Inside the Hidden Power Struggles of Bitcoin Upgrades | Steve Lee & Ren

Transcript

if North Korea got just hacked coinbase and just got all the Bitcoin they're like I'm not giving it back I'm sorry we're North Korea do you guys think we should hard Fork it or not I do not think we should hard Fork we just have to suck it up and deal with it I see a lot of failed attempts at forking Bitcoin but someone might look at a coin split token chart and say wow like it started trading at 0 2 BTC 02 BTC today would be larger would be two times the size of salana like so the amount of money at risk the value of this network will probably precipitate into some form of chain split in 25 or 26 scale is the blockchain that is

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it all right everyone welcome back to Empire we have uh two new guests we have Ren who's a partner and engineer at Electric Capital uh we also have Steve Lee who is the head of crypto at block uh Steve last time I heard about you you were reporting directly to Jack dorsy I don't know if that's still the case over there um but uh yeah Steve Ren welcome to the show thank you thanks for having us you still reporting to Jack yeah over five years now that's cool he hasn't he hasn't ditched me yet that's cool that's good um so the reason that we're having these folks on um is they recently published a paper on the Bitcoin consensus mechanism and before we uh bore you and put you to sleep because I know uh Bitcoin consensus mechanism is not something that we talk about a lot

on Empire um let me I want to give a little bit of context for this episode so this paper is uh the deepest thinking I have seen in probably several years about uh Bitcoin consensus from a game theory perspective and why is this important to me it's important because um this actually used to be this big issue in crypto um and for anyone who was around in 2017 and 2016 you'll remember the block size Wars um it's funny Steve and I were talking about this before the episode um I was talking to some some new blockworks employees who recently joined the industry they've never even heard of the Block siiz Wars so this is this topic that used to be super important it's now not really discussed but I think it will be

discussed again soon and the the motivation for that is um there are different like Covenant op codes um and there's going to be groups who say this is terrible we should not make Bitcoin programmable and enable l2s and this whole Bitcoin Renaissance is super stupid and Bitcoin should just be sound money and then there's this other group of people who I think are probably gonna uh take the other side of that basically and there's these really important stakeholder groups they uh the ETF providers there's coinbase and Kraken and okx and there's the wallets there's retail users there's the media companies there's developers there's Miners And I think we could see this huge uh debate um again in Bitcoin and the last time this happened was bit led to a split

which was Bitcoin versus Bitcoin cash and I think it's a really this paper is the best analysis of um what could happen and what maybe should happen um but anyways want to have Stephen Ren on so actually Steve maybe uh and Steve and ren I don't know who wants to take this I'd love to before jumping into the paper get to your why like why is this the thing that you guys decide to spend time on why is this a really fundamentally important issue in crypto today sure I I'll start um thanks for having uh me on the show for the first time uh great to be here just so folks know my context so I've I've been leading spiral at block for five and a half years now and it's an initiative at

block where we have complete free reign on what we do we we don't work on the commercial business uh it block we we are our our mission is to uh help Bitcoin specific speically so we mostly do open source software development um but but I ALS I work on a lot of different projects so this this is one of them so what you know why did I start why did I start working on it um actually what you said Jason was part of the motivation or you know the beginning of this year I saw more and more um discussion and starting to see some contention about possible Covenant changes to bitcoin um and some people you know some opponents wanting to activate it and it didn't really feel to

me like there was consensus and it just got me to thinking back to 2017 during the those the blocksize wars and I realized um my own knowledge of forks and how how these situations work out was very Rusty I hadn't really thought about it for seven years um and then I realized 95% of people in the space weren't even around in 2017 so the the best knowledge they might have is just reading like the book block size Wars so it I and then also I realized the space has grown up like look how much bigger it is today than 2017 you know any metric you want to pick um so I thought

it was a good idea to to like take a look at this uh create you know do some analysis create a project that could educate people and sort of you know increase people's knowledge of how this um how this appears to work um I think it's important to note this you know there's no blueprints on how to change Bitcoin or not change Bitcoin um so this is just our observations of how it works um it's also we made an open source project so there's three of us Ren myself and Lyn Alden uh created this but we we made an open source project we welcome

contributors over time because it it needs to be a living document and living project to adapt over time and improve um so yeah we're we're we're super excited to have have gotten it to a good starting point and looking forward to talking about on the show nice maybe we could actually revisit 2017 for a second um you I think you guys are going to inspire me to do a couple other episodes about the 2017 block size Wars just because there's such an interesting moment in history but uh could one of you you guys give just a brief overview of what happened in 2016 and into 2017 with the eventual split uh into Bitcoin and Bitcoin cash R do you want to take it yeah sure

so most of my study of 2017 has been done by looking at onchain data and historical markets and reading facts after the fact because I wasn't around in 2017 but 2017 the the way that it played out led to a lot of the downstream work of the paper which is in these different communities when you have irreconcilable differences and frustration in terms of one group of developers ability to change the consensus of the network those frustrations eventually boil over and lead to often times very rash and this

repeated game theoretic process in which the two sides Vive for the resources of the network in bitcoin's case hash power and node adoption in order to push for the change that they want to see played out so in 2017 probably some of the most notable moments include the New York agreement which was a Consortium of quite a lot of the different stakeholders groups that we have highlighted in the paper it ranged from large investors large mining pools manufacturers of the as6 and also some quite large economic nodes in terms of the in terms of the centralized

exchanges and through this back and forth forth process different sides were forced to play cards or actions that precipitate reactions in this repeated game Game Theory type of process and the paper has this uh heat map that shows the different the different stakeholders and the different cards or actions that they play back and forth But ultimately what ended up playing out is the market voted with their dollars and with value which led to things like chains spit tokens which heavily dissuaded some

previous Fork attempts um and ultimately decided that Bitcoin would be the token that retained the vast majority of the hash power yeah the way I is such an interesting time so there was um just to remind listeners who maybe weren't around there and thanks for that Ren um Satoshi obviously said there's you know going to be one one megabyte blocks and then um what ended up happening in 2017 is the the blockchain got clogged up because people were actually doing things on it um and so people started to say hey look uh bitcoin's got you know seven what is it seven transactions um in in a seven transactions a second uh ethereum had 29 or 30 back then and Visa

has 1,700 so if bitcoin's really going to scale payments around the world we need bigger blocks and so there were basically the big blockers versus the small blockers and the first thing was Bitcoin XT which said uh look we should take Bitcoin from one megabyte blocks to 8 megabyte blocks you guys should correct me if I'm getting any of this wrong but there was Bitcoin XT and then that was like okay 8 megabyte blocks that's too big actually so then um I forget the developer I think it was Peter W or wheel um will uh put forward um segwit which was the two megabyte blocks said okay maybe eight megabyte blocks are too big let's do two megabyte blocks and um and then that led to the New York agreement which was this super

contentious thing was the middle of 2017 and there were like 50 or 60 crypto companies who met in this closed door meeting and they came up with this two phase solution to activate segwit and then to uh double the block limit um I think it was activate segwit to two and then they wanted to double it again to four if I remember correctly you guys should correct me if I'm wrong but there were the small blockers who said whoa whoa whoa whoa whoa there's all the crypto companies getting together these you know Executives here in a room we don't like this we need this is this is not stand for what Bitcoin is which is this open decentralized network and actually there's all this contentious debate and then the proposal was finally suspended in November 2017 um I don't

know how how did I do there Steve you did well though the um segwit it wasn't a exact two 2x increase it it what segwit did is it segregated witness meaning it moved the the signatures out the block so the the block size of one megabyte actually stayed fixed but because it reduced the amount of information that needs to um to be stuffed in there it it gave anywhere from a 1x to a 4X increase so two 2x approximately and then separately seg 2x the second part of that agreement as you said was was an actual 2x bump from one to two megabyte block that's right so let's lay let's lay the groundw for this

episode maybe um and for this conversation can you guys remind me because I have not thought about this in 7 years um can you just lay the groundwork for understanding Bitcoin consensus and I'm going to ask some super dumb questions for example can you honestly remind me like hard Fork versus soft fork and like why soft Forks are typically preferred for Bitcoin upgrades and like uh just be curious yeah give give us a reminder yeah we can do that real quick to just to the audience knows that so this project uh Bitcoin consensus analysis project or bcap for short um it it's important to people who want to change Bitcoin and it's important to people who don't want to change Bitcoin

uh and and there's a range of people in in between but there is definitely a camp who absolutely does not want to see Bitcoin change very conservative views and they should care about this project because what actually prevents Bitcoin from changing you know and because it's software right so what actually U prevents it from changing and then obviously if someone wants to see a change understanding the lay of the land could be helpful too so yeah um yeah so to get into your your questions about what what do consensus even mean so yeah hard versus soft Fork um a a hard Fork is a change to consensus rules which is not backwards compatible so every node in

the network would need um to to support and enforce the new rules by a certain block height uh or you know time um or else they or else they'd be forked off and it would be a separate Network um whereas a soft Fork um is by you know by by the the name soft it's it's a it's a softer Landing basically like if if your node doesn't upgrade you would not be booted off the network you'd still see in the network you would not be able to support the new functionality so you couldn't like you're if if you wanted your wallet to support the new functionality you would need to upgrade to support those rules but you'd you'd still be able to spend your coins receive coins into your wallet as long

as those new coins didn't need the new rules um so it's backwards compatible in that way there there's pros and cons to to each approach so um it's not like one approach is it's not like soft Forks are completely better than than hard Forks in all situations but the reason soft Forks are are preferred in Bitcoin is that it's so difficult to coordinate a change um there there's just Bitcoin is such a large ecosystem to coordinate a change where everyone upgrades at the same block height is incredibly difficult um and there's a strong desire not not to see the network fork and split yeah yeah so I could I could hard

Fork it to I could hard Fork tomorrow but but the reason the consensus is important is because well nobody's going to go follow me into into my hard forked Bitcoin right yep any of us you any of us could like change the code on our computer and run different codes change the rules to however we like we we have self- sovereignty we can do that but if we can't convince anyone else then we're off on an island yeah so how did back in the back in the day so Satoshi if he wanted to hard or he or she or whoever um wanted to hard Fork it would just you know send a memo out to the to the small group of Bitcoin uh folks and and say hey we're doing this and everyone would just get on board but now there's all these stakeholders right who and they

all have different uh incentives and so it's actually much harder to actually get anything done yeah um why is it how does it differ from something like ethereum's consensus and like uh yeah how does it differ from something like ethereum's consensus uh yeah so maybe I can take that one because I sit across these different ecosystems on ethereum in in proof of stake we have not yet seen cases where the upgrades rolled out by the core developers and the core and the client teams have got have gotten

opposition in terms of the holders of ethereum via the validators choosing to not accept those upgrades but in terms of the upgrades being rolled out on ethereum as long as more than 66% I believe of the stake adopts the upgrades the upgrade becomes live there are the beginnings of forms of validator based signaling on ethereum for certain types of features including increasing the block gas limit so we are starting to see some Echoes of the

blocksize wars from Bitcoin starting to play out on ethereum but today I looked at the numbers maybe a week ago it was only 3 to 5% of the stake was was starting to be uh was starting to tag their blocks with with this type of signal but the ethereum upgrades tend to have very fast and Fast finality in the sense that once the upgrades are rolled out they they end up becoming quite permanent due to the proof of stake nature whereas it takes longer on bitcoin or it takes longer on bitcoin you're saying it does yeah so for proof

of stake the network effectively will upgrade at a specified block height whereas on bitcoin the upgrades will often take a median of 40 weeks for the nodes on the network to upgrade in terms of the activation mechanism for Bitcoin upgrades they often embed a grace period of 6 to 12 months which allows the rest of the network an opportunity to upgrade their nodes what about um where where what is uh it's such a it's very interesting to me because it's such a it reminded me reading this paper it's such a soft consens like it it's so it's so rough there's no there's no um like you follow

this step then this step then this step you're basically just trying to influence other stakeholders and it's it's it's very messy actually it's definitely very messy um I think a lot of people in Bitcoin including myself like that we think that's a benefit because if there were a clear blueprint it's much easier to to game it and take control of it yeah so um obviously messiness and chaotic has downsides it can it can take a long time uh to get it change through but I think that's what that that is a a huge part of the attraction and value of Bitcoin is how difficult it is to change so yeah

anyone trying to change Bitcoin absolutely gets frustrated and a lot of people get burned out and leave and this goes all the way back to bolic leaving and starting ethereum so it's always been I mean it's been present for 10 years uh and it's only going to become harder to change because it's growing getting bigger and there's just more and more stakeholders yeah before we get into the stakeholders um because I want to hear about these different groups of stakeholders and how you think about them um there's one interesting I don't know if this was your guys's term or someone else's term I'm uh for anyone on YouTube I'm sharing my screen and showing the paper I will try to find this yeah it's state states of Mind s so Som and um yeah you define like Psalm 1 through six can you define

what Psalm is or state of mind for these stakeholders and how yeah how you guys I don't know if this is your definition or just actual an actual Bitcoin definition but tell tell me about this these different Psalms yeah we we we introduced this terminology um the Genesis of it was uh I realized one difference today versus 2017 is that the if there's going to be contention today it's around a soft fork change soft forking in one of these Covenant proposals um whereas in 2017 the contention contention was around a hard fork and with a hard Fork if you actually fork and split the network and have two coins investors have tremendous

power then because investors can choose to sell one coin and double down in the other coin and that can impact the price and if one coin is worth tremendously more than another coin that goes a long ways towards defining what is bitcoin um but with the soft Fork the observation was that investors aren't really involved in that process or at that stage of a change um so getting back to state of mind you know as people who can see the screen what you're showing is um State of Mind for is unaware so there's I mean right now I'd say most people in Bitcoin are unaware of the 10 different

Covenant proposals and the details of those Covenant proposals may maybe they've heard of covenants and that there's some kind of like discussion or drama but you know most are unaware um and so you can you can imagine you might start in an or everyone starts in an unaware State because and then you when you you know before you learn something and then you can progress towards either being supportive or not supportive and the different states of mind you can be supportive or not supportive or so so extremely supportive or not supportive that you're willing to expend resources your your money your time your energy to either fight or support a change right uh St i a very dumb

question I think Co I think I understand covenants covenants are um covenants are synonymous with spending constraints is this right is this um yeah particularly um you know for for people familiar with the the Bitcoin utxo model you know any transaction there's in you have coins that you are inputs like if I'm sending you money in a Bitcoin transaction um I choose some of my coins as inputs and then the outputs would be from your wallet if I'm sending it to you and right now there's no mechanism in Bitcoin to put constraints on the outputs you can put constraints on the inputs like some of my coins I might own and control them but they might have a time constraint like a time delay where I can't spend

them until a future block height but there's no such constraints right now on outputs and and and there's like 10 different propos technical proposals for how to add constraints to those outputs and that's what is referred to by covenants got it and the reason this is actually very important is because these generalized covenants could enable a lot of new applications for scripts right like uh Turing complete contracts or um uh uh like scripts with unbounded length that could include different things I don't I don't know this is actually this is way above my pay grade but is that is that correct yeah I mean bitcoin's always had smart contracts but you they've been Limited in functionality I mean you can do multisig and you can

even do loans and Futures contracts on bitcoin script um but like ethereum and other um virtual machines and and and consensus mechanisms or script languages allow for much more extensive uh functionality covenants would it wouldn't take Bitcoin all the way to ethereum level expressiveness but it it it would be a pretty substantial Improvement to expressiveness got it okay so when you said I think you said the numbers 10 there are 10 covenants like out right now for proposal just different technical proposals stages anywhere from like an idea sketched out in email list to you know to to a Dev email list all the way to

several are like fully implemented with test Suites and sort of ready to press the button and go got it okay and why this and this is really important because there's all these like I feel like there's this moment in time right now Bitcoin Renaissance there's all these Bitcoin l2s applications getting built on bitcoin the more of these covenants you put into uh into the the Bitcoin code uh the more applications you can probably build on top of Bitcoin however I would guess the argument against that is well you're kind of taking away from the purity of Bitcoin it introduces new risk vectors is that the that's the pro and the con side of this that's the pro and the con and I mean I say there's 10 proposals I no one's arguing all 10 should be activated it's it's more like either pick one of

them or maybe two or three could be merged together and it makes sense technically to merge them together got it but there's definitely a camp too that doesn't want to see any of them merge the the the reasons for that that camp would stay say no one they still don't see um sufficient value like valuable use cases emerging from this um and then two is the risk vectors that you mentioned in particularly around Mev or or me like evil evil Mev um which does impact ethereum and the ethereum community you know is having to to learn and grapple with that and deal with it so there's definitely a group of of people in Bitcoin who don't want to see that exacerbated on bitcoin yeah Ren can

you walk us through the stakeholders and how you guys came up with these stakeholder lists and why these are the people who matter and I'd love to hear yeah I'd love to just this section might take a while but would love to hear about these different stakeholders yeah so in terms of the stakeholders we try to think about both the powers and the incentives that drive the different stakeholder groups and the way that we separated or categorized the stakeholders is simply by in by looking at nonoverlapping powers and interest so in terms of the six stakeholder groups we have in

alphabetical order not in terms of how important they are we uh there are the E economic nodes the investors the media influencers the miners the protocol developers and the users and application developers wow so you're saying you're saying blockworks has a is a stakeholder here that's blockworks is a stakeholder quite quite an important stakeholder um to start off with the economic nodes so when most people think about an economic node um they include cryptocurrency exchanges the key differentiation between an economic node and a node that someone is just running on a laptop at home is

that economic nodes handle a significant volume of Bitcoin transactions in terms of Bitcoin being sent to that node and Bitcoin being sent from that node whereas if I were to just spin up a node at home it's highly unlikely that that node will see a significant volume of Bitcoin being sent to that node and Bitcoin being sent from that node so that's that's the key difference between just a regular node that someone can run at home on their laptop and the node that for instance coinbase binance or okx is running to help facilitate uh the transactions of their users so so it's

fair is it fair to say the nodes the power of an economic node so this could be you mentioned the exchanges but it's also probably the you know bitgo Anchorage uh the custodians things like that um PayPal maybe like the these economic nodes is it fair to say that their power is in there is correlated with their volume of of basically transactions on the Bitcoin blockchain I think that's fair to say it is certainly correlated with the amount of volume that they do um okay so that's the that's the economic nodes um what is the next what is the next group so the next group are

the s or excuse me actually what is their incentive what is they what what is their main incentive these economic nodes right so most economic nodes um run a take rate type of business so they are looking to maximize uh the transaction volume and the trading activity on their platform um and that is oftentimes correlated with the amount of Bitcoin that is being custody uh by that Exchange got it so they they just want to maximize transaction volume basically of Bitcoin more more more Bitcoin on their platform equals good more volume equals good right okay all right so that's the economic nodes bucket number two so the

second bucket probably uh so the second bucket is the investors um the investors they include large individual holders at Bitcoin active and passive institutional fund holders at Bitcoin Sovereign wealth funds central banks governments even even publicly traded companies um uh they don't tend to play a role in the day-to-day operations of Bitcoin they don't tend to run nodes on their own they tend to use qualified custodians um in today's day and age um and their main power is that they're able to influence market prices through buying and selling Bitcoin and

they can also signal the preference to the market through Futures markets prediction markets um and historically chains split token markets which are which are a subset of which are a form of prediction Market that allows the investor to express their preference in cases where you have contentious consensus changes so for example in the 2017 segwit upgrade there were coin split token markets that were listed for Bitcoin unlimited and segwit 2x which were two proposed um two proposed consensus changes that were ultimately defeated in in the chains split token Market because

the investors sold those chains split tokens down to nearly zero BTC which meant that it would have been economically unviable to actually go through with that fork process yeah I'll just interject real quick there going back to the history of 2017 that the the segt 2x Futures that Ren just mentioned was I think occurring in October of 2017 bit finex was listing it and I remember the kind of impact it had on on me and other observers that the price of the Legacy Bitcoin chain was like 10x over the price of SE segma 2x so there there was a clear indication by

people willing to to risk their coins on on that market to show that there is a strong preference for the Legacy chain I don't think we'll ever know how much influence that had yeah for for on like coinbase and other exchanges and the miners who eventually capitulated and and and dropped the seg 2x Fork idea but it definitely was a factor yeah is it it feels like the economic nodes are slightly more powerful I would say than the investors for two reasons one is um the investors mostly custody their Bitcoin with the economic nodes now so like the economic you know they the investors Bitcoin sits with the economic

nodes that's one but two I mean Steve to your point I remember 2017 as well and into 2018 and stuff like you know if you owned Bitcoin on coinbase I remember there were these moments in time this was when all the all these Bitcoins were coming out right and it was like oh coinbase chooses to support this Bitcoin and you'd wake up one day and you'd have more Bitcoin in your account it's just a different Bitcoin and then another day it was like coinbase doesn't choose to support this Bitcoin it's like all right well I guess that Bitcoin is going to die so it does feel like the economic nodes I mean just in the two groups that we've discussed do hold a lot of the power we um Ren will get into it in a little bit I think on on the the timing but I think

early early phases of a potential change to bitcoin I would totally agree with what you said um but later stages especially if there's contention and you do get to this point where there's a split in two different coins then you know I think our analysis with this project demonstrates that um investors have substantial power then like definitely the most power because they're interesting because even like if you take a large investor owns like 50,000 Bitcoin or something even if they're custody with coinbase the investors still owns them and can sell them can move them off the platform um and and

actually another thing we'll we'll talk about um we can talk about now in a few minutes is the extra power um or or the uh um disproportionate power that self- custody investors have and this is actually one of the my own personal Delights from this project is seeing how self- custody investors have extra power maybe ren do you want to skip down or can we skip down to where we segment the investors and you can speak to that a little bit yeah this this part right here yeah yeah so so the investor there are there are a lot of different types of investors so you have the self- custody proprietary owners of Bitcoin my guess and it's just

a guess is that this group is actually uh the largest investor group in Bitcoin just due to the nature of of how Bitcoin came to and group um they're they tend to self- custody their Bitcoin they are accountable to No One except themselves and they have a very and they have a high ability to act very quickly because they own their own Bitcoin um the second group are institutional investors so these might be V Venture funds these might be long only funds these might be hedge funds they they often are required to use a qualified custodian but they often use more than one qualified

custodian and they do have the ability to switch if a qualified custodian is not fulfilling their needs um they tend to be accountable to uh their General partners and their limited partners which means that their ability to act quickly in a contentious consensus change scenario tends to be a bit slower because in some cases the ability to act might be outside of the mandate that they have been given by their limited partners the next segment of investor are corporations with Bitcoin on their balance sheet um again they often use qualified custodians often that qualified custodian might be an exchange

um they are accountable to their board of directors their shareholders and as a result of of being accountable to their board and shareholders um often have a low to medium ability to act quickly especially in cases where the Bitcoin is being used as a as a treasury type of asset and then the final segment of investor um are the ETFs they use qualified custodians um the ETFs are run by the ETF sponsor and portfolio manager so for example Black Rock um would be the ETF sponsor of the Black Rock Bitcoin ETF and their ability to act quickly in the current regulatory regime

as of December 2024 is highly constrained because in cases where Bitcoin Forks into two different coins the ETF has to abandon their coins on one of the forks and not be able to hold them on behalf of the EF holders so the ETF holders would not under the current under the current laws um would not be able to get the quotequote airdrop uh from Bitcoin Fork interesting yeah I was think I just saw this uh stat today it was Eric balunis from uh Bloomberg said the the US spot ETFs have just passed

Satoshi and total Bitcoin held now more than 1.1 million more than anyone in the world and they're not even a year old yet um yeah it made me think about like actually your guys's paper because it was like okay well like Black Rock right black rock is a Bitcoin ETF and they obviously hold a boatload of Bitcoin now but coinbase custodies their Bitcoin so who's the more powerful entity there if there was a consensus um if there you know in in in all the things that we're talking about here if you play this forward I know we're kind of skipping through some sections here but like if you play this forward several years do you guys have any concern that you know Black Rock could create the the Black Rock

Bitcoin well that that's one reason we were I mentioned a few minutes ago about the disproportionate power the self- custody investor has and we we are quite happy to see that that logic um be because it helps address the concern and risk about too much power from Black Rock or an ETF issuer um while black right Rock might you know there might be hundreds hundreds of thousands of Bitcoin or you know it'll be over a million for just black rock themselves but they neither own nor control them right as you mentioned the control of those Bitcoin right now is with coinbase that can shift over time it could shift like like Fidelity for

example with their ETF they self- custody so that's an example of the second biggest ETF issuer they do control the Bitcoin but in neither of those cases do they own the Bitcoin their shareholders own own the Bitcoin so if you do fast forward to it a contentious change to bitcoin where there is either a uh threatened fork or there is a fork with a with a split of the coins um we don't think it's realistic that the black rocks of the world are going to be able to dump one coin and buy the other um they would face first of all there's there's many people involved in

that decision including a lot of lawyers right and and and I I think it's it's much more realistic they're they're going to be conservative hold both coins let the dust settle and then it you know which is which is considered Bitcoin by the world will emerge from that so that gives a self- cust the investor a lot more power even if they don't have a million Bitcoin because they can actually sell one coin double down in the other coin and that will move the price just to clarify for the listeners so so so the reason why the self- custody owners by selling one coin and buying the other is so important is that creates a hash P that that creates a

hash profitability spread that moves hash power from the sold coin to the purchased coin and the reason why the speed is so important is because as one as one coin gains a hash power lead the lower price coin has a disproportionate amount to catch up in terms of a price increase for the hash power to switch back huh that's interesting okay I hadn't thought about it like that um so speed to be able to dump one coin and double down the other does matter yeah it's it's this column it's the ability to act column it's a yeah exactly yeah yeah it was interesting you guys I mean I it's very deep research there was a you guys found

this line in oh man where is this uh the the perspective of black rocks Bitcoin ETF it says quote uh we'll use our sole discretion to to determine in good faith which peer-to-peer Network among a group of incompatible Forks of the Bitcoin Network furthermore the sponsor may also disagree with shareholders the Bitcoin custodian other service providers the index administrator crypto platforms or other Market participants on what is generally accepted as Bitcoin and should therefore be considered quote Bitcoin for the trust purposes very interesting um all right let's move past so we've got the economic nodes we've got the invest invers we've got four other groups to cover yeah so the next group are the media influencers they play a crucial

role in shaping public perception disseminating information and broadly in terms of educating the public about the ongoings in Bitcoin and the rest of the space so for example this podcast would be a great example of that um and and in terms of their powers their powers are quite so R it's it's generally just any it's it could be it could be blockworks it could be independent podcasters it could be Kobe it could be the anonymous you know threaders on Twitter it's anyone who kind of exerts like soft influence it's less of the hard influence of of like oh we're going to accept this Bitcoin on our as on our on our crypto platform it's more like hey here's a thread on like why this bit soft Fork is a good or bad idea yes yeah

anyone with an audience got it then and and can sh help influence and shape a narrative got it yeah and and media groups are media influencers are especially powerful in the early stage of a consensus change because they can oftentimes distort the perceived support level of a consensus change by either making it seem larger than it is or smaller than it is um and in terms of their incentives um they in cases where the media influencers have sponsors they often act in the best interest of their sponsors they historically try to

maintain some semblance of credibility and neutrality but there have been cases where media influencers in the past have in have effectively uh built up a lot of Goodwill and then burnt it all in a in a very quick period what's the power of these F there's this is just like power stuff right it's soft power but it's also quite important and it's probably more powerful today than it was in 2017 yeah sentiment does Drive price um there are tons of studies that show that um so the power of the media influencers is not to be

underestimated got it got it um okay next group uh miners um so so the miners are in uals or organizations but today largely organizations um that use specialized Hardware um to effectively Mine Blocks um include trans include transactions um produce block hashes and they're of course solving uh solving solving a quite expensive problem to find a solution that is less than or equal to the Network's difficulty Target um and miners today um often mine mine on the

behalf of a pool um so they're contributing their hash power to a pool um and they often do not run the Bitcoin software on their own they are submitting Solutions based on a pre-pro acts against the interest of an individual minor the minor can switch off from the pool um so one of one of the broad public perception is that pools have all the power but that's that's I think not nuanced enough because miners just miners have the abilities to switch from from one pool to another Pool there's no reason that they have to stick with a single pool what is their what is their

incentive so Minor's incentive is to generate Revenue um their cost are purchasing the hardware paying for the power to mine and they're looking to grow their percentage of the network or grow their grow their mining Revenue some are starting to sell secondary Services um but those are quite small when compared to just their ability to produce blocks and that that is that is uh ultimately their nordstar and because they are making long longer term Capital commitments in a proof of workchain compared to a proof of stake chain they have an incentive

that the price of Bitcoin not fall tremendously while they're paying back their capex costs do they run oh God this is gonna out my understanding of um they don't run Bitcoin software right Steve do you want take that yeah so um the the pools run Bitcoin software the m what work on the miners like the hashers do not run do not but some of the pools do right well the pools have to all the pools yeah of course and just for the audience's uh understanding what we're saying we what we mean by run Bitcoin software is like who's selecting the transactions that go into a block

and today that is pools and not miners however there are technical um uh proposals and projects in place to allow miners to do the to run the Bitcoin software and we're just at the the the beginning of adoption of that so that's an example of something that is going to change over time we are going to see miners selecting transactions in the future but that that doesn't describe why is that why is that changing um well step one is just having the software to actually enable it and that the protocol and the software exists now so now it's a matter of adoption and which just takes time and aligning incentive

H how much power do you think it's funny I can't help but think of Barry silbert in in a lot of these examples um whether it's like you know do does dcg still own Foundry because Foundry is the biggest pool um and you know hearing you guys talk I can't help but think of eth and eth classic of which Barry was obviously a massive eth classic bull which never really took off um H I don't I don't there's not really question there but just yeah I think I'm very well I mean I I think you're just thinking about like centralization and and power dynamics here another thing that the audience should understand is from a pool distri distribution perspective it's even worse than what

this graph shows because bitm the large ASC Chinese company that that makes asex they control about 50% of the hash rate because they own or control ant pool via BTC and they ALS a number of the smaller ones shown there now have partnered with antpool and bitmain to to to do transaction selection and manage the Bitcoin payouts so so actually Foundry is the second largest pool in terms of of controlling um which transactions make it into a block so that that is concerning and something um that that my

own team and a lot of others are working on improving but as Ren said earlier it's not as bad as it would seem as if that's the only information you had because M miners themselves are much more distributed and decentralized and they can switch pools L literally within milliseconds so the switching costs are low but it's still not a you know we we we we working on bitcoin want to improve that situation scale the blockchain that is Simply Built different let's face it other L1 networks have costly transaction fees that increase as the network gets busier scale has solved this problem with a gas-free scalable

infrastructure where users never pay gas fees scale was awarded the most active gaming chain in 2023 by coin Gecko and hosts five of the top 25 games on dap radar you should definitely check out scale I was using it the other day it really is incredible to use that's scale spelled with a K hit the link in the show notes or head on over to scale dospace ecosystem to get started today hey everyone Jason here I wanted to take a second to break down why magic Eden is getting into token trading their team is extremely concerned that crypto is still Consolidated in the hands of a few centralized exchanges who act as Gatekeepers ultimately recreating the trafi space they believe that crypto is still missing an onchain binance and

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that go through Unis swap X you can also swap with the peace of mind that the code is completely open- source and independently audited download it today it's available on Chrome IOS and Android hey everyone Jason here wanted to uh just take a quick break and highlight everything that's been going on in the mantle ecosystem in just one year mantle has seen its tvl surge by over 1,100% now reaching 1.69 billion that's just such a crazy amount to think about more than 225 protocols have made mantle their home while the platform's Eco fund has invested $38.5 million in 51 pioneering projects through strategic Partnerships

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buckets yeah so we broke out the developers into two separate buckets because the parts of the code base that they tend to work on are are different so for instance the protocol developers including the group that people refer to as the core devs um these are the developers proposing and implementing consensus changes in addition in to maintaining the Bitcoin protocol and clients um the protocol developers they don't have unilateral power over Bitcoin um because for for instance if if the core developer shipped an outrageous change to bitcoin core the economic

nodes do not have to run that software the miners do not have to run that software um but in some sense what we what we realized through this work is that the core developers of the Bitcoin core client have a veto is type of power in the sense that because of how difficult it is to to bootstrap and grow adoption of an of an alternative client um that provides them with something with the semblance of a veto um and on the flip side the application developers and users these are developers who are building things like uh a Marketplace that lets you

trade uh runes ordinals nfts defi applications um these are these are devs who are working more at the app layer got it okay okay what are the different incentives of protocol devs and app devs yeah and here here part of it may be differentiated by their uh willingness to take on risk um especially to the Bas layer and the base protocol so for the protocol developers they're really really careful um which is great um they want to increase bitcoin's technical capabilities and

security but they they want to do that in a very measured and secure approach whereas application developers tend to be Venture backed and startups which means that they are taking on a huge amount of risk they're very risk on they're looking to grow the adoption of their product um um and they're looking to grow grow grow whereas the protocol developers are main are maintaining the protocol and upgrading it in a very measured approach with with I think it's also fair to say a lot more testing than what an application developer might

do okay let me just pause because that was that was a lot of info for folks um and also just for me and I'm kind of processing it what is your uh just kind of getting to the end of those six day colders like maybe just Line in the Sand before we move on to anything else like what is your analysis of those six day holders and like how they interact and like I don't know if you're able to share who you think has more power than other people obviously they all have power and I thought it was one of the interesting things of this paper was oh all these groups actually have a lot of power and they all influence each other in weird different ways and it's not like I think there's this uh idea that like oh this one company has more power

than the other um and maybe that's kind of true but actually there's power is more evenly distributed than I think people think that that was my takeaway but I'm I'm just curious to get your guys's takeaway from uh from this part of the the research in the paper um yeah I I I would agree with everything you said it I think it's a I think it's a strength of Bitcoin and we talked a little bit earlier in the show about it's chaos and messiness again I think that's a strength I think the fact that there's these six distinct groups all of which clearly have like substantial power but each of the groups power is is different than the other groups it's like kind of a unique power

um I think it's really I think that's fascinating to so I I think anyone I'd love to see academics dive into this like they don't they don't have to be into crypto or Bitcoin but just from an organizational perspective I think this is really fascinating yeah um and I do think it's it's a strength of Bitcoin because I think it it makes it really hard to change Bitcoin which again I think is what gives Bitcoin which is one of the the factors that give Bitcoin a lot of value um and it's hard to gain um it it is I mean another takeaway is that even though there's these six different groups we've identified um one person or one entity like a company can can fall

into multiple stakeholder groups um so so so it's not like you can only they're not mutually exclusive groups um and so yeah a large a large company or a wealthy investor might be in two three four of these groups um or even impact other like if you're if you're a wealthy investor you can fund developers and influence those developers as well you can create your own media uh or you know or fund media and influence media Outlets um but even with that um you know that I don't really see one entity

having you know sort of unilateral power control right now and even projecting in the future I think it's um the future is pretty bright my my own personal biggest concern about Bitcoin decentral maintaining decentralization is around mining I think it's around this bit bit Main and yeah well there's there's a there's different payout mechanisms for like when a pool finds a block and then pays out the miners um and that I won't get into the details of all the different mechanisms but you have to make a trade-off who's taking the risk because you don't the when a block is found is a Pon distribution so like you you might have 1% of the hash rate but

that doesn't mean in 1% of the hash rate on average we'll find a block about once a day but you might go a week without finding a block you might go two weeks there's like a luck Factor so who takes that Financial Risk is it the pool or the minor you have you had to make that decision so there's one payout mechanism called fpps which is where the pool takes the risk and that is a centralizing force and that is why all these other pools are partnering with bitmain because bit means raising less Financial Risk will take that risk and obviously the larger liquidity pool you have you can withstand you you're less likely to go bankrupt if you're a small pool you risk bankruptcy if you don't have enough

liquidity to handle a a bad luck streak so that's uh you know I'm of to mytic we'll figure that out but like exactly figuring out how to combat that centralization force is an open research issue yeah Ren what are your uh what is your biggest risk to bitcoin and at this point yeah I think the biggest risk and I have uh counteracting Force against it um is this concept of single entities that that span multiple stakeholder groups and growing across multiple stakeholder groups over time so for example if you have a very large mining organization that owns a lot of Bitcoin

on its balance sheet that starts to fund potentially some protocol developers but at the same time is making Venture investments in the application layer and might also own an economic node um um over time they can start to kind of like Stack Up uh a collective of different stakeholders to push a certain change but the counteracting force against this is the self custody proprietary owners of Bitcoin who often are not very loud on crypto Twitter um there are often people with right like less than 5,000 Twitter followers who don't really

partake in the in in kind of like the subcycle narratives and ultimately because of the finite supply of Bitcoin and how the coins have been distributed across time these individuals serve as kind of a final guard against that type of risk yeah that's interesting are you huh I'm I'm trying to I it sounds like we just need more people self- custody Bitcoin I think self- custody Bitcoin is probably the most important thing to ensuring bitcoin's longevity as a neutral store value

Steve well I mean so I totally agree with that um it it's a personal mission of mine and I'm optimistic more people will self custody over time um I mean right now that there's two metrics if you look at the number of Bitcoin that are self- custody that's actually a high percentage but if you look at the you know if you look at the percentage of people who own Bitcoin that self- custody it's a very low percentage um I'm optimistic that will increase over time though um one private key man just self- custody software and solutions are improving over time it way way better user experiences are being created that are still quite secure that that makes it more palatable reasonable and realistic for for normal human beings to do it um and then secondly I think anyone's

Bitcoin Journey you you might not see or feel the need for self- custody at first especially if you live in like the us or in know Market where you generally trust the the legal infrastructure and the banking infrastructure in the government um but your Bitcoin Journey usually follows a path where you start to appreciate the value in self- custody more and more over time so people from like the last cycle that got in in four years time all of a sudden like maybe 30% of them are like now we see why we're to self custody coincides with products that are actually reasonable for them to use and more self custody yeah uh I'd probably take the other side

of that unfortunately which is just like basically the longer that Kraken and coinbase and bitgo and everybody else exists the more uh staying power they have and the more people trust them um so you know but let's say coinbase has been around for what 11 years at this point if coinbase is around for 25 years people it's like JP Morgan like I've I completely without uh hesitance trust that my money is safe with JP Morgan I still have a little like there's there's always something in the back of my head when I open a kraken or coinbase or whoever it may be fire blocks that I'm like is is the crypto gonna be there or not you know but over time that gets probably stronger yeah maybe not I agree I mean like I the the force you're

talking about is undeniable I mean the brand brand power the trust with that but fundamentally there is a difference between JP Morgan and coinbase or cash app or any other brand like that and and that's if you know if the it's a coinbase is an enormous honey pot actually speaking of risks to the whole crypto ecosystem if if a hacker if a hacker uh is able to to to steal coinbase's Bitcoin or the Bitcoin that they control that would be absolutely devastating right okay let let let's go there because I've thought about I've been actually thinking about this recently let's say that happens you got to imagine there's just a hard Fork though right no well think so it would obviously be like

um discussed but I I in Bitcoin I don't think I don't think there would be so you don't because the bitcoiners what do you guys think should happen let's say so I don't know how much of the Bitcoin do you guys know how much of the Bitcoin cryp coinbase custodies it's over it's like one and a half to two million I think okay so they hold let's say they custody 10% of all the Bitcoin in the world if someone if some if North Korea got just hacked coin base and just got all the Bitcoin they're like I'm not giving it back I'm sorry we're North Korea do you guys think we should hard Fork it or not I do not think we should hard Fork we just have to suck it up and deal with it I I think that I I I value the principles over the 10 plus

year like recovery you know it would it would take like 10 to 20 years to recover from such a disaster uh I think it's worth it to Future Generations just suck it up and deal with that versus lose the principle and because to me if we forked it like um ethereum did with the Dow Hack That destroys The credibility of Bitcoin maybe a better question is also how would they Fork it because if you're another exchange or a major economic node one of your competitors suffered probably an unrecoverable um hack which increases your market share as yeah kraken's like all right

right and then on the minor side the minor still like as long as there are other exchanges that they can sell their Bitcoin on and if those exchanges are not aligned with forking um because it makes no sense for them to Fork um because they are better off actually on the other side of that um those miners would not have any incentive to support the fork either ah it's super interesting to think about this because then you're like yeah it's like the economic what the economic node think but maybe some of the investor oh man that's a really interesting well let's just avoid that yeah yeah the risk by by um you know I'd

love to see ETFs distribute the coins across more custodians same same um hope I mean hopefully people don't take centralized custody risk anymore after 2000 after the last cycle um so it feels like laying out these stakeholders uh I like it seems like the only one who's really incentivized to push major changes through at this point I'd love to hear you guys argue why I'm wrong about this is the application developers it's like the economic node the investors the miners everyone's like look this thing's working got 100K Bitcoin numbers going up we're all happy everything's great but if I'm an application developer I'm

like wait I'm raising Venture money or maybe I just raised Venture money I need to build applications way faster than I'm building I need to go raise more Venture money I need to get users on my on my apps I need I need these changes to go through so it feels like the group that might push for things to happen uh the stakeholder in 2025 are the application developers what do you guys think about that generally agree um Al although if you're if you're an exchange if if like new functionality to bitcoin leads to more trading and more trading Revenue then which which it could some changes will lead to more more trading more trading Revenue then an exchange is

going to be a supportive of this um I forget actually where where did we land run on on VC investors investing in application developers did we put those VCS in the application developer category yes yeah you said VCS are application developers yeah well and we did that that's what I thought we did we did that because um the the if you look at the powers and incentives yeah the same so um but but I mean but that is you know that's a different group it's the same stakeholder Group by our definition but obviously VCS are a distinct group from application developers but they do have aligned incentives so that's another group of people who would be for changes

um and and some you know and and there's an overlap of people who are VC's investing in equity in these startups and they also often hold a lot of Bitcoin so our investor category as well so so what do you guys think um let's start talking about next year and just like the years to come I mean so historically uh Bitcoin core has been the dominant uh implementation um but you're starting to see alternative clients get some attention right now just curious how you guys think um both about the opportunities and risks that these present um and I'm also just curious to hear your guys' predictions on like actually what happened like what will happen like do you think we'll see big philosophical split similar to 2017

or is this just going to be uh a little less contentious than than back then yeah so the so for first of all the the Bitcoin implementation so Bitcoin core is the dominant implementation on the network basic you know 99% plus of the network uses that implementation um and you know and I think it sort of earned that um it it has a strong track record of being conservative prioritizing security quality and it's generally a no-brainer choice to run that software versus other implementations if you're a if you're an you know a business or a minor um having

said that you know we're certainly starting to see some signs of Champions who want to see a change unable to get that change merged into Bitcoin core um [Music] voicing support for an alternative client another important fact for everyone to know is that every consensus change to bitcoin that's happened to date has always been merged into Bitcoin core so the historical pattern is you get a chain you convince the developers on bitcoin core that there's enough consensus for that change to get it merged then it gets merged and then the ecosystem chooses to or or chooses not to adopt the latest version of of

Bitcoin core but Ally if it gets into core it does get adopted um so if but yeah if if you can't convince the core project to merge it then your your outlet or your option is to create an alternative client but we do study that in this project and it's enormous Hill to climb be because of the coordination problem like how do you get everyone to adopt that new client because most most people that run businesses in the space are not super aware of or passionate about a change so I mean let's say you run like a multi-million dollar

business and someone's telling you first of all someone has to even like you you have to become aware that oh I'm I'm supposed to change to this other software and then like do you well we actually outline in this project thing questions you should ask and consider um and yeah I mean like you you know there's a track record with core of highquality software that's secure what do you know about this new project and the developers behind it are they going to be behind it in three years you have to go through these series of questions and then is it in in just operationally switching to that software does it make sense and I think most are going to say no unless they see tremendous value to their business and so it's a big barrier to switch to Alternative clients but

it's also at the same time important that that's an option so that like the whole ecosystem is not beholden to to the Bitcoin C project Ren what do you think do you do you think uh what are your some of your predictions for next year and the year Beyond like do you think that this becomes this big contentious we see something similar to 2017 or or no yeah so I I think on this side I might differ from Steve in terms of what I think will happen but the paper lays it out I think very clearly in terms of how a soft fork with an alternative client um would ultimately lead to a chain split um and likely failed outcome

for the alternative client but that being said I think it will still happen um because I think that you think we you think we'll get a coin split in 25 I think there will be a coin split in 2025 or 2026 I around what sorry to interrupt around what um around what thing like what is the thing that will be contentious like 2017 was the the block sides yeah I I think it will be covenants um I think that there like 2017 there are growing irreconcilable differences within the community that I hope can be reconciled through public discourse

technical debate bug bounties Security review and more of a standard process but I also keep in mind maybe like like the I also try to Red Team um the ideal path which is there's a lot of money that has gone into this quotequote Bitcoin season 2 um these application teams are on the clock startups are all startups are fundamentally on the clock they have they have a set amount of months that they're able to burn for um anywhere between two to four years and they are under tremendous pressure to deliver

results um and I think that there is so much money at stake and the value of Bitcoin is so high that if anyone looks at so from from our perspective or sorry from my perspective when I look at the coin split token charts I see a lot of failed attempts at forking Bitcoin but someone might look at a coin split token chart and say wow like it started trading at0 2 BTC Point 2 BTC today would be larger would be two times the size of salana like so the amount of money at risk and the value of this network and

also I think some of the underlying incentives in terms of some of the teams who are really really pushing for change will probably precipitate into some form of chain split in 25 or 26 interesting guys I see we're coming up on time here any other there's a I'm going to link to the paper uh it's a 40 plus page paper so we obviously weren't able to get through everything I feel like the whole back half we weren't able to cover too much of it but anything else that um we weren't able to cover here or important things that you think people maybe are starting to be obvious to you too that aren't as obvious to maybe our listeners yet well I mean the main ask I'd have is

just um to suggest people become more educated on this and we're trying we're trying different forms because it it is a it's a dense 45 page paper so it'll take hours to to Really uh get through it so if that's your jam great if not um you know just listen to this podcast um and and there's other other ways to learn about it for those that are really into it again it's open source and we're seeking more contributors so we would welcome people to to file issues make improvements to it and we're we're pretty active on on that on that GitHub repo um so if you could you know if you could drop the GitHub repo in in the notes that would be great um so we we definitely welcome new contributors yeah

Ren anything on your end yeah I think the most important thing is going back to the state of mind which is most most of the different stakeholders for one reason or the other um are often unaware or apathetic to the ongoing developments and I think it is it's not necessarily A criticism it's very fair because they have their day-to-day operations to run um but one of the things about Bitcoin is that it is a repeated game between the different stakeholders and the worst outcome would be if everyone wakes up in five years with a tremendous amount of

regret and decides that the network has changed it stands for something different and I no longer want to be a part of it so it's really important for the different stakeholders to still keep somewhat up to date with the ongoings so that they are able to use their powers when they are most maximally powerful yeah well said well guys thank you I will leave a little bit of alpha for listeners who have made it all the way to the end of this which is works is uh thinking about launching a a Bitcoin Renaissance related podcast Bitcoin only podcast and I think it will tie in nicely with some of these topics in 2025 so stay tuned for that and Steve uh and ren thank you for coming on Empire I

feel like uh this will not be the last time you guys are both here so appreciate it thanks man for having us yeah hey everyone thanks for watching today's episode just wanted to quickly thank today's title sponsor scale scale really is one of the best chain experiences out there today and I've used so many different chains there's a reason they are gaining so much adoption in both gaming and AI use cases hit the link in the show notes to explore the scale ecosystem [Music]