Bitcoin created a new paradigm in finance by giving users direct control over their digital assets. Never before had a digital bearer asset existed where there was no trusted third party who had control over the ledger of user accounts.
While Bitcoin was extremely innovative when it first launched, it has not seen many huge changes in its protocol rules over the years. There has been plenty of experimentation on alternative crypto networks, but the base Bitcoin blockchain has mostly remained unchanged in terms of what constitutes a valid transaction.
So, why is it so difficult to change Bitcoin?
Bitcoin’s Protocol Rules are ‘Set in Stone’
According to Bitcoin creator Satoshi Nakamoto, the core design of Bitcoin was “set in stone” with the release of version 0.1 of the Bitcoin Core software. This is due to the nature in which Bitcoin works, where all of the nodes on the network must stay in consensus with each other. While upgrades are possible, they are done in a slow, backwards-compatible way—known as a soft fork—to ensure that everyone stays connected with each other on the same network.
Of course, the most well-known rule on the Bitcoin network has to do with its unchangeable monetary policy. One of the first things anyone learns about the bitcoin asset is that there will only ever be 21 million bitcoin that exist, and the amount of new bitcoin issued with each block of transactions is cut in half roughly every four years.
This unwavering monetary policy is at the core of bitcoin’s underlying value proposition, so its credibility is paramount. People are willing to buy into the idea of bitcoin as a long-term store of value because they don’t have to trust a third party to not inflate the supply.
Technically speaking, it would be possible to alter bitcoin’s monetary policy by creating a new network, calling it Bitcoin, and getting a sufficient number of users to move over to that new network. For this reason, Bitcoin has an inherent resistance to backwards incompatible changes—known as hard forks—of any kind. After all, if such a drastic change could be made, it would harm the credibility of bitcoin’s “set in stone” monetary policy and its base value proposition.
Contrary to popular belief, Bitcoin is not a democracy. The rules cannot be changed by a simple majority of nodes or miners. Instead, it is a system that runs on consensus where new features can be added from time to time but complete alterations to the ruleset are incompatible with the incentives of the network. Economically-relevant full nodes are effectively in control of the Bitcoin ruleset, and they don’t want to adopt anything that could weaken bitcoin’s value proposition.
Bitcoin was more flexible in the early days when it had a much smaller, less diverse userbase. However, it is now difficult to even add additional transaction types, such as covenants, to the network for fear that something could break and ruin the Bitcoin experiment.
Lessons from the Block Size War
The reality of the difficulties associated with changing Bitcoin were best exemplified by the block size debate of 2015-2017. As the network began to reach its transaction limit for the first time in its history, various segments of the userbase began to promote the use of a hard fork to increase capacity. However, this would also increase the costs of operating a full node on the network, weakening decentralization. Additionally, the use of a hard fork would put into question the rigidness of the Bitcoin ruleset as a whole.
The developers who had been working on the Bitcoin protocol offered Segregated Witness (SegWit) as a compromise that would both increase the effective block size limit while also fixing a bug that would make secondary protocol layers for payments, such as the Lightning Network, more secure. This would both increase the amount of transactions that could take place directly on the blockchain and set up the system to scale more efficiently via upper layer payments protocols over the long term.
Some members of the Bitcoin ecosystem, namely a contingent of miners, did not think SegWit went far enough and effectively blocked the change. Eventually, a group of the largest Bitcoin companies found a further compromise and agreed to activate both SegWit and a hard-forking increase to the block size limit. SegWit would be activated via a soft fork first, and the hard fork for the block size limit increase would occur some months later. This was known as the New York Agreement or SegWit2x.
SegWit was activated in the summer of 2017; however, consensus around the hard fork portion of the New York Agreement fell apart in November due to a lack of clear consensus. Due to the requirement of basically moving all users over to a new network and the optics of having large companies pushing for a change that would increase centralization on the network, many were fearful that the hard fork could lead to a split of the userbase into two separate cryptocurrencies or cause irreparable harm to bitcoin’s value proposition.
The whole ordeal showed how difficult it can sometimes be to get something as simple as SegWit, which was effectively a bug fix, added to Bitcoin. While some viewed this as a negative due to the perception that it would make it more difficult to scale the payments use case to more users over time, the reality is it solidified the “digital gold” narrative that has allowed the explosion in adoption of bitcoin as a store of value to occur since then.
Will It Ever Make Sense to Change Bitcoin Again?
Going forward, it seems clear Bitcoin will only experience a hard fork in a situation where the network is broken without it. The risks associated with this kind of change are simply too high for the network to build consensus around them. Additionally, hard forks become increasingly impractical to coordinate as the network expands and the userbase becomes more diverse.
That said, soft forks that enable new features or transaction types are still possible. Taproot was the last such change to occur in 2021, and there is some interest in adding covenant functionality to Bitcoin in an effort to improve the security of secondary protocol layers and increase functionality at the base layer. Of course, this would not be a riskless endeavor, as there are good reasons Bitcoin has maintained its relative simplicity when compared to something like Ethereum.
Complete ossification, where no more changes occur, is seen by many as a long-term goal for the Bitcoin protocol, as it would solidify Bitcoin’s monetary layer once and for all while still allowing experimentation for additional features to occur on secondary layers. This provides the best of both worlds in terms of securing the store of value narrative at the base layer while also allowing other use cases to proliferate in a more experimental way on sidechains and other secondary layers.
While ossification may eventually take place at the base layer, there are still likely to be small tweaks and improvements added to Bitcoin every now and then for the foreseeable future.
