Technology × Freedom

Bitcoin's Scaling Debate Is a Fascinating Exercise in Game Theory

June 22, 2017 invisiblehand

If you follow Bitcoin news, you know that the years-long scaling debate is quickly coming to a head with Sergio Lerner's recent SegWit2x proposal and the subsequent New York Agreement. But for the merely casual onlooker, all of the technical jargin about block size, coinbase strings, and user-activated soft forks can leave you feeling a little lost.

The thing to understand, as Erik Vorhees eloquently explains, is this:

…the unfortunate context in which [the scaling debate] is occurring is one of diminishing utility on the platform: transactions are getting more expensive and less reliable. The user experience of sending a Bitcoin transaction today is worse than it was two years ago. While the price has risen, fundamental utility has actually declined. This is unsustainable, and will be inevitably resolved by utility once again rising, or price declining to meet it.

In other words, everyone in the Bitcoin community has a vested interest in achieving scale so that a key value proposition or "utility" of the cryptocurrency - easy, secure transaction - doesn't get destroyed by the increasing cost of that transaction (because of finite network capacity and miner fees).

But despite everyone having skin in the game, finding a solution to the scaling problem hasn't been easy. It's certainly possible the whole Bitcoin experiment could go down in flames. You can think of it like a business, where everyone from the lowest employee to the chairman of the board is a stakeholder in the company's success. Yet businesses fail all the time due to poor management, lack of accountability, infighting, employee sabotage, and so on. This is why companies and thought leaders have become obsessed in recent years with the concept of alternative organizational models and "Enterprise 2.0," as they realize that the traditional, bureaucratic-hierarchical model that has dominated the past century no longer works in today's "flat" technological world.

So even if you don't understand the finer points of the SegWit2x proposal, you can appreciate it on a higher level as a fascinating case study in alternative organizational models and begin to think about how the Bitcoin model might be applied to - or even replace - current forms of government. Bitcoin developer Jimmy Song has written about how the bitcoin ecosystem is like the three branches of government, with developers being the legislative branch, miners being the executive branch, and users being the judicial branch. In a recent CoinDesk article, he also touched on its parallels with the democratic voting process:

While scaling is the reason everyone claims for this conflict, the actual reason may lie higher up. And when you think about the actual consensus process that's required to change bitcoin, it's clear that both sides want more control than they currently have…. This has brought us to the current impasse. Both sides want control, but given that bitcoin is a consensus-based system, there's no way to give each side what it wants and keep bitcoin on a single chain.

This sounds eerily similar to the current right-versus-left political gridlock in America, with both sides wanting to grab the power apparatus in Washington in order to force their vision of the future on the rest of the country. This is what inevitably happens in a democratic government. But the Bitcoin community is not a democracy, and the concensus approach to making coding changes to the blockchain protocol doesn't force everyone to accept the outcome - instead, it creates a "hard fork" where the minority are cut off from the main chain (Bitcoin Core, in this case) and must form a new chain. Whether this is a good or bad thing will depend on what side you're on and whether you're a miner, user, or investor. But it certainly offers the greatest amount of freedom. And when we talk about government, freedom is the only legitimate goal.

Now For a Bit of Game Theory

Courtesy of Wikipedia:

In economics and game theory, a participant is considered to have superrationality if they have perfect rationality (and thus maximize their own utility) but assume that all other players are superrational too and that a superrational individual will always come up with the same strategy as any other superrational thinker when facing the same problem. Applying this definition, a superrational player playing against a superrational opponent in a prisoner's dilemma will cooperate while a rationally self-interested player would defect.

Remember that in the prisoner's dilemma (where neither player can know the other's decision ahead of time), if both players cooperate, they both get a medium benefit. If both players betray or "defect," they both get a small benefit. If one of them cooperates and the other defects, the cooperator gets no benefit and the defector gets a big benefit. The problem, of course, is that because of the phenomenon of loss aversion, both players will always defect. Might this explain America's political gridlock?

But if superrationality is possible, the cycle of defection can be broken. If everyone in the Bitcoin community were superrational, they would all come to the same scaling solution and would all cooperate to make that solution happen. The question is, how do you promote superrationality?

One way that occurs to me is to allow for multiple prisoner's dilemma scenarios, like different blackjack tables in a casino, and allow participants to move from table to table. Eventually, the superrational players will all find one another and stick together, and all the defectors will be left to themselves. Once the defectors see the superrational players enjoying better returns, they'll be incentivized to join the superrational table. It will never be a perfect system, but it will be a system where the defectors are continually weeded out.

It would follow, then, that the best form of government is a sort of loose confederation of states or municipalities, with relatively easy movement across the municipalities. Think of the Swiss canton model, except without a state-controlled monetary system. As part of the confederation pact, municipal governments could only have a voluntary tax system using, for instance, Dominant Assurance Contracts. People who were unhappy with the number of non-cooperators in their municipality or who disagreed with the concensus vision could vote with their feet. In a word, the best government is radically decentralized.

As we watch the Bitcoin community wrestle through the tough questions and growing pains of a decentralized organizational model, I can't help but wonder if we're failing to see the broader lessons than can be learned and applied to our broken political system.