I've noticed a couple of videos being promoted recently which contain a number of fallacies regarding Bitcoin. Below I have conducted a thorough debunking of one of the earlier videos. I was going to conduct a rebuttal of the second video, however I've found that I've mostly responded to the points in the second video already through this rebuttal. The second video is at the end of the page.
"Hey you! You may have seen something about Bitcoin a few years back. It sounded revolutionary. This was going to replace the banks. It was permissionless, decentralised, peer-to-peer, electronic cash. No one could take it from you. You can send any amount for less than a penny, fast. But damn, the price was a hundred dollars, and it would probably fail anyway. So, you had better play it safe and see what happens. Then you saw the price recently on the news, $15,000 and immediately your stomach dropped because you realised how rich you could have been, but blew it. But you realise that its still going up fast and if you invest now, you're probably still on the ground floor. When you finally get your bitcoin after waiting 5 hours for it to confirm, you realised that something is missing. Turns out that your small investment of $30, $15 went to the transfer fee to put it in your wallet. This is what was going to change the world?"
In this example, the exchange is sending you Bitcoin. The exchange therefore sets the fee for the transaction, and therefore determine themselves how much they charge you. There are methods in which exchanges handling large volumes can reduce the fee paid for each recipient, by batching a large volume of transfers into 1 transaction (Handling multiple recipients). These types of transactions greatly reduce the bloat on the network. Additionally, if they implement Segwit, this frees up space for transaction data that would have been taken up by witness data in the first 1MB. Competent exchanges can use efficiencies like these to reduce network fees to a point where they can comfortably take on the network fees themselves, instead of passing it on to the customer.
Bitstamp for example, hasn't charged customers transaction fees in years for withdrawals because they innovated in transaction batching to a point where they can easily take on the fees, instead of passing it onto the customer.
There became high demand for these efficiencies recently due to the high fees, and now these efficiencies being used on the Bitcoin Network are making the Bitcoin transaction fees cheaper than the Bcash fees. In other words, the demand for lower fees on the Bitcoin network became a self fulfilling prophecy.
"Let me fill you in on what happened while you were gone. Transaction fees have risen because of the block size. The block size is 1MB currently"
This is false. With Segwit, blocks are now measured in Block weight. Theoretically blocks can get as large as 4MB including the witness data, but realistically should be expected to be ~1.8MB if all the transactions were Segwit transactions.
"and only allows for a few transactions to take place."
On the base layer with Segwit, it would be much closer to a dozen transactions per second, than a few. However, this is only talking about the base layer. With either transaction batching or Lightning, a much higher volume of cached transactions can occur before broadcast as a single transaction. In reference to Lightning, this could mean dozens, hundreds, or thousands of transactions occurring, with the end balance transaction only broadcast once to the network.
"Many more happen than this, so the people who pay the highest fee get to go first in line. On December 12 2017 at the time I'm recording this video, the average transaction fee today, was US$24.40.
Transactions with 5 satoshis per byte are now passing through, meaning transaction fees of less than 15 US cents
This problem only gets worse with time and as adoption spreads. Instead of raising the block size again, the development team has decided to go for a second layer, called the lightning network. It promises instant transactions, super-low fees and this is the basics for how it works:
Let's say me and you transact regularly. So we open a channel for 2 bitcoins. I Send a bitcoin, and you send a bitcoin to a multisignature address, where it's temporarily locked away. Now we're free to trade 2 bitcoins back and forth with no fees, as long as we both sign each transaction. This is because the actual bitcoin was never moved. We're essentially trading for the rights of the coin off-chain, similar to an I.O.U. When we close our channel it settles on the on the blockchain. Our I.O.Us are redeemed and we get our share of the real bitcoin."
This is a terrible way to think of Bitcoin with Lightning. An I.O.U implies a contract which can be broken and non-redeemed. Lightning uses Bitcoin's cryptographic proof of ownership, but instead doesn't broadcast to the chain. If somebody tries to cheat by creating a fraudulent state, the other party will see this and can broadcast a valid state to the network.
Additionally, The author here is objectifying value (bitcoins in this example). As I have repeatedly explained in previous posts, value is subjective. A person living in a climate where the temperature all year round never drops below 30c would see nil value in a woollen jumper for its intended purpose. But somebody who lives in a cold climate, would indeed value such a good. If you have cryptographic proof of ownership (Which is how Bitcoin works), then you have command of the good. With this point, you can see how silly it is to objectify broadcast and non-broadcast transactions as 'The real Bitcoin' or 'not the real Bitcoin'.
"The only time the high transaction fee occurs is when you open or close a channel to settle up. What if you want to transact with somebody who you don't have a direct channel open with? Let's say you want to transact with Bob and pay him 1 Bitcoin. Bob does not currently have an open channel with you and you don't want to have to pay the fees to open another channel. It turns out that my first cousin Sam has an open channel with Bob. You could send the payments through our channel, and use the channel I have open with Sam and finally from Sam to Bob paying me and Sam very small transaction fees for using our open channels.
This is ideally how the network could work, hopping from individual to individual until your transaction reaches the intended recipient. But it turns out if Sam isn't as fortunate as us and our channel only have 0.5BTC deposited, this won't work. There has to be enough loaded on each channel along the way for it to be used, and the network must find another route. Luckily it turns out that Bob and You both eat at the same Pizza shop regularly enough that you both have open channels. The Pizza shop has plenty of Bitcoin in its channel, and is one less hop than the last example. Bob gets paid, less fees for you, and the pizza shop gets a reward for providing a usefull service. Everyone wins, or so it would seem.
A problem with this system is the requirement to preload every open channel you have ahead of time. With what you would assume will be the upper limit of your spending habits with that channel. It's more convenient to have one open channel and a large amount of Bitcoin to a well connected party that consistently has more money than you so that you can always route through. This is why hubs will naturally occur. A lightning hub is a node with enough channels open and enough liquidity available. By connecting them, you limit the number of channels you need to personally open, never have to worry about their balance, and reduce the amount of hops and fees required to make transactions."
A counteraction to this centralisation is the fact that any hub which has a large amount of bitcoin in their channel is a big target to hacking. The larger amount of Bitcoin held in a hot wallet, the more enticing it is to thieves. This is why (At least on the early version of Lightning), Lightning's use case will be primarily focused towards micro-payments and small payments (eg Coffee shop, pizza shop, etc). If you wish to make a large payment, you would conduct this on-chain
"Unlike miners, who don't actually transfer value, these hubs will likely be classified as third party settlement organisations. Being subject to heavy financial regulation laws such as KYC and AML"
This would be practically impossible to enforce. Every wallet is capable of providing a service to the network without permission via anonymous onion routing. No external person will be able to view the route the payment took.
"Also, unlike on-chain transactions, there's a chance of theft in this system. If another party attempts to broadcast a channel in an old state, they can try to steal your Bitcoin if you can't catch the in time. For this you will either need to run a full Bitcoin node that will always be online to monitor the transactions yourself, or hire a third party service to do this on your behalf."
The way Lightning channels work is that both parties have to agree on the current state. A full node can verify that the information broadcast by the other node is accurate by itself. A lightweight wallet would have to ask a full node if the information is accurate. However, this is how lightweight wallets work for regular transactions as well, trusting nodes. So there is no risk difference in this respect between using a lightweight wallet for regular transactions or doing lightning transactions.
"So, the lightning hubs will be required to be setup for financial regulations and reporting laws. Require massive amounts of liquidity to keep multiple well funded open channels. Offer fraud departments to watch the blockchain constantly and prevent theft. All while taking small fees for every transaction you route through them."
Requesting information from a node doesn't incur a fee. As per above, lightweight wallets operate by requesting information from nodes. Additionally, there is no method available to a government to enforce laws upon individuals running a hot wallet, since anyone can do this completely anonymously. Also, there is no need for Government regulation in this regard because the lightning protocol (Like the Bitcoin protocol), is regulated by mathematics, instead of corrupt humans.
"Does this system sound familiar? Just replace the term 'Open Channel' with checking account. These lightning network hubs will be run by the same financial institutions that Bitcoin was made to challenge. The banks aren't fighting Bitcoin, because Bitcoin will be the new Banking system. Bitcoin needed no middle man."
As per above, the video contains a number of fallacies. Additionally here, there is a false equivalency made between a lightning hub and a bank. Lightning doesn't involve custodianship, and so isn't anything like a bank / checking account. It will be extremely difficult for these financial institutions to run Lightning Hubs because of their need to comply with KYC/AML laws. This is because they cannot see the route the transaction takes due to onion routing
"There was no fraud to detect, no permission to give, no transaction to reverse, no fees to collect."
Bitcoin was always intended to have fees. They are needed to incentivise the security model (POW) against attacks.
"So it had to be broken to need them. And the worst part is, you won't have a choice."
Bitcoin is a permissionless open source system. You have plenty of choices. You could choose to use it, or you might choose not to use it. You might choose to fork the code to create competing node software, or create an altcoin or a fork coin.
"Either give up your freedom and use the Lightning Network, or be subject to double or even triple digit ever increasing fees for every move you make on the blockchain."
Lightning Network doesn't reduce your freedom because you still have command of the good, it just allows you to transfer that good a lot faster with far less overall fees due to more efficient use of blockchain space.
"The truth is, the 1MB blocks restricting Bitcoin are kept there by the developers. The absurdly high fees and long waits created a demand for a solution,
I am still confused to this day over this bizarre illogical narrative being pushed by the author and a few others. The Bitcoin Core development project is completely open source. You can fork it to create a competitor node implementation any time you want. If the economic majority of the network agreed with you, the Bitcoin core developers would be redundant. The author's argument makes no sense.
In fact, there have been many attempts from multiple parties with adversarial goals to the incumbent (Bitcoin Classic, Bitcoin Unlimited, Bitcoin ABC [primary Bcash node implementation]), all of which have failed to convince the economic majority that their idea is superior.
"and the solution they give us is the banking industry."
Again, no custodianship is involved. The key ingredient to Banking is custodianship. If the person has command of the good, this isn't 'banking' in any sense.
"The block size restriction was placed as a temporary safeguard by Bitcoin's creator Satoshi Nakomoto. As soon as the blocks were close to being full, it was to be raised again. Satoshi mysteriously left the project in 2010. But before he did, he left instructions on how to raise the block size, and left Gavin Andresson in charge of the project. Once Satoshi left, institutional money started to make its way in and take control, and a company, Blockstream emerged. Over time, it happened that a large portion of the development team was part of, or hired by this company.
And when it came time for another block size increase, there was a portion of developers that thought this was a bad idea. This just so happened to be the same group of developers that worked for Blockstream. The story of how Blockstream took over is a long and strange one, and I'll have to cover it in another video. But with massive amounts of censorship, organised attacks, and manipulation, Blockstream managed to take primary control over the development of Bitcoin, And force out any of the developers who opposed their choices, and gave open arms to the ones whose opinions are aligned."
As I said before, even if it weren't false, it wouldn't even matter because anybody can fork off tomorrow and if they secured the economic majority Bitcoin Core would become redundant.
"Ever since then, the fees have exponentially risen, the confirmation times have grown from minutes, to hours, to days. And the merchants are dropping support at a rapid rate. The blocksize should have been raised long ago. It could be raised for years without any risk for any of any centralisation giving us time to find other solutions."
Centralisation and decentralisation aren’t a dichotomy. It's a scale which usually involves trade-offs. If you increase the block size, you increase centralisation through multiple small multifaceted implications which lead to larger centralisation impact. Increasing the block size does the following:
* Increases costs of storage - thereby increasing barrier costs for miners and nodes on the network to keep the blockchain * Increases bandwidth costs - thereby increasing barrier costs for miners and nodes on the network to keep the blockchain * Decreases the amount of time a small miner has to download the (now larger) blocks - Least understood implication. Means that larger miners are already half way through mining a block while smaller miners are still trying to download that block, thereby knocking smaller miners out of the market.
While this is somewhat bad, the implications are often exaggerated by people who understand the power that a single miner has to change the rules, but misunderstand that that miner has next to nil power to enforce the economic majority to follow. Nipping at that miner's heels is the 'long tail' of many, many smaller miners jumping at the chance for the big miner to go off and do something stupid like this, so that they can collect the reward instead.
Centralisation leads to less people either mining or watching the blockchain. Bitcoin itself provides no guarantee that it may not be corrupted by central authority if it became highly centralised. It merely provides a openly visible mathematical security platform in the hope that it doesn't.
But how much centralisation can be tolerated? Roger Ver believes that a dozen nodes worldwide is enough decentralisation. This is quite bizarre from somebody with his history and claimed political leanings. The current establishment systems in western countries already work with this level of decentralisation. The RBA, the US Federal Reserve, fiscal review boards, and many other decision making authorities usually consist of a number roughly of which Roger describes as being 'enough decentralisation'. He himself would have been reviewed by decision making boards regarding his imprisonment for sending explosives by post (Not to draw into a debate of whether this was or wasn't just).
Decisions regarding many critical functions in western governments are made through boards to distribute power (Because power corrupts). Arbitrary decisions made through an individual become too entrenched in bias that their infamy is well earned and their collapse is too likely. Boards of a dozen or so, also suffer from corruption, but to a lesser extent and more of a systemic nature.
When you compare these 2 systems, it becomes obvious that centralisation / decentralisation is a scale. An individual could make extremely corrupt decisions quickly, while a board of a dozen would suffer less from obvious signs of corruption, but still be susceptible. A board of 50 would operate slowly, but would contain greater demographics and perspectives to further remove the corruption. We can therefore conclude the following: the greater the number of board members (On the assumption that these are random candidates as board members), the less the system is susceptible to corruption. Bitcoin creates a system which allows potentially endless numbers of 'board members' (Listening nodes currently number over 10,000) to review the blockchain to ensure that actions being taken are in line with your views as a member of the economic majority.
To anyone who questions whether changes to the blockchain history would be made if only a small number of nodes were watching, this has already happened with XRP (Ripple token), because of its centralisation.
"But it won't happen, because Blockstream states that they plan to turn a profit by selling sidechains to businesses. Allowing them to accept custom Bitcoin backed chains that aren't subject to Bitcoin's high fees. Taking small fees for every transaction, fixed monthly fees for the businesses, and selling the custom hardware needed to run them. This model is far more profitable, if Bitcoin doesn't work properly. If the fees are low and no one wants their sidechains, then how will they pay the $74 million dollars back to the corporations and big bankers who have invested, the ones who benefit from the Lightning Hubs.
This amazing technology, designed to give freedom, stability and power to the people around the world, has been ripped apart and destroyed for power, control and profit. But it's OK, because we're going to the moon!"
As per my above response to the Blockstream conspiracy theory and other points, custodianship is not involved in Lightning and anyone can fork. Developers in this system have no power but the power given to them by the economic majority.
