Bitcoin and the ship of Theseus


Change and identity in a decentralized system

The Ship of Theseus is a philosophical conundrum about the continuity of identity in the face of change. Theseus and his ship sail the wide-open seas. Natural wear-and-tear takes its toll on the vessel, requiring its components to be replaced gradually over time. One day it is a few planks in the hull, the next season one of the masts are swapped out, followed by the sails. Eventually there comes a point where not a single nail or piece of fabric is left from the original build, and some parts have been replaced several times over. But unbeknownst to Theseus, a mysterious collector of maritime souvenirs has carefully preserved every component from the original ship taken out during repairs. (This is a variation on the original paradox, due to Hobbes.) In what may be the first case of retro-design, this person meticulously reassembles the original components into their original configuration. The riddle on which much ink has been spilled: which one is the true ship of Theseus? The one that has been sailing the seas all this time or the carefully restored one in the docks, which contains every last nut, bolt and rope from the original?

Bitcoin has been confronting a version of this riddle, most acutely during a few days in March when a hard-fork of the network appeared imminent. To recap: Bitcoin is a distributed ledger recording transactions and ownership of funds. This ledger is organized into “blocks,” with miners competing to tack on new blocks to the ledger, one block on average every 10 minutes. The catch is there is a limit on the size of blocks, which constrains how many transactions can be processed. Currently that stands at 1 megabyte—a gratuitous and arbitrary limit which may have seemed generous back in 2011 when it was first introduced, with plenty of spare room left in blocks to solve the problem. But kicking the can down the road predictably ends exactly as one would expect: increasing popularity of the network all but guaranteed that ceiling would be hit. Results of scarcity follow: transactions both became slower and more expensive. The time expected for a transaction to appear in a block increased and the fees paid to miners for that privilege sky-rocketed.

It is clear the situation calls for some form of scaling improvement. But there is no governance framework for Bitcoin. A system marvelously effective at bringing about distributed consensus at the technology level—everyone agrees on who owns what and which payments were sent—turns out to be terrible at producing consensus at the political level among its participants. Even the existence of a scaling crisis has been disputed. Some argue that Bitcoin excels as a settlement layer or store of value, and there is no reason to increase its on-chain capacity to handle everyday payment scenarios.

After much internecine fighting and several false-starts, the community coalesced around two opposing camps. One side mobilized under the Bitcoin Unlimited (BU) banner seeks to increase block size with a disruptive change, ratcheting up the arbitrary 1MB cap to some other, equally arbitrary but higher limit. On the other side is a group pushing for segregated-witness, a more complex proposal that solves multiple problems (including transaction malleability) but conveniently has the side-effect of providing an effective capacity increase. At the time of writing, this controversy remains in a deadlock. Segregated witness must reach roughly 75% miner support to activate. It has stalled at 30%, prompting supporters to give up on miners and seek an alternative approach called user-activated soft-fork or UASF. Meanwhile BU has been plagued by code-quality problems and DDoS attacks.

At some point in March, the miner support for BU was hovering dangerously close to the magic 50% mark. If that threshold is crossed, those miners could realistically start producing large blocks. While anyone can mine a large block any time, such blocks would be ignored by miners following the 1MB limit. It makes no sense to start producing them when they are only recognized by a minority. Such additions to the ledger would be quickly crowded-out and discarded in favor of alternative blocks obeying the 1MB restriction. But suppose BU exceeds 50%. (With some safety margin thrown in; otherwise there is the risk of block reorganization, where the original chain catches up and results in the entire history of big-blocks getting overwritten.) What happens if BU miners in the majority start producing those large blocks?
This was the question on everyone’s mind in March. It would result in a spit or “forking” of the Bitcoin ledger. Instead of one ledger there would be two parallel ledgers, maintained according to different rules. All blocks up to the point of the fork would be identical. If you owned 1 bitcoin, you still have 1 bitcoin according to both ledgers. But new transactions after the fork point can result in divergence, appearing on only one ledger. In effect two parallel universes emerge, where the same funds are owned by different people.

That brings us full-circle to the philosophical riddle of Theseus: which one of these is “Bitcoin”? Major cryptocurrency exchanges opted for a pragmatic answer: the original chain is Bitcoin-proper. According to this interpretation, the alternate ledger with large blocks will be considered an alternative cryptocurrency traded under its own ticker symbol BTU. (Reuse of the acronym for “British Thermal Unit,” a measure of heat, provides unintended irony for those who consider BU to be a dumpster-fire.)

While that tactical response addressed the uncertainty in markets, it did not provide a coherent definition of what exactly counts as Bitcoin. In effects the signatories were declaring that the chain with the large blocks would be relegated to “alternate coin” status regardless of hash power. For a system where security is derived from miners’ hash power to issue a blanket declaration of the irrelevance of hash power is extraordinary. Arguably the harshest criticism came from left field: the Ethereum community. Ethereum itself had taken flak in the past for taking exactly the same stance of ignoring miner choices during the 2016 DAO bailout. Orchestrated by the Ethereum Foundation and widely panned as crony-capitalism, this intervention resulted in a permanent, with a minority chain “Ethereum Classic” continuing at ~10% of hash power. In a case Orwellian terminology, this alternative chain is in reality the true continuation of the original Ethereum blockchain. What is now referred to as “Ethereum” incorporates the deus ex machina of the DAO intervention. But from a governance perspective, the most troubling aspect of the DAO debacle concerns how the legitimacy of the fork was ordained. When faced with a faction of the community expressing doubts about the wisdom of intervention, the Foundation insisted that regardless of what miners do, the branch reversing the DAO theft would become the official Ethereum branch. Such a priori declarations of the “correct chain” go against the design principle of miners providing integrity of the blockchain through costly, energy-intensive proof-of-work. Why waste all that electricity if you can just ask the Ethereum Foundation what the correct ledger is? In anointing a winner of the hard-fork by fiat without regard for hash power, the Bitcoin community had exhibited precisely the same disregard for market preferences.

Once unmoored from the economics of hash power, arguments about which chain is “legitimate” quickly devolves into philosophical questions about identity. If you hold that 1MB block-size is the sine quo non of Bitcoin, then any hard-fork modifying that property is by definition not Bitcoin. Yet some of the same individuals arguing that changing to 2MB blocks would results in complete loss of identity have also proposed  changing the proof-of-work function, after evidence emerged suggesting that mining hardware from a particular vendor may be exploiting a quirk of the existing PoW function to optimize their hardware. Changing the PoW is arguably a far more disruptive change than tweaking block size.

So it remains an open question what exactly defines Bitcoin and to what extent the system can evolve over time while unambiguously retaining its identity as Bitcoin. Is it still Bitcoin if block sizes are allowed to increase based on demand? If the proof-of-work function is replaced by a different one? Or if the environmentally wasteful proof-of-work model is abandoned entirely in favor of proof-of-stake approach? What if the distribution of coinbase rewards is altered to decrease continuously instead of having abrupt “halving” moments? Or to take a more extreme example, if the deflationary model with money supply capped at 21 million bitcoin is lifted, allowing the money supply to continue expanding indefinitely? Is it still “Bitcoin” or does that system deserve to be relegated to alt-coin status with an adjective attached to its name? A related question is who gets to make the branding determination? When Ethereum went through its hard-fork to bail to the DAO, it was the altered chain bestowed with the privilege of carrying the Ethereum name; the original, unmodified chain got relegated to second-class citizen as “Ethereum Classic.” Would the situation have been reversed if the Ethereum Foundation was instead opposed to intervention and the hard-fork was instead driven by a grassroots community effort to rescue the DAO at all costs?

Having been pronounced for dead multiple times, Bitcoin continues to defy the odds. It is already up more than 50% against the USD for 2017 at the time of writing, having survived a crack-down on capital controls in China. Yet the contentious scaling debate shows no signs of slowing down. BU proponents continue to lobby for a disruptive hard-fork, while segregated-witness adherents play a a game-of-chicken with user-activated soft forks.  Will the resulting system—or one of the resulting systems, in case the contentious fork results in a proliferation of incompatible blockchains— still qualify as “Bitcoin”? Beyond the crisis du jour, it remains unclear if Bitcoin is capable of improving by incorporating new ideas, especially when these ideas call for a disruptive change  breaking backwards compatibility. If the community interprets every hard-fork as an identity crisis that calls into question the meaning of “Bitcoin,” the resulting stasis will  place Bitcoin at a disadvantage compared to alternative cryptocurrencies which are more responsive to market demand. (To wit, the so-called “Bitcoin dominance index” which measures the market capitalization of BTC as a fraction of all cryptocurrencies is now at an all-time low, having dipped below 50% mark.) There is something to be said about stability and consistency. Whimsical changes and excessive interventionism of the type demonstrated during the Ethereum DAO hard-fork do not inspire confidence in the long-term reliability of a currency either. Bitcoin so far has stubbornly occupied the opposite end of the spectrum, clinging to a literal, originalist interpretation of its identity defined by Satoshi.

That is one way of dodging the paradox of Theseus: this ship may be taking on water, but at least every single one of its planks is original.

CP

 

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