Excerpt
Learn about the potential impact of nation state sanctions on Bitcoin’s resistance to censorship, which is critical to its role in promoting human rights such as freedom and privacy, as well as resisting authoritarian powers.
Transcript
When I saw this news about the fact that one transaction seems to have been filtered out of the mining, so basically, someone tried to censor a transaction, I was very much alert, because the uncensorability is, in my eyes, one of the most important properties of Bitcoin, which makes it different to any other form of money or cryptocurrency that we have. And it gives it a lot of the properties that are needed to use Bitcoin as a tool for freedom, for privacy, for human rights activists, and against authoritarianism. And as you might know, that’s actually the focus of my work. And so I was very alarmed by that. And so Bitcoin, without the censorship resistance is useless, because then we can just use PayPal, credit cards, or central bank digital currencies. And Satoshi Nakamoto built Bitcoin to be exactly the alternative to the current financial system. And as I said before, in October 2023, so one and a half months ago or something, one of the mining pools, F2Pool, which is the third largest mining pool globally, seems to have censored a transaction. And this filtered transaction is part of the OFAC list of sanctioned Bitcoin addresses. So the American, the US American OFAC, a not really voted for institution, is blacklisting Bitcoin addresses that they think are linked to terrorists or money laundering or whatever. And the payment went through because all the other miners included it into their blocks. Only F2Pool didn’t include it. And there’s a Bitcoin developer who is going by the name 0xB10C and they published this finding in November, on November 21, and found the missing transaction with a tool that this guy developed, it’s called mining pool observer. And this tool aims to detect when mining pools are not mining transactions they could have been mining. As far as I know, that project is basically financed by the Human Rights Foundation. So that person got a grant from the Human Rights Foundation, because, of course, for the Human Rights Foundation, it’s also important to find out if someone tries to censor transactions. While I was researching for this article, I found a tweet from a certain person called satofishi on Twitter. And this satofishi wrote “A censorship resistant system must be designed to resist censorship at the protocol level rather than relying on each participant to act consentiously and refrain from censorship. The Internet and TCP/IP have failed this. Bitcoin should learn from the failure.” And it was weird because people like TheBlueMatt, Matt Corallo, or Adam Back, which are core developers, answered this guy. And then I found out that this person seems to be the founder, co-founder or whatever, CEO maybe of F2Pool. And I found an earlier tweet of satofishi, where he admitted that he, 2FPool basically censored that transaction because he refuses to confirm transactions for criminals, dictators, and terrorists. He later deleted that tweet, but there are screenshots on Twitter that you can find. So satofishi really decided to censor this transaction. And I really wonder now, was this either a message from F2Pool that mining censorship can and will happen in the future, and that the community of developers and users should increase the censorship resistance on the network? Or he really just said I don’t want to go to jail, I’m the miner and if the US Americans want this transactions to be censored, then I do that because I don’t want to end, like CZ from Binance or other people. He doesn’t want to go to jail, of course. So the big question is, has Bitcoin lost its uncensorability? The short answer is: no. Because F2Pool is a mining pool. And a mining pool is actually only a piece of software that runs in the cloud where a group of miners come together voluntarily to combine their computing power and resources in order to increase the chances of successfully mining a block and earning the associated rewards, the block reward. And F2Pool is not the only mining pool out there. There are others, and all the others did not censor this transaction. That means these mining pools consist of a lot of people or hashing machines that are pooled together. And if an individual miner doesn’t want censorship in the pool, then they can switch to another pool very fast. And the second thing is, censoring Bitcoin addresses in general doesn’t make a lot of sense as one can use thousands of addresses, so just use new addresses, you know. But the longer answer is it’s a slippery slope. It shows that mining pools today are often corporate entities. They are huge buildings with thousands of machines, and they of course will have to comply with the regulations in their jurisdiction. And one of the biggest mining pools, Foundry USA, is already KYC mining only. That means that all the individual miners who are in that pool together are personally identified, just like if you are verified on a centralized crypto exchange. And whereas F2Pool is located in Asia, which makes it weird that they were the first one to comply with the US OFAC blacklist. But it shows that mining pools, just like banks, can over-enforce regulations in anticipatory obedience. With that, they further increase and invite stricter regulations. It’s a vicious cycle which culminates in tight KYC regulations, data collection, and financial surveillance, which is doing more harm than good, as we know. I mean, just think about all the personal data that is already being collected, breached, and now available on the Internet. So KYC in general is not effective. The financial and human costs outweigh the results. I mean, there’s still terrorism, right? There’s still money laundering. KYC doesn’t help. The only ones who are profiting are regulators, lawyers, surveillance, corporations ,and bureaucrats, resulting in ever stricter surveillance and control. So if we go down that slippery slope further and further, we will find ourselves in the situation that Bitcoin might hard fork in the future with the outcome that we have a KYC corporate Bitcoin and a free Bitcoin, the people’s Bitcoin, which they will call the black market Bitcoin. That would be a costly situation. And also, at the moment when a hard fork is happening, of course there’s a lot of insecurity. The price of Bitcoin might fall. And while at the moment there is no danger that this happens, we see that more and more, and also institutions coming in like BlackRock, all the ETFs that might be possible or starting in January. With all these institutions and corporations coming in, they of course, have to follow the KYC rules and all the regulations. So they will start mining, sorry, censoring transactions. And then we are back to the same exclusive financial system that we already have, and we have won nothing. But in the end, we still might have the new people’s Bitcoin, which doesn’t censor transactions. So what are possibilities to mitigate that? What should happen actually now, as fast as possible, actually? So, home mining. Home mining would be really a great alternative. The censorship shows that it’s important that individuals or small power producers are starting to mine. As long as you have access to cheap electricity or excess power, Bitcoin mining at home is possible. And that’s a measurement to keep Bitcoin mining decentralized. I mean, that’s even possible in countries like in Zimbabwe, which is sanctioned by the US. But we have a Bitcoin miner somewhere in Zimbabwe, and I’m going to meet him maybe later this year, by the next weeks, because the year is almost over. Another measure to keep Bitcoin decentralized and also to disable basically the possibility to censor transactions is a new protocol for pooled mining, which is called Stratum v2. It’s in development, and it enables the individual miners within a pool to select the transactions that they want to mine in the next block themselves. At the moment, in all mining pools, the mining pool software of the centralized entity is deciding which transactions are put in the next block. And so Stratum v2 is a great opportunity for that, for censorship resistance. And it went fast in the last two weeks. Last week, I read that there’s a new mining pool, which is called Demand. And they started the first Stratum v2 mining pool. So they are already using Stratum v2. And it’s also for solo miners. And then I think, it was last week, there was the new big headline. And that’s regarding also the third question I was talking about before, is Ocean Mining. Ocean Mining was launched last week in an event with Jack Dorsey, who seems to have given like $6 million to the development of the pool. And the founder is Luke Dashjr Junior, who is a Bitcoin core developer, who already, I would say even like ten years ago, if I remember correctly, already had a mining pool software. And this Ocean seems to be the new version of this mining pool software. And the slogan was “We wanna keep Bitcoin decentralized. We are not censoring transactions.” And then it’s also planned that they adopt Stratum v2. They are not using it at the moment, but there are plans to use it soon. And then suddenly on Twitter, there were a lot of tweets about how Luke Dashjr is an opponent of Ordinals because they raise the fees on chain. And many people, I mean, Ordinals are basically like NFTs, it’s like images on the blockchain. And so there are a lot of these Ordinals, and they drive the transaction fees higher and higher. And a few people think Ordinals have no place in Bitcoin. Bitcoin is first and foremost money or a digital asset, and this is its function. And they don’t want any other use of Bitcoin on Bitcoin. And so there was a lot of talk about how they already are censoring Ordinals transactions, but to be honest, I’m not sure if they really do. And so we will see going forward what’s happening. In any case, it’s good when new mining pools, who are dedicated to do non KYC mining and also implement Stratum v2 are coming up. And we were talking about decentralization of Bitcoin. So the mining pools, yes, one could say this is centralization, but as I said before, the individual miners can move very fast to another mining pool. So that was not really a problem, and it’s not yet. And decentralization is like, with privacy, you don’t have zero decentralization or 100% decentralization. The same with, you can’t. It’s always like on a slider, it’s not zero or one. And with decentralization, it’s the same in Bitcoin. We try to have the most possible decentralization that is possible with the current technology. And that’s one of the reasons why in 2017, with the block war, block size wars, it came to the hard fork, because the B-Cash people thought, we can increase the block size. And the Bitcoiners said, no, we shouldn’t increase the block size, because then people in countries who have bad Internet connections, or also very expensive Internet, cannot participate anymore. They can’t run their own node anymore, they can’t download the blockchain. And so this was one very important decision to stay more decentralized. And another option to prevent censoring of transactions is, of course, to increase privacy. So Adam Back proposed committed transactions already in 2013, but this technical solution seems to be the most far out, because that technology would render BTC addresses private for miners, so they couldn’t see the addresses. And then a blacklist doesn’t make any sense anymore. But I don’t believe that this is a solution that will be done fast, because as you see already in 2013, Adam Back proposed it another thing you can do to help decentralize Bitcoin, or keep it decentralized, is to run a node, either a Lightning node or a Bitcoin node. Because as you know, each Bitcoin node holds a copy of the blockchain, and each of these nodes can also decide which Bitcoin core software it is running. And in the case of a hard fork, the node runners decision on which version of the software they run is maintaining the network. So the node runners decide over a soft fork or a hard fork, not the miners. To conclude the good and the bad, basically. If I put on a pessimistic lens and follow the 80 to 20 pareto principle, I assume that maybe 80% of all miners will bow to regulations just like I guess 80% of Bitcoin users will have their bitcoin in custody. In case this turns out to be true, it could be that we see a hard fork in the future. But the optimistic outcome is that in a censorship resistant Bitcoin chain, that this chain will most probably survive, even though it will be a smaller network than the KYCed, the corporation Bitcoin.
