This Is Who Controls Bitcoin

This Is Who Controls Bitcoin

As a decentralized system by design, it can be difficult to see where the real power lies in Bitcoin. There are a number of different players in the ecosystem (e.g. miners, hodlers, exchanges, developers), but one entity has more power than the others in terms of what types of protocol improvements will be made.

As I’ve explained previously, the hodlers (again, not a typo) have the biggest impact on the bitcoin price due to the effect they have on the supply of available Bitcoin. Taking this point further, they also have the largest amount of power in terms of what types of improvements are made to the Bitcoin protocol because everyone in the system is incentivized to make the native tokens on the platform as valuable as possible.

Why Investors Control Bitcoin

The idea that investors are the ones who control Bitcoin is not a new idea. Multiple articles and blog posts have been written on the topic over the years. Daniel Krawisz’s article on this topic for the Satoshi Nakamoto Institute is perhaps the most notable.

In 2017, Bitcoin hodlers’ collective level of control over the network was put to the test as large companies in the space combined with more than 90% of the network hashrate in an attempt to move everyone over to a new network they would agree to call “Bitcoin.”

In the end, the combination of multiple futures markets for the coins on the potential new network combined with a variety of other factors (such as the view of SegWit2x as a corporate takeover) led to an abandonment of the proposal before it was scheduled to activate. Miners were only willing to mine the less valuable chain (as predicted by the futures market) for 12 hours after the activation of the new network (see this article for a full breakdown of what happened with SegWit2x).

As indicated by the SegWit2x situation, miners are incentivized to mine the most profitable chain for their business, which means the chain with the highest valuation and level of activity. In other words, they’ll do what hodlers tell them to do. Exchanges and wallet providers will simply provide access to whatever chain their users demand.

There are some limitations to the point that investors control Bitcoin. For example, it’s much easier for changes to be implemented via a soft fork rather than a hard fork. A soft fork is a backwards compatible change while a hard fork effectively requires everyone to move over to a new network at the same time.

As Mastering Bitcoin author Andreas Antonopoulos has pointed out in the past, Bitcoin is inherently resistant to contentious hard forks due to the desire for everyone to remain on the same network because a blockchain that has more users is obviously more useful.

Additionally, investors need competent developers who are willing to write the code for new features. These investors can also be politically manipulated by other actors in the space.

However, the general point remains here in that new features will come to Bitcoin by way of a soft fork if investors demand them.

What Can Be Done with This Information?

To make the reality of investor control over the Bitcoin network more apparent, it would be useful to use the sorts of futures markets that were used to debunk the level of supposed support for SegWit2x during new debates in the future. These futures markets effectively gauge market sentiment to see whether a single bitcoin would be more or less valuable in a scenario where the soft fork had activated.

Futures markets that rely upon centralized exchanges are less than ideal for a decentralized network, but there is also an alternative, more decentralized solution known as Bitcoin Hivemind, which is intended to be a sidechain to Bitcoin (see this article that explains how Bitcoin Hivemind could solve future protocol decisions).

While Bitcoin Hivemind is more of a long-term vision of an ideal system, less decentralized options that rely on a collection of trusted oracles could also be used over the short term.

One final point to add here is that a high level of support is not necessarily needed for a soft-forking change to add more value to Bitcoin. If only 5% of users are interested in the new feature or improvement, the overwhelming majority of users may be interested in adopting the opt-in change because it will increase the value of their own holdings by bringing in new users who wish to take advantage of this hypothetical feature.

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