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THE Bitcoin Podcast
LYN ALDEN & STEVE LEE: Analyzing Bitcoin Consensus: Risks in Protocol Upgrades (THE Bitcoin Podcast)
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- [00:00]
Lyn Alden
One of our findings are in the paper, which I think is a very positive finding, is that self custody 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 compared to start out strong and then stay strong. And so if there's a hard fork that occurs, people that are self custody their own coins can literally act, you know, within the hour, within the day. They, 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, 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 going to 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 a rather, I'd say antifragile 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.
- [01:22]
Steve Lee
Larger institutions on an absolute level have a lot more Bitco 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 price is set in the margin. One Bitcoin from a self custody investor 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 1 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, you know, the the fork that is currently losing in terms of market price. So I think there's tremendous power there.
- [02:34]
Walker
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 Lyn 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.
- [03:13]
Ren
A technical and economic perspective.
- [03:16]
Walker
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 listen. Check out bitcoin podcast.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 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 helloitcoinpodcast.net if you have feedback or if you're interested in sponsoring the Bitcoin podcast. And if you you find this show valuable, consider giving value back by giving it a zap on no or a boost on Fountain.
- [04:55]
Ren
I truly appreciate it.
- [04:56]
Walker
Without further ado let's get into this bitcoin talk with Lynn Alden and Steve Lee.
- [05:08]
Ren
Thanks for reaching out about this. I was very eager to dig into this because I saw, I. 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.
- [05:30]
Lyn Alden
Exactly. Yeah. And that's also why we open sourced it. So everybody who views things differently is welcome to contribute to it.
- [05:39]
Ren
Yeah, I think that's honestly awesome and 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, you know, 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.
- [05:58]
Lyn Alden
Yep, I love it.
- [05:59]
Ren
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.
- [06:14]
Walker
Fair to call it a report.
- [06:16]
Ren
Is that the correct nomenclature there?
- [06:19]
Steve Lee
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 bitcoin consensus at one moment in time. It's always evolving. But. Yeah, but it's also a report in a paper as well.
- [06:42]
Ren
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.
- [06:55]
Walker
Like, what do you mean?
- [06:55]
Ren
There's nobody in charge that just makes the decisions and makes the rules and you know, like who, you know, where does the buck stop? You know, and it's kind of like, well, you know, 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 going to 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 Lyn, folks I think know you pretty well, but Steve, maybe you could just give a quick introduction for folks. And Lyn, you're welcome to as well. But I think at this point, you know, you're you're ubiquitous in the industry, but Steve, maybe people aren't as familiar with you.
- [07:41]
Steve Lee
Sure, yeah. Thanks for having me on the, 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, get to work on, on. I'm on team Bitcoin and my, 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, is this project we're about to talk to. And so I, I've been collaborating with Lyn and we had another collaborator, Ren, who and the three of us put this together. We also have over a couple dozen people have reviewed it to this point and has stated 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, we started it, but it's really just the beginning, not the end.
- [08:56]
Ren
I love that. And yeah, I think the work that you all are doing at SPIRAL is just really cool and it's pretty great that you're given that latitude to kind of go out there and do cool things on top of bitcoin. And perhaps Lyn, 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, 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?
- [09:35]
Lyn Alden
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 consensus is a tricky area because it's hard to even define 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 into bitcoin in the first place was the last time there was kind of disagreements around consensus, which was 2017. My first public article on Bitcoin was in 2017, and that was right when 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 a blank sheet of paper. We don't assume that things worked out in 2017, worked the same way, and 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 a much more decentralized, complicated environment. And so we now, we're years in the. In the future, and we also look toward even further ahead and say, you know, what, what. What lessons could we learn from the past and what issues could we see in the future as? 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.
- [11:44]
Ren
Consensus, can we, 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.
- [11:59]
Steve Lee
What.
- [11:59]
Ren
What does that mean?
- [12:02]
Steve Lee
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 for what those. What those rules are, where it gets complicated, is that software can be changed. So you might run software and Lyn 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 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 how 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 it's. Yeah, as you've seen in this. In this paper, it's very complicated. There's a lot of. Lot of different types of entities and a lot of different. 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 going to be successful. Well, what. How does that actually work? So that's what this project's trying to address.
- [14:35]
Ren
Lyn, is there anything you'd add to that?
- [14:39]
Lyn Alden
I think that pretty much covers it. Yeah. There's the 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, because you can say that there's consensus or there's not consensus to make a change for what the consensus rules are. 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 sufficient consensus for change. There's no 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 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 every one is activated in a different way, which makes analyzing the past interesting and of course makes predicting the future hard.
- [15:44]
Ren
Yeah, there's seems to be like meta layers of consensus around consensus there, which is kind of, 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 basic set this thing up type questions. I think that people, when they hear like, I agree with you, Steve, that, you know, one of the reasons we're all drawn to Bitcoin is because it's.
- [16:08]
Walker
Not easy to change.
- [16:09]
Ren
And people hear the word changing Bitcoin or doing anything on Bitcoin and that kind of, you know, sends up red flags, which I think is a good thing.
- [16:16]
Walker
Right.
- [16:16]
Ren
People have their guards up. But I think there's also, for let's say the layperson who may not be as technical, there's often some confusion around.
- [16:26]
Walker
What changing bitcoin means.
- [16:27]
Ren
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.
- [16:45]
Steve Lee
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. I think if you look at a number of lines of code or number of commits on GitHub for code changes, the percentage that aren't consensus changes has got to be 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 my organization, spiral, we fund about a dozen different projects in this space and we've never like, 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.
- [18:49]
Ren
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 mate like if you don't do certain maintenance tasks there are going to be problems with compatibility. And I think that's like a. I wanted to set that up a little bit just because again, people hear 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 Lyn, anything else you wanted to add on just that to alleviate any confusion that folks may have on that? Sure.
- [19:27]
Lyn Alden
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 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 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 if it's going to keep working with modern operating systems. Unless you're running a vintage system. And that's like Steve said, a lot of the changes there. Whereas consensus changes, especially in the post Satoshi environment, are few and far between.
- [20:20]
Ren
Yeah, I appreciate that clarification. Sorry Steve, was there something you wanted to add on?
- [20:24]
Steve Lee
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 want to correct that. A non goal is for the project to take a position in 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, just observing how it works, is really the goal of this project.
- [21:56]
Ren
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?
- [22:24]
Lyn Alden
Sure. So in the paper we broke the stakeholders up into six different types of groups. So it's probably best to start that high level. And that's because there's no one type of entity that has all the power in Bitcoin. 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 fiat for Bitcoin, those economic nodes, whether it's exchanges, brokers, payment processors, they're playing a pretty significant role. So for example, what software, you know, Coinbase or Binance are running matters more than what my node, 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 were five groups or seven groups. The way we went about this was saying every group has a power and then every group has or a set of powers, and then 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 lifecycle of how a fork could go, those different groups have different levels and types of power throughout the process that change.
- [25:24]
Walker
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- [26:50]
Ren
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, their different motivations. You introduced this concept of state of mind as well. 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.
- [27:28]
Steve Lee
Right.
- [27:28]
Lyn Alden
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 exchanges set them up ahead of a potential fork, which can determine whether that 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. 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 majority. It's a filtering. It's not 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, 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 a 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 or kind of show them to their audience. And so they can shape the probability or the outcome of how consensus moves forward and 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 code, so there's protocol developers and application developers, they have different powers and incentives. So protocol developers focus on maintaining Bitcoin itself. They also generally their incentives are going to be more aligned towards stability and security. Like Steve mentioned, almost all changes are keeping it performant, as it is not actually implementing consensus changes. Application developers, 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 node. They can update their node 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.
- [32:10]
Ren
Thank you for that breakdown because I thought it was really nice to see it explicitly kind of set out like this 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, you know, 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, what constitutes a hard fork?
- [33:08]
Steve Lee
Sure, I'll answer that. But you said something right before 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. 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 I. So I thought I had 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 was 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 in bitcoin or what are some extremely large percentage 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 work 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, like I'm upgrading my software to support these new rules and taking that action is sort of 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 support from mining hash rate and a sufficient amount of economic nodes. And that's one scenario we actually go into future potential scenario in the BCAP project, which is what if, like what if varying degrees of economic nodes support and enforce rules changes and can we, can we wind up in a situation which creates a fragile network which I believe all of us would want to avoid?
- [36:58]
Ren
Most definitely. And I'm curious, Duke, 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 report as well.
- [37:10]
Steve Lee
Yeah. Well, let me, to provide context, 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 that, 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 miner 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, there's no cookie cutter, there's no like 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 a user assisted software that would be where there's, 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, you know, enforcing those new rules and make it so that sort of force the hands of miners. And it's a, it's a chick, you know, 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 block height X some point in the future, and if, 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, if it's a small percentage of economic nodes or, you know, if it's just a handful of people running bitcoin core on their laptop, it doesn't actually really have, I mean, I think them voice, their, their voice has power. Like, if they're making a point about something that can have power, it can influence people. That's more of the media influencer stakeholder group that we've identified. But if, you know, if just like 100 people running Bitcoin core on a Raspberry PI or laptop that actually isn't really transferring much money run a uasf, I don't think that that in itself has much power. And then the resistance, the ursf, I don't think that's ever been att. 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 to sort of unwind or undo it.
- [41:40]
Ren
Okay, okay. And 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, 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, you know, okay, it's this, this iterative process, right? And you're. 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?
- [42:30]
Lyn Alden
So basically what we identified is that as a change occurs, there are different levels of powers that happen. And hard forks and 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 merging 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, like 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, you support it. You'll say you're supportive, but you don't really do 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.
- [44:26]
Ren
You're.
- [44:26]
Lyn Alden
You'd voice your opinion, but you're not. 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. You just. 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. 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, you know, 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.
- [45:31]
Steve Lee
Or happy to do that, or even Taproot, which is the last change that was activated. 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, my speculation on that is that they, you know, like, as an investor, you look for, like, is there disagreement? Is there are people yelling and screaming? Who and who's against that change? Are they credible developers or credible, credible thinkers in the space? What are their. 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. There was essentially no like, technical concerns from any. Any developers. The only small amount of drama and Taproot was how to activate it, as opposed to like, should we activate it? And there's a little bit of drama, but. But it wasn't, 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 lending themselves to what Lyn said about. For a soft fork, investors tend to have less power until it reaches. Until it becomes contentious. And it can, you know, and it can get as contentious as actually creating a chain split and having a fork, which is a dramatic, you know, which is very dramatic in Bitcoin and generally, I think moving forward, Bitcoin's so big now, we want to do our best to avoid a chain split. It hurts the credibility of Bitcoin. I think even technically, with lightning and a lot of layer twos, 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.
- [48:11]
Ren
Yeah. And 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, Or Real in the case of, you know, country like El Salvador or Kingdom of Bhutan, but potentially from very large nations as well. And I kind of want to get into some of the game theory about that later. But in terms of these states of mind for the various 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 going to be in the unaware or probably in the unaware or apathetic or undecided category like that they probably don't have super strong feelings about it if they just have IBIT in their retirement account. How do you guys think about that in terms of, 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.
- [49:39]
Lyn Alden
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, that the average ETF holder is going to be more passive than the, you know, self custody holder. They're not even necessarily mutually different groups though some people will self custody 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, that from what they're understanding is that there are a significant percentage of fairly sophisticated holders of those ETFs that hold that ETF for any number of reasons, either in, either in either 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 custody 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 compared to start out strong and then stay strong. And so if there's a hard fork that occurs, people that are self custody their own coins can literally act within the hour, within the day. They can sell the, 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 going to 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 one unilateral person that can just do it that hour. It could be a board of directors that asked or approved. 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, 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, it would be utterly disastrous if a large ETF were to like sell, you know, one coin and then, and 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 if you're just self custodying, you just on the spot can make that call. And mainly 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 antifragile 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.
- [53:04]
Ren
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 smallholders 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 microstrategy, for example, or as you know, coinbase or the ETFs. So is it, I'm kind of curious if 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. It's not Hopium. No, it's Microstrategy is buying up all the bitcoin they can. ETFs are having record inflows compared to any other ETFs in history. I feel bad for Peter Schiff on this with the gold ETFs but you know what, he's just going to have to let this one slide. And you have nation states who are talking about strategic bitcoin reserves in the U.S. lummis has put out a bill. El Salvador has been just kind of humbly stacking a bitcoin a day for a long time. So we're not just in this era of little, maybe some whales, but mostly just little Hodlers 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.
- [54:58]
Walker
Interplay as we go forward?
- [55:00]
Ren
Kind of into a bit of an unknown territory in Bitcoin's adoption cycle?
- [55:05]
Steve Lee
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're, you have 4K and fork B or a futures market for, for K and fork B as, as Lynn walked through, I, I really do think self custody investors have a big leg up here. Even if they have less Bitcoin because I think it's an undeniable that they will be able to, to act much quicker and price is set in the margin. So even, even though the, you know, so, so one bitcoin from a self custody investors might be, you know, or 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 1 in favor of fork A versus fork B, it, it would, it makes it even more legally risky and like from a fiduciary standpoint to, to actually sell the, you know, the, 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 in their treasury have big pockets, own a lot of bitcoin, it does seem like they're going to 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 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 fork B. Like if, I mean imagine yourself if you're self custody Bitcoin and this occurs like yes, you have the opportunity to sell one and double down, double your stack. It sounds attractive. What if you're wrong though? So you're going to have to go through that. Even though you can act swiftly, you have to go through that own calculus yourself. You're going to 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.
- [58:17]
Lyn Alden
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 wild, 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 there were net inflows 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, that's where ratios do matter at the end of the day.
- [59:08]
Ren
I think that's an important clarification and I appreciate the explanation from both of you on that because I think that's, 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 going to 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, you know, could negatively impact bitcoin in that way.
- [60:05]
Steve Lee
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, you know, institution by buying and custodying bitcoin. You know, 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. 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, 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 mine the switching cost for a miners to go from one pool to another remain low. So that's, that's good and healthy. So if you want to switch to marapool 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. Why are these other pools sort of capitulating and using ant pool? It's 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 FPS 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, there's some projects and some ideas to do that, but there's no clear concrete answer.
- [63:36]
Ren
Lynn, I'm curious on your take, somewhat.
- [63:39]
Steve Lee
Orthogonal to this project, but it is that. I mean that's my answer to your question.
- [63:43]
Ren
No, no, no.
- [63:44]
Steve Lee
It actually leads into a scenario we walked through in the project which we'll get to in a second. But yeah, let's hear from, from Lynn.
- [63:51]
Lyn Alden
Yeah, I have similar concerns. I think one, one thing I notice in macro and technical stuff is that concerns are often smaller in practice than fear because there are response mechanisms. So for example, if that concentrated pools became a problem, there'd be responses to it. Now of course the question is how would those responses be effective? It still is. Basically it is a, it is a significant risk. But that's something that I observe in general is that theory crafting is one thing and then actual scenarios when they occur and people have to make decisions is a response to those. I am to 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 apart from that, it's just 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 in 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, 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.
- [65:56]
Ren
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?
- [66:07]
Steve Lee
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 looked at the future, none of us know whether Bitcoin's ever going to change again, how it will be changed. So this is just what I'm going to 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, you know, let's assume there's a group of people who want to change consensus and add, add a new, new feature or rule. As I mentioned earlier, every consensus change historically that's been activated has been done through the Bitcoin core project. It got merged into Bitcoin core because basically everyone's, everyone runs Bitcoin core. That has been the path. Let's let's assume though that there, I mean, Lynn mentioned covenant changes. So there's like eight or ten 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 want to 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, you know, 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 going to 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 going to 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 going to change Bitcoin. But I just mentioned that Bitcoin mining is very centralized right now. So it's absolutely possible to get 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 +% 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 support to 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 economic nodes support it. Let's say 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, 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 going to 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 or 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 you know, 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.
- [72:58]
Ren
Yeah, that does not sound like a situation that anyone really wants to go through, I would think. Lyn, 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 what the downstream impacts of something like. I mean, is that like catastrophic for Bitcoin or is that just a. I mean, okay, yeah, yeah, it would be terrible. But if it happens, it happens and you know, the dust will settle eventually and the best, you know, the better chain will win ultimately, as has happened in past splits.
- [73:30]
Lyn Alden
I think part of why we analyze it is that even though it's a. On its own, it's a relatively improbable scenario. We analyze it and write about it to make it even less probable. 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'd probably. My expectation would be that the legacy rules would probably win in that scenario 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 goes 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 in the way I would categorize it is it's a relatively low probability risk and then the outcomes that can come from it probably aimed 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, if there was no risks around 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.
- [75:35]
Ren
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, and now that hopefully everyone listening understands the difference between 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, you know, 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, you know, I shouldn't say no way, but there's a low probability that people are going to create a potential chain split scenario over, you know, these particular upgrades. But if they go to tail emissions or block size increases, that's certainly going to create this scenario.
- [76:30]
Steve Lee
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 to 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 hard trade offs there. If you add 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, and, and, and the, the consequences would be extremely 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. It also, which, 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, it would be public information. The attack occurred 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. That sounds like chaos to me, especially now that bitcoin so much bigger. So I think people will be convinced once they're, 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? 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, like we, I mean what, 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, 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.
- [81:02]
Lyn Alden
The types of things that can, they can create that bounty claim that, 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 the scenario where a relatively small percentage of economic nodes have, 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.
- [81:50]
Ren
You guys had a great, 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.
- [82:10]
Walker
Is instead gauged by the absence of.
- [82:12]
Ren
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 know, you're, you're more look, 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 going to keep railing against it. Can either of you just 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. Miners signaling, node adoption, economic node statements, community sentiment. And the list continues to go on. There's a lot of stuff there. So I mean, it almost seems like, you know, can you ever, like, 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?
- [83:18]
Steve Lee
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, or 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 and all the work done to minimize risks. And if there's no one yelling and screaming, saying no, and they're not. And it's not just yelling no, but like, to take someone seriously, if they're yelling no, you want to, like, why? What's the rationale? If there's no solid rationale being provided with someone yelling no, then yeah, it typically proceeds. And that's what we saw with Taproot and basically every change historically, except for Segwit. 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, you know, 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 it's. 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. We want to make those change. So there's no right or wrong answers. It's not like we can clearly say 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, methods that are reckless, which we try to. 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.
- [86:06]
Ren
And, Lynn, I'm, I'm curious too, because you, you know, I think a lot of people may, hopefully, after this conversation will come out saying, okay, I have a better understanding of this, but, like.
- [86:16]
Walker
What does this mean for me?
- [86:17]
Ren
How should I approach it? Like, and you guys identify some. 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?
- [86:42]
Lyn Alden
Sure. And obviously it will depend on what stakeholder group that you're in for. A lot of people watching this podcast 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 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 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 hopefully increase adoption. Then you can ask, are there groups that are disproportionately benefited or harmed by the change? Or is it pretty much everybody's 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 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 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 adopting this change that maybe some anonymous people made. And you're like coinbase 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.
- [89:18]
Ren
Yeah, I think that 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, 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?
- [90:12]
Steve Lee
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 because it's 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.
- [90:36]
Lyn Alden
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 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, BCAP, you'll be able to find it. And we welcome contributions.
- [91:18]
Ren
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. You can still push or set on a pull request just with some nice text if you have something you'd like to add. Sorry, Steve, was there something you wanted to add to throw in on top of that?
- [91:35]
Steve Lee
I just wanted. I mean, for your audience, like, 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, yeah, it let the chips fall as they may. But my like one suggestion would be identify different people in the space that you trust at or at least you like their take. Like some people are like fairly balanced in their takes, like someone like Lynn. I think others have really hot takes and they're 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 is, 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?
- [92:42]
Ren
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.
- [93:44]
Walker
Still in kind of.
- [93:45]
Ren
That we haven't yet crossed the chasm, but we're getting close.
- [93:49]
Walker
Where do you think we're at in.
- [93:50]
Ren
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 cycles from that. Where do you think we go in the next decade? What does the state of bitcoin adoption look like to you.
- [94:08]
Walker
Steve?
- [94:08]
Lyn Alden
Do you want to touch on that? You want me to touch on it?
- [94:11]
Ren
It's a big question.
- [94:13]
Steve Lee
So I mean to me like bitcoin as store, 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. 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, some, 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, that, that pattern will keep being repeated. So I think that 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, you know, 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, 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 of value. Um, I think like Vijay Boyapati wrote an article or actually and then turned it into a book many years ago about this and I subscribe to that. I think just it makes logical sense that it will start, I mean the, the kind of volatility and number go up that we see with any emergent store value, it's going to 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. Yeah.
- [96:30]
Lyn Alden
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 3 trillion? Then it's, can you, can you be bigger than any monetary base which would put you over 5 or 6 trillion? And then it's, can you start approaching gold's market size? And then after that, then you get to really high levels of 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 workable in that earlier emergent phase, because generally people are going to use something that's more stable or that's kind of Gresham's law in 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 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, 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. Part of what makes Bitcoin valuable to me compared to 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 optionality, even if I'm not doing a lot of volume with it, that optionality increases my perception and usability of the investment and medium of exchange was used really on 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 continue to catch on. And I'm also hopeful about the other attributes of bitcoin as well. And I think it takes patience to some extent to see those overall other use cases increase.
- [98:55]
Ren
Yeah, I think it's what's the expression of the future is 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 already crossed that chasm. You've already made the phase shift. You're already using it not just as a store of value, but as a medium of exchange. You're using it as your own unit of account as well, perhaps to measure everything else. But that's not everyone. It's some people. But the future happens one person at a time, I guess. But I want to thank both of you and the co author as well. Wren. Correct. I'll link all of your noster and Twitter and this paper in the show notes. Is there anywhere else you want to send people or anything else you want to leave folks with?
- [99:46]
Lyn Alden
I'm just thankful you had us on. I think it was a great discussion and hopefully listeners got something out of it.
- [99:52]
Steve Lee
Yeah. Thank you. Thank you.
- [99:55]
Ren
Thanks so much for being on here. I know you guys are doing a circuit and so I hope you can keep the stamina up. But I think that you've got 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 want to seem stupid. Well, now you've answered pretty much all of them, both here and in the report itself. So again, want to 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.
- [100:37]
Steve Lee
Thank you, thank you.
- [100:39]
Ren
And thank you to folks in the live stream. I'm cutting you off right now.
- [100:49]
Walker
And that's a wrap on this Bitcoin Talk episode of the Bitcoin Podcast. If you are a bitcoin only company interested in sponsoring the Bitcoin podcast, head to Bitcoin Podcast.net Sponsor or send an email to hello Bitcoin Podcast.net if you are enjoying the Bitcoin Podcast and find it valuable, give it a boost on Fountain a five star review wherever you're listening. Or better yet, share this show with your network so more people can learn about bitcoin or don't. Bitcoin doesn't care, but I sure do appreciate it. You can grab links in the show Notes to watch or list this show wherever you get your podcasts. Or go to bitcoin podcast.net podcast and you'll also find the links to Follow me and the show on Noster and on X. Bitcoin is scarce. There will only ever be 21 million, but Bitcoin podcasts are abundant. So thank you for spending your scarce time to listen to the Bitcoin podcast. Until next time, stay free.