In part 1, I described the computers that run the Bitcoin network, aka the nodes. But now it’s time to talk about the people who run the nodes, the miners, and everything else that comprises the Bitcoin ecosystem. Some say if you think of Bitcoin as layer one, then the people are layer zero.
There are basically three different groups of people that contribute to the Bitcoin community: the miners, the holders, and last but not least, the developers. These groups can overlap, and the lines can get blurred, but for the most part they form three distinct divisions, each one important and necessary for the network to function.
We already know that miners are needed to produce blocks and secure the network, and that they are incentivized to perform this work through the coinbase reward. But the truth is the coinbase reward would be worthless if there was no demand for the coins themselves. This is where holders come in. Holders are people like you and me who buy the coins. We provide the capital and the liquidity that enable miners to profit from their work. Holders are incentivized to do this because they see the coin as an investment. They believe in a coin’s prospects and that holding the coin will give them more purchasing power in the future. In other words, they see it as a store of value.
Finally, we have the developers. Primarily, I’m talking about the developers who work on the protocol (though you could also include developers who work on applications or infrastructure like wallets, explorers, indexers, etc.). The developers are the people who write the code that will scale the network, while making it better, faster, and easier to use. Even in the distant future when the network has scaled to handle millions of transactions per second, developers will still be needed in order to avoid technological decay. You don’t want bugs going unfixed, or the knowledge to disappear to such a degree that nobody remembers how anything works anymore. This is why developers will always be necessary and crucial, to continue to fight decay and to pass down knowledge.
The miners, holders, and developers are not only all necessary, but they also act as checks and balances against one another. Without buy-in from any one of the three pillars, the system would fail. For example, if the miners and the developers suddenly decided to double the total supply of the coin and use those coins to pay themselves, the holders would balk and dump their coins so that no one would benefit. Basically, everyone needs to be happy and share a common goal or making any progress will be difficult. In other words, number go down.
If we look at Bitcoin as an example, everyone in that ecosystem has reached consensus on the digital gold narrative. They have settled on a chain that’s slow and expensive to use, but also won’t ever change. You know what to expect and don’t have to worry about frequent hardforks or upgrades. The miners are happy because they’re earning a steady income. The holders are happy so long as number goes up. And the developers seem satisfied because they don’t have to do that much work in exchange for being sponsored to do what they love.
But to me that’s not how you get better. You get better by pushing the limits and always iterating to make new advances one step at a time. I believe that is the motive force behind crypto. It’s not about stagnating or resting on your laurels, it’s about proving your work to achieve the amazing.
Besides being censorship resistant, there’s something else about Bitcoin that I feel is almost as important. The fact that it’s open source.
When Satoshi Nakamoto released the project, he did so under the MIT license meaning anyone can take the code and copy it, modify it, sell it, and pretty much do whatever they want with it without having to worry about intellectual property rights or patent restrictions.
This enables decentralized innovation. Since no one owns the code, it can be used however anyone sees fit, including changing it to meet your needs. There are two ways to fork the code. You can either create your own network from scratch with its own genesis block, or you can split the network starting at a specific block so that both the old chain and the new chain share the same history up until that point. In both cases, the new network will have its own set of consensus rules, which would be the reason it was created in the first place. For example, Litecoin was created to change block times to be 4 times faster than BTC while Bitcoin Cash was created to increase the block size limit from 1MB to 8 MB. The difference is that Litecoin was started with its own genesis block while Bitcoin Cash split from BTC starting with block 478559.
The main distinction between a chain split versus creating a brand new coin is that everyone who held the original coin at the time of the split now owns the same number of coins on the new chain as well. This allows those with skin in the game to vote with their money. Holders can choose to weight their portfolio in favor of one set of rules over another, or continue to simply hold both. Miners and developers can also choose to mine or develop on whatever chain they prefer. The beauty of this is that this allows people to pursue different roadmaps without having to start from scratch while also inheriting all the desirable qualities they want to keep from the old chain like Bitcoin’s fair distribution model and capped total supply. It would be like making a copy of your country and changing the laws in order to give people another choice.
This is exactly what happened on August 1, 2017, when Amaury Séchet and his team at Bitcoin ABC forked Bitcoin Core to create Bitcoin Cash. This came after a long multi-year period known as the blocksize wars. As network usage went up in the mid 2010s, some in the Bitcoin community were calling to raise the 1MB block size limit to increase capacity and keep transaction fees low. The so called big blockers believed that on-chain scaling was the best path forward while small blockers preferred to seek layer two solutions such as the lightning network in an effort to keep the network as decentralized as possible. The debate raged on for years, and after several failed attempts by various big block proponents to launch a new fork, it was Bitcoin ABC who finally wrote the code to successfully create the first viable big block alternative for miners, holders, and developers who believe in a different path forward. In other words, the free market at work.
In Part 3, I will discuss the rise and fall of Bitcoin Cash.