Bitcoin's Social Contract: Seeking Sovereign Balance in Decentralized Networks
Original Author: Jameson Lopp
Original Translation: Deep Tide TechFlow
Bitcoin enthusiasts often talk about sovereignty; it's a value we cherish. By holding your own keys and operating as a sovereign entity in the Bitcoin economy, auditing the blockchain's history, and enforcing the rules you agree to, it's a way for individuals to empower themselves.
However, since the scalability debate six years ago and as we delve deeper into the governance of the Bitcoin protocol, the nuances of this perspective have become clearer to me. Consider this:
"For privacy to be widespread, it must be part of a social contract. People must deploy these systems together for the common good. Privacy can only extend to the cooperative behavior of other people in society."
- Eric Hughes, "A Cypherpunk's Manifesto"
You might take issue with the term "social contract," but we will delve into this later. I find Eric's statement to be relevant because it touches on a question of network effects. While we are all individuals, if we are to live in a way that necessitates interaction with others, we rely on some degree of cooperation. This holds true for economic interactions, communication, and any other network activities that rely on protocols.
I present to you an assertion that if you replace "privacy" with "sovereignty," Eric's statement holds equally true.
What is Sovereignty?
Sovereignty is independence; the ability to operate freely without seeking permission. It is often attributed to nations, but individuals can also become sovereign to a limited degree.
Individuals can have sovereignty in many aspects of their lives. Of course, for Bitcoin enthusiasts, financial sovereignty is the focus.
In the interconnectedness of today's society and economy, it is nearly impossible for individuals to have complete sovereignty. This is due to specialization of tasks: when we focus on doing one thing, an individual's productivity increases. Therefore, we outsource many aspects of life to third-party experts who specialize in providing specific goods and services.
Even if you are someone living in a remote area, relatively independent from the world, it is unlikely that you live a completely primitive life. For most, they still rely on supply chains occasionally providing them with raw materials and high-tech products that they cannot manufacture from scratch.
Achieving Sovereignty Through Mathematics and Game Theory
From a practical standpoint, how do we achieve financial sovereignty? Of course, we must start from the basics.
What is blockchain? It is a combination of blocks.
I am a technologist. When people talk about "blockchain," what I hear is "database." When people discuss "solving problems with blockchain," they often overlook many crucial details in these system architectures.
When you create a blockchain, all you are doing is creating a linked list of data, a new data structure that is cryptographically linked. This data structure gives us the property of immutability. Besides having an ordered history of events, what you really get is "this happened after that." Nonetheless, to be precise, you cannot determine if the ordered history you are looking at is the true history from the blockchain data structure.
Most of the things people associate with blockchain are not actually guaranteed by blockchain itself. What is blockchain not?
It is not a network of nodes.
It is not a consensus protocol.
It is not an immutable history.
It is certainly not a arbiter of truth.
It is not even a trusted timestamp service.
Blockchain itself can only provide evidence of immutability. You need PoW, PoS, or other consensus mechanisms to make rewriting the blockchain very expensive. You need a network of nodes to ensure the accuracy of the history. You need specific consensus rules to ensure blocks are timestamped within a specific range.
How does blockchain enhance individual sovereignty? Cryptography allows users to create an asymmetric defense barrier for themselves. In other words, the cost of attacking a user whose data is protected by cryptography is several orders of magnitude higher than the cost of the user defending themselves with cryptography.
Similarly, by running software that verifies that no one violates system rules, we gain sovereignty to some extent, as we do not need to trust a third party to be honest.
In these networks, each of us enforces the rules we agree upon, determining which data to accept and propagate to our peers, and which data to reject, thereby achieving consensus. When there is divergence among participants regarding the rules and accepted data, the network automatically forks. Consequently, the "social" interaction among participants will also split, and the "governance" of the entire network is completely seamless.
In my view, the fairest system is one where any participant can veto anything they wish to veto. This allows us to create a system that is not optimized for the majority (the goal of democracy).
Instead, this architecture creates a system that optimizes for minimizing harm to the entire user community.
Traditional Governance
Let's think about how human civilization has developed to this point. Over the past thousands of years, we have created these hierarchical command and control systems to help us organize ourselves, to help us become more specialized, so that none of you have to worry about growing food and maintaining livelihoods.
Instead, you can delegate these specific functions to other professionals who may work in companies and other hierarchical organizations, efficiently and productively accomplishing one or two things.
The result of this is that you have a system where power is centralized at the top, and this power is essentially used to coordinate the other levels of personnel in the organization who actually get the work done. This applies to both public and private sector organizations.
It's quite efficient, but of course, it comes with trade-offs. I think as a society, we haven't really considered these trade-offs. While we gain efficiency and convenience, we also lose resilience.
Social Scalability
You often hear a lot of people talking about technological scalability solutions and all the performance issues we face on the blockchain, because the blockchain is perhaps the most inefficient and underperforming database structure to date.
But I think many people overlook the issue of social scalability. So what is social scalability?
"The progress of civilization consists in the increasing number of important operations which we can perform without thinking about them."
― Alfred Whitehead, British mathematician and philosopher
If you think back to bureaucracy and how civilization has developed through these hierarchical systems of command and control, this is a big issue, the trade-off between efficiency and the systemic risk created by concentrating power in the hands of a few.
Therefore, I believe a consensus network based on blockchain can enable us to create a system with social scalability, which means the cost of participating in the network and remaining in the network is much lower.
I'm not talking about the cost from a technical perspective, but rather from a cognitive perspective. If you're familiar with the concept of Dunbar's number, it refers to the fact that at any given time, the human brain can truly keep in play only about 100 to 150 other relationships before experiencing some form of cognitive overload.
When you're in a system so structured that other participants have enough power to displace you, change the rules, and even change the system itself, then you have to spend a significant amount of time worrying about all these other participants and the influence they may exert over your sovereignty.
But, if we can build a robust platform where power is sufficiently decentralized to create a more flexible and trustworthy system, people can interact with each other and use the system with minimal cognitive burden. Through a public permissionless network, we can create a truly socially scalable free market, realizing this goal by creating a system where you don't have to worry about power dynamics and behind-the-scenes games.
We actually create these new forms of the online society through disruption and automated bureaucracy.
"When we can ensure the most important functions of the financial network through computer science rather than traditional accountants, regulators, investigators, police, and lawyers, we transition from a manual, localized, and inconsistent system to an automated, global, and more secure system."
- Nick Szabo, "Money, Blockchains, and Scalability of Social Systems"
Property Rights
In a system with cryptographic security protocols, property rights are very clear. Either you can provide enough evidence to prove your ownership of an entry in the distributed ledger and operate on it, or you cannot.
However, at a higher level, game theory comes into play. While you can ensure that your assets are not stolen or frozen by some arbitrary authority, the entire ecosystem may pose a threat to you. Due to the nature of game theory and the governance of decentralized networks, coordinating such changes becomes highly unlikely, but not impossible.
Take the response of Ethereum to the DAO hack as an example. This is the most well-known example of a response to a perceived significant threat, but it is not the only time when the protocol has changed due to the actions of malicious entities.
In the case of the DAO hack, a sufficient amount of value was removed from the control of a sufficient number of entities on the network, thus incentivizing enough coordination for a protocol change to return the funds to their original owners. The attacker had control of 3.6 million ETH, which was approximately 5% of the total supply at the time. Of course, it can be argued logically that the DAO hacker simply acted according to the protocol rules and legitimately acquired these tokens, but it demonstrates that not all rules are explicitly defined.
Note that similar situations have occurred with Bitcoin, even though the Bitcoin ecosystem was smaller at the time. On August 15, 2010, it was discovered that block 74638 contained a transaction that created 184,467,440,737.09551616 BTC distributed across three different addresses. This was possible because the code used to check transactions did not consider the case of overflow when summing up output values.
Within five hours of the discovery, a new version of the client was released that included a soft fork change to the consensus rules rejecting transactions with overflowed output values. The blockchain forked. Although many unpatched nodes continued building on the "wrong" blockchain, at block height 74691, the "correct" blockchain overtook it and all nodes accepted the "correct" blockchain as the authoritative source of Bitcoin transaction history.
On the one hand, regardless of who exploits the vulnerability, their bitcoins will be taken away by the entire network. On the other hand, if the rules are only patched from that point, the exploiter will eventually have 99.9886159% of the bitcoins. The incentive is very clear.
Social Contract
There is a dilemma that a social contract cannot be written because there is no authoritative institution to enforce it. I believe that the legal system formulated by the government is an attempt to encode the social contract.
"Everyone bears a part of the social responsibility; no one can evade their responsibility through the efforts of others. If society is moving towards destruction, no one can find a safe way out for themselves. Therefore, everyone must actively participate in the struggle for knowledge. No one can stand aside; everyone's interests depend on the outcome. Regardless of whether he chooses it or not, everyone is involved in the great historical struggle, which is the decisive battle our era has fallen into."
—Ludwig Von Mises
In my opinion, the "social contract" is just a euphemism for "the minimum common factors of beliefs among humans in a given organization." It is illusory, difficult to define, and prone to change. Although we have made a lot of progress in advancing machine consensus to automate the enforcement of social rules, we seem to be forever bound by the chaos and unquantifiable nature of human consensus.
Choosing to Join and Choosing to Exit Society
By creating a publicly permissionless network protected by cryptography, the people who choose to participate do so out of their own self-interest. Anyone using Bitcoin today does so because they chose to join this system of rules. Although the situation may be different in the future if more countries decide to adopt it as a legal tender.
In contrast, projects like the Free State Project are essentially "invading" existing societies, such as New Hampshire, and trying to subvert them from within. The latter is certainly a more challenging path, involving a struggle with existing stakeholders rather than "developing" on unoccupied territory.
Bitcoin's Social Contract
What is Bitcoin's social contract? I often refer to the widely recognized "unconfiscatability property" by its users.
Consensus, not command and control: Governance is built on the rough consensus of Cypherpunk principles and executable code.
Minimize trust: Trust makes systems fragile, opaque, and costly. Trust failures lead to system crashes, and trust plans result in inequality and monopolistic lock-ins. Naturally occurring trust bottlenecks can be abused to deny access to legitimate procedures.
Decentralization: It has many attributes, but power is the most important.
Resistance to censorship: No one should have the power to prevent others from interacting with the Bitcoin network. Nor should anyone have the power to indefinitely resist the confirmation of valid transactions. Although miners are free to choose not to confirm transactions, any transaction paying competitive fees should eventually be confirmed by economically rational miners.
Anonymity: Owning or using Bitcoin should not require official identification. This principle enhances the resistance to censorship and fungibility of the system, as it is more difficult to select for consideration "tainted" transactions when the system itself does not track users.
Open source: The Bitcoin client source code should always be open for anyone to read, modify, copy, and share. The value of Bitcoin is built on the transparency and auditability of the system. The ability to audit any aspect of the system ensures that we do not need to trust any specific entity's honest behavior.
Permissionless: No arbitrary gatekeepers should prevent anyone from participating in the network (as a trader, node, miner, etc.). This is a result of minimizing trust, resistance to censorship, and anonymity.
Legal neutrality: Bitcoin should not concern itself with national laws, just as other internet protocols do. Regulatory agencies will have to figure out how to deal with the capabilities provided by Bitcoin technology, rather than the other way around.
Fungibility: Fungibility is an important attribute of good money. If every user had to perform taint analysis on all funds they receive, the utility of the system would be greatly diminished.
Forward compatibility: Bitcoin supports signing transactions without broadcasting them; a principle is that any current potentially signed but un-broadcasted transactions should remain valid and broadcastable. Bitcoin's adherence to this principle instills confidence in everyone about the protocol. Anyone can protect their funds through any scheme they envision and deploy without requiring permission.
Resource minimization: In order to reduce verification costs, block space is limited. Therefore, it should be expensive for anyone to consume a large amount of block space. Verification should be cheap, as it supports trust minimization, and if more users can afford to audit the system; cheap verification also makes resource exhaustion attacks expensive.
Convergence: If any two Bitcoin clients connect to an honest node, they should eventually converge to the same tip of the chain.
Transaction immutability: Every additional block added after a given block should significantly reduce the likelihood of that given block being orphaned due to chain reorganizations. While immutability cannot be technically guaranteed, it can be ensured that reversing transactions becomes impractically expensive after they are sufficiently buried under sufficient proof-of-work.
Conservatism: Currency should be stable in the long term. We should take a conservative approach to reforms, both to minimize risks and to allow people to continue using the system in ways they deem appropriate.
Sovereignty within the System, Not against the System
Systems like Bitcoin are superior because their incentives and governance are more transparent, despite the unclear definition of governance processes and power allocation. Some people would argue that that is a feature in itself.
We all have the ability to have sovereignty in limited ways, but we rely on cooperation with others in society to trade and obtain the products of their labor. Remember that our Bitcoin has value because some people around the world recognize its value together with us. Remember, "no man is an island".
While it may be better to opt into a networked society than to be subject to traditional nation-state and city-state governance supported by the threat of violence, what if the concept of the opted-in society fails over generations?
Over the years, I have been contemplating issues related to cycles that we see in civilizations.
I believe there is a moral dilemma because a society may choose to reorganize itself and form new government and legal systems. But these laws tend to perpetuate and impose themselves on future generations. If the society changes and decides that these laws no longer match their expectations of the social contract, changing them peacefully may be very difficult.
This is because default settings tend to be very stubborn. If we look at the rise and fall of empires, we find that they often collapse due to increasing bureaucracy imposed on society, until there is a popular uprising or the system collapses due to resource exhaustion and inability to cope with environmental changes. I often wonder if it would be fairer if the default setting is that laws need to be reapproved by every generation/every few decades.
Where Are We Headed?
After covering all these issues, I think an open question is how to guide the evolution of the social contract? I think this is a question about culture, narratives, and memes.
"My prediction is that libertarians will turn to Bitcoin. And this will happen after about two years, when it becomes mainstream. I don't know how you don't end up with edge technology without edge people and politics... You just have to go through a maturation process when a technology becomes mainstream on the other end. And in that process, edge politics will leave."
- Marc Andreesen, 2014
Although Marc's prediction didn't come true, he did discover something. If an opted-in society transitions from niche to mainstream, new entrants may bring their own culture and values, which could change the unwritten social contract and lead to attempts to change the written and statutory rules. Since the ideals of liberalism are "edgy," the mainstream adoption of Bitcoin certainly has the potential to evolve the social contract of the system into something weaker in terms of guarantees.
I believe that in Bitcoin we have a lifeline, which is the early adopters who have a strong ideological belief, a large amount of Bitcoin, and significant influence and power in this field. They will not easily change their position. This is an open question about how game theory comes into play.
Dear readers, what can you do to contribute to the social contract of Bitcoin and the continued integrity of property that we consider inviolable?
Run your own node to enforce rules on your funds.
Safeguard your private keys.
Educate your friends and family.
We all have a responsibility to ensure the system remains robust, resilient to new threats, and not undermined from within.
"Vigilance is not only the price of freedom, but the price of success as well."
- Henry Ward Beecher
