Bitcoin Scaling Game Theory

Go figure a scaling “consensus” was reached attheConsensus 2017 conference. Barry Shillbert’s negotiatedBitcoinScaling Agreement taken at face value appears to betheholy grail; however, once one engages in a moment of critical thought, its importance quickly dwindles.TheBitcoincore developers (Core) believe Segregated Witness (Segwit) isthesolution to scalingBitcoin. Many large miners, lead by Jihan Wu of Bitmain, believe a 2MB block size increase via a hard fork isthebest scaling solution. Theagreement signed by followers of both factions sets outthefollowing schedule:

• Activate Segregated Witness at an 80% threshold, signaling at bit 4

• Activate a 2 MB hard forkwithin six months

95% ofthehashrate must signal for Segwit activation bytheend of November 2017.Thesix month hard fork deadline is at a similar time. This presents an interesting game of chicken. Iftheminers signal for Segwit and it is activated before a hard fork, they lose all leverage. Core then has no reason to support a hard fork.Theconverse is also true. Ifthehard fork happens first,theminers have no incentive to signal for Segwit. Each side hasthesame ultimate goal, increasingthethroughput of transactions at a reduced cost. Howthegoal is achieved could adversely affect each side economically. Many off-chain advancements, such as Lightning, require transaction malleability to be fixed, which Segwit will accomplish. Blockstream and its investors, which directly paysthesalaries of many core developers, is banking ontheability to implement and profit from Lightning.Theminers under this circumstance would lose income from transactions not being processed directly ontheBitcoinblockchain. However, both sides benefit fromtheprice continuing to march higher. A cute and cuddly agreement, with no teeth aimed at can-kickingtheimportant decision as to howBitcoinmust scale, is needed to distract new investors fromthefundamental problems that continue to afflictBitcoin. There is no incentive for either side to blink first. Both sides must compromise if any solution is to prevail.Thestatus quo will remain as long astheprice remains above $1,000. Below that level, miners profit margins become tight, andBitcoinholders feel moderately poor again, most likely because they FOMO’d intothemarket at $2,000. When your portfolio is sliced in half, you might come tothenegotiating table. My base case remains that Segwit will not be activated, andtheblock size will not increase.