This blog is the eighth extract from our upcoming eBook, “A Short History of Bitcoin Myths”. Register your interest, and we'll send you an invitation to download your complimentary copy as soon as it becomes available. You can also read other extracts over here:
Part 1: A Short History of Bitcoin Myths
Part 2: The Genesis of Bitcoin
Part 3: Myth I - Crypto Anarchy
Part 8: Myth VI - The Lightning Network Will Bail Bitcoin Out
Part 9: The Rebirth of Bitcoin
In part 5 (Myth III) of our Bitcoin Myths series, we refuted the idea that Bitcoin is broken and cannot scale on-chain. The evidence we offered showed that the myth is so old hat that both the Bitcoin Cash and Bitcoin SV blockchains have implemented on-chain scaling successfully. In the case of Bitcoin Cash, the original 1MB block size has been raised to 32MB, and for Bitcoin SV the current limit is 128MB with a 2GB default planned for July 2019.
But alas! Bitcoin Core (the developing community of the BTC chain) kept repeating the rhyme. Instead of making on-chain scaling happen on BTC, they’ve insisted on deploying ‘software updates’ (SegWit and SegWit 2X) to enable ‘second-layer solutions’ (the Lightning Network).
When we first discussed SegWit and the Lightning Network, we hinted at the technical and legal problems it introduced. Today we tackle some of these issues and look at how BTC’s protocol changes have warped the network to where it no longer represents the core philosophy, design and values of the Original Bitcoin.
Segregated Witness is an oxymoron. Signature can't and shouldn't be segregated from the content it signs.— Ivan Mlinarić (@eyeone) April 25, 2019
A: Here is the contract you wanted
B: Why it's not signed?
A: Well it was once, but the signature was stored in a separate cabinet and it was discarded after a while
On Wednesday, 9 August 2017, the Bitcoin Core group introduced a software update presented as scaling solution: SegWit (Segregated Witness). The SegWit concept was a highly technical update that promised to implement critical fixes to the Bitcoin protocol and a method to scale. This ‘scaling’ method entailed storing some of each transaction’s data off-chain, instead of on the immutable Bitcoin ledger. Essentially, this SegWit approach makes Bitcoin akin to a multi-layered settlement system.
It turned out that SegWit only made a temporary and coincidental difference to the network congestion. But more than that it twisted the BTC network in direct opposition to one of the core functions of the Original Bitcoin, namely serving as a single immutable evidence trail. By storing some of the core transaction data off-chain, the BTC ledger is incomplete and therefore, compromised as an indisputable transaction record.
“Bitcoin is not anonymous and cannot be anonymous. There are people in Core who want to create a system that does not maintain logs. Hence SegWit.
All that we can see happening is an alteration of the system to remove logs long-term. This increases the need for separate systems to record AML and KYC information which is contrary to the purpose of bitcoin. Isn't segregated witness simply a means of handing bitcoin off to the lightning network where logging is no longer required and users can engage in a system that only settles on bitcoin? Wouldn't such a system be exactly what criminal groups wanted?”
Could it be that the very actors that Bitcoin intended to expose have gained a hold of the protocol to distort it to suit their criminal intentions?
Once you understand the counter-argument to the proposed ‘benefits of anonymity’, the introduction of anonymity to the BTC roadmap alone will cause you alarm. But SegWit’s failure to resolve scaling adds another dimension to the disfigurement of the Original Bitcoin. Transacting on the main BTC chain remains so slow and expensive, that it’s unrecognisable as the ‘peer-to-peer electronic cash system’ of the Bitcoin whitepaper.
In March of 2018 the plot to overturn the Original Bitcoin’s philosophy, design and values took on new proportions.
Building on the path laid by the SegWit protocol changes, Lightning Labs launched the second-layer solution that BTC devs had been clamouring for; the Lightning Network (LN). The proposal was that the LN would operate as a client to the BTC network to process small transactions without storing the transaction data on the main blockchain. These small transactions would be routed along ‘state’ or ‘payment’ channels, instead of the BTC blockchain, and would be operated by LN ‘hubs’ or ‘nodes’.
The architecture of the Lightning Network alone is enough to make Satoshi’s hair stand on end. In an in-depth analysis of the mechanics by which LN channels operate, Bitcoin Unlimited, Chief Scientist, Peter Rizun concludes:
“Small payments on the LN aren’t ‘trustless’ at all. LN can only be accomplished by using large, centralised hubs collecting a massive amount of fees. These hubs are essentially custodial operators similar to PayPal, which means that the network is no longer trustless.
Secondly, LN transactions are not recorded in any immutable, public ledger at all.”
So, it's good bye to trustlessness, immutability and decentralisation. Which begs the question: how is the Lightning Network different from the traditional banking system at all?
While the Bitcoin Core community claim that the LN would enable small transactions to be processed quickly and cheaply, the LN is a convoluted process.
Besides the complexity of using LN, there’s a lot of danger involved with users facing the risk of losing all of their funds through no fault of their own.
“When someone uses lightning, it’s necessary for someone using it to remain online to make sure their “counterparty” isn’t trying to steal those funds. But this is obviously a UX nightmare; for example, customers don’t have to monitor their Wells Fargo accounts every day to ensure that they’re not being defrauded.”
Another grave concern around the LN is the legal implications of its design. As funds no longer pass directly from one peer to another but through payment hubs, these hubs can legally be defined as payment processors. If the appropriate licences are not acquired, payment hubs would be operating squarely against financial regulations. As financial regulators are increasing their focus on the cryptocurrency industry as we speak, it is only a matter of time before the LN faces the legal ramifications.
The US Government declares that every Lightning Network node is a Money Services Business (MSB). Every LN wallet company will have to buy MSB licenses and comply with AML/KYC. Users will have to scan ID to use the wallet.
As response to the lack of oversight and user risk that the LN’s design has introduced, Lightning Labs introduced a network of ‘watchtowers’ with their July software update. These ‘watchtowers’ are tasked with monitoring the LN to prevent fraud, theft and dishonesty.
Yes, you read correctly. After breaking the immutability, transparency and therefore trustlessness built into the Original Bitcoin Protocol, the LN is forced to deploy a copy of the traditional financial system’s fraud prevention and security measures to try and fix it.
“Why Lightning will never be currency, and why BSV matters”, by Craig Wright
"They utilised the Lightning Network as a Trojan horse to introduce cancer into Bitcoin" Michael Hudson at CoinGeek Toronto
From the perspectives of legal compliance, user experience and value proposition, it’s pretty clear that BTC’s design choices have been pretty bad over the last few years.
But, are we dealing with incompetence or ill-intent?
Apart from anonymous networks’ usefulness for criminals, it’s telling to note the financial implications of the introduction of third-party protocols. While the Bitcoin network already incentivises miners to secure the network and confirm transactions, second-layer solutions create new income streams.
With these economics in mind, some have gone so far as to propose that Bitcoin Core willingly chose to limit the BTC network’s capacity with the future plan of cultivating second layer scaling solutions.
BitCoinSV is the ONLY Original #Bitcoin created by Dr. Craig S. Wright aka Satoshi Nakamoto and the ONLY Regulatory Friendly Cryptocurrency— BSVBoom (@BSVBoom) July 16, 2019
Bitcoin Core #BTC is NOT original Bitcoin #BitcoinSV scales MASSIVELY & already USED by Enterprises
In 2020 UNLIMITED transactions/second pic.twitter.com/38JM1bzQpE
While skies are darkening around BTC’s one and only ‘scaling solution', the Bitcoin SV project has stayed on track with their focus on scaling (on-chain), security, stability and secure instant transactions, all in a regulatory compliant manner. It’s clear that, where there’s a will, there’s a way. What more can we say?