Base Block Podcast Host: The Further We Go, the More I Think That the Case of Bitcoin Is Not About the Technology

13.05.2020

Being as unsurprising as it gets, the reward halving in Bitcoin is an important event on many levels: it’s a historical milestone and a reason to recap on the progress made, a piece of news big enough to remind the public that Bitcoin is still here, and clear evidence of the predictable deflation that makes it different from government money.

In this piece, Sergey Tikhomirov, the founder and host of the Base Block podcast, talks about the changes in and around Bitcoin since the previous halving in 2016, the evolution of privacy in Bitcoin, and the post-halving trends to expect.

What are the main changes in Bitcoin we’ve seen since the previous halving back in 2016?

Bitcoin is conservative. It managed to keep its key properties and its fundamental architecture. That’s why we all love it and hope it stays that way. During this period, the most important milestone is probably the block size debate and the subsequent activation of SegWit. There were lots of different proposals concerning the actual activation mechanism. It eventually led to a conflict and Bitcoin Cash fork.

This is an interesting historical example, but it also means that the people who have fundamental disagreements with the engineering culture of Bitcoin simply left for forks like Bitcoin Cash or Bitcoin SV. I think this conflict laid the foundation for the steady progress and growth of Bitcoin.

SegWit activation itself was an important step towards Lightning Network implementation. There was a problem of malleability that basically blocked second-layer solutions. Earlier, you could take a transaction from the mempool and change its signature just a bit so the transaction remains valid, but its hash is different. This made it impossible to track what’s happening in the blockchain by looking at hashes, which is very important for Lightning Network and other second-layer projects. There were several valid ways to sign each transaction, so there was uncertainty.

SegWit separated the signature data into a different structure that is omitted from hash calculations. Now, a hash reflects only the semantics of the respective transaction and there’s only one such hash. The ability to use a hash as a unique identifier makes second-layer solutions possible.

What has changed in terms of privacy in Bitcoin over these four years?

Over the last four years, there was a lot of research done, lots of privacy-oriented projects appeared like Samurai and Wasabi wallets. These projects address a certain market demand for greater privacy.

Of course, nothing here is perfect. As far as I understand, coin mixing protocols like CoinJoin haven’t reached wide use. The situation is even more complicated because centralized exchanges are able to see which coins have passed through mixers and can simply reject such coins. This is a significant argument against mixing your coins if they aren’t “dirty.” Why would anyone risk by putting “clean” coins into mixers? When everybody follows this logic, mixing services don’t get enough coins to work properly.

In academia, you think about anonymity not in terms of a binary state where it’s either anonymous or not. You think in terms of an anonymity set, a group within which you want to be indistinguishable. If it is a set of 10 people, there’s not much anonymity to speak of and each user can be identified easily. When it’s a million, it’s already something.

Notably, a lot of privacy-focused altcoins appeared over these four years. I see coins like ZCash and Monero as the main drivers in terms of privacy. They made a lot of improvements and developed new interesting cryptography. ZCash even started a wave of academic research into zero-knowledge proof technologies. It has given a boost to what was previously somewhat of a fringe area of cryptography and magic maths by creating a use case.

Would Bitcoin benefit from the rule “one ASIC per person?”

At first, it seems like it would. But the competition between miners will still be there. If they can’t compete in terms of better and bigger hardware, they will compete in terms of locations and cutting costs of things like electricity. This will make regions with an excess of electricity and the cheapest prices the mining leaders.

I don’t think we will get back to the stage when you can buy a miner, put it in your garage, and make profits. The industry has more professional players now, which is good for network security. Just like a trained army is better than a militia, professionals are better at their job than regular people. Of course, this leads to certain centralization, but I hope that Bitcoin mining will be represented by many competing companies from all over the world.

If Bitcoin is the “digital gold,” what does this halving mean for altcoins aiming to become the “digital silver?” What’s with the competition?

First, we should figure out what we compare and how. You can probably say which car manufacturer is leading the world, which takes second place, and so on. There clear criteria here. But when you compare McDonald’s with a supermarket, it’s a different story.

I’m also not convinced by the term “digital silver.” If you think about it, the reason why people were using silver instead of gold was that the amounts of gold needed for small day-to-day payments were too tiny to handle. In a digital world, where the “digital gold” is divisible to very small fractions, I don’t see why we would need “digital silver.”

Still, speaking about the example of Ethereum, I think they aren’t trying to be said “digital silver.” They are trying to be the finance of the crypto-industry. They are trying to recreate the mechanisms of traditional financial institutions like loans. It isn’t directly competing with Bitcoin.

The further we go, the more I think that the case of Bitcoin is not about the technology. Sure, there has to be a quality threshold because if your system loses people’s money and has all sorts of bugs it’s unacceptable. But still, when the system does work fine, further improvements start bringing diminishing returns and the project’s reputation becomes the main parameter. Bitcoin’s history of 11 years has no cases like the DAO hack, no catastrophic failures of the consensus. This is why I am somewhat skeptical of newer tech-focused projects. They may have better technology, but they still have to gain a reputation from scratch. But this is all about Bitcoin’s use case. Maybe, in other cases, you will benefit more from things like transaction speed and reliable oracles.

The full Russian-language video is available on ForkLog YouTube channel.

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Tags: ASIC, halving, mining