Be aware the long term consequences of messing with the protocol

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This article has been published in a slightly different form on reddit. I decided to re-publish it in order to explain in a more coherent way what I call a constitutional crisis and potential capture of the Bitcoin (Cash) project.

Let's start with asking the following three questions:

What makes actual cryptomoney special?

  • p2p transactions without intermediaries

  • based on sound money principles

  • permissionless to any participant in any possible role (developer, miner, user, investor, node operator, business).

    Only users have to pay a fee in order to make use of their right to transact on-chain. Despite the users self-interest to pay a fee as low as possible there is also self-interest in generally paying a fee as it secures the network even if zero-fee transactions are a possibility.

What makes cash special?

  • p2p transactions, immediate settlement

  • somehow permissionless to most participants

What makes the constitution special?

  • hard to change once established

  • agreement that builds the foundation for trust in a society that is bigger than a network of people we directly know and relate to

  • built on equal rights following neutrality as a major principle

    The constitution is a highly recognized document merely because it is formulated in neutral language. Neutrality is a pre-requiste for people from different walks of life to almost unanimously agree upon one thing. The same is true for money.

Implicit and explicit principles are formulated in the whitepaper. Sound cryptomoney is incompatible with a built-in "tax" (no matter if it's called a "developer tax", a "miner tax" or an "investor tax") .

Starting with Satoshi

Satoshi wrote in the whitepaper: "Any needed rules and incentives can be enforced with this consensus mechanism." It's a much discussed phrase, often misused for propaganda purposes in favor of radical changes or simply misunderstood.

That's why I suggest to add some precision: Any needed rules and incentives can be enforced with this consensus mechanism as long as they provable don't undermine the function of sound cryptomoney. One of those necessities is uttermost neutrality and another one is fungibility.

I read that phrase more as an humble description of the Bitcoin pre-conception state in 2008 implying some form of imperfection. It can easily be seen as an invitation for others to join that project from a practical, non-academic point of view. And not neccessarily an invitation to change rules and incentives in the future.

But let's ask ourselves the question: What is actually needed? And who decides that question?

What is actually needed will change over time and in scope which means we need a mechanism that is able to adapt on a constant basis, factoring in new input data. The only tool available to society that is capable of such a task is the free market. That makes investors - if they recognize it or not - the ones in charge. Just like sovereigns are the ones in charge even if it seems at times that government is doing the job.

This includes every aspect pre-decision, during the decision and post-decision.

Miners are the ones who get to meta-decide which choice to present to the market based on available information. If they suck at it they pay. If they do their job well nobody will even recognize it and accept it as a "normal" state. They are servants. Just like developers are servants. Notice how both BTC and BSV declare either developers or miners to be the kings. It's important to understand the sole purpose of miners is presenting the market with choice at times of uncertainty and provide reliable security and stability at all other times. Compare this to politics.

A constitution is like a protcol

It is important to shape a constitution early on, but as time progresses you want a reliable framework to build a nation upon. This means conservatism has an increasingly more important role to play.

The importance of alignment of incentives

A complex system that has constantly adapt to changes works best if participants can play various roles at the same time without fracturing into sub groups. Then and only then are incentives aligned within each and every participant.

Thinking about the long term

Now I suppose that neither in 1913 nor in 2020 people are thinking about the (real) long term consequences of their actions. Some may question if such a thing as karma (action) exists or not. Still it's undeniable that actions have long term consequence resulting in responsibility today.

This is meant when we are talking about precedents (bending principles we signed up for), as well as tragedies of the commons (we didn't sign up for but likely ignored). More could be said about slippery slopes and degradation of values over time resulting in divide and rule schemes or why the road to hell is paved with good intentions (more often than not by the good guys). Because people always forget that all three: intentions, people and successors change over time.

___

So I may be the first to ask this question: Who has thought about the long term consequences of this tax proposal*?

*Remarks: I know that funding devs is a hard problem we as community should tackle. Still I think it's a red herring (propaganda) to frame this tax around a thing we all can agree upon. Namely that development (caveat: NOT developers) needs funding in order to bring forward and scale this project.

___

So fast forward

[>>] : After installing this temporary tax (we all know it won't be temporary) what potential outcomes can be expected in the future when reward (inflation) tends against zero.

In this not to distant future fees have to pay for security of the network. Notice how BTC and BCH fundamentally disagree on how fees have to pay for security. But they both agree that fees will have to and also will be sufficient to pay for security. (Notice how Monero begs to disagree and uses tail emission instead).

In that future world what implications does a "mere" 5% tax have? Which incentives do the tax collectors in control have? But most important: Won't they be incentivized that the stream of funds will never stop even if rewards decline (like every other tax system in human history)?

Now what kind of methods can they use to leverage their influence over the network? And how easy is it to influence certain policies (from easy to hard):

  • Keep or change beneficiaries

  • Increase or decrease tax?

  • Increase or decrease fees?

  • Increase inflation aka 21M limit?

I am quite sure the list above is incomplete. My main take away is that by adjusting the effective tax rate after (and even before) rewards have gone to zero, "we" created a financial policy instrument that will be used to influence the economy built on top of Bitcoin (Cash) as well as control other (opposing) participants.

If an entity (let's call it "Fundstream") can leverage centralized control over the network AND use this for all kinds of monetary policy (e.g. alimenting the good developers aka the good guys and fighting against the bad guys, whoever they may be) a central bank like structure has successfully been established on top of Bitcoin. This is genius -or NOT!?

Fellow Bitcoiners. This is our personal Wilson Woodrow moment. Everything else became history.

___

Personal remarks

I will immediately stop any activities that will lead to more adoption for BCH be it through new users or through investors. I can not recommend to invest in a project that is planing to introduce a tax on their investors. That's 100% against what Bitcoin stands for. I already started to talk to current investors and made them aware of the situation including the potential necessity of complete divestment.

As someone who entered this market as an investor in 2011 and someone who manages quite a huge amount of BCH for others I will observe the situation closely and am already looking into best divestment strategies in the case Amaury gets his way.

A funding model based on voluntarism and accountability like it's perfectly working on Monero is the way forward and anybody denying that is either not interested in accountability or is more interested in attacking Bitcoin (Cash) right before it enters a new bull market and just before BTC's fee problems could wake up plenty of people. Monero proves and other oldtimers agree with me that funding is not the problem. UX and accountability is. I hope Flipstarter can help in this regard just like CCS helped Monero.

If this was about funding developers we would simply sit down. Evaluate what projects need to be funded in the next 3 or 6 months (looking at the roadmap) and come up with some numbers. But this is not about funding developers. This is about playing a power play to gain as much control over the Bitcoin protocol as possible in order to define monetary policies a decade or two down the road.

I wonder when we will call this an attack of one or two colluding miners who built a cartel with the developers of the reference client maxing out their current power (going all-in on control).

The BTC capture has been bad. You can like the propagated arguments for node decentralization or not. But in the end a fee market is still some kind of free market. The capture of the protocol we see in BCH is even worse. It introduces government and central bank like capabilities into BCH. And believe me - it won't be temporary. If anything it will kill the host like every government system does if you give it enough time as there never will be enough taxes for all the wonderful things we could fund.

Also notice how BTC produced a spill over effect into alts in early 2017 when it maxed out for the first time. The tax on BCH willl create another spill over effect as miners can enforce some rules but fortunately they don't have ultimate power. Capital controls won't work in BCH. Imagine what would happen if citizens were free to move their money in the light of the fact that a 5% tax is going be enforced on all investors in stock markets...

Without capital controls the money will simply leave! That's economics 101.

I fear for the long term prospects of BCH if economic illiterates take over once again just like they did when Amaury himself had to provide the code for a fork from BTC.

Some thoughts on good old cash

Using cash means trusting its security features. Taking away those security features means your money is easily counterfeited, which questions both the value of your money as well as trust in money itself. Putting inflation aside. Would you use cash attached with strings that makes it less secure and makes you pay a certain amount to certainly great people who make the design of the notes, grow the trees for the paper the notes are printed on or distribute it

Conclusion

We fail to live up to the principle: No taxation without representation/accountability as it's not possible for the system to represent those who get taxed in a proper way. I therefore suggest to discard any further plans of direct protocol taxes.

It's all about creating a system of aligned incentives. Because then whom would I tax but myself?

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Comments

It is not a tax. It is miners looking for a way to set up an automated way to donate to developers. Lets try to find a way to do this that you do like?

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1 month ago

great Read.. we all need to step back and look at the bigger picture. sound money is absolutely important. its trust that brings a coin value. people trust in its future value and ease of use.. for that we need to be careful how we manipulate the incentives. if IFP goes through. there would be a huge loss in trust.

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