upgrade. Will China or Russia allow for privacy in transactions if they are the dominant miner? Will they censor any transactions that they deem to be against their best interests?

 

Adaptability is a function of centralisation both of the developers, funding mechanism and coordination method. The more decentralised and rough a system is, the slower and less adaptable it is. This is a strength and a weakness for Bitcoin and an area which will be tested many times in the future.

Closing Thoughts

What I find so interesting in this overview is that many of Bitcoins strengths are also its weaknesses. It is resistant to change and tampering with the monetary policy, whilst at the same time constrained in adaptation potential by this design decision. It is decentralised in its nodes yet this is an attack vector for bugs in the code and coordination. Users own the consensus mechanism, until the security budget grows thin.

 

We don’t know what the end game is but I think it is going to get hairy for Bitcoin many times.

 

It all comes down to trade-offs and every blockchain has to make them as part of the design. To close out this study I figured it would be valuable to make a quick comparison between Bitcoin, Ethereum and Decred which I feel are the strongest PoW, PoS and Hybrid PoW/PoS chains respectively. The comparison considers the long term assuming all three projects reach their goals (PoS for Ethereum and full decentralisation of the Decred treasury for example) and develop strong network effects.

 

I have colour coded as black where I see it as a status quo and average baseline, red where I see serious setbacks and problems over time and green where I see an improvement over the competition. Keep in mind that these metrics are subjective, the ability to coordinate and adapt may be seen as a flaw to some and an advantage to others.

 

These are my opinions (which as always remain fluid) however after coming to terms with some of Bitcoin’s flaws, there is a very strong argument behind Decred as Bitcoins biggest competition.

 

 

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