Taking a break from our focus on the ever-evolving narrative landscape. let's revisit some basic Bitcoin and blockchain concepts so as to elucidate the importance of Bitcoin's infrastructure as it pertains to security, stability, and its reliability as a store of value that must be established before it can become a medium of exchange.
Anyone with a computer science degree will no doubt roll their eyes at the following display of ignorance, but these topics are nevertheless crucial to grasp even if slightly inexact, specifically because the central issue emerging in crypto is the negative environmental impact of Bitcoin's high energy demands. Bitcoin, unfortunately, wears its energy usage on its sleeve. To the uninitiated who consider it a worthless speculative outlet for gamblers, criminals, and degenerates, its energy requirements will not only seem irresponsibly superfluous but needlessly damaging to the environment. But to those who are beginning to believe in the promise of Bitcoin, one must confront this critical aspect of all proof of work technologies - one, because of its controversy and two, because Bitcoin's high energy cost is that which gives the asset a certain "intrinsic value": the real-world physical inputs required to mine and validate Bitcoin blocks, physical inputs which must be present so as to effectively convert actual human desire (want, fear, hope, greed, avarice, altruism) and even existential human value (immaterial as such things are) into a digital form. This costliness makes it difficult to mine and therefore "hard" to produce, both of which contribute to Bitcoin's scarcity and "security", which is to say, the difficulty to effectively attack the network. What's more, from a philosophical perspective, there must be a mechanism to facilitate the conversion of tangible inputs into digital outcomes because without it a blockchain is only software, an algorithm, an abstraction, vulnerable to attack, nefarious influence, and forever prone to centralization.
Though in crypto parlance the term "layer one", "base layer", or "protocol layer" differs slightly from the original definition set forth in the Open Software Interconnections Model (OSI model), Bitcoin's layer one is composed of the physical infrastructure (computers, hard drives, servers, mining rigs, cables, physical buildings in which mining rigs are housed, etc.), the data or "encryption" component (digital signatures, SHA-256 hash, Bitcoin mining), the network (peer-to-peer interaction facilitated by global broadband aka "the internet"), the consensus component (the proof of work algorithm, node validators), and lastly the application layer (user interface, crypto wallets, smart contracts, decentralized applications [Dapps]). Whenever someone references "layer one" in our context, they most often mean "blockchain", i. e. the distributed digital ledger which keeps an ongoing record of transactions (UTXOs), aka "the coins".
As I've mentioned before, one of the revolutionary features of bitcoin in particular and crypto more broadly is that value is primarily captured at (or in) the protocol or blockchain layer, not the application layer. With the world wide web, value isn't captured at the TCP/IP protocol level but in the specific apps that are built atop it such as e-commerce websites (Amazon), social media platforms (FB, Twitter), search engines (Google), and so on. In crypto, because applications are dependent upon the underlying blockchain for their security, stability, and indeed their existence in the first place, applications will never be more valuable than the underlying blockchain, at least not over the long term. The reason for this is because token applications have to "use", "spend" or at least transact in the base layer coin to carry out their most basic functions (like coin issuance).
Base layers capture value principally through electricity/energy conversion. Whenever a user conducts some sort of economic activity with Bitcoin, this activity is broadcast to the network which records the transaction in the particular block that corresponds to the time of the activity. Miners spend electricity by converting it into a cryptographic hash to create the block in which that transaction falls; the nodes then validate whether "the work" that miners have done is/are true and original transaction(s). If original, onto the next block we go. If not, the block gets rejected. The value that is recorded on the blockchain is paid for, reinforced, and underwritten by the electricity (hash) that miners collectively use to create the block. In a certain sense, BTC coins represent stored electrical energy waiting to be deployed for future financial or social functions.
The Bitcoin algorithm limits transactions to 7 per second. Thus, in an average ten-minute block, 4200 can be processed, give or take. If there are more miners processing transactions on the network, blocks are created a little faster, while the opposite is true for fewer miners. Here's where the bitcoin mining adjustment comes into play. In order to maintain the 10 minute block time average, the mining difficulty adjusts either up or down every two weeks depending on the amount of hash power being used to secure the network. Without the difficulty adjustment, which in the long run increases the energy and electricity demands of the network, the 10-minute average block time would have been broken long ago because too many miners would have been mining comparatively easy and cheap blocks. The difficulty adjustment is the algorithmic mechanism that has enabled Bitcoin to become "harder" and more expensive to mine and thus more costly to attack, making it also more "secure". High security comes at a price though: Bitcoin's transaction bandwidth is limited, making it "slow" and difficult, if not impossible, to globally scale. To put it in context, Visa processes around 4700 transactions a second. Traditional, centralized payment rails blow Bitcoin out of the water as far as transaction capacity is concerned. But speed and high bandwidth also come at a price: centralization and vulnerability to single points of failure. In the realm of physics and technology, there are always trade-offs.
Bitcoin, however, is a final settlement layer, meaning, once confirmed on the blockchain the transaction is complete and cannot be reversed. In general, Bitcoin transactions are generally considered "valid" when they have been processed by three to six (30-60 minutes) blocks. Compared to the current SWIFT system on which the dollar operates, final settlement takes 1-4 working days. This excludes weekends and holidays. International wires take just as long, or even longer. And they can be expensive. Bitcoin, on the other hand, has achieved a 100% 24/7 uptime since its genesis block, and its fees, while ever on the increase, are insignificantly small and change very little due to the size of the transaction.
Further, Bitcoin's block size, i. e. the size of the digital ledger that records the 4200 transactions is 1 MB in size. This is considered "small" compared to other crypto projects. A reason for this small size and the limited number of transactions that can be processed every 10-minutes is so that bitcoin node validators can operate their nodes cheaply, simply, efficiently, and with limited hardware capacity. To keep track of a long history of large blocks in a certain blockchain would quickly override the capacity of independent node validators to inexpensively maintain their nodes on basic laptops. As we discussed in the past, Bitcoin achieves its decentralization primarily because node validators have the ultimate say in which blocks get verified and which don't. As opposed to virtually every other proof of work coin, the miners do not hold the cards in the Bitcoin ecosystem but the node validators: if the miners aren't playing by the consensus rules, their transaction will be rejected by the nodes. While Bitcoin mining decentralization is an important goal for the network moving forward, node decentralization, simplicity of node operation, and global distribution are far more important features for Bitcoin to maintain. Operating an Ethereum node on the other hand is technically complicated, expensive, and requires more hardware capacity, three factors that shoulder out the vast majority of small, independent node validators. In fact, a single company called "Infura" controls an outsized portion of the Eth nodes. What's worse, they exclusively use Amazon Web Service (AWS) as their client software which presents another single point of failure in the Eth ecosystem. Bitcoin node validators, on the other hand, use a diverse array of client software from Linux, Windows, iOS, and so on, further helping to reduce the potential for centralization in this critical layer of the Bitcoin blockchain.
In sum, yes, Bitcoin is expensive, "slow" and it's nearly impossible to scale its base layer in a meaningful way. These "bugs" are well known and have been debated since Bitcoin's founding. In fact, there was a "civil war" that raged in the Bitcoin community from 2013 to late 2017, also known as the "blocksize war". The conflict pitted those who wanted to maintain the integrity of the original Bitcoin blockchain and its underlying code against those who saw Bitcoin's slowness and inability to scale as a detriment and who therefore wanted to change or "fork" Bitcoin's code to allow for larger blocks that could accommodate quicker transactions which would have also reduced Bitcoin' transaction fees. Many original members of the Bitcoin community and large, venture capital-backed entities such as Coinbase, Shapeshift, and huge mining pools who would have stood to potentially make more revenue through faster block processing times supported the proposed change which ultimately resulted in Bitcoin Cash, a hard-fork of Bitcoin in August 2017. Ultimately, the market spoke: the original Bitcoin (BTC) blockchain remained the leader while Bitcoin Cash (BCH) has continually lost market share and is now destined for the dustbin of history along with many of the central figures who supported the change as well. In its essence, the war was fought between the "little guys" who supported decentralization, node distribution, and what they believed to be Satoshi's "original mission" for Bitcoin - which is to provide a trustless, permissionless, alternative global currency beyond the control of nation-states and centralized entities - and the "big guys", the large institutions funded by big-moneyed Silicon Valley investors and other "leaders" in the early Bitcoin community who tried to use their power to influence the debate in their favor. Bitcoin, as opposed to every other project, has no king, no leader, no spokesperson, no champion, no hero. Demand for Bitcoin, as has been proved time and again, is the result of "pure" market dynamics and raw supply and demand; it's as unmanipulated as any market could be, and only gets less manipulated (i. e. less vulnerable to the influence of single powerful individuals or entities) the larger the network becomes.
In the next article, we will further explore the benefits of Bitcoin's slowness and inability to scale, and why it sets the gold standard by which all blockchains will be judged and diverge at their own peril.
NSV