What are a few direct and indirect costs of the “block size debate”?

About six weeks ago I mentioned a dollar figure during a panel at the Consensus event in NYC: $6 million. Six million USD is a loose estimate — for illustrative purposes — of the amount of engineering time representing thousands of man hours over the past 7-9 months that has gone into a productivity black hole surrounding the Bitcoin block size debate.

A little recent history

While there had been some low intensity discussions surrounding block size(s) over the past several years, most of that simmered in the background until the beginning of 2015.

On January 20th Gavin Andresen posted a 20 MB proposal which was followed over the subsequent weeks by a number of one-and-done counterpoints by various developers.

About four months later, beginning on May 4, Gavin posted a series of blog articles that kicked things up a notch and spurred enormous amounts of activity on social media, IRC, web forums, listservs, podcasts and conferences.

The crescendo of public opinion built up over the summer and reached a new peak on August 15th with a post from Mike Hearn, that Bitcoin would fork into two by the beginning of next year.

The passionate enthusiasts on all sides of the spectrum took to social media once again to voice their concerns.  During the final two weeks of August, the debate became particularly boisterous as several moderators on reddit began to ban discussions surrounding Bitcoin XT (among other forks and proposals).  There was even an academic paper published that looked at the sock puppets involved in this period: Author Attribution in the Bitcoin Blocksize Debate on Reddit by Andre Haynes.

Ignoring the future evolution of block size(s), with respect to the opportunity costs of the debate itself: investors and consumers have unintentionally funded what has turned out to be a battle between at least two special interest groups. 1

So where does the $6 million figure come from?

Of the roughly $900 million of VC funding related to Bitcoin itself that has been announced over the past 3 years, about half has been fully spent and went towards legal fees, domain names, office rent, conference sponsorship’s, buying cryptocurrencies for internal inventory and about a dozen other areas.2

At the current burn rate, Bitcoin companies collectively spend about $8-$10 million a month, perhaps more.  And since the debate is not isolated to development teams, because upper management at these companies are involved in letter writing campaigns (and likely part of the sock puppet campaigns), then it could be the case that 5-10% of on-the-clock time at certain companies was spent on this issue.

Consequently, this translates into about $400,000 to $1 million each month which has been redirected and spent funding tweets, reddit posts, blog posts, conferences, research papers and industry conferences.3

What about specific numbers?

For instance, with around 150-200 attendees the Montreal scalability conference likely absorbed $250,000 from everyone involved (via travel, lodging, food, etc.).  Similarly, one independent estimate that Greg Maxwell mentioned at the same Consensus event was his back-of-the-envelope projection of the opportunity costs: a few hundred thousand USD in the first couple weeks of May alone as engineers were distracted with block sizes instead of shipping code.

While a more precise number (+/-) could probably be arrived at if someone were to link individual developer activity on the dev mailing list/reddit/twitter with their estimated salaries on Glassdoor — since this past spring roughly $6 million or so has probably gone towards what has amounted to basically two diametrically opposed political campaigns.

And the issue is still far from resolved as there are more planned scalability conferences, including one in Hong Kong in early December.

Why is it a black hole though?  Surely there is utility from the papers and projects like Lightning, right?

It’s a money pit because it doesn’t and cannot resolve the coordination problem that decentralized governance creates.  I have an upcoming paper that briefly touches on this issue (in Appendix A): the key point is that any time decision making is decentralized then specific trade-offs occur.

In this case, due to an intentional power vacuum in which there is no “leader,” special interest groups lobby one another for the de facto right to make decisions.  Some decisions, like raising the minimum transaction relay fees involve less tweets and downvotes and are for various reasons considered less important as others.  Yet ultimately, de jure decision making remains out of reach.

Not the first time to a rodeo

Because decentralized governance (and external social consensus) was/is a key feature for many cryptocurrencies, this type of political activity could happen again with say, increasing the money supply from 21 million or if KYC becomes mandatory for all on-chain interactions.

Again, this was bound to happen because of the tragedy of the commons: because the Bitcoin network is a public good that lacks an explicit governance structure.  Anytime you have a lack of formal governance you often end up with an informal power structure that makes it difficult to filter marketing fluff from sock puppets like Cypherdoc (aka Marc Lowe) from actual fact-filled research.

And this subsequently impacts any project that relies on the Bitcoin network as its security mechanism.  Why?  According to anecdotes, projects from new organizations and enterprises have reconsidered using public blockchains due to the aforementioned inherent governance hurdles alone.

After all, who do they call when the next Mexican standoff, block reorg or mutually assured destruction situation arises?  There is no TOS, EULA or service-level agreement and as a result they look at other options and platforms.4

  1. It is probably too simplistic to say that, with $6 million in funding, these same developers could have simply created a new system, like Ethereum, from scratch that factors in scalability challenges from day one.  It is unlikely that these same developers would have come to agreement on what to spend those funds on as well. []
  2. See What impact have various investment pools had on Bitcoinland? and Flow of investments funds in Bitcoinland []
  3. The academic term for this is single-issue politics. []
  4. For instance, Tezos was designed specifically with a self-amending chain in mind due to this issue. []
Send to Kindle

Some housekeeping of events and interviews

It has been a little while since I posted the events, panels and presentations I have been involved with.  Below is some of the public activity over the past 5-6 months.

Interviews with direct quotes:

Indirect quotes:

Academic citations:

Presentations, panels and events:

Send to Kindle

The great pivot? Or just this years froth?

smjmeAbout a year ago I briefly explored the PR and branding challenges of Bitcoin, a topic that has been independently discussed by others.

Over the past 6 months there has been a visible trend in the overall “Bitcoin” space to rebrand or not use the term “Bitcoin” on corporate material.  This has been done for a variety of reasons.

Some startups simply are no longer touching or interfacing with bitcoins or the Bitcoin network.  Others do not want to be affiliated with the term preferring the alternative “Blockchain” as a catch-all euphemism.

For instance, below are 10 companies which raised their Series A (and sometimes more) and were originally affiliated with “Bitcoin” in some manner but are no longer publicly positioning themselves as such:

  • Abra ($14 million): originally launched as a “rebittance” company, still claims to use the Bitcoin network but the word Bitcoin does not appear on its homepage
  • BitGold ($5.3 million): pivoted from Bitcoin last December
  • Bitreserve ($14.6 million): rebranded as Uphold and now vocally moving away from Bitcoin
  • ChangeTip ($4.25 million): removed the word Bitcoin from its frontpage, now focused on USD-denominated tips
  • Chain ($43.7 million): after closing its recent B round, remarketed from Bitcoin-only and removed the word Bitcoin from its frontpage except in the headlines of past news articles
  • Circle ($76 million): rebranded after receiving a Bitlicense; neither its frontpage nor its new 60 second ad use the word Bitcoin
  • Cryex ($10 million): the word Bitcoin does not appear on its frontpage
  • Mirror, formerly Vaurum ($12.8 million): the word Bitcoin does not appear on its frontpage (but does on some older blog posts)
  • Peernova ($19 million): originally a Bitcoin mining company that is no longer affiliated with Bitcoin at all
  • Vogogo ($21 million): the word Bitcoin does not appear on its frontpage

A few others who have done marketing changes (some more substantive than others):

  • BTC China ($5 million): still focused on its virtual currency exchange renamed itself as BTCC to move further abroad into the international marketplace
  • itBit ($28.25 million): in addition to running its virtual currency exchange, they also launched the Bankchain initiative this past summer
  • DAH: originally planned on using the Bitcoin blockchain but broadened its scope during the summer after acquiring Hyperledger; the word Bitcoin does not appear on its homepage although it still uses the network for product launches (like Pivit)
  • Symbiont: originally used the Counterparty platform and the Bitcoin network as part of its financial service, but has now built a permission-based system
  • Align Commerce, Serica and many others do not use the word Bitcoin on their homepages yet still use the Bitcoin network for some lines of business
  • Coindesk renamed their quarterly report: “State of Bitcoin and Blockchain”
  • Inside Bitcoins (the conference circuit) added “with Blockchain Agenda” prominently at the top of their homepage

What about venture capital itself?

btcstartusp

Source: CB Insights

As visualized in the chart above, Bitcoin-related investments have declined the past two quarters.

However, the chart is not fully accurate as CBI includes 21inc funding as “one” round in Q1 2015.  According to Nathaniel Popper, 21inc did not raise its war chest in one round but rather over the course of 3 rounds.  So it is likely that Q1 2015 probably was altogether around $175 million as the other ~$60 million were raised in 2013 and 2014.  Similarly Q3 2015 should be less as Chain.com is no longer a Bitcoin-specific company.

What about other changes in the VC world?

Crypto Currency Partners: renamed itself Blockchain Capital

Boost VC: while the word Bitcoin does appear on its homepage, in his most recent writeup of its portfolio, Adam Draper does not use the word Bitcoin but instead uses “block chain” to describe his investments

Pantera: while it remains publicly committed to Bitcoin, based on its most recent newsletter the team likely views the word “blockchain” as more palatable to investors and LPs.

For instance, the year-over-year comparison of word frequency between two Pantera Capital newsletters:

DCG: launched its website during the summer, prominently display the word “blockchain technology” instead of Bitcoin, despite the fact that nearly all of its portfolio is Bitcoin-reliant or Bitcoin-specific.

In fact it appears that the trend by some VC-backed Bitcoin-heavy portfolio’s adopting the term “blockchain” is a marketing gimmick as neither DCG, Pantera nor Boost have purposefully invested in non-Bitcoin blockchain companies.  In fact, individuals such as Barry Silbert (founder of DCG) are outspoken in their dismissal of non-Bitcoin blockchains.

What are some reasons for the decline shown in the CBI numbers?

Part of it has to do with the fact that consumer-facing Bitcoin companies have found muted traction, if any at all.  For instance, BitPay (which raised $32.5 million) recently laid off most of its staff, liquidated a large portion of its bitcoin holdings, raised its fees in order to stay afloat and did a (non-pivot) pivot towards catering to other enterprises.  This looks bad for other Bitcoin-branded companies looking to try and raise funds for consumer-facing products.

Another reason is that some of the buzz and froth simmered down with the price of bitcoin itself.  It seems common parlance to hear people at conferences say “the price of bitcoin doesn’t matter” but that is very untrue for fundraising.  If prices were on a tear into orbit or were managing some stability higher than it was 2 years ago, it’d be easier for entrepreneurs to convince new investors (not just the same 4-5 funds) to deploy new capital in Bitcoin-specific products.  Maybe Gemini will change that?

So where has some capital been deployed instead?

Into that amorphous catch-all term: “blockchain.”

There are just over a dozen “blockchain” / distributed ledger startups collectively trying to raise $200 million at over a $1 billion valuation.

And incidentally, there are a couple companies in each of the VC portfolio’s above that have now built non-Bitcoin blockchains or ledgers.

Some of them are currently raising while others recently closed funding rounds.

This includes: Symbiont, Chain, Peernova, Ripple, Eris, Setl, Credits, Tradeblock, itBit, Tembusu, Clearmatics, MultiChain, BlockStack, DAH, Blockstream (via Liquid) and a few others in stealth that well, are in stealth.

What does being a “blockchain” company mean?

blockchain search google

January 2009 – October 2015. Source: Google Trends

The term “blockchain technology” is basically a catch-all term at this point.

In many cases, when someone at a fintech conference now says they’re interested in “blockchain technology” it typically means they are interested in common elements like public/private key signing, resolutions to double-spending and permission-based multitenancy environments.  Bitcoin, as described by Gwern Branwen, was not the creator of those elements.

What will next year look like?  Will there be a new term that is co-opted?  Or are we stuck using a word that never appeared in the original Satoshi white paper (it had a demarcated space between “block chain”) and has now become an umbrella term for many different neat ideas?

See also: Needing a token to operate a distributed ledger is a red herring and also A blockchain with emphasis on the “a”

Send to Kindle