Bitcoin’s History Predicts its Future
As we hurtle towards the end of another year, the breakout story has nonetheless been bitcoin’s meteoric rise. Not only has the digital currency moved from $1,000 to a little over $11,000, but a wake of innovation has followed closely behind. Initial Coin Offerings, respective regulations, proposed national cryptocurrencies, scams, and revolutionary technology have made up an extremely dynamic sector. That being said, an acute awareness of bitcoin’s history and current trends should better prepare us for its future.
Inception and Free Money
In an insightful article by Blockstream developer Rusty Russell, he breaks down the history of bitcoin into three epochs. The first includes the technology’s inception in 2009 by Satoshi Nakamoto, up until 2014 when transaction fees were raised.
This was more a wild west than it is today because of how new and “barely-understood” the technology was. Transactions were free, demand for the currency was extremely low, and the implications were opaque if visible at all.
Ultimately, this created a hotbed for scammers. The lack of central authority and supposed anonymity behind bitcoin was abused to spread misinformation or simply make “The permeation of real information extremely difficult.”
Another notable characteristic of this period was the severe of bifurcation and sectionalism in the community of early adopters. This was all wrapped up in the general pursuit of money and the “boosterism” of replicated models.
Fortunately for users in the current period, not everyone was seeking a cheap buck. As developers watched their creation wander off into chaos, they took quick care to real the currency back in. This was done in three ways and rolled out the carpet for the second era. Russell explains the need to charge fees and reduce minuscule transfers as such:
“The developers were aware, so added some configurable settings in the reference client to minimize the worst abuses. These rules did not change bitcoin, just the default behavior: they added a minimum fee, stopped relaying tiny payments, and enhanced the scripting language to reduce the size taken up by unspent outputs.”
Growing Awareness and New Policies
Roughly around 2014 and into the period Russell calls “Satoshi’s Subsidy,” we begin to see how the current bitcoin culture came to be. As interest in the technology grew, minor tweaks and edits made to optimize code were no longer enough to ease congestion. Not only that, but the volatility that we have become so accustomed to in 2017, made determining the transaction fee “difficult at best, and extremely difficult to present [users].”
The latter issue was dealt with by applying more complex and nimble algorithms to estimate fees. This helped to determine whether the data equivalent of “1000 pennies” was going to be sent by mail, or “a $100 bill.” The first being significantly more expensive than the second.
After that developers turned to a number of different improvements in order to run the network at capacity. Operations like block propagation through the expansion of nodes in the global network, the ability to substitute exchanges by increasing the transfer fee, and even “an opt-in block expansion.”
This last point leads us to the debate laid out by proponents of Bitcoin Cash, as well as concerns of centralization.
Within the first era, and to a certain extent the current Bitcoin Core blockchain, blocks were released at relatively the same time to all miners. If, however, blocks were expanded, say from one megabyte to eight, the blocks would then arrive at different times to different miners.
The expansion of the block size would mean smaller miners would actively work on obsolete data sets because they would be unaware of the newly released block. Small-scale mining resources are then at a disadvantage to miners like Bitmain, for instance, and we arrive at a major concern in the community.
In any case, these improvements moved bitcoin out of an era of free money and closer to something like a payment network. Industries that relied on the prior model of the currency now struggled and sought recompense.
The newly formed mining monopoly also reared its head and force-pushed a regression to the first era.
The death of the SegWit2X protocol marked the end of these attempted regressions, and here we are now. With the table set and end of mining on the horizon, we move towards the undeniable fact, “That an increase in transaction capacity reduces the eventual burden of fees, and is the main motivation for the growth plans which were implemented in this era.”
A Self-Sustaining Ecosystem
Businesses established in the second era, or those built in the first that adjusted for change, will face difficulties once all bitcoin’s have been mined. As securing the network from double spending will become the highest priority, massive fees will be accrued by user-facing businesses.
Russell explains how “One large business [that] claims to be responsible for 25 percent of the bitcoin transactions: in 10 years [would] be paying [$700] per year to secure the network at current levels,” which leads to the question, who will be paying for these costs?
Many businesses in the sector or steering clear of a solid answer while also banking on the steady appreciation of the coin.
Miners will also suffer during this period as they will be in constant “Danger of having their income squeezed by large businesses or cliques of users. This may lead to further centralization, as miners consolidate under revenue pressure.”
The pressure will amount to another distinction in community interests similar to the aforementioned New York Agreement. Arguments that retreat to economic first principles (i.e. one percent inflation) and counter-arguments suggesting that bitcoin’s design deliberately eschewed inflation to make the cryptocurrency a store of value. In the third economics era, developers will put up resistance to changing bitcoin as well as early adopters and businesses will be divided between those who support developers (such as vaults, insurers) while others such as exchanges will want on-chain activity to be as high as possible.
It is difficult to determine exactly what will happen in this third era, even though bitcoin’s supply remains capped. Naturally, communitarianism has already been a signature portion of this new technology. We can also assume that the role of miners will change as time goes on. As for the user-face businesses, their troubles come from both ends; national regulations and the expenses of securing the network.