The Bitcoin protocol was initially “centrally planned” by Satoshi Nakamoto — — he was the creator, the architect, and sole initial issuer. But it was built in such a way to support an open/unbounded peer-to-peer economy and to open up new frontiers and paradigms with microtransactions. Once Satoshi left the project at the end of 2010, the narrative slowly started to change; first, from practical questions and concerns (“how do we go forward?”), to later more explicit political/ideological forces that went beyond the actual protocol itself, giving rise to the “Bitcoin is a store of value” or “digital gold” theory which heavily relied on the idea of “decentralized consensus,” or everyone running their own node. In this system, changes to this consensus are driven by developers and enforced by so-called “full node” operators, while actual miners are minimized and re-branded as “utility providers” whom we should never trust.

The very title of bitcoins WP is clear on its idea

The introduction of WP is also very clear on what it tries to solve

In reality, so-called “full nodes” should be viewed as archival nodes, with no real impact on block production or hash power. Rejecting a block means refusing the proof-of-work, that is refusing to build more blocks on top of it. Archival nodes have no such power. Miners are the ones who are economically incentivized to keep the network secure and valuable, whereas protocol devs mostly fall back on the crutch of altruism and volunteer work. They can get corrupt as their incentives are not necessarily aligned with the survival of the network. These reversed narratives and broken incentives have resulted in a very limited Bitcoin economy, which is shrinking by the day. Their belief, in simple terms, is that the blockchain itself needs to be very limited in order for everyone to run their own node and that “second-layer” solutions such as Lightning Network must be built to accommodate this.

WP is again very clear on what node does. WP doesn’t recognize anything to be a node if it’s not a mining node.

With this strategy, Bitcoin is not allowed to grow, interesting/novel use cases are often disregarded as “spam” or “bloat,” and even simple everyday transactions become an expensive, unwanted and unreliable hassle. At this point, the main use-case of BTC is, indeed, gambling on altcoins on loosely regulated and notoriously manipulated crypto exchanges. The lack of a real economy should be of great concern.

Satoshis view on bitcoins scaling roadmap

The idea that Bitcoin is a democracy and that all users have a say “voting” with their archival nodes is as flawed as democracy itself when poorly implemented. Satoshi once stated:

“The nature of Bitcoin is such that once version 0.1 was released, the core design was set in stone for the rest of its lifetime.”

BTC has betrayed this notion; it remains to some extent backward-compatible to an archival node, but a mining full nodes have “hard”-forked and diverted from original protocol rules many times. Ultimately much of the protocol’s real utility has been crippled by artificial limits, removing OP codes and adding changes like RBF (replace by fee) and more recently Segwit (Segregated Witness), which has been said by some to be the final nail in the coffin.

Bitcoin’s incentive model is based on PoW (proof-of-work). PoW is the heart and soul of Bitcoin; not a mere feature, but the fundamental ideology. It’s important to fundamentally distinguish between concepts like PoW and PoS (proof-of-stake). I will not go into the details, but most important in this context is that proof-of-work *is* work, continuous work. The blockchain can only further extend if there is continuous work being done, in the midst of endless competition between other miners, and this work doesn’t stop — ever! The proper incentives have to be in place for such a system to actually work; Bitcoin’s ledger cannot be rewritten because of the work involved to do so; the beauty is that it’s more economically rational to “play nice” and abide by the rules. There is no such elegance in proof-of-stake. Once you acquire a stake, unless you decide to sell it, you keep the control no matter what and only get it more through time, without putting in any additional work. With proof-of-work, on the other hand, one can not rest on their laurels or become complacent/lazy; nothing is certain for tomorrow, and the game is always changing.

In order for PoW to be properly incentivized, Satoshi anticipated two main “phases” in Bitcoin. Ten years after the Genesis Block, we are still in the first phase, in which miners are more or less exclusively funded through subsidies of newly issued coins, also known as the block reward. Eventually, as this reward dwindles approximately every four years, we enter the second phase, which is fee-funded mining operations. The “problem” with the block reward subsidy is that they are merely a bootstrap for the greater economic system; Satoshi couldn’t build the entire Bitcoin economy overnight and by himself, so he came up with this clever solution to provide a relatively fair solution to distribute coins early on.

Satoshis view on the sustainability of bitcoin and what will it need to succeed.

Currently, miners operate on a short-medium timeframe (mining what is currently the most profitable) and tend to not be very vocal about their strategy or beliefs. PoSM (proof of social media) is alive and well in this regard, and many choose to spectate from afar, despite having the most skin in the game. In the short-term, the price is way too important, and many don’t want to affect this considering their power. They don’t want to become enemies of the stakers/”hodlers”. If there is a dispute for change, those who hold most of the coins seems like effectively have the most power. They can drive behavior on a short-term scale. In theory, miners can organize and start steering the wheel more to their long-term favor, but we have yet to see this dynamic play out. In essence, the subsidies set in place (the block reward) are distorting the healthy behavior of the free market and enabling speculation and staking and other such abnormalities not rooted in a proper market. I’ll call this first phase a “hybrid Pow/Pos” phase!

If bitcoin can successfully transition to a second phase, where transaction fees replace the subsidy, this changes the entire game. Proof of Work becomes more “pure” as a capitalistic equilibrium, since the demands of the market are different and not fixed to a predictable reward. Bitcoin will succeed regardless, even if the “hybrid form” remains in some way. If miners remain completely passive in the governance sense and continue to be driven only by short-term profit, once the subsidy is gone, stakers will have very little influence over the behavior of miners and the economic incentives will transfer to those who are continuously spending and transacting. There needs to be a real, rooted economy based on high-velocity usage and built on lots and lots of work, which is nonetheless still aligned with Bitcoin’s fundamental ideology. An organic free market, not distorted by subsidies or social media. I’ll call this second phase a “double Pow” phase!

In navigating this debate, there are questions we must ask in order to realize phase two:

Are miners well incentivized to help growing economy which will scale and as a result produce more fees?

Are miners well incentivized to scale the whole network and not compete only being better at hashing?

Are miners well incentivized to orphan blocks which do not comply well with common rules, for example, they don’t respect instant transactions rule?

Are miners aware their role is to solve the double spend problem or do they only care about finding particular hashes?

Are miners well incentivized to broadcast as many transactions as they can into a single block, or they care little as it is safer to distribute small block with few transactions?

Can bitcoin be efficiently attacked by mining empty blocks?

Does selfish mining still make any sense?

Does it matter how many blocks miner found or is it more important how much fees he is able to win with them?

Are miners well incentivized to make a real marketplace for the ledger as a commodity? Make price distinguishing of different data? Taking a certain risk to set the real market prices?

The impact on the system is huge looking at it through many angles. The changes brought by fee funded security model are overwhelmingly positive. Often, we hear that 21 million supply cap is something that is enforced by decentralized consensus and there is no way that will ever change. In reality, it’s just a number. No archival node will ever enforce it because it has no real economic power in the context of funding security or any other whatsoever. The network becomes insecure the moment revenue for miners is depleted, which is why transaction fees must provide their income going forward. We’ve already seen proposals by some Core developers to change the supply cap in order to mitigate the effects of the block reward halving, but this is a corruption of the system, a blow to Satoshi’s vision, bastardizing his original design and further belief in a free lunch fallacy. Stakers would not be happy if this were to happen either; eventually, they will have to realize that they are stuck in a Ponzi scheme that they brought upon themselves.

To conclude. The protocol was designed to be unbounded so that the economics of the system can grow very fast. Incentives funded by subsidies have been a huge influence on the collective debate of Bitcoin scaling. By their nature, subsidies bend markets and are a form of “free lunch fallacy,” and Bitcoin is no exception. Bitcoin will have to become a real meritocracy, where the best and brightest can make profits; not the best speculators or social media influencers, but those best at competition and business and recognizing the needs of their customers and clients. Bitcoin is proof of work, and it thrives to be even better proof of work once the machinations of the system reveal themselves to the most cutthroat players. It’s a long road ahead, but the seed has been planted with Bitcoin SV. Anyone arguing that big blocks are bad and that data on the blockchain is “spam” hasn’t done their proper due diligence on what Bitcoin really is as an economic system and a commodity ledger. The beauty is not in running your own node, but participating in a fair peer-to-peer system that rewards hard work.