Blockstream vs miners – looking at the incentives around the SegWit2x fork


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The past few months in the Bitcoin community have been filled with discussion of an upcoming hardfork – SegWit2x. There have been a lot of people voicing their opinion on the matter of whether that fork should be allowed to pass or not, but today I would like to look at who I believe to be two key players in this debate – Blockstream (opposing SegWit2x) and the miners, the core signatories of the New York Agreement. More specifically, I will be focusing on the incentives both of those parties have when it comes to dealing with SegWit2x.

What is SegWit2x?

SegWit2x was first proposed as a compromise between the various factions in Bitcoin that were trying to solve the problem of blocks being full. It aimed to both enable the activation of SegWit to enable off-chain transactions, and to increase the block size to 2MB to increase the number of transactions that can be processed on-chain. It was to be deployed in two stages – first by activating SegWit in the summer (which already tookplace), and then by increasing the block size in winter (which is still pending).

Basic incentives for everyone

When examining why people would be for or against a certain change, it is often useful to look at the incentives they have for being on either side of the fence. An incentive shared by every Bitcoin user and company is to see Bitcoin succeed, be used by more and more people and to gain in value. You can occasionally see someone stating the opposite (along the lines of “it’s good the price is going down, it will slow the adoption rate so the project will be developed further before mainstream starts to use it”, or people wanting to buy the dip in price), but most people that are invested in Bitcoin want to see it grow, that’s pretty much a given.

Beyond that, things tend to get murky. You can see some ideologies come into play and so on. But if you focus on SegWit2x, the basic incentive for both sides appears to come down to the good old money…

Incentives of Blockstream and the miners

Blockstream is a for-profit company. As such, it is expected it will increase in value and, at least eventually, start generating revenue. While it had some projects that seem to be a money sink, the core business plan seems to still focus on sidechains – “sell[ing] side chains to enterprises, charging a fixed monthly fee, taking transaction fees and even selling hardware” (which the Blockstream CEO even explicitly confirmed). The original SegWit proposal was introduced by Blockstream’s co-founder.

So with this, we have a clear picture – Blockstream’s revenue stream will come from off-chain transactions. Now, let’s look at the other side of the debate.

Miners are paid directly in BTC by the blocks they mine. They mint new coins with each block, and they also collect fees for any transactions they include in that block. At the moment the block reward is 12.5BTC, and the fees add up to about 0.5 to 2 BTC on average. Pretty straightforward and as described in the original whitepaper.

So the miners are incentivised to include as many transactions in their blocks as they can, giving priority to those that pay more fees than the others per unit of size.

Clash of incentives

Both sides of this debate get their money from the same source – transaction fees. Blockstream wants more transactions to flow through their proprietary service to collect more fees from institutions and individuals. The miners on the other hand benefit from more transactions taking place on the blockchain – they earn transaction fees only for the transactions that are included in the block and get nothing from off-chain transactions until they come back onto the chain. With finite amount of money flowing through the network, this is a classic zero-sum game – the more transactions flow through your preferred channel, the more money you have and the less money your opponent has.

In an ideal scenario, we would let both of those options onto the free market and let the consumer choose what they want to use. Some would choose off-chain transactions for their speed, others would prefer on-chain transactions for the immutable records, etc. In a truly free market, the best product will win and the market will reach equilibrium. However, one side is currently at a disadvantage.

The size of the blocks is currently fixed at 1MB and SegWit has been activated on the network. This means that the miners have a finite amount of space to work with, while Blockstream and similar service providers don’t have to do much to promote themselves – when the consumer will see on-chain transactions being too expensive for them and the blocks being full, they will by necessity make their way onto their platform to be able to transact.

Moreover, SegWit transactions have a smaller “weight” to them, meaning you can put more of them in a block and even go over the 1MB block limit with them.

So we have a company that benefits from the traditional blocks being filled, while also giving preferential treatment to on board onto and off board from its proprietary services, while blocking others from increasing the overall throughput, all for “the benefit of the consumer”. This is basically the Net Neutrality battle all over…

Dynamics of power

Looking at this only from the lens of money is of course a bit of a simplistic view of things. There is probably a lot more politics, ideology and power in play – SegWit2x is a hard fork to the Bitcoin network being pushed by the miners rather than the traditional core developers. If it is allowed to pass, it will show that they don’t have full control over the project and thus remove them from a position of power, while giving the miners more power on top of the computing power they already hold.

Conclusions

If you look at things from pure monetary perspective, the fight over SegWit2x is a fight about where the transaction fees will flow – whether they will be on or off the chain. Increasing the block size will mean more money will be going to the miners, while keeping it low will force more money to flow through SegWit-enabled services, and to a degree, through Blockstream.

SegWit2x is also a struggle for power in the space – who will be able to make changes to the protocol and how things will be handled in the future.

The struggle might be framed in many ways – allowing an average user to run Bitcoin on RaspberryPi, the centralisation of power in the hands of the miners or core developers, an attack on the Bitcoin network, etc. How much of that is genuine concern and how much of it is propaganda from either side it will be hard to discern.

But in the end, it’s probably about money and power…

Photo via Getty Images

Source: BraveNewCoin

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