How the banks bought off bitcoin

Episode 1: What has actually happened?

There’s a pattern that follows the subversion of an idea, and it’s worth knowing it well.

To destroy a promising movement, it is not necessary or desirable to use force. All that’s required is to cultivate the idea inside an institution you can influence, then you just need time. Trapped inside a paternal institute, that idea’s growth will mirror the perspectives of its institutional captors. Capture the institution, and you’ve captured the idea.

This is what has happened to bitcoin.

I’m talking in literal terms here: the actual ‘BTC’ you know well, the ones sitting inside your custodial binance wallet. The ‘proper’ bitcoin, have been purposefully denigrated into a nearly useless hump of numbers on a dysfunctional network. They are now tin cans connected by string whilst the world hurtles towards Artificial General Intelligence. Depending on who you are, and how many bitcoin are sitting in your binance wallet, you might already be angry with this characterisation, but hold onto your transaction fees and hear me out, because there’s a path out of this mess but it’s rapidly crumbling.

Full disclosure, I like bitcoin, and I may or may not have a few satoshis somewhere. If the ship is falling apart, I’m destined for the cold ocean waters like everyone else. Also, much of the work here is based on a book called Hijacking Bitcoin, you should totally buy that book. The author of the book was recently on The Digger podcast. Anyway, let’s get into this.

I want to start with the principle of what has happened to bitcoin, and in future articles we’ll explore how.

Look at that image above. That overflowing cone of cash is the network where your bitcoin is stored, and all the bitcoins in the world are stuck inside that same cone. For any transaction to happen, the bitcoins have to travel through that tiny gap at the bottom of the cone. After passing through the gap, the transaction is recorded; “Phil paid Bob for a taxi ride”, and the BTC are the moved from Phil’s wallet to their new rightful place in Bob’s.

So what happens if that cone of cash gets bigger and bigger but the bottleneck just doesn’t budge?

There’s currently about $1,126 billion locked up in that cone. In case it’s not obvious, that’s an absolutely massive amount of money. It’s close to the GDP of Saudi Arabia, which supplies most of the world’s oil, which begs a very important question… How many transactions prop up an economy like Saudi Arabia’s?

Well, we know how many are required for a country like the United Kingdom, because the Bank of England told us! In their detailed and imminent plans to implement their own digital pound, they say “The Bank estimates that throughput of approximately 30,000 transactions per second, and confirmation and settlement in under one second, might be needed.” Extrapolate that out over a single day and you’ll get a sense of just how many transactions are required to prop up a single modern economy.

So look again at the cone of cash above, and consider that it represents the global network of Bitcoin. How many transactions do you think that bottleneck at the bottom can handle?

It’s seven. Bitcoin supports seven transactions per second.

Settlement, the time it takes for the transaction to properly finish, typically takes an hour, but it’s not unusual for it to take more than 80. The transaction cost averages at $5, but this too can fluctuate wildly above $120. Could you run a business where transaction fees run higher than the value of the transaction itself? Where you might have to wait 80 hours for confirmation?

Bitcoin is so far off target that people have simply stopped using it for the thing it was designed to do. Now, here’s where things get interesting. There’s a folk narrative that explains this, and by folk narrative I mean the short hand ‘thing’ you use to understand the world, the story that’s just there. The narrative is that the underlying bitcoin technology just can’t work properly, there’s some ambiguous reference to difficult math problems and heavy GPU processing somewhere in that story narrative… but here’s the truth; Bitcoin is slow because it has been deliberately sabotaged in a targeted takeover that has taken years.

I said what I said…There’s a lot to get through here, so stick with me. Remember, we’re sticking to the what happened for now. So what lever was pulled to bring bitcoin to its knees?

Take a look at the cone network image again, notice the bottleneck shrinks to an impossibly small width relative to the massive sums of cash locked into the cone. There is no good reason for this bottleneck to be there. The developers of bitcoin have deliberately left a bottleneck in the code to ensure the network cannot process any more than seven transactions a second. This hikes prices, clogs up the network, and massively hampers innovation on top of “the internet’s payment layer”.

It has made your bitcoin useless.

Tomorrow, all of this could be fixed, and bitcoin would zoom around the network instantly with transaction fees below a cent. By ‘widening the pipe’, which is a simple code fix, the network could immediately process thousands of transactions per second, we really don’t know what the limit might be. So why doesn’t it happen? Because unbeknown to almost everyone who wasn’t paying very close attention, myself included, Bitcoin suffered a slowburn hijack.

As I write that I can hear a thousand angry inner-monologues ready to erupt into a frenzy of caveats. “The reason for the bottleneck is because….!” That conversation will always get dragged to the weeds, because in the weeds most people get exasperated and just quit. “I guess it’s complicated”, they think, and they’re out.

We’ll venture into the weeds later on in this series, but for now, the trust-me-bro truth is that bitcoin could scale to thousands of transactions a second, but the developers refuse to allow it. Are you curious as to why yet? Soon soon, but first let’s look a little further into bitcoin’s absurd state of affairs. Bitcoin itself is now so useless at settling transactions that hoards of very talented people have spent years creating complex systems to bypass the bitcoin network entirely. It’s a bit like designing an ambitious expressway in full knowledge that it’s too narrow and will become clogged and useless, thus prompting a half baked attempt at a second even more complex ‘bypass-bypass’ to ease the pressure off the disaster you created.

They call this ‘layer two’, and it’s soaking up all the talent which should be focused on building apps that make use of a functioning bitcoin network. It’s a bit like when Mao told all the farmers that, “hey, instead of farming which I know you’re all really good at, why don’t you smelt steel in your garden in a needlessly complex system, then we’ll use the steel to make tractors or shovels or something, and then you’ll be better at farming, oh and then while you’re smelting steel don’t forget, you’ll also need to do farming? That’s a good plan right?”

Chairman Mao claimed these useless small furnaces demonstrated “mass enthusiasm, mass creativity, and mass participation in economic development.” but they actually contributed to a famine.

So what are the absurd details of this Maoist layer two? Instead of fixing the bottleneck and allowing developers to build great stuff on the network, they’ve been diverted towards creating an incredibly complex system to bypass the bitcoin network. The clever (though dysfunctional) system they’ve come up allows for the BTC to stay exactly where it is. Instead of Phil’s bitcoin taxi fare leaving his wallet and ending up in Bob’s, a glorified accountancy tool separately keeps track of all the transactions happening then calculates ‘settlement’ amounts, to be paid at regular intervals, between companies that have thousands of special ‘lightning’ accounts. That this arrangement looks almost identical to modern high-street banking is precisely the point.

Have you ever tried to split a social bill where one person takes a big hit on their card, then an awkward impromptu accounting session happens downstream of that payment? They usually crop up because there’s no way to directly settle the bill with multiple cheap transactions that are properly itemised to each person.

A frustrated adult, hunched over a napkin, drawing math equations with a lipstick as he counts out ‘Well, Paul didn’t have starters, but he paid for a round of drinks and James got the bowling lanes and Laura paid for the taxi’. We’ve all seen this happen. If that person is particularly smart, you end up with an incomprehensible settlement amount in which you pay James ‘£9.27’, which apparently factors in the £12 you spent on table snacks, as well as the bottle of red wine you ordered during the meal. It’s all so complex that you just have to trust that the responsible adult calculated it correctly, because you’re tired and you haven’t got the energy to look through his lipstick spreadsheet. Everyone feels ripped off, and everyone is forced to trust the napkin accounting tool was free from error or that it gave any unfair advantages to its creator.

That’s layer two bitcoin.

Working out layer two is now the de facto vision because it’s just not practical to transact with the bitcoin network yourself. You cannot, under your own judgement and at your own pace, pay directly for a service or product because the bottleneck makes it prohibitively expensive. You’re forced off bitcoin and towards other middlemen services in order to achieve your objective of moving some money from A to B. It renders a very important question: if I’m dependent on these napkin accounting tools to record my transaction, what is the point of the bitcoin powering the transaction in the first place? It sits like a great useless elephant in the middle of the transaction?

I want you to notice something about this whole thing, hence my slight repetition. Because the actual payment network is expensive, slow, and confusing, bitcoin users are forced to rely on a trusted party (a bank) to record and calculate their transactions. But Bitcoin was supposed to empower people to reliably transact with each other without these legacy systems. Bitcoin was invented by an anonymous genius called Satoshi Nakamoto, and the vision this person expressed for the project was crystal clear: secure and effortless transactions without the need for a trusted intermediary.

Don’t believe me? Go and query everything Satoshi Nakamoto ever said on case.science

So how is bitcoin now at a place where it only works with trusted intermediaries? I’ve thought about useful ways to conceptualise this design failure, and I eventually remembered an example of an automated ticket machine in India. It’s supposed to empower passengers to navigate the complicated ticketing system on their own, because the incomprehensible ticket price system forced people into a wild west of hucksters and agents. Exasperated passengers had no choice because the complexity meant they needed the agent, and maybe the agent takes a cut of their fare. Was the price you paid even the price on the ticket? Who knows.

Like with any public facing system, when there’s an asymmetry of knowledge about it works, it creates opportunities for people to benefit. Hence, to address this asymmetry, an automated ticket machine empowers passengers to navigate the tickets for themselves. But what happens if the machine itself becomes as slow and difficult to use as the original system? It’s inevitable! A guy (rightly, in my view) becomes absolutely masterful at using it, and he’ll then charge a small fee to navigate the impossible machine. Passengers are back at square one, the revolution will not be ticket machines, your liberation was stunted when the technology to help you became another tool for middlemen to exploit.

I’m yet to think of better visual metaphor for bitcoin in 2024 than this ticket machine. Just add hundreds of these machines all around the internet, with each operator performing the ticket ritual with different layers of complexity. Then imagine the exhausted public who just want to get home, they will resign to trusting the button smashers.

Is it in the ticket wizard’s interest that the machine becomes fast and easy to use? That dozens of these machines open in the ticket hall? Clearly, his place in the pipeline is toast if that ever happens. He might actively lobby against more machines being installed into the station. If a new machine does come along that passengers are happily using, he might be incentivised to break it. He could be incentivised to convince passengers they won’t understand the machine, that he can get them a better deal. But here’s the really interesting part, the actual ticket wizard above really does provide a valuable service. Since his service can only exist if the ticket machine doesn’t work, there are subtle ways in which he and his colleagues can act to ensure the ticket machine doesn’t work. The method that’s most interesting to me is convincing people it’s too complicated for them to understand.

Is he really solving a problem that needs to be solved? Who knows. It’s easier to trust the button smashing.

In the case of the bitcoin industry, we’re in a very similar place. There’s a ‘layer-two’ service industry cropping up around the dysfunctional network and the people in that industry can act in good faith, but they’re subtly incentivised to ensure the dysfunctional network remains.

Then consider the banks and legacy payment systems that were due to be directly replaced by bitcoin. They have an even more powerful incentive to ensure bitcoin doesn’t actually work because their entire industry, which is more than 400 years old, is dependent on banking being too complicated for the average person. The asymmetry of knowledge they’ve enjoyed has afforded them incredible power and wealth, something we’ll explore later, so do you think they’re going to roll over while bitcoin eats their lunch? Do you think they’d be happy for an ‘email like’ payment protocol to be baked into the fabric of the internet?

Of course they don’t want that, so of course, they used their incredible power and wealth to derail it. If they could find a way to slow the network down and thus encourage companies that create a side-step for the bottleneck, then maybe the banks could buy up all of those companies.

Let’s return to the network cone image, notice thriving ecosystem of button smashers around that bottleneck? They’re all trying to come up with clever ways to move bitcoin around an unusable network, and with bitcoin held captive in the middle, the banks have bought access to all these companies. That’s the play.

In much the same way that healthcare principles were abandoned at the altar of profit and people actually cheered it on, we’re seeing the same phenomenon in the financial freedom space. In the coming articles, we’ll be exploring the players in this space who are knowingly lobbying to ensure bitcoin remains unusable. Their arguments are concealed behind opaque rationale that sounds plausible, but it’s all hot air.

You probably don’t believe me, but all good stories start that way. How did our magical internet money end up as a near perfect replacement for the banking system it aimed to replace? We’ll be getting into exactly that, so subscribe below.

If you liked this, please consider a paid subscription, or… a bitcoin cash donation. Details on this next time! Comments open, but I’ll be moderating for reasons that will soon be obvious.

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