HOME PERSPECTIVES Time to Save Bitcoin

Time to Save Bitcoin

   Silver Xie  |   2020-02-26

by Silver Xie, founder and CEO of IPSE


It is only one quarter before the next Bitcoin halving that is expected to occur on May 2020.


The title of this article, Save Bitcoin, is not to appease this anxious waiting mood, but to listen to the voices of Bitcoin optimists and many Bitcoin sceptics. And it is the time to clearly and simply talk about the current problems of Bitcoin, as well as some ideas from our team for blockchain development.


As I said before, if I want to choose the most widely spread and successful value in the past ten years, I want to choose the Bitcoin network value other than democratic freedom, universal value, etc. First of all, we must understand the relationship between bitcoin and the blockchain. Bitcoin became a new innovation and then blockchain technology followed. Like the James Watt, well made improvements in steam engine and then led the thermodynamics.or like Wright brothers were aviation pioneers whose inventions like the world's first successful motor-operated aircraft leading the aerodynamics technology made the industrial revolution possible.


When bitcoin was first invented, some of its attributes were passed on as an immutable creed, which were definitely like "religious" beliefs. This is like having the Christian belief before the theological system of the Trinity.


How can Bitcoin be scalable?

In the process of human development, the role played by religious belief is huge. The choice based on empiricism is often more correct than the choice based on rationalism. In an open game system, the rational choices made by each mini-game have selection boundaries. No one can stand in the perspective of God and choose a road map of the global optimal solution from the beginning.


Let's take a look at several basic tenets of Bitcoin's optimists core group:

l  Fully decentralized. Bitcoin system must be widely operated by nodes with censorship resistance, and not be managed by a government, bank or agency. Bitcoin has to be public and decentralized enough to make it easy to run even on a microcomputer such as a Raspberry Pi, so that the government or other central authority cannot kill the entire network. Because we insisted on this, the block size cannot be arbitrarily upgraded, that is, the current Bitcoin block is locked at 1M and the network cannot be scalable.

l  The underlying consensus, PoW, cannot be converted from PoW to PoS like Ethereum.


The expansion group derived from the core group adopted a different attitude. After the Bitcoin fork war, BCH was forked from BTC. The BCH community believes that Bitcoin software does not need to limit the block size to 1M, so the network can be scalable. If the node performance is getting stronger and stronger, since it has been expanded once, there is no difference in expanding N times, and the block size can be continuously expanded, as long as a single node can process transactions in the block within a block time.


The benefit is that it can carry more transactions, and the price ceiling is not as obvious as BTC. In fact, no matter how the block is expanded, there is always a price ceiling. With more and more transactions, the cost of a single transaction will still rise, but it is not as obvious as Bitcoin.


Let's take a closer look and start from the two basic tenets of the core group of Bitcoin's optimists to reason about the problems facing BTC.


The serious problems of Bitcoin

It is very clear that the number of bearing transactions will be limited and the highest handling fee will have a price ceiling when the block size is locked at 1M. With the increasing handling fee, more and more bitcoin transactions will move towards off-chain transactions and expand the second-tier network.


With less and less block rewards, the fees have a clear price ceiling, and the total market value of the mining industry that can be maintained will shrink. According to this logic, the total market value of BTC may exceed 10 trillion dollars. However, the total market value of the mining industry is only less than 10 billion dollars, which means that the value of the mining industry is less than one thousandth of the total market value of BTC. The cost of a 51% attack is relatively low, and it is possible to take less to initiate a 51% attack, or go short for the secondary market to get huge arbitrage profit.


As we know, the next bitcoin halving event is about to occur, the block mining reward will decrease from 12.5 to 6.25 BTC, and to 3.125 in fourth halving.

At the beginning of the Bitcoin design, the assumption in the model was that at the end of the halving, the main reward will no longer be a block reward, but a commission fee as a reward. However, the increase in handling fees is obviously not enough to make up for the reduction in rewards brought by the halving event. Moreover, I think that even if the bitcoin network is scaled, this contradiction cannot be resolved fundamentally, it can only delay the arrival of this halving end effect.


Therefore, Satoshi Nakamoto set up a block expansion plan from the beginning, and wrote examples and other statements. I don't take it for granted. If you can imagine this from the beginning, the 1M block size parameter could be directly set to 10M in the initial bitcoin blockchain version.


Bitcoin halving: The good, the bad, and the ugly

If we want to figure out what Satoshi Nakamoto insisted on at first, I personally think there are two points:

l  Everyone can participate in mining, one CPU, one vote. Later PoW evolved into ASIC chip mining, which has long been far from its original intention. This is also the starting point for limiting the block size to 1M. The threshold for mining nodes is as low as possible, and everyone can participate.

l  Create a new cash system to Fight against inflation. The most hard-core attribute of creating a cryptocurrency against universal inflation is a deflation model that will never be issued again. This is also to realize the currency that can be competed in the "currency jungle" envisioned by Friedrich August von Hayek.


I personally like the two insistences of Satoshi Nakamoto. And when we conceived to be a new cryptocurrency, we adopted a new underlying consensus of PoC to restore the original intention of everyone in Satoshi Nakamoto.


You can learn more in this article, " Beyond Bitcoin: Strengthen The Blockchain Consensus" (https://blog.ipse.io/en/content/64), where I shared the design ideas of the conjugate PoC and the logic of strengthening consensus, and explored how to maintain the market value and total computing power of the mining industry, and maintain the security of the entire blockchain network.


In fact, for the "halving end effect", the simplest solution is to directly remove the halving rule at the end, which is also the best solution that the core group of Bitcoin optimists can come up with. At the end of the halving period, when the fee and block reward are not enough to maintain a sufficiently safe group of miners, the halving mechanism can be abandoned directly. For example, after halving in 2024, the block reward is 3.125 BTC, and this mechanism has been continued in the future so that the block reward will no longer be decreased. But this will destroy the deflationary nature of Bitcoin. Bitcoin will no longer be a cryptocurrency with the number of 21 million but a digital currency with an annual inflation of 0.78%. With such an inflation can Bitcoin still be the digital gold for everyone?


Analyzing from a theoretical level, if the core group of Bitcoin optimists promote the cancellation of the halving rule, it will seriously affect the "bitcoin hardness". The Bitcoin hardness S2F theory is the latest research theory. The S2F (Stock to Flow) model, inventory / output, were indicators used to quantify the scarcity of assets, can be called the "hardness" of the assets.

 3-bitcoin stock to flow.jpg

According to the current halving rule, the hardness of Bitcoin is constantly increasing. If the halving rule is cancelled, the growth trend of Bitcoin's hardness/difficulty will be interrupted. Then a linear regression relationship between the total market value of Bitcoin and S2F will show that the hardness/difficulty of Bitcoin will no longer increase and its price will no longer increase significantly if the rule of halving Bitcoin is cancelled.


According to the "Drunk Man Going Home Theory" by Stephen Jay Gould, the drunk man's path is winding, but the way home is traceable. Bitcoin hardness is like the way Bitcoin price goes home. If Bitcoin hardness keeps growing, its way home will be like a constant increase in price. If Bitcoin's hardness is no longer increasing, its way home will be to keep the price from increasing. If you want to know more about the theory of Stephen Jay Gould, please check this article, "The Path and Logic from Weak Consensus to Strong Consensus". (https://blog.ipse.io/en/content/65)


If it cannot rely on network capacity expansion to alleviate the problem, and BTC has missed this opportunity that has been taken away by BCH and others. And we can't simply cancel the halving rule and destroy the original design of Bitcoin. So, is there a way to save Bitcoin now? The problem facing Bitcoin is so significant that a solution must always be given to make mining industry better. After the above analysis, even the most fundamentalist believers in Bitcoin optimists should understand that there is indeed a game ending: Saving Bitcoin is not an empty slogan but a serious problem.


If we do not cancel the halving rule and do not expand the capacity at the same time, then there is only one way to solve the half-end effect, that is to make users willing to bear the high Bitcoin transfer fee, and then this part of the fee is sufficient to maintain the bit mining industry.


However, it has also been analyzed before. If the fee is too high, such as transferring a bitcoin, a handling fee of up to several tens of dollars will be required, and many transactions will move towards off-chain transactions and expand the second-tier network. Unless there is a subsidy mechanism that allows the use of Bitcoin payment itself to create value. Satoshi Nakamoto positions bitcoin as a peer-to-peer electronic cash system. Its main idea is to create value through the circulation of bitcoin in the payment link. If this cannot be done, Nakamoto's bitcoin cash system is impossible to achieve.


TransX, a new way to save Bitcoin

Our team has created a new aggregate payment, TransX (transx.io), which also uses Bitcoin as the core payment cryptocurrency. It essentially encourages Bitcoin to play the role of payment currency in large-scale offline and commercial transactions, while rewarding users with DCAP (the native cryptocurrency of TransX platform). During the payment, although the transaction fee of Bitcoin is consumed, the DCAP of TransX will be sent to user as mining reward, which encourages more people to choose Bitcoin as a payment method.

What needs to be mentioned is that both major cryptocurrencies (btc, eth and more ) and stablecoins(such USDT)are supported in the TransX system. Even EOS with no fees are supported. However, each cryptocurrency has a quota, and the Bitcoin quota is relatively large.


In essence, TransX relies on the cryptocurrencies led by Bitcoin to create a decentralized aggregate payment platform. In turn, through the improvement of this payment link, Satoshi Nakamoto ’s peer-to-peer electronic cash ideal is realized. The most important thing is that by rewarding DCAP, the transaction fee of the Bitcoin network is subsidized, which fundamentally solves the problem of  halving end effect of Bitcoin.


As a new way to save Bitcoin, TransX helps promote the development of decentralized finance and blockchain technology.