Bitcoin’s Social Contract

Over the years, there have been many “Bitcoin Improvement Proposals” (BIP) to make the network run smoothly. As with any software, upgrades need to be implemented to fix bugs and increase efficiency. 

There are many new implementations for Bitcoin around the corner such as lightning networks and sidechains. Improvements are a natural part of the process just as long as the protocol stays true to the social contract that defines Bitcoin.

In this article we shall explore the core principals that define Bitcoin’s social contract. Bitcoin investors made a decision to purchase coins based on an understanding of its fundamentals. 

Bitcoin was founded on four main pillars: openness, immutability, scarcity and decentralization. 

Openness 

Bitcoin is open-source software, which is the primary reason why blockchains are thriving right now. Making Bitcoin open-source was Satoshi Nakamoto’s gift to the world because anyone can create their own blockchain.

Any decentralized financial network needs to have its source code publicly available for auditing. Blockchains or applications that aren’t transparent cannot be fully trusted. 

Sending money to proprietary software requires faith in a third party, which defeats the entire purpose of trustless systems like Bitcoin. 

Immutability 

One of Bitcoin’s main value propositions is being an immutable ledger that’s free from political meddling. Its immutable nature is a necessary ingredient to ensure that data stored on the blockchain is accurate. 

Bitcoin is impartial to transactions and makes no moral judgements about money sent on the network. There have been major exchange thefts, yet the Bitcoin network will never alter its history to change these events. Doing so would kill its immutable nature and set a terrible precedent. 

It’s important for the network to treat all transactions equally, otherwise it opens up changes to the ledger based on subjective political whims. A blockchain that lacks immutability could be replaced by a cheaper centralized database. 

Scarcity

Bitcoin is the gold standard of crypto due to its network effect, liquidity and scarcity. Many investors own bitcoin as a store of value because the supply creation is regulated and hard capped at 21 million. 

This supply model is an integral component to Bitcoin’s social contract and should never be changed. Unlike traditional financial systems, Bitcoin sells itself on its predictability. We know the exact rate of inflation and quantity of supply. 

Violating Bitcoin’s supply model would make investors lose confidence in the system.

Decentralization 

The entire purpose of Bitcoin is to have a decentralized financial network without needing to trust third party institutions. Decentralization is a more difficult concept to define because the circumstances are dynamic. 

Bitcoin’s decentralization is based on diversity amongst miners, nodes, development and ease of access. 

Bitcoin is a self-selecting meritocracy because it requires some technical knowledge to use and secure private keys. That said, the network is still accessible to anyone with a basic internet connection and has a relatively low financial barrier to entry.

Decentralization isn’t a fixed metric but something that requires constant vigilance and must be defended. Centralization of nodes or 51% of the hashing power would be bad for the network. Any changes on a protocol level requiring additional red tape such as KYC should also be avoided. 

In the event that Bitcoin’s decentralized nature is ever attacked, changes can be made to the protocol to defend the network. 

Rocky

Crypto trader and investor. My preferred style is swing trading and longer term accumulation plays. I help coach traders and share my trades over at skillincubator.com
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