The Blocksize War – Chapter 4 – Scaling II – Hong Kong

Chapter 4 of the book The Blocksize War is published below. The full book is available on Amazon. As a reminder, 50% of any profits from physical book sales will be donated to Médecins Sans Frontières, a charity that provides medical assistance to people affected by conflict, epidemics, disasters, or exclusion from healthcare.

The Blocksize War – Chapter 4 – Scaling II – Hong Kong

A few months after Scaling I, phase two of the Scaling conference series took place in Hong Kong on December 6 and 7, 2015. Hong Kong was chosen due to the close proximity to China, where many Bitcoin miners were based. A lack of engagement between the miners and developers was considered a major problem at the time, and the location was designed to address this concern. As it happens, by this point I had decided to resign from Ruffer and move to Hong Kong, so the timing and location of this conference was very convenient for me. I used the opportunity to find an apartment in the city and had a full week in the region. Hong Kong would later emerge as one of the key battlegrounds in this conflict and, if one wanted to witness this war unfold, it was certainly a good place to be.

The conference took place in Cyberport, a business park on the West side of Hong Kong island, overlooking the ocean. The Cyberport project had been controversial in Hong Kong. It was meant to be a technology and startup hub for the city, which is why the project was approved. However, not many technology companies had located there, with most of the vast space left empty, leading to accusations it was a housing development in disguise. The government granted the development project to Pacific Century Group, a company controlled by Richard Li, the son of Hong Kong property tycoon Li Ka-Shing. Controversially, this project was awarded without an open tender, which led to accusations of impropriety.[1] You may think we are going into too much detail here, but amazingly it is the basis of conspiracy theories by some of the most extreme large blockers. Horizon Ventures, Li Ka-Shing’s VC firm, had invested in Blockstream and therefore this association with Cyberport was cited as evidence of an establishment plot to cripple Bitcoin and keep the blocksize small. The same was said about the French insurer AXA, whose venture arm also invested in Blockstream. The former CEO of AXA was Henri de Castries, chairman of the steering group for the Bilderberg meeting, a closed-door gathering of the world’s financial and political elites, which provided perfect material for conspiracy theorists. These deranged and stupid theories were repeated again and again on /r/btc.

The atmosphere in Hong Kong felt much livelier and more intense than Montreal. Tensions were significantly higher. It also felt less productive and less useful than Montreal. It did not feel like there was much useful dialogue and discussion going on between the two sides at this conference; just arguments and clashes, mostly people speaking at each other. On the first evening, at the opening party, I tried to get a sense of the mood of the crowd. This was a much larger event than the one in Montreal, with a wider spectrum of people. The mood was very optimistic: the overwhelming majority of people were large blockers who expected the issue to be resolved in a few months, with a blocksize limit increase. Most people seemed to think the arguments in favour of small blocks were being gradually defeated and that only a tiny minority opposed a hardfork blocksize limit increase.

As for the sessions themselves, just like in Montreal it was mostly technical. A key difference between Montreal and this conference was the presence of the miners. One of the most anticipated sessions was the mining panel on the Saturday afternoon.[2] There were seven people on stage representing the mining industry. Many of them were Chinese speakers, and China was regarded as having around 65 percent of the global hashrate at the time. The session started with a question about whether they supported a blocksize limit increase. Most people responded yes, however some gave qualifications such as it’s best to proceed with caution, or that dialogue between China and the West needs to improve. Much of the translation from Chinese to English was conducted by Bobby Lee, who at the time was the CEO and founder of the BTCC exchange. Bobby was an enthusiastic proponent of Bitcoin and had been one of the key promoters of Bitcoin in China. The two proposals that were discussed on the panel were BIP 101 (implemented by Bitcoin XT) and BIP 100 (a proposal by Jeff Garzik allowing miners to vote on what the blocksize limit should be). Most of the miners indicated a preference for BIP 100, rather than BIP 101. This is perhaps no surprise, as BIP 100 gave more discretionary power to the miners.

Wang Chung, the operator of one of the larger mining pools, F2Pool, said that miners are the only party that could vote and therefore miners would decide. Bitcoin is a proof-of-work system, he argued, and there is no mechanism for anyone else to vote. However, he went on to say that an 8 MB blocksize limit was too large, as it would take too long to sync a node, which he said would be a disaster.

Most miners seemed to agree that they were in control of the network and that it was their decision, however they believed they did not have enough information available to make the right decision. In general, the smaller blockers did not believe the miners had decision-making power over the Bitcoin protocol, and that end users either did, or should, control the network. Proof of work was there to solve the double spending problem, they contended; miners merely decide on the order of transactions. However, most miners believed this decision was theirs; partly because of bias, as people tend to want more power, but also because they were being lobbied by both sides. After all, why would they be the ones being lobbied and being asked to vote, if the decision was not theirs to make? As to whether miners actually had this power or not, it wasn’t totally clear. Staunch small blockers would argue that miners never had such an ability, as they would never accept Bitcoin XT coins, while others believed that if the 75 percent activation threshold was reached, Bitcoin XT would become the new Bitcoin, as Bitcoin XT would be the “most work” chain. It was this most work concept that controlled Bitcoin governance, in their view, and users would rally behind the majority hashrate. In a way, each side was correct, based on their assumptions that users would behave like them. If Bitcoin XT reached the 75 percent threshold and then everyone upgraded to the larger block client, then there would be one new, larger block Bitcoin. However, if users refused to upgrade, then the original chain would persist and miners would not be in control. The trouble here is that most people assumed that other users would behave the same as themselves, without considering that they may act differently.

After the mining panel, there was another discussion with miners, in a side room. This was a round table-type discussion, rather than being on stage. As far as I am aware, this session was not an official part of the conference. This was what many of the conference attendees had wanted to see and, as this session progressed, the small room eventually became crammed with people as everyone frantically made their way there. There was perhaps 80 people eventually squashed into the room; it was standing room only. In this second meeting, some miners appeared to say they wanted to work together with Bitcoin developers and agree on a solution. However, years after the event, I was informed that the message was not as collaborative as this; it was more assertive about miners controlling the protocol. The message had supposedly been lost in translation, as the translator wanted to try and help resolve the situation, rather than make the conversation difficult and confrontational. Apparently, one of the miners had said that they have real businesses, they invested real money and they produce the blocks, giving them real power over the network, while the developers had no such influence.

Now feels like an appropriate time to introduce Roger Ver to the story, as he was in attendance at the conference. Roger describes himself as the first investor in Bitcoin startups. He certainly had a successful investment track record in the space, backing companies such as, Bitpay and Kraken. Roger had been one of Bitcoin’s most prominent and relentless promoters in the early days, and he had always been extremely enthusiastic about Bitcoin. When he first discovered Bitcoin, Roger is said to have been so excited by the opportunity that he was hospitalised for several days.[3] In particular, he had always been very keen on the payments use case for Bitcoin, and had been instrumental in driving adoption of Bitcoin by aggressively encouraging merchants to accept Bitcoin payments. Perhaps due to this unabated enthusiasm for Bitcoin, which was not to everyone’s taste, he earned the nickname “Bitcoin Jesus”.

Prior to Bitcoin, Roger Ver had a company selling computer components, Prior to that, he was convicted of illegally selling explosives online in the US, something he served a prison sentence for. Roger had not spent much time in the US after his release from prison. He formally relinquished his US citizenship in 2014, and by this point he lived in Tokyo. As far as I can tell, prior to this Roger was interested in the practical and business side of Bitcoin and, prior to the blocksize war, he had little interest in the technical or computer science aspects of the system. Roger was also well known in the Bitcoin community for ensuring users of the solvency of the MtGox exchange in July 2013, after reviewing “multiple bank statements”.[4] Unfortunately, at the time MtGox was insolvent and had lost thousands of Bitcoin.[5] A few months after Roger’s assurances, in February 2014, MtGox spectacularly failed. This damaged Roger’s reputation to some extent, however people in the space have short memories and there are always waves of new joiners. Anyway, MtGox already felt like ancient history by the winter of 2015.

Roger was the owner of the alternative Bitcoin subreddit, /r/btc and, given his forthright libertarian views, he was very strongly opposed to what he perceived as censorship on the main /r/bitcoin subreddit. At this point, at the conference, Roger was not known as one of the main proponents of larger blocks. Instead, he had a loud and very public altercation with the CEO of OKCoin, Star Xu, over the domain and a supposedly fraudulent contract.[6] This appeared to have something to do with Changpeng Zhao (then CTO of OKCoin), who would go on to found the extremely successful cryptocurrency exchange, Binance. We will not go into the details here, but the point is that, at the time, Roger appeared distracted by other things and was not directly involved in the blocksize argument; although it’s clear he was on the side of the larger blockers.

Jeff Garzik spoke again at the conference and talked through the pros and cons of the major options, which were essentially four pathways forward: BIP 101, his BIP 100 idea, a simple one-off increase to 2 MB (BIP 102), or doing nothing. After his speech, he was asked how the decision would be made. He replied:

I think it’s more of a process whereby in Montreal we did some input data stage. In Hong Kong now, we’re looking at here are all the issues, the validation costs, the various proposals et cetera. Now step 3 is you take this back, you noodle with the businesses, users, miners, then you get a rough consensus. My general response is you need to make your thoughts known. Everyone can know this is what jgarzik thinks, or this is what BitPay thinks. I think that transparency and discussion are the ways we find this. I think backroom deals, private visits to various people, that’s not the way to do it. You have to do it in public. That’s the open-source way.[7]

At the end of the conference, Jeff was back on stage again. This time, he asked for audience feedback on the various proposals. He would state a proposal and if the audience agreed, they would clap. When he came to the idea of a simple increase to 2 MB, there was a large amount of applause across the venue. Around 70 percent of the delegates appeared to clap enthusiastically. However, a small minority were clearly unhappy with this process and appealed to people to stop clapping. They wanted decisions to be made on merit, not by basing it on who clapped the loudest at an event. However, most people thought this was harmless. It appeared as if the consensus view at the conference was that going beyond 2 MB was too risky for now. Many presenters, including large blocker Jonathan Toomim, had presented technical arguments as to why 2 MB was safe given the current network conditions and, if we went much higher than that, longer block propagation times could cause issues for the network. Most miners seemed to agree with this logic.

After this event, there was no clear pathway forwards. However, what did seem clear to me was that Bitcoin XT was dead. The view was that 2 MB may be appropriate for now, not 8 MB. Bitcoin XT was not formally withdrawn, nor was there an acknowledgement from its proponents that they had pushed too aggressively for a limit that was too large. Such an admission may have helped resolve the situation. To the small blockers, Bitcoin XT had created a crisis situation, causing tension and controversy which made progress on the blocksize issue more difficult. While, to the large blockers, it was a necessary catalyst to get the debate going.

After the conference, I went out to dinner with seven or eight people from Blockstream, off Hong Kong island, in Kowloon. Most of the discussion at dinner was about highly technical subjects, such as how Bitcoin signatures could become compressed or aggregated. This discussion then moved on to Gavin and his tactics. Doesn’t Gavin realise that Bitcoiners do not like being told what to do, they pondered. People feel like they own Bitcoin and they want to be in control. Bitcoin XT was thrust on them from above, with no effort to make the users feel like they are in control, like it was their decision. From a tactical standpoint, Gavin appears to have made a big mistake here, they thought. Everyone at the table appeared to agree and was surprised by Gavin’s apparent misstep. There was still sympathy at the table; most wanted Gavin to listen to their advice and try to increase the blocksize limit again with a more collaborative approach, which left users feeling more in control of their currency. If Gavin just told users it was their choice, they would probably all just follow him, opined somebody at the table. However, it seemed as if Gavin just wouldn’t do this, as he did not believe it was the users’ choice.

We took the ferry back to Hong Kong island late at night. I remember looking over the towering skyscrapers in central Hong Kong, the city that was soon to be my new home. The centre of the city is dominated by the financial services sector, or what some Bitcoiners call the legacy financial system. The sense of power projected by the buildings put this debate into perspective. We were just a few hundred people arguing in a room in Hong Kong. Was Bitcoin really that important? Would Bitcoin really be able to stand up and challenge the financial system one day? If we cannot resolve this dispute now, when only a few hundred people really care about it, what hope does Bitcoin really have? I thought about the immense pressure which would be exerted on Bitcoin by major economic and political players as Bitcoin grows. It would make what Mike and Gavin were doing look miniscule by comparison.

I began to realise that the rules of the network had to be robust. It doesn’t matter who is trying to change the rules, or whether it’s a good idea or not. If Bitcoin is going to succeed, it had to be really difficult to change the rules, otherwise it would not stand up to the pressure from the main financial establishment, which would surely emerge as the value of the system increased.

However, from the large blockers point of view, increasing the blocksize limit was not a change in the rules. On the contrary, it was sticking to the original vision. It was a change in the rules in a literal sense and in a computer science sense, in that the network rule would become relaxed if the blocksize limit increased. However, they thought that, if the limit persisted, then there would be a major economic change and a change in vision: we would go from non-full blocks to full blocks.

However, the status quo had to be defined somehow. If Bitcoin was to succeed, there had to be dynamics in place to ensure the status quo would survive and prevail. As far as I could tell, these schelling point dynamics appeared to work around the literal technical rules of block validity. There didn’t seem to be any mechanism to ensure people’s vision for the network couldn’t change. Only the rules on block validity appeared hard to change, due the fact that divergence from the status quo could result in an economically costly network split.

This governance system was far from perfect, and it did leave the system as potentially too inflexible, but it’s all we had that appeared to be potentially sustainable. It reminded me of a quote from Winston Churchill: “Democracy is the worst form of government, except for all the others.” Perhaps a system in which the status quo rules prevail, unless there is overwhelming consensus for change, is the worst form of Bitcoin governance – except for all the others.