The Greatest Threat to Bitcoin Could Very Well Come from Within

by Cornelius Black

The sun may be shining outside but, deep in the caverns beneath the Bitcoin mountain, a dragon has reared its ugly head.

Up until now, I have been very confident about Bitcoin's prospects for long term dominance over alternative cryptocurrencies, and not just because Bitcoin has first-mover advantage. Over the years, I have witnessed the protocol's ability to be modified and to evolve, in order to solve a variety of issues and problems. I have, so far, come to greatly respect Bitcoin's core development team and trust their judgment. I assumed that they would always listen to the community. I assumed they would make carefully considered decisions. I assumed they would always continue to do the right thing to keep Bitcoin not just stable and secure, but also at the forefront of financial innovation.

Barring something drastic and unforeseen emerging as a result of human error, I thought Bitcoin would remain agile and flexible enough to pull through just about anything. Call me overly optimistic, or call me naive. It doesn't matter. What matters is that, in my complacency, I was far from alone inside the Bitcoin community.

However, after closely following the recent wrangling between some of the Bitcoin core developers and Counterparty lead developer PhantomPhreak on the bitcointalk.org forums, I have felt the dangerous rumblings of centralized power at the heart of the Bitcoin community.

The crux of the matter is the following question: should innovative protocols that build new features on top of Bitcoin be allowed to exist on top of the Bitcoin blockchain?

After seeing the position the Bitcoin development team as a whole is taking on this matter, I must admit I am getting rather nervous about the future of Bitcoin itself.

Should anybody have authority over the Bitcoin blockchain?

Counterparty (like Mastercoin, Colored Coins and other similar projects) builds another protocol layer on top of Bitcoin and gives users the ability to perform more-complex financial transactions, while still benefiting from the security of the blockchain. Counterparty users pay fees to Bitcoin miners who process their transactions.

The fully-functional distributed cryptocurrency and asset exchange that the Counterparty protocol provides is a world first, even though it is still under ongoing development. Distributed exchanges that eliminate the need to trust a central entity are a very much needed service, particularly in view of the serious trust issues with traditional exchanges that the Mt. Gox fiasco has painfully highlighted.

It is hard to underestimate the value such services add to the Bitcoin community as a whole. Just as an example, services like Counterparty make possible projects such as LTBcoin, the crypto-token that will power the Let's Talk Bitcoin network and serve to compensate content creators and other people who add value to the network.

And yet, the majority of Bitcoin core developers seem hostile to this kind of innovation.

While there are indeed valid concerns that building additional services on top of Bitcoin could make the blockchain large and unwieldy, there are also serious efforts underway to solve this problem. Most notable is Bitcoin core developer Gavin Andresen's recent pull request to standardize what is known as the OP_RETURN transaction output to hold 80 bytes of data in a way that is prune-able.

Counterparty embraced this solution and actively worked to implement it. Using OP_RETURN means Bitcoin nodes that do not want to store a full copy of the blockchain data, including Counterparty's data, would be able to safely trim away those outputs and thus save on resources.

However, after the Bitcoin community was led to believe that 80 byte OP_RETURN transactions would be relayed in the latest update to the Bitcoin protocol (version 0.9.0), the Bitcoin core developers suddenly decided to half the size of OP_RETURN data field to 40 bytes, seriously limiting its usefulness.

This unexpected move forced Counterparty to continue using bare multi-sig outputs as the only way out. Bare multi-sig outputs are not prune-able (although they can be respent) and take up slightly more resources than 80 byte OP_RETURN transactions would have done.

As was to be expected, all hell broke loose.

A rude and most worrying awakening

I have resisted the temptation to paste specific parts of the discussion here because of the very real risk of quoting people out of context. If you have any stake in Bitcoin, I strongly urge you to read through the posts yourself and catch a glimpse of the sort of drama that happens behind the scenes. Grab some popcorn if that's your thing.

You will see Bitcoin core developer Jeff Garzik argue that miners and full node operators should not be forced to store anything except financial data, which they have implicitly agreed to do.

His opinion is very vocally backed by Luke-Jr, another core developer who also founded and owns the Eligius mining pool that currently makes up around 13% of Bitcoin mining. Ironically, Luke-Jr once used his pool's power to embed prayers in Latin into the blockchain as data attached to transactions that must now be stored forever.

Nevermind the radical and unexplained shift in Luke-Jr's position regarding what counts as a legitimate use of the blockchain. Nevermind the counter-argument that Bitcoin should be completely agnostic to what is done within the parameters of the protocol, much as the principle of Net Neutrality demands that the Internet should not treat any data as more or less valid.

Both Luke-Jr and Jeff Garzik somehow manage to completely ignore the fact that Counterparty features a distributed exchange and financial system, and that Counterparty transactions are indeed financial transactions designed to store financial data. They also conveniently forget that Counterparty jumped at the chance to use the proposed 80 byte OP_RETURN to reduce its footprint and store its data on the blockchain in such a way that it can safely be discarded by those who don't want to carry it.

The only voice of reason from Bitcoin core developers in the discussion is that of Peter Todd. In the interest of full disclosure, Peter Todd works with Mastercoin and currently has a paid position performing a security audit of the Counterparty source code. Still, the broad issue at hand is not about any specific service, but rather if Bitcoin should remain a limited protocol, or continue to grow and adapt in order to allow innovation at higher layers.

Eventually, Luke-Jr, seems to backpedal a bit and comes up with some half-baked proposals that involve (among other things) individually white-listing Counterparty, Mastercoin and other services, at least on a temporary basis. Essentially, his argument here is that Bitcoin mining pools like his own should have the power to pick and choose what transactions they allow. Another reason to be concerned.

Then, he suddenly goes on to make a thinly-veiled threat that any other developers could fork Counterparty and build a version that fits in with the worldview that he wants to impose, and that that would be the end of Counterparty.

Once again, grab that popcorn and get ready for some drama! Or better still read through the back and forth very carefully and then take another look at your cryptocurrency investment portfolio. You might want to reconsider it and diversify further into promising alternative coins.

It is the revelation of this kind of intellectual fundamentalism, hostility to innovation and a penchant for centralized control coming from the core development team that has me suddenly seriously worried about the future of Bitcoin. There are many competing altcoins chomping at the bit to find a way to differentiate themselves from the world's top cryptocurrency, and one or more of them will likely come to the fore as soon as Bitcoin fails to live up to the expectations of its users.

While services like Counterparty and Mastercoin would be initially less secure should they migrate to another blockchain (something that is very well within the realm of what is possible), this would also provide a very valid reason for an alternate blockchain to take off in earnest and pose a significant threat to Bitcoin's dominance, maybe even to its existence.

Bitcoin can be versatile and flexible...

It is a fact that Bitcoin can, at least in most cases, change and adapt in order to remain the primary cryptocurrency by implementing features of other altcoins that are considered to be valuable enough to be a threat.

It doesn't matter if that threat is a relatively trivial one like Litecoin's faster blocktimes, or something much more complicated, like the Open Transactions model of using federated servers you don't have to trust in order to efficiently process large volumes of complex transactions. The Bitcoin protocol can, in theory, be modified to take on such improvements and retain its competitive advantage, provided that there is a consensus to do so among the community, and particularly among the majority of Bitcoin miners themselves.

Yes, the hard forks that will most likely be required to bring about such changes are not trivial matters. However, where there is a broad consensus that a change is for the better, the Bitcoin community can (and should) work to make that happen as seamlessly as possible, while minimizing the downsides and the risks.

...but it is in danger of getting stuck in a rut

In practice, however, even in Satoshi's dream of a decentralized currency and in his implementation of Bitcoin there remains the threat that powerful gatekeepers will emerge and exercise centralized control, potentially forcing the Bitcoin community down a path that is not optimal, and even downright dangerous.

I expected this sort of threat would come in the form of something like stifling government regulations, or maybe competition from banks with a widely-recognized brand name and the power to draw the general public towards their own propriety cryptcurrencies. I never really thought it would come from within.

But then again, I suppose I should have known. After all, there is a natural tendency for human beings who find themselves in positions of power to try to abuse it. This tendency needs to be kept in check.

It is our duty to make sure Bitcoin encourages innovation and remains relevant

The Bitcoin community needs to be vigilant and take a much closer interest in the internal politics that goes on behind the scenes. A decentralized community is not guaranteed to remain so forever. Subversion can creep up ever so subtly when nobody is watching, as seems to be at risk of happening right now. When that does happen, it will be too late.

While this issue cropped up with Counterparty, as the most advanced second-level protocol, what is really at stake here is all kinds of development and innovation on top of Bitcoin. This includes untold projects that are still to be invented and countless benefits to the Bitcoin community that are still to be dreamt up.

I believe it is the duty of every one of us who has a stake in the success of Bitcoin to do our part and make our voices heard. We must do whatever it takes to make sure Bitcoin remains an exciting platform for development that breaks new ground and reaches for new heights. We must work together to face up to the threats that come from within, particularly the threat of railroading and stagnation, which will be the death of the cryptocurrency we have all grown to love.

If we do not, we will only have ourselves to blame.

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