This is the fourth essay in my series on Bitcoin’s history and original value proposition, all of which will be included in my upcoming book, All That Bitcoin is Not Gold.
The discussions about Bitcoin’s “cashness” vs its “goldness” are not something new. While they have developed an almost religious-like temperament in the past few years, from the moment Satoshi announced Bitcoin, “a peer-to-peer electronic cash system,” on the Cryptography Mailing List in 2008, he was met with skepticism that it could scale to become global money and arguments against its intended use as cash.
We very, very much need such a system, but the way I understand your proposal, it does not seem to scale to the required size…
If hundreds of millions of people are doing transactions, that is a lot of bandwidth – each must know all, or a substantial part thereof.
This email, from a man named James A. Donald, was the very first reply to Satoshi Nakamoto’s announcement, and it began a rather interesting conversation about the nature of Bitcoin, its purpose, and its potential, with clear lines drawn between two camps that have only gotten deeper and more explosive in the years that followed.
Satoshi’s reply is one that is regularly cited by big blockers and Bitcoin Cash users, as it makes clear that from the start , Bitcoin was intended to be digital cash that scales for the entire world that offered a substantial improvement over the existing system.
Long before the network gets anywhere near as large as that, it would be safe for users to use Simplified Payment Verification (section 8) to check for double spending, which only requires having the chain of block headers, or about 12KB per day. Only people trying to create new coins would need to run network nodes. At first, most users would run network nodes, but as the network grows beyond a certain point, it would be left more and more to specialists with server farms of specialized hardware. A server farm would only need to have one node on the network and the rest of the LAN connects with that one node.
The bandwidth might not be as prohibitive as you think. A typical transaction would be about 400 bytes (ECC is nicely compact). Each transaction has to be broadcast twice, so lets say 1KB per transaction. Visa processed 37 billion transactions in FY2008, or an average of 100 million transactions per day. That many transactions would take 100GB of bandwidth, or the size of 12 DVD or 2 HD quality movies, or about $18 worth of bandwidth at current prices. If the network were to get that big, it would take several years, and by then, sending 2 HD movies over the Internet would probably not seem like a big deal.
Satoshi might very well have been wrong about this. Perhaps Bitcoin truly cannot scale like he believed, but that he believed it could be digital cash that replaces the existing Visa system is absolutely indisputable and should not be written out of history.
Consider for example another related reply from Satoshi to James A. Donald that explains why Bitcoin is better than the credit card system:
Paper cheques can bounce up to a week or two later. Credit card transactions can be contested up to 60 to 180 days later. Bitcoin transactions can be sufficiently irreversible in an hour or two.
The original value proposition of Bitcoin was that, for many reasons including that it is peer-to-peer, has low fees, censorship resistance, non-reversibility and a deflationary nature, it was better than the existing internet payments system. It was cash with some gold-like properties, but it was still cash.
While we have Satoshi on one side arguing that Bitcoin is digital cash that can scale and James. A Donald (and cypherpunks) on the other arguing that Bitcoin is gold. It can’t scale:
…we will need a layer of account money on top of the bitcoins, supporting transactions of a hundred thousandth the size of the smallest coin, and to support anonymity, chaumian money on top of the account money.
Let us call a bitcoin bank a bink. The bitcoins stand in the same relation to account money as gold stood in the days of the gold standard. The binks, not trusting each other to be liquid when liquidity is most needed, settle out any net discrepancies with each other by moving bit coins around once every hundred thousand seconds or so, so bitcoins do not change owners that often. Most transactions cancel out at the account level. The binks demand bitcoins of each other only because they don’t want to hold account money for too long. So a relatively small amount of bitcoins infrequently transacted can support a somewhat larger amount of account money frequently transacted.
Donald’s argument makes a proto-case for the Lightning Network and for Bitcoin as a sort of “gold” settlement system, not a cash system. He goes on to repeat himself again throughout the email exchanges:
We can build a privacy layer on top of this – account money and chaumian money based on bitgold coins, much as the pre 1915 US banking system layered account money and bank notes on top of gold coins, and indeed we have to build a layer on top to bring the transaction cost down to the level that supports agents performing micro transactions, as needed for bandwidth control, file sharing, and charging non white listed people to send us communications.
Those familiar with today’s arguments for small blocks, “digital gold” and second-layer scaling solutions will find these statements from Donald strikingly similar, though they are admirably absent of any of the insults and innuendo so regularly paired with these claims today which reveal more about the character of the attackers than their targets.
He makes one last argument in the discussion about the need to keep bandwidth prices low to maintain maximum censorship resistance, to which Satoshi doesn’t directly respond.
I think we need to concern ourselves with minimizing the data and bandwidth required by money issuers – for small coins, the protocol seems wasteful. It would be nice to have the full protocol for big coins, and some shortcut for small coins wherein people trust account based money for small amounts till they get wrapped up into big coins.
The smaller the data storage and bandwidth required for money issuers, the more resistant the system is the kind of government attacks on financial networks that we have recently seen.
Though we don’t have Satoshi’s direct reply to this, remember that he believed that Bitcoin “would be left more and more to specialists with server farms of specialized hardware” instead of individuals using equipment with small bandwidth requirements to secure the network. Since no reply was given, it’s likely he felt he had already made his case.
Unfortunately, the argument was not settled here and it continued for years until it led to the creation of the alt coin market and the ultimate splitting of Bitcoin into BCH and BTC.
It will be interesting to watch the development of the two chains to see whether Satoshi was correct or Donald was correct, but BTC investors who make the small block argument should understand that when they do, they are not using the words of Bitcoin’s creator, but the words of James A. Donald.
Bitcoin was not intended to be “gold,” but cash. It was intended to scale on-chain, not off-chain, and it was meant to compete with Visa and other existing payment solutions. When normal people first began signing up for Bitcoin, it was this value proposition that excited them.
Forgetting it might perhaps be dangerous for Bitcoin’s future.
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 It was in fact already clear from the white paper.