Explosive and sudden change is common

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Steve Sokolowski
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Joined: Wed Aug 27, 2014 3:27 pm
Location: State College, PA

Explosive and sudden change is common

Post by Steve Sokolowski » Thu Mar 03, 2016 5:27 pm

Unlike Mike Hearn, I'm not ready to say that bitcoin is dead yet, but the project is definitely on life support. I do believe that absent some action soon, we are going to see a very rapid event where faith in bitcoin is suddenly and permanently lost.

A study of societies in the world reveals that most social change is exponential, not linear. As a result, people are often surprised when events happen seemingly out of nowhere. This post reviews how such dramatic change is actually commonplace, and how dramatic change in cryptocurrency is not only possible, but it is more likely than a scenario where there is a slow period of transition.

An example of how social change occurs suddenly is how the 160-year-old Republican party, in just the last week, is now in danger of dissolution due to its current officials attempting to overrule what voters have chosen. The factors at play in that event involve a very unstable coalition of people who have increasingly disapproved of the actions of elected officials for years. The tension between those people built exponentially until March 1, when Trump won commandingly. Republicans who oppose Trump now have two options: they can either accept that voters have rejected their ideals and adapt, or they can make a stand on principle and destroy the party. Voters have spoken and politicians are unlikely to make Trump supporters support them instead.

What is important is that Republicans had many opportunities to prevent the outcome by compromising before that point was reached. If, at any point, people like Paul Ryan had talked with Trump and endorsed him, they would essentially have ended most of the opposition and been able to move forward with Trump, adapting to what people want. Regardless of the negative opinions they or many voters have of Trump, Trump has demonstrated that he inspires more people than any other candidate has. But now that things have come to a boiling point, the politicians' options have become limited.

We also see this effect of social change in many revolutions around the world. During the 2011 coup in Egypt, Mubarak refused to respond to the demands of protestors for weeks. The delay allowed tension to build between the government and the protestors in the street. The day before Mubarak resigned, he attempted to place his vice president in charge. If he had taken that action immediately after the protests began, he could likely have remained in power in a lesser role. By ignoring what the people wanted and allowing tension to build, he made the offer unpalatable to the Egyptian people, and he was forced to abdicate to the military that Friday in March.

Bitcoin is a social system where the tension is building. Before Gavin Andresen began his push for larger blocks last May, people like me were the only ones who cared about the upcoming crisis, and an agreement on a compromise solution with the Core would have been easy if they had been willing to come to the table. The tension escalated in August with the release of BIP101, and it then became more difficult, but still possible, to come up with a solution.

The most important, and possibly last, point of escalation occurred on February 29, the day that will probably be remembered as when the bitcoin network became "full." Now that there is a permanent transaction backlog, the network is now too unreliable for applications other than as a store of value. It is no longer possible to create an auditing system for a business that interacts with the bitcoin network, because transactions cannot be resent with a different fee to ensure they were processed and be guaranteed which transaction will be spent. This is a critical shortfall that eliminates most business applications that pay customers. The posts in /r/btc have turned almost entirely to criticisms of the blocksize, indicating that the tension is reaching a tipping point. Most of these posts complain about high transaction fees, but the real issue turning users away is that it is impossible to determine what fee to pay, and if your transaction will be received.

As with the other two examples above, Bitcoin Classic would have probably have allowed bitcoin development to continue had it been accepted by the Core at the first two escalations in May or August. Now, I suspect that the Core's outright accepting Bitcoin Classic with no other concessions is insufficient to save bitcoin. In May and August, few normal users were affected because blocks weren't full. Now, many users are unable to use the system because it is too unreliable, and they are taking notice. Support for BIP101 among users was already at a plurality of 50% in September according to surveys, and that was before the goalposts were lowered and the network became full.

The rise of Ethereum is not an accident. It follows a series of altcoin bubbles in the past six months - first with litecoin, then with dogecoin, where people were sampling other coins to see which one, if any, would stick. I used to think that the Ethereum bubble was entirely the result of the spam that was being sent out to reddit users, but there is far too much money going into the system now for Ethereum to be ascending solely due to spam. Ethereum has many flaws, the greatest of which is that it is needlessly complex to port existing software to it, but even if Ethereum ultimately crashes, one of the coins will soon see a rise that doesn't end. Remember that bitcoin gained huge value well before significant usage occurred, and there is no reason we should expect to see a well-developed industry around an altcoin before it rises. The altcoin bubble will come first, and then the industry will move to it.

Before bitcoin's reward halves, the tipping point is going to be reached. Like the Republican party did with Trump, the Core has wasted its opportunity to negotiate with its users, who simply want a reliable network. The Core does not have the time remaining to complete the Lightning Network, and even if they did, their intransigence earlier means that the Lightning Network is completely dead on arrival for alienated users. They are going to be faced with a choice sooner than anyone expects. They will be able to maintain their positions by increasing the bitcoin blocksize, or they will be able to stand on principle and destroy the bitcoin network. My prediction is that they will follow the Republicans and choose to take a stand.

Most likely, the event would play out something like this: an altcoin begins to gain significant market share, transaction volume, and support from big business. If Ethereum is going to be this altcoin, it already fulfills one of the three: the "support from big business" criteria, and it already has resolved the blocksize issue. The price of bitcoin begins a slow bleed as speculative value begins to flow into the altcoin. A prominent figure calls for the Core to support an emergency fork to reassure users. The Core holds a decisive meeting, and they come out of the meeting with a statement that they will maintain support one of the lengthy scaling roadmaps previously discussed. As soon as the news breaks, bitcoin has the largest crash in its history and within a matter of hours almost all of the value is transferred over to the altcoin. Faith in bitcoin is permanently lost, literally overnight, and big industry businesses wake up the next day and are forced to write software compatible with the altcoin.

Some may question whether such a fantastic scenario could occur. Most economists would agree that this scenario is, at the very least, far more likely than a "slow takeover" scenario where bitcoin slowly loses value over a matter of weeks or months. Markets tend to exaggerate movements and sells are often sudden, aided by automated bots that would trigger emergency liquidations when key levels are reached. The most compelling argument against the idea is that the Core can produce the Lightning Network and have it ready for production within a month or two.

I suggest that right now, the loss of faith scenario is the most likely outcome to bitcoin. If bitcoin's future were in the hands of businesses, their shareholders would see it in their economic interest to step in. Indeed, the CEO of Coinbase sees the danger but is unable to do anything about it. But the people with the most influence on bitcoin are unpaid, so they can't simply cut a deal for more money to produce a desired outcome. Theymos, for example, has said many times that he will never compromise under any circumstances.

Ethereum may not be the altcoin that triggers this outcome, but the Core's decision point is coming far sooner than everyone thinks. A telling event is that the number of posts about altcoins exceeded the number of posts about bitcoin in the /r/bitcoinmarkets daily discussion threads recently. The moderators reacted by banning all non-bitcoin discussion, indicating that interest in altcoins has already started to rise significantly. The increasing number of Classic nodes (but not blocks), the bubbles in other coins, and the takeover of /r/btc of 100% posts about the blocksize indicates that everyday users are irreconcilably dissatisfied with the Core's actions. They allowed events to spiral out of their control, and it is no longer possible for them to achieve their desired outcome of a widely-used network with small blocks. When the tipping point is reached, their only options will be to capitulate to users, or declare that they would rather destroy the network on principle - and past actions have demonstrated that they are likely to choose the latter.
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