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Bitcoin Isn’t Ossified, It’s in Equilibrium

Bitcoin Isn’t Ossified, It’s in Equilibrium

Bitcoin is the world’s first truly global grassroots revolution.
Rapha Zagury
Rapha Zagury
Jun 19, 2024June 19, 20248 min read8 minutes read

Bitcoin is a global revolution that starts at the individual level. This is a beautiful thing.

Moreover, unlike other technological breakthroughs, where those with privileged access to investments adopt it first and front-run average people, Bitcoin has the most ethical and fair investment adoption cycle I’ve ever seen. Anyone can invest. So, those who truly understand its value proposition are the ones with the advantage. Knowledge is the barrier.

If that’s the case, how do we know that individuals' interests will lead to a broader good?

The answer is game theory. Game theory studies strategic decision-making, where each participant’s outcome depends on others' actions. It explores how individual self-interest can align with the collective good.

Swan Private Insight — Issue 36, June 2024

Swan Private Insight — Issue 36, June 2024

Swan Private Insight is our free monthly research report exclusively for ALL Swan Private client (anyone who spends over $100k with Swan).

Inside this issue you’ll find:

  • Bitcoin — For All Ages, For The Ages by Tomer Strolight
  • Bitcoin Isn’t Ossified, It’s In Equilibrium by Rapha Zagury
  • Running the Numbers by Sam Callahan
  • Financial Advisors: It’s Time to Study Bitcoin by Matt Golliher
  • Multi-Sig Custody and Inheritance by Matt Gillette
  • Macro View by Lyn Alden
  • Bitcoin News Roundup by Drew Mealey

… and more!

In game theory, Nash Equilibrium (named after its discoverer, John Nash, the subject of the film A Beautiful Mind) is a situation in which no player can benefit from changing his strategy without others changing theirs to offset those benefits.

Many aspects of Bitcoin are close to this state. I, therefore, prefer to describe these features as Nash balanced rather than ossified (or unable to be changed). That is, the system stays stable because it is in Nash equilibrium, not because it can’t be changed. Ossification implies rigidity. Equilibrium implies balance.

I would, for example, say the fixed supply of 21 million Bitcoin is in a strong Nash Equilibrium: This fixed supply is embedded in the protocol, and any attempt to change it would require consensus from the majority of the network. Since the fixed supply underpins Bitcoin’s value proposition as a store of value, network participants (miners, nodes, users) have no incentive to change this rule, assuming others also adhere to it. If someone attempts to change the issuance algorithm by altering the code, they are essentially excluded by all other participants whose code ignores any data that violates the original algorithm.

Proof-of-Work (PoW) is in the same category: Miners have invested heavily in hardware and energy costs. Cheating the system (e.g., double spending Bitcoin) would devalue the currency and its rewards, which are denominated in Bitcoin, leading to significant financial losses. Hence, the optimal strategy for each miner is to continue mining honestly, assuming all other miners do the same. On a protocol level, changes to PoW would make Bitcoin worse as a store of value. Not changing it is the Nash Equilibrium action.

Transaction verification incentives (ensuring every transaction has a valid cryptographic signature and only spends never-before-spent coins) are also arguably in Nash Equilibrium. Honest transaction verification ensures that miners receive their rewards. Invalidating or ignoring valid transactions would undermine the network’s trust and devalue the rewards, making it in both nodes' and miners' best interests to adhere to the protocol.

Thus, when we talk about features ossifying in Bitcoin, it would be more accurate to refer to features reaching Nash Equilibrium. The above examples are the obvious ones, but there are others. Some may never reach Nash Equilibrium, and some may stay in it until they need to change—Dynamic Equilibrium.

Another well-known game-theoretic aspect is Bitcoin’s network effect. The value of Bitcoin increases as more people use it. Bitcoin’s utility, security, and value increase exponentially with the number of users (according to Metcalfe’s law). This makes Bitcoin more attractive to new users, creating a positive feedback loop that reinforces Bitcoin’s dominance.

Unlike the network effect, which everyone agrees on, some features in Bitcoin are still contentious. These can often be described by the famous game theoretic scenario known as the “Prisoners' Dilemma.” In this scenario, while a player would personally benefit by acting alone, he knows that his benefits can be offset by the other player taking the same action. At the same time, both of them are better off if neither takes action. Miners and nodes face a similar dilemma regarding protocol changes. Maintaining a stable and secure network is in everyone’s collective interest. While individual actors might be tempted to push for changes that benefit them personally, Bitcoin’s decentralized governance ensures that any significant changes must be widely accepted, mitigating the dilemma.

The Blocksize Wars were a classic example of the Prisoner’s Dilemma, where mutual defection led to a network split. Those who initiated the action of forking, intending to benefit themselves, ended up doing themselves tremendous harm. Hey, Bitcoin Cash and Bitcoin SV, are you guys ok?

Yet another game theory situation is known as the “tragedy of the commons, ” which states that if people harm a system but can spread that cost to others, those who can do this all will. Inflation is a great example of hoisting a cost onto others. But Bitcoin’s fixed supply prevents the tragedy of the commons in terms of monetary inflation. Unlike fiat currencies, where governments and privileged insiders can print more fiat money or get easy access to it and personally benefit, Bitcoin’s scarcity ensures that its value is not eroded by inflation, aligning individual incentives with the collective good. It is the anti-Cantillon effect. There is no mechanism to benefit the few at a cost to the many.

Finally, let’s discuss “coordination games.” Bitcoin operates as a coordination game where all users, miners, and nodes benefit from agreeing on the rules and following the same protocol. This coordination ensures the network’s security and stability. Changes to the protocol, such as the implementation of SegWit, require broad agreement, reflecting the cooperative nature of Bitcoin’s governance.

There are, on the other hand, features that are not in perfect Nash Equilibrium. Here are a few that come to mind:

First up are scalability solutions. Proposals to expand the Lightning Network aim to improve Bitcoin’s scalability but are not yet universally agreed upon.

Similarly, block size discussions are still ongoing, with some parties wishing to enlarge the block size, others upset that they’re already as big as they are, and even others wanting to reduce them. But for now, things are in an equilibrium stalemate state of everyone being unable to get others to agree with them.

As Bitcoin’s mining subsidy decreases with each halving, a transaction fee market is developing, but the future dynamics of transaction fees are uncertain. The volatility observed in fees indicates we are by no means in equilibrium. Not yet at least.

The whole consensus upgrade procedure, and Bitcoin’s governance in general, has no formal process. Agreeing on upgrades can lead to conflicts, as seen during the SegWit2x debate. Stakeholders (developers, miners, users) may have differing views on the necessity and implementation of changes, leading to potential forks or stalled upgrades.

Each proposed consensus change in the last seven years appears to be a different game that played out differently.

Even when it comes to enemies of Bitcoin, game theory serves to defend it as well. As my colleague, Brendan Lane, pointed out, if governments and central banks could coordinate to ban Bitcoin, they would. However, since other governments and banks might benefit from it by accumulating reserves themselves, they ultimately have no choice but to participate themselves. A true prisoner’s dilemma, thankfully. What stops governments from stopping Bitcoin?

The fact that other countries’ governments won’t stop Bitcoin, especially rivalrous nations. We can even see this playing out in the current presidential election in the United States where two of the three candidates have already pledged to embrace Bitcoin so that other countries don’t get the upper hand on the U.S.

In conclusion, I believe ossification is an illusion or, at the very least, a misnomer. Instead, I think much of Bitcoin is better described as being in Nash equilibrium — stable and unlikely to change but changeable should the circumstances themselves change. Moreover, it appears to me that we will get closer and closer to Nash Equilibrium in more and more of its features. In a sense, this is the evolution process of the Bitcoin protocol.

It’s survival of the fittest features. It’s a dynamic equilibrium where changes tend to happen less and less often. Yet, nothing can be taken for granted, as new information can quickly turn a stable aspect into a chaotic one. The most important thing, in my view, is that incentives, both monetary and at the protocol level, tend to keep everyone in check.

To me, this system is indescribably beautiful and truly inspiring. It is a completely new governance system for broad-based human interactions. As Hayek once said,

  • “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

Rapha Zagury

Rapha Zagury

Rapha is the Chief Investment Officer and Head of Research at Swan Bitcoin. He previously spent his career on Wall Street as Managing Director of Deutsche Bank, and later as the Founder of Open Co.


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