Oddbean

How is #bitcoin going to scale? The same way all other monetary systems have Except that this time we have cryptography on our side will it be trustless? barring a 0 to 1 innovation - no all scaling solutions are optimizing for fundamental tradeoffs but we will be able to remove a lot of "mal-trust" in the same way we will remove "mal-investment" everyday we trust people to provide services for us By doing so we can specialize in various trades In economics the people we trust for goods and services are referred to as agents Trusting agents in other trades and giving ourselves time to specialize in our own trades is the greatest enabler of economic wealth since the dawn of man and largely what separated homo sapiens from our common ancestors so trust is like really really good but only when our interests are aligned with agents when there is a conflict of interest things always end up bad because money is the most desirable good, financial history is littered with conflicts of interests between agents and those trusting them So we have this agency problem with money and fiat money is the epitome of it whereby the agents of the system privatize profits and socialize losses Now #bitcoin needs to scale it's own financial system and we're encountering similar problems of legacy systems But now we have cryptography - which changes quite a lot actually Just as #bitcoin used cryptography and properly aligned incentives to reduce trust in base layer money...a similar approach can be used to reduce trust in scaling layers #bitcoin is not a perfectly trustless system When you trust that #bitcoin will not change it's not just math and software but also properly incentives you trust Try arguing against #bitcoin FUD without discussing how perfect the systems incentives are aligned Incentive alignment is innovation and it was one of the key innovations that separated #bitcoin from it's predecessors This is a critical point when it comes to scaling Banking systems were the scaling mechanism for gold enabled by the printing press these systems worked well when they were free from government interference but it didn't take long for government to learn how to control them and create conflicts of interest If you want more detail check this out: yakes.io/bitcoin-bankin…Banking systems were the scaling mechanism for gold enabled by the printing press these systems worked well when they were free from government interference but it didn't take long for government to learn how to control them and create conflicts of interest If you want more detail check this out: https://yakes.io/bitcoin-banking-systems-full-reserve-vs-free-banking/ I believe #bitcoin will follow the same pattern of history but resist centralized control This is because the #bitcoin will be able to leverage unique properties of a digitally native system such as: - The internet: moving information instantly - software: automating functionality that removes unnecessary agency - P2P competition: for the first time in modern history you can exit the financial system and participate in a P2P online economy - Unilateral exit: some protocols will allow for trustless exit of the system into P2P systems - Cryptography: having the option to conceal information and identity of economic behavior - information transparency: service providers and centralized interference will much more challenging to go undetected No banking system in history has had any of these properties I believe their combined result will be a system so efficient, dynamic, private, & transparent that it can't be captured or controlled These unique properties will align incentives in a way that history has not seen Many are focused on trustless/trust-minimized systems and that is great and I hope they proliferate but 0 to 1 innovations may be necessary for these systems to be competitive with trusted systems that's why I think trust optimization should be a priority as well I believe eCash systems such as fedimint and CashuBTC will play a large role in this because: 1) they can optimize trusted custodians for various use cases 2) they use eCash which doesn't have a blockchain eCash has all the benefits of cash in a wallet as well as a paypal account no blockchain means scalability is limited to the latency of the internet or federation but you have to trust in a mint that creates it for you - like a bank - when you send it #bitcoin Why wouldn't the eCash mint rug me? Great question. This is a perfect example of using cryptography and incentive alignment to take a banking function and optimize it's trust nature .@callebtc theorized this specific scheme w/ origins from the Scrit project gist.github.com/callebtc/ed522… By setting an expiration date on eCash issued by a mint we can effectively automate bank runs This creates a probabilistically certain outcome of catching a cheating mint WHILE STILL allowing users to remain private that is innovation Just as #bitcoin pushed the marginal cost of verifying money to near zero This eCash scheme can push the marginal cost of automating bank runs to near zero which changes the incentives of everything They create a probabilistically certain outcome that a cheating mint will eventually get caught They reduce the cost of implementing bank solvency verification to near zero That means these methods can be cheaply and easily implemented in eCash wallet software And that means we’ve created incentives aligned against pursuing fractional reserves This isn't a perfect technological solution but it is one that aligns incentives and it is from these types of solutions that I expect much of #bitcoin scaling will occur Self-custody for all monetary use cases is a serious consideration - but shared custody may be But creating a system with incentives aligned to resist any form of centralized capture is likely This story will be trustless and trusted but most importantly - trust optimized Here's the detail behind a lot of this: https://yakes.io/banks-without-bankers/