This is a chapter from the book Token Economy (Third Edition) by Shermin Voshmgir. Paper & audio formats are available on Amazon and other bookstores. Find copyright information at the end of the page.
Bitcoin was created to provide a P2P electronic cash system that resolves the double-spending problem over the Internet in the absence of traditional financial intermediaries. The proposed solution was a coordination mechanism (Proof-of-Work) that allows untrusted Internet actors to collectively maintain a public ledger of transactions by rewarding them with newly minted Bitcoin tokens. While its original vision emphasized decentralization and autonomy, practical realities have introduced new financial intermediaries and power structures, challenging its foundational principles. This chapter builds on the technological details explained in the first part of the book and will analyze to what extent the token design reflects this purpose and how the network and its stakeholders have evolved over time.
On November 1, 2008, the pseudonymous Satoshi Nakamoto published the Bitcoin white paper on a financial cryptography mailing list. It proposed combining P2P networks with economic anti-spam mechanisms and digital signatures to create a fault-tolerant, attack-resistant P2P electronic cash system that resolved the double-spending problem over the Internet without relying on traditional financial intermediaries. The white paper sparked immediate interest and discussion. Two weeks later, Satoshi distributed a preliminary source code to selected mailing list participants, who began improving it.
On January 3, 2009, the "genesis block" was mined by Satoshi Nakamoto, marking the official start of the Bitcoin network. The genesis block contained a special message in its first transaction: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks." This was a reference to a headline from “The Times” newspaper on that day. A few days later, version 0.1 of the source code was publicly released by Satoshi, inviting broader participation in the network’s development and use. Bitcoin’s launch coincided with the global financial crisis, which, combined with its groundbreaking Proof-of-Work innovation and the mystery surrounding Satoshi Nakamoto’s identity, fueled widespread interest.
Initially, it was uncertain whether the economic assumptions underpinning Proof-of-Work would withstand manipulation attempts. However, the network proved resilient, and interest and economic traction grew. While the protocol underwent improvements, conflicting political ideologies and economic interests among participants began to influence the decision-making process over network upgrades, complicating the protocol’s evolution. Bitcoin’s open-source protocol catalyzed innovation far beyond its network, sparking a renaissance in P2P network research and development and laying the groundwork for what is now referred to as "Web3" or "crypto." Satoshi Nakamoto’s online presence abruptly ended in 2010, leaving the Bitcoin community to steer its evolution. While the reasons for Nakamoto’s disappearance remain unknown, the vibrant ecosystem that followed has revolutionized money, finance, and Internet infrastructure.
Political Principles
The true motivations behind Bitcoin's creation remain speculative, as Satoshi Nakamoto’s identity is unknown. Insights can only be drawn from the purpose of the cryptography mailing list where Bitcoin’s ideas were first discussed. The purpose of that mailing list was to explore technical aspects, social implications, and political dimensions of cryptosystems, such as cryptography export controls. The discussions there suggest that Satoshi’s motivations were primarily engineering-driven rather than purely dogmatic. However, many contributors to Bitcoin’s evolution brought their own political ideologies, often rooted in the cypherpunk movement, which emphasizes internet privacy and anarchy, and the libertarian movement, which advocates Austrian economics as an alternative monetary framework. Today, the Bitcoin community encompasses a broad political spectrum, with varying degrees of libertarianism, privacy orientation, and adherence to dogmas when it comes to interpreting the original intentions of Satoshi. Bitcoin's foundational principles were grounded in practicality rather than ideological rigidity. Many trade-offs—such as sacrificing perfect privacy and enabling irreversible transactions—were made to address immediate challenges like achieving distributed consensus. Over time, the Bitcoin community layered its own interpretations and dogmas onto these initial design choices, creating a broader narrative that continues to evolve.
- Disintermediation, decentralization & censorship resistance: A key principle of Bitcoin was collective maintenance of the network to prevent state-based censorship. Historical failures of private electronic money systems like “e-gold,” which relied on centralized coordination and were shut down under banking and anti-money laundering regulations, likely inspired this approach.
- Open source, public & permissionless infrastructure: Bitcoin’s design as open-source software enabled distributed control over its evolution. Satoshi envisioned a system where anyone with the requisite skills could publicly contribute to protocol development, use the network for payments, or operate mining nodes without requiring permission from any authority.
- Irreversible transactions: While “immutability” has become a core belief among many Bitcoin enthusiasts, it was not part of Bitcoin’s original design philosophy. Instead, Satoshi emphasized transaction irreversibility as a practical decision to maintain clear consensus among anonymous network participants. Making Bitcoin transactions irreversible was a highly contentious topic among early Bitcoin developers. The trade-offs were clear to everyone involved. Creating a robust distributed consensus mechanism in the absence of trusted intermediaries was already a difficult task, which is why the original developers ultimately decided to accept this trade-off, but it was not intended as a long-term design feature.
- Privacy was an essential political principle for Bitcoin but conflicted with the need to publicly broadcast transactions to achieve consensus and prevent double spending. While public broadcasting compromises privacy, Satoshi proposed mitigating this by keeping public keys anonymous and using a new key pair for each transaction, but this workaround had limitations. Satoshi acknowledged these limitations in the white paper and seemed to assume that more robust privacy features would be implemented before Bitcoin gained widespread adoption. At the time, solving the double-spending problem took precedence over sustainable privacy measures.
Functional Design
In order to replace the functions of a central bank for issuing money and the function of private banks for managing accounts, verifying and mediating money transfers, the designers of Bitcoin needed to find distributed ways to issue money and verify who owns what to validate transactions—in the absence of intermediaries—while avoiding the double-spending problem. They resolved this with a series of functional design choices:
- Ledger management & chain of blocks: Private ledger management was replaced with public ledger management, ensuring that every network participant has access to an up-to-date and synchronized record of all historical Bitcoin transactions. This record of transactions was designed as a unique data structure, containing cryptographically linked blocks of Bitcoin transactions, guaranteeing the integrity of transaction records.
- Money could not be represented by a digital file but as a chain of digital signatures recorded on the collectively managed record of transactions. Ownership was designed to be verified using cryptographic keys, with each transaction transferring control to a new Bitcoin address. This eliminated the need for private banks to track balances or ownership of money.
- Identification of token holders & digital signatures: Instead of a bank issuing bank account numbers and passwords, decentralized Public Key Infrastructure (PKI) was proposed so users could autonomously generate Bitcoin addresses and cryptographic key pairs (private and public keys) via mathematical algorithms using wallet software, with which they could sign any Bitcoin transactions that other node operators could independently verify.
- Peer-to-peer distributed timestamping & Proof-of-Work: The biggest functional challenge was how to verify the order of transactions in a distributed system, ensuring that the same unit of currency could not be spent multiple times by the same person. Satoshi’s solution was to generate a computational proof of the chronological order of transactions through the coordination mechanism Proof-of-Work. The aim was to record a public history of transactions that quickly becomes computationally infeasible for an attacker to change if honest nodes control a majority of computing power. This method was expected to provide a robust mechanism that required little coordination among participating network nodes.
- Block reward, distributed minting & security: The block reward in the form of newly minted Bitcoins serves two purposes: (i) incentivizing participation for network services and (ii) issuing newly minted Bitcoins in a peer-to-peer way without the need for a centralized issuer. Since the race for creating a new block requires significant computational effort, the design of a block reward makes manipulation among untrusted network actors prohibitively expensive.
- Proof-of-Work’s difficulty adapter: To ensure consistent block creation times and deter 51 percent attacks, Bitcoin's creator introduced an algorithm to dynamically adjust the difficulty of participating in the process of Proof-of-Work and creating a new block of transactions. This was done to maintain network stability and security despite fluctuating participation by node operators and to account for hardware advancements.
- Block creation interval: The process of slowing down block creation and transaction verification to 10 minutes was chosen so that slower computers could also participate in the system—balancing transaction speed with network security and ensuring adequate levels of inclusiveness and decentralization.
Stakeholders
A range of stakeholders influence the Bitcoin network by contributing network services, consuming network services, offering external services, or by influencing the network from the outside. Their roles evolved over time, driven by the economic and political realities of Bitcoin’s adoption.
- Mining node operators (“miners”) execute critical network functions by verifying transactions and writing new blocks to the ledger. They invest in hardware, install Bitcoin software, download the full transaction history, and compete to create new blocks, earning block rewards and transaction fees. Miners are the only stakeholders incentivized to participate and vote on network rule changes. Over time, Maximal Extractable Value (MEV) opportunities emerged, allowing miners to reorder, insert, or censor transactions, generating additional revenue through financial market strategies such as front-running and sandwich attacks. This has introduced new economic dynamics to Bitcoin mining, influencing miner behavior and network fairness.
- Mining pools emerged when the difficulty of mining blocks increased, making mining more competitive and requiring expensive, purpose-built hardware. Some miners began pooling computational resources to increase their chances of solving Proof-of-Work puzzles. Mining pool participants share block rewards, while only the pool operator needs to maintain the full blockchain data. This has effectively created cartels of miners and increased node centralization.
- Full node operators (“full nodes”) do not participate in Proof-of-Work. They maintain the complete transaction history, independently verify transactions, and uphold network integrity. Bitcoin’s white paper did not originally conceptualize them as independent stakeholders. As mining started to require expensive, purpose-built hardware, some users chose not to participate in the consensus process but continued maintaining the ledger, ensuring full control over all network transactions. Since they were not originally envisioned, this activity is not incentivized, which has led to a decline in their numbers over time. Today, full node services are often outsourced to specialized providers, reintroducing the very principal-agent problems Bitcoin was designed to avoid.
- Light node operators (SPV Nodes) were envisioned in the Bitcoin white paper by Satoshi Nakamoto for devices with limited storage and processing power, such as mobile phones. They do not store the full blockchain data but only the block headers, relying on full nodes for transaction verification. However, this reliance on other nodes diminishes their independence.
- Users aka Bitcoin holders can use Bitcoin wallet software to hold, send, and receive Bitcoins P2P. As mentioned in previous chapters, many users started to rely on custodial wallets provided by third-party services from such as centralized exchanges and banks, effectively losing direct control over private keys and reintroducing financial intermediary services.
- Protocol developers are individuals who contribute to the improvement of the Bitcoin protocol. They are Bitcoin’s internal policymakers, proposing and implementing protocol improvements. The lack of incentives to develop Bitcoin code has led to the situation that many Bitcoin developers are now funded by private individuals and institutions, who all have their own special interests. What once was a superpower of the Bitcoin network as it was still emerging, had become a serious challenge for decentralized Bitcoin development.
- Software & hardware wallet providers develop applications and devices for users to manage Bitcoin securely and independently. They provide key interfaces that make the Bitcoin network accessible and influence industry standards, user adoption, and integration with financial services. With the rise of alternative blockchain networks, wallet providers also offer interfaces with exchanges, decentralized finance (DeFi) protocols, and centralized finance (CeFi) services. This has given them significant market power as on-ramps and off-ramps to traditional financial systems.
- Token exchanges & banks: When Bitcoin was first deployed, many network functionalities—such as exchanging Bitcoin for other currencies or assets—were not conceptualized or implemented. Eventually, dedicated exchanges emerged, both centralized and decentralized, enabling Bitcoin to be traded for other assets, fueling adoption and price discovery. Traditional banks also entered the ecosystem, offering custodial services and Bitcoin-based financial products, expanding Bitcoin’s user base.
- Custodial wallet operators: Crypto exchanges and banks eventually also became custodial wallet providers, managing Bitcoins on behalf of their users who preferred to keep their Bitcoins with the institutions where they bough them, effectively re-centralizing money transfer by operating full nodes and managing wallets on behalf of their users. Over time, they outsourced full node operation and wallet management to third-party services specializing on wallet services, reintroducing systemic risks and further undermining Bitcoin’s original vision of P2P transactions and financial sovereignty.
- Merchants accepting Bitcoins for goods and services are another market participant that can drive adoption as a payment method. Their participation depends on local regulations and economic conditions.
- External policymakers: Nation-state regulators influence Bitcoin’s adoption by creating legal frameworks for regulated Bitcoin use or imposing sanctions on those engaging with the network. While Bitcoin was designed to be censorship-resistant, policymakers can effectively pressure node operators, developers, exchanges, and users within their jurisdictions to comply with local laws, significantly impacting Bitcoin’s adoption.
- Chain analytics companies: The rise of blockchain data analytics services has altered the dynamics of the Bitcoin ecosystem. These privately operated companies use algorithms and artificial intelligence to analyze blockchain data, tracing transactions and identifying general usage patterns as well as individual users. Such services undermine Bitcoin’s pseudonymity and have become tools for regulatory compliance, enabling asset freezes and limiting Bitcoin’s fungibility.
- Hardware producers & chip logic: Satoshi Nakamoto envisioned that anyone should be able to participate in Proof-of-Work using a standard home computer. While the Bitcoin white paper acknowledged that hardware requirements would increase over time, this shift happened much faster and in an unexpected way. The chip logic of a computer interacts with Bitcoin software, defining protocol boundaries and influencing the difficulty adjustment mechanism. Advances in hardware research and development directly impact mining costs and efficiency, shaping the economic landscape of the Bitcoin ecosystem. Eventually, specialized companies began producing dedicated mining hardware, using special-purpose processors with significantly greater hashing power at lower energy consumption. However, these machines were too expensive for the average user, leading to the dominance of mining pools. As a result, hardware manufacturers have become powerful players in the Bitcoin network, influencing mining costs, network security, and overall ecosystem dynamics.
- Electricity market dynamics–including availability, costs, and regulatory conditions—affect the profitability of mining. Renewable energy sources have become an attractive alternative, offering cost advantages while addressing environmental concerns. If managed wisely, Bitcoin miners can help balance excess loads on power grids while benefiting from lower energy costs. Mining pool operators can collaborate with renewable energy producers, such as wind and solar farms, which often generate excess capacity that is difficult to sell back to the grid. However, if poorly managed, Bitcoin mining can also contribute to energy shortages and regulatory pushback.
- Second layer protocols & meta protocols such as the “Lightning,” “Liquid,” “Rootstock,” “Stacks,” “Runes”, and “Ordinals” (inscriptions) address limitations of the Bitcoin main network, such as scalability and transaction speed. They also expand Bitcoin’s use cases, from payments to smart contract processing. These protocols can drive adoption if they support broader application development. On the other hand, they can also negatively impact Bitcoin’s transaction fee market if user adoption outpaces the network’s transaction capacity.
- Alternative Web3 ecosystems: The emergence of alternative blockchain networks has introduced competition for Bitcoin while also strengthening general crypto/Web3 adoption and research and development. Innovations and market growth in other blockchain networks can positively influence protocol development and adoption within the Bitcoin ecosystem, and vice versa.
Token Types & Token Properties
The Bitcoin network, unlike many later Web3 protocols, has only one type of native token with the following properties:
- Minting event: Each time a new block of transactions is successfully mined, the block reward, consisting of newly minted Bitcoins, is created by and allocated to the winning mining node in the first transaction of the new block.
- Expiry date/event: Bitcoins do not expire and can be stored indefinitely. They become inaccessible only if: (i) the private key is lost, or (ii) they are moved to custodial wallets where they may be mismanaged, frozen under regulatory pressure, or rendered unusable by centralized service providers (e.g., merchants, exchanges, or banks).
- Rights: Bitcoins represent property rights (network assets with currency aspects) and access/usage rights for network services, as they are the only way to pay transaction fees.
- Privacy: Bitcoin provides limited privacy due to: (i) Its existence as a chain of digital signatures, traceable to their origin. (ii) Pseudonymous Bitcoin addresses, which can often be linked to real-world identities through analysis. (iii) The cryptographic primitives used. The pseudonymous nature of Bitcoin transactions is not at all comparable to the anonymous nature of cash and also affects its practical fungibility.
- Fungibility: While theoretically interchangeable (a currency criterion), in practice, specific unspent transaction outputs (UTXOs) can be flagged or sanctioned, undermining Bitcoin's practical fungibility, especially for compliance-sensitive transactions.
- Transferability: Bitcoins are designed to be unconditionally transferable.
- Stability: Bitcoin's protocol does not include mechanisms to maintain price stability. Its value fluctuates based on market dynamics, making it unsuitable as a stable medium of exchange. This gap has fueled the development of stable tokens, which aim to provide price stability.
Economic Mechanisms
Bitcoin’s economic mechanisms are regulated in the protocol, defined by the anonymous creator Satoshi Nakamoto, before the protocol was first implemented and deployed.
- Monetary policy: Bitcoin’s supply is capped at slightly under 21 million BTC, with issuance halving approximately every four years (210,000 blocks). The block reward is currently 3.125 BTC and will halve again in 2028. The final Bitcoin is expected to be mined in 2140, when the block reward will drop below 1 satoshi—the smallest denomination of BTC. At this point, miners will only earn transaction fees and potentially engage in MEV activities if this issue is not resolved before then. The fixed supply of newly minted BTC, combined with decreasing issuance, creates a deflationary dynamic, where demand exceeding supply drives price appreciation. This dynamic is further influenced by "sunk" Bitcoins—those lost due to misplaced private keys or mismanagement by custodial service providers. Bitcoin’s ideological emphasis on scarcity has become a core feature. There is no provision in the Bitcoin protocol for changing the monetary policy. Changes to the supply cap or issuance rules would require widespread consensus among mining nodes, an unlikely scenario due to the economic risks of altering Bitcoin’s scarcity-driven value proposition. As previously mentioned, all newly minted Bitcoins were and still are rigidly distributed via the Proof-of-Work process. No tokens were pre-mined or distributed to founders or investors, unlike many Web3 protocols today.
- Network taxes: As previously elaborated, mining node operators also collect transaction fees, which can be described as network taxes that are paid directly to the winning miner. Unlike newer Web3 networks that collect fees in treasuries for later redistribution, Bitcoin lacks a centralized treasury. Early development, marketing, and operation relied on voluntary contributions and community enthusiasm.Network taxes solely benefit mining node operators, which has created power asymmetries within the network, favoring miners over other necessary stakeholder groups such as full node operators or protocol developers. Network fees depend on several factors: (i) urgency of the transaction, (ii) network congestion, (iii) transaction size, and (iv) general market conditions such as Bitcoin’s exchange rate.The fees can be set by the user who initiates a Bitcoin transaction and are directly paid to the miner who creates the block in which the transaction is included. As a result, miners tend to prioritize transactions with higher fees, as this increases their potential earnings.When the Bitcoin network experiences high demand for transactions, the available space in each block becomes limited. If users want their transactions to be confirmed quickly, they can choose to pay a higher fee to incentivize miners to prioritize their transaction. The size of a transaction in terms of bytes also plays a role in fee calculation. Larger transactions with more inputs and outputs require more space in the block and thus incur higher fees. While it is possible to send Bitcoin with no fee, such transactions may face long delays or rejection, particularly during high congestion periods. Wallets and exchanges often provide fee estimation tools or preset options (e.g., low, medium, high) to guide users, which means they can influence the fee market through the software frontend they provide to users.
- Bitcoin’s difficulty adjustment: Every 2,016 blocks (roughly every two weeks), the difficulty of creating a block is recalculated, based on the total computational power deployed by participating miners. This adjustment mechanism ensures that despite fluctuating miner participation and technological advancements, Bitcoin’s block issuance remains predictable, creating a self-regulating market for mining profitability. When mining becomes too competitive and unprofitable, some miners exit the network, reducing hash power and triggering a difficulty reduction, which restores profitability. Conversely, when mining is highly profitable, more miners join, increasing hash power and prompting a difficulty increase. Bitcoin’s difficulty adjustment also prevents runaway inflation. Unlike fiat currencies, where central banks adjust the money supply, Bitcoin’s supply schedule remains constant, enforced by its cryptographic rules. However, rapid advances in mining hardware or concentrated control over hash power can cause temporary fluctuations in block times and fees. While theoretically adjustable through a protocol change, any modification to the difficulty algorithm would require near-unanimous agreement among miners and developers.
Governance, Protocol Upgrades & Network Splits
Any change to rules defined in the Bitcoin protocol requires a social governance process, which, in the case of Bitcoin, has been loosely defined. As a result, a series of informal social practices have manifested over the years around the social governance process of the Bitcoin network.
- Policymaking: To propose upgrades, Bitcoin developers can use a code repository of so-called Bitcoin Improvement Proposals (BIPs) to post their ideas on how to change Bitcoin rules. The ideas are discussed through forums, mailing lists, and social media among developers and the broader Bitcoin community.
- Voting: Once this process is completed, mining node operators decide whether or not to adopt the protocol changes by updating the Bitcoin software on their computers or refraining from doing so. The network with the most cumulative Proof-of-Work, also referred to as the “longest chain” which has more “hashing power” or “network power,” is always considered the valid one by the network nodes. This essentially means that the majority vote can be influenced by the amount of computing power one has, where one vote equals one CPU. Bitcoin token holders, while not directly involved in this process, can influence governance indirectly. They may sell their tokens to signal discontent or coordinate with other users to initiate a user-activated fork, which pressures miners to adopt specific changes.
- In Bitcoin's early years, protocol upgrades were frequent, and generally uncontroversial due to the small community and lack of economic stakes. As the network grew, upgrades became politicized, with stakeholders reluctant to risk their economic or network power. This politicization led to contentious upgrades, resulting in forks and network splits. In the Bitcoin network, there are two types of protocol changes, so-called “hard forks” and “soft forks.”
- “Soft forks” are a type of protocol change that is backward compatible. Nodes that did not update the protocol can still process transactions if they do not break the new protocol rules. Blocks produced by miners running the upgraded protocol are accepted by all nodes in the network. Blocks produced by miners running the old version can still be created but will not include features introduced by the soft fork. If old-version miners get their blocks rejected by part of the network, they may be inclined to upgrade as well. Soft forks, therefore, have a more gradual voting process than hard forks and take several weeks.
- “Hard forks” require all miners to upgrade their clients to the new protocol immediately, which can lead to sudden splits in the network. As a result, many protocol upgrades have been designed as soft forks. In the case of a hard fork, anyone who owned tokens in the old network will also own an equivalent number of tokens in the new minority network, which they can then sell or hold. However, this requires at least one token exchange to list the new token of the minority network; otherwise, there is no market, and the network fades into oblivion.
- “Temporal forks” can occur when two miners solve a block simultaneously, creating parallel versions of the blockchain. The protocol resolves such splits by adopting the chain with the most accumulated Proof-of-Work, ensuring that only one branch survives. Such temporal splits highlight the importance of Bitcoin’s consensus mechanism in maintaining network integrity.
Whether planned or accidental, forks can influence Bitcoin’s community, development resources, and market dynamics as they can dilute user, developer, and miner power, forcing stakeholders to choose which network to support.
Power Structures
The power dynamics in Bitcoin have changed significantly over the years, as new stakeholders emerged and political and economic realities changed, both within and outside the network.
- Executive Power: Execution of network functions is primarily carried out by individual miners or mining pool operators according to computational rules defined in the protocol. Miners validate transactions, package them into blocks, and add them to the ledger. Unlike other Web3 networks, Bitcoin lacks centralized management or day-to-day executive oversight through foundations or special-purpose entities. Full nodes enforce protocol rules and verify transactions but do not participate in the mining process or directly execute transactions.
- Policymaking power: In theory, anyone can propose Bitcoin Improvement Proposals (BIPs). In practice, only a small group of highly skilled developers have the expertise to make meaningful contributions. Full-time protocol developers are the only ones who can juggle the complexities and understand the cryptoeconomic intricacies of Bitcoin enough to make meaningful proposals to change the rules. This puts a lot of policymaking power in the hands of this small group of experts. At the time of writing, approximately 300 developers actively contribute to Bitcoin’s code, while Billions could use it. This raises concerns about the decentralization and inclusivity of policymaking. Additionally, Bitcoin lacks native mechanisms to incentivize developers. Early contributions were driven by ideology and reputation, but today, economic support often comes from mining pools or people who own many Bitcoins, concentrating policymaking power among these entities.
- Voting Power: Protocol changes in Bitcoin are decided by mining node operators, whose voting power depends on their hashing power—in other words, the amount of money they are willing to invest in hardware. Mining pools, which aggregate resources from multiple contributors, add to this dynamic, as only the mining node operator has a vote. The influence of other mining pool participants on protocol upgrades depends on the contractual agreements with mining pool operators. Regular Bitcoin users have no direct possibility to vote on protocol changes, but they can use their market power to collectively coerce mining node operators into accepting a protocol upgrade they otherwise would not accept. At least in theory. They can do so via User-Activated Soft Forks (UASF) or User-Activated Hard Forks (UAHF). To engage in a UASF or UAHF, users need to operate a full node or a light node to be able to technically and, therefore, politically coordinate. Users who have their tokens managed by custodial service providers (such as exchanges or banks) cannot participate in a UASF or UAHF. In practice, however, the growing dominance of mining pools exacerbates power imbalances, because mining pool operators have a better ability to politically coordinate than individual users since they are a smaller and more concentrated group.
- Market Power: Bitcoin holders can influence the network through market actions such as buying or selling Bitcoin, which affects its price. Large holders wield greater influence over market dynamics. Additionally, users can engage in the above-mentioned actions like UASF or UAHF, although such efforts require significant coordination and expertise. Mining node operators and wallet providers also have market power. Miners can prioritize transactions based on fees, while wallet providers influence users’ fee settings through interface design. Wallet providers and miners can collude more easily, being a smaller and known group of institutions, to the disadvantage of users. Merchants and exchanges influence Bitcoin’s utility and adoption by deciding whether to accept or list Bitcoin. External regulators can also impact the Bitcoin market by enacting policies that affect citizens, businesses, and institutions within their jurisdiction. Other market players, such as hardware producers and electricity providers, indirectly shape network dynamics by influencing miners’ operational costs. Competing Web3 protocols can attract developers and users, potentially draining resources from the Bitcoin ecosystem.
- Information & coordination power: The dynamics of protocol upgrades in Bitcoin resemble public discussions during elections. Effective inclusion requires mechanisms to ensure all stakeholders’ voices are heard and interests balanced. However, coordination in Bitcoin is often dominated by those with technical expertise, financial resources, or influential voices in the community. Moreover, most users rely on hosted wallets or light nodes, creating information asymmetries regarding historic Bitcoin transactions. As wallet management and full node operation are outsourced to third parties, who have access to Bitcoin users’ transaction histories, this raises privacy and trust concerns. Whether or not Bitcoin holders and wallet service providers operate their own full nodes (or any node at all) influences the information flow, coordination power, as well as asset and network control.
Purpose & Reality
Double spending challenge: The Bitcoin protocol successfully solved the double-spending problem over the Internet without relying on centralized trusted authorities. This breakthrough was a significant achievement that had previously eluded researchers and developers. In addition to fulfilling its primary purpose, it also initiated a renaissance in P2P network development.
- P2P electronic cash: While Bitcoin definitively resolved the double-spending problem, it has not become practical for everyday payments due to its high and frequent price fluctuations. In economies with moderate inflation and stable currencies, Bitcoin’s lack of a stability mechanism limits its usability as a form of day to day payment. Instead, Bitcoin's scarcity mechanism has made it more comparable to commodities like gold, which is what many refer to Bitcoin as “digital gold.”
- Transaction fees: Bitcoin aimed to reduce transaction costs, especially for international transfers and micropayments. However, high adoption levels and speculative trading, coupled with rudimentary monetary and fiscal policies, have driven transaction fees beyond what is feasible for day-to-day remittances or micropayments. Second-layer solutions intend to address this issue, but as of the time of writing, Bitcoin has yet to meet this aspect of its original value proposition.
- Privacy: Bitcoin’s pseudonymity is compromised at the edges of its network, where centralized exchanges and merchants can be sanctioned by governments. Additionally, even within the decentralized network, chain analysis can reveal user identities. While Satoshi Nakamoto suggested creating a new wallet for each transaction to maintain privacy, this approach proved impractical. Wallet developers implemented features to address this but with limited success. Bitcoin’s lack of built-in privacy has spurred innovation in privacy-preserving payment solutions, both within the Bitcoin ecosystem and through other more privacy oriented networks.
- Economic assumptions: The economic model underlying Bitcoin’s Proof-of-Work mechanism relies on simplified game theory rather than collaborative dynamics. This has resulted in a more centralized network than originally envisioned, with a few mining pools dominating network operations and protocol maintenance. Some critics argue that, given the emergence of mining cartels, Bitcoin practically operates as a "delegated Proof-of-Work" system, diverging from Satoshi Nakamoto’s original goals to make network contributions as inclusive as possible.
- Stakeholders & power structures: Bitcoin’s historical development illustrates the unpredictability of complex socioeconomic networks. Satoshi’s white paper envisioned only mining and light node operators, but new stakeholders—such as full node operators, mining pools, exchanges, chain analytics firms, and a range of centralized and decentralized financial service providers—emerged over time. These unforeseen participants altered the network’s political and economic dynamics, reshaping power structures and deviating from the creators original assumptions.
← Previous: Purpose-Driven Tokens
Footnotes
[2] Launched in 1996, “e-gold” was one of many attempts to create a digital currency, which gained critical traction among users and merchants. The currency was backed by gold, similar to tokenized commodities, but operated by a centralized service provider who managed the precious metal reserve and settled the transactions. Any user could create an account with the website operator, and pay with dollars to purchase units of gold and other precious metals, which were denominated in grams and could be digitally spent. In 2006, the system was settled at around 2 billion USD. By 2009, when the project was shut down for legal reasons, the network had around 5 million user accounts.
[3] A hash is a cryptographic primitive that creates a digital fingerprint of the block. It is a fixed-length string of numbers and letters which is unique to the input data upon which it was calculated. Hashing refers to the method of transforming any data, no matter how small or large, into a fixed length string – which then acts as a digital fingerprint for the underlying set of data. It allows the conversion of any text or picture, which represents a variable-length string of data into a fixed-length string of data in the form of a hash, to ensure data integrity. Calculating the hash value from data is very easy and efficient, while reversing the data from only the hash value is close to impossible. This way, if one single bit of input data is changed, the output changes significantly, which makes it easy to detect small changes in large files, such as a text file.
[4] Central Processing Unit.
[5] The biggest company sponsoring developers is Blockstream, but Bitmain and Circle have also sponsored developers in the past, as well as the MIT Media Lab.
[6] Application-Specific Integrated Circuit.
[7] It is estimated that roughly 3.7 million BTC issued to date have been lost forever, as a result of people losing access to their private keys. Source: https://decrypt.co/37171/lost-bitcoin-3-7-million-bitcoin-are-probably-gone-forever
[8] https://bitcoin.org/bitcoin.pdf
[9] The “length of the blockchain” refers to the network branch with the most cumulative Proof-of-Work, not the one with the most blocks.
[10] https://blog.bitmex.com/a-complete-history-of-bitcoins-consensus-forks-2022-update/
[11] GitHub is a social network for developers and cloud-based service for (potentially collective) software development and version control, allowing developers to store and manage their code. A commit on GitHub is similar to saving a file that has been edited. It records changes to one or more files.