Insight
February 24, 2023
Agent Smith: Why, Mr. Anderson?! Why?! Why do you persist?!
Neo: Because I choose to.
- The Matrix Revolutions
This week noted Bitcoin developer Marco Falke announced his intention to step down from his role as a Bitcoin Core maintainer. Falke’s relinquishment comes on the heels of several other noted Bitcoin developers who have over recent months reduced roles, relinquished code permissions, or stepped back entirely, leaving many to worry about a technical void in the developer community. Last week, the WSJ published an article, which did a reasonably good job of describing some of the technical update process associated with Bitcoin Core, the centerpiece of the Bitcoin software ecosystem, but ultimately added fuel to the “technical concern fire” that we feel misunderstands critical aspects of Bitcoin, how it is run, and who controls it. We explored Bitcoin’s technical development much more in-depth and with added historical context several months back in our Developers of Bitcoin report, which we encourage readers to revisit that piece for a more detailed and nuanced view. Still, Falke’s stepping back brings up some important questions about Bitcoin, the role of developers, its technical progress, and the funding of its development.
The first thing readers must understand about Bitcoin is that Bitcoin is a “common good.” Yes, we think that Bitcoin is “good for the common person.” Still, we are talking about the economic definition of a common good, which means that people cannot be prohibited from using it (non-excludable) and the marginal cost of providing it to another individual rises as more use it (rivalrous). Other common goods are often cited as exhaustible or finite resources, such as fish stocks, roads, coal, and public transportation. This is slightly different than a “public good”, which is considered non-rivalrous, meaning its marginal cost to provide to another user is near zero, like traditional, free, open-source software or over-the-air TV and radio. The Bitcoin software is free to provide to any user, but the fixed maximum block size and market-based transaction fees mean that, as more people use the network, the cost to execute a transaction rises (rivalrous).
As a common good, Bitcoin as open-source software suffers from several economic shortcomings, including the free-rider problem, i.e., users taking advantage of the product without contributing to it, and the efficient allocation of resources to the product, i.e., how to supply enough development resources to build and maintain Bitcoin. For those that speak of Bitcoin as being some immutable law of nature, akin to scarce elements within the earth’s crust, that better describes the social bond about Bitcoin’s economic promises rather than its technical underpinnings. More on that later though. The reality is that Bitcoin Core is a software program, and the broader ecosystem comprises a collection of software programs, each of which continually requires feature additions and active maintenance. Functionality is built and bugs are squashed.
How to fund that development has been a continual conversation since Bitcoin’s creation and the broader economic question of allocating to this type of resource pre-dates the existence of Bitcoin or even open-source software. “Sponsoring” Bitcoin Core developers has been a popular way to support the technology and, in the case of Marco Falke, he was previously sponsored by grants from the VC firm Paradigm and the exchange Okcoin. Other private and public organizations that rely on these technologies, such as investment funds, service providers, non-profits, development studios, and educational institutions, have also been sponsors of Bitcoin developers and the development of Bitcoin, most notably BitMEX, Chaincode Labs, Spiral (formerly Square Crypto), Brink, and Blockstream. However, making a living out of maintaining and upgrading Bitcoin has always been an unstable economic arrangement at best. And while it might be tempting to fantasize that one might spend one’s free time updating Bitcoin, a nights and weekends hobby, Bitcoin’s complex codebase and the need to build consensus amongst other developers for updates, makes part-time work on Bitcoin difficult to achieve. Funding the development and maintenance of a public good like Bitcoin is an important conversation point and one that is becoming increasingly topical.
With that economic and technical backdrop, it is important to understand that Bitcoin’s technical contributors—even the prolific ones with long tenures—have constantly changed over. Satoshi Nakamoto started this trend when he passed his leadership role to Gavin Andresen in 2010, who then turned the role over to Wladimir van der Laan in 2014. Turning to our Developers of Bitcoin report on page 12, the GitHub commits by year for Bitcoin Core’s most prolific contributors support this idea that developers come into the Bitcoin ecosystem for some time, make contributions, but eventually move on to other endeavors. So, while we’ve seen some turnover as of late in Bitcoin technical community, this has always been part of Bitcoin - continual renewal.
We owe a debt of gratitude to these individuals for their contribution, and even if they are continuing to contribute to the project in other ways (many continue to be very active despite a formal change in roles), we feel it essential to identify them. One of our developer report's goals was to highlight that these were not “mysterious coders” as the WSJ asserted, but rather identifiable individuals. So, a special thanks go out to Wladimir van der Laan, Jonas Schnelli, Pieter Wuille, Samuel Dobson, John Newberry, and Jeremy Rubin for their contributions to Bitcoin, to name just a few.
“Who controls Bitcoin?” is an age-old question often asked by investors, technologists, and regulators. And while the WSJ article focuses on a technicality, i.e., those individuals with administrator roles for the Bitcoin GitHub repository, it misses the forest for the trees entirely. The reality, one proven by the outcome of the scaling debate, is that Bitcoin’s users control Bitcoin, not the developers, miners, exchanges, or any individual. If one of these administrators does something against the will of the user base, the code can be copied and updated, thus removing unwanted “contributions” by the individual and removing them from the update process.
The social agreement of what “Bitcoin is” is what binds Bitcoin. The code changes, user factions can leave Bitcoin, the developers come and go, miner and pool shares rise and fall, and even portions of the white paper have been invalidated or are no longer relevant. There are few legal or technical barriers to making a copy of Bitcoin’s code, making some trivial changes, and calling it something else. But like many institutions in this world, “Bitcoin” is a construct of human design that is available for individuals to opt into for any reason, be it technical, economic, or social. This is why we favor valuing Bitcoin through its user base, the number of addresses that own bitcoin, or those that have opted into the Bitcoin ecosystem via free will. The central conflict of The Matrix trilogy, free will versus control, tells us that the choice exerted by Neo is the most potent force in the world, even more so than the code enforced lack of free will by Agent Smith. We think the analogy holds true for Bitcoin as well.
Bitcoin fell 2.6% on the week as renewed fears about persistent inflation pressured risk asset prices. Equities fell as well, with the S&P 500 down 1.9% and Nasdaq Composite down 2.2%. Commodities were down as well with gold down 1.3% on the week and oil down 3.9%. Bonds were a bright spot during the week, however, with investment grade corporate bonds flat, high yield corporate bonds up 0.5%, long-term US Treasuries up 0.7%.
Regulation and Taxation:
Joint Statement on Liquidity Risks to Banking Organizations Resulting from Crypto-Asset Market Vulnerabilities - Fed Reserve, FDIC, OCC
Stablecoins Attract Scrutiny in SEC’s Drive to Control Crypto - WSJ
Gary Gensler on Meeting with SBF and His Crypto Crackdown - NY Mag
Hong Kong Proposes Rules for Crypto Trading Platforms - CoinDesk
Trading Platform eToro Gains New York BitLicense to Provide Crypto Services - CoinDesk
Investing:
Binance Semi-Automates B-Token Reserves Management After Errors - Bloomberg
Companies:
SEC Objects to Binance.US’ $1B Voyager Deal, Alleging Sale of Unregistered Securities - CoinDesk
Galaxy Digital Closes $44M Acquisition of Self-Custody Platform GK8 - CoinDesk
Introducing Base - Coinbase
Mar 10 - February jobs report
Mar 14 - February CPI release
Mar 22 - FOMC rate decision
Mar 31 - CME expiry
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