35 - Thank a maxi
Opinions expressed are solely my own. Shout out to my friend and colleague Scott Henry and my parents for some great edits. Follow me on twitter @thatsauchward.
Over Thanksgiving, a colleague of mine sent our group a video reminding me to “Thank a Maxi.” Maxi is a term short for “Bitcoin maximalist” which describes someone who believes that bitcoin (BTC) is the only digital asset that is useful, valuable, and not a scam. One core tenet of a Maxi is that everyone should self-custody their BTC meaning that you store your digital assets in a wallet who’s private keys you store and control. The recent collapse of FTX, Blockfi, and Celsius has given BTC Maxi’s the ammunition they lacked to cut through the marketing veil of the last digital asset bull run. Today Maxi’s are again beating the drum of self-custody, but it’s not the only song they’re singing.
BTC Maximalists
The term Bitcoin maximalism was used on Reddit subchannels but popularized by Ethereum co-founder Vitalik Buterin when in 2014 he used the term “Bitcoin dominance maximalist,” which he defined as a person with…
“A simple desire to support Bitcoin and make it better; such motivations are unquestionably beneficial...rather it is a stance that building something on bitcoin is the only correct way to do things and that doing anything else is unethical.”
The term is often used as a pejorative, but maximalist’s have begun to wear it as a badge of honor. They view it as an indication that they hold true to bitcoin’s unwavering conviction on the core tenants of Bitcoin–Tenants that many other individuals (alt coiners) and projects like Ethereum have sacrificed. Those tenants rest squarely in a libertarian ideological camp where individual rights reign supreme, and any third-party’s meddling in the lives or livelihood of the individual is unwelcome.
The Bitcoin blockchain and BTC were originally created as the only true alternative to the fiat based financial system. Blockchain technology was the means to these financial ends; however the Bitcoin blockchain itself intentionally optimized the technical design of the network for monetary policy and not for efficiency. In the early days, there were many in the community that argued that Bitcoin could be so much more than a network that tracked and secured BTC if they only made a tweak here or a tweak there. The issue with these “tweaks” is that they would dilute both the libertarian philosophy at the core of the technology and the monetary principles bitcoin maximalists see as the very bedrock of any digital asset’s value. Understanding Maxi's ongoing defense of the system requires that we understand what those principles are and why they can never be compromised.
Understanding Maxi’s
Satoshi who?
A unique feature of BTC, one that almost no other network can claim, is that no BTC was “pre-sold” or “pre-mined.” These terms describe funding techniques used to raise money either by selling tokens or rights to tokens before a blockchain network is launched. Bitcoin was famously only a whitepaper that was sent to a bunch of cryptographers. Coordinating through email and direct message, often not revealing their true identities, this group of people built the bitcoin network and started to mine blocks. There is no “founder” in the traditional sense; Satoshi Nakamoto, the anonymous person or entity which could claim that title disappeared in 2011. There is also no centralized institution that can make structural changes to the system in isolation.
Bitcoin’s total independence from a centralized entity has been one of the most important points for bitcoin maximalists. It is the only network that is truly decentralized because it is the only network where no small group of people has significant influence or control over the direction of the network. Other networks claim these qualities, but Bitcoin Maxi’s will push back asking, is that truly possible when the project has a founder or the network’s token was sold to a small group of investors prior to the launch? Bitcoin is unique in that regard, and it’s a quality that would be hard to mimic today. Blockchains today have too much focus on them. Investors want a piece of the action, and bad actors know they make excellent targets. Bitcoin grew up in an era where organic blockchain growth to the point of extreme security could happen naturally.
Self-Custody
Self-custody is simply the concept that the individual maintains total control over their personal assets. Their emphasis comes from experience in a fiat-based banking system where centralized governments are easily able to freeze an individual’s funds. Two recent examples of this are the Canadian “Freedom Truckers” and the women of Iran.
Earlier this year, the Canadian government froze the funds of truckers who were protesting a mandatory vaccine requirement. The government refused to release the trucker’s funds until they complied with the mandate. Trudeau and the rest of the CA government effectively weaponized the financial system, a move most considered unthinkable in a first world nation. A more recent example of such a practice was in Iran. Iran is currently experiencing massive unrest over their abuse of women’s rights. To stop acts of defiance, the Iranian government has stated that if after being warned they do not comply, “…. the bank account of the unveiled woman will be frozen.”
Bitcoiner’s point to these and countless other examples of financial overreach by the government and poor business practices as a reason to always keep your bitcoin in a self-custody wallet where the private keys are stored with the individual owner. Of all the principles bitcoin maximalists trumpet, self-custody is the one that translates across every blockchain. There is no blockchain where the individual is not able to self-custody their assets. If one is advertised to the contrary, it is a blockchain only in name, not in reality.
Ability for anyone to participate
Compromise is often a term that is hailed as a virtuous act. Bitcoin Maxi’s don’t see it as such. One of, if not the, greatest debates within the Bitcoin community was the “Block size wars” in 2017. The battle was between two ideologies–one focusing on increasing the speed of the Bitcoin network by increasing the amount of data that could be included in a block; the other focused on keeping blocks small so that the total computer storage needed to download the entire Bitcoin blockchain wouldn’t be so large that it could not be downloaded on your average desktop computer. The disagreement led to forking of the BTC network into BTC and Bitcoin Cash (BCH). The main difference is BCH’s having larger blocks which allowed it process transactions faster but also requiring participants to have significantly more computer space to house the data.
Like the desire to self-custody, Bitcoin maximalists see the need to limit block size as a feature requirement of self-sovereignty. Networks are made up of individual actors, and there should be as few hurdles to joining the network as possible. Reducing these hurdles means that anyone, anywhere can access the Bitcoin network at will. If a requirement to join the network is having a massive computer with significant storage, then you push the average person to rely more heavily on third party service providers to access it. Relying on third party’s starts to make the network and the value it is providing vulnerable to attack.
Limited Supply
Determining the value of any object is depicted nicely in economics through supply and demand. The value or price of anything is dependent on how much of it there is and how much people want it. One of the most well-known numbers in the digital asset space is 21 million, and it is the total supply of BTC. Capping the total supply of BTC was meant to be a long run price stability mechanism. Over time, the utility of bitcoin would drive adoption, and the limited supply would force BTC’s price appreciation. At a certain point, the distribution and use of BTC across the economy would be complete. At this point the per unit price of BTC would stabilize, making it the best form of money. A known capped supply would have a deflationary effect on BTC ensuring that price would greatly expand as we approach market saturation.
Contrast this to the current and past economic systems. Never in the history of the world has there been a form of money that has had a set supply. Fiat dollars are created through the wave of a hand by US Federal Reserve (FED), and the total supply is unknown even to them. Before the fiat system, the gold standard was used to help limit dollar issuance. Every dollar had to be backed by ounces of gold in Fort Knox. Unfortunately, that “rule” of ounces backing dollars was enforced by the Federal Reserve and over time it became more of a “suggestion” which led us into the unbacked fiat era. Regardless, humans don’t have any real idea of how much gold or other precious metal is in the earth so relying on that to contain currency manipulation isn’t fool proof. Spain’s discovery of Potosi (“The mountain of silver”) in the 1500’s led to riches for the Spanish king, but the enormous increase in the supply of silver coins created crippling inflation for everyone else.
The “halving”
21 million might be all the BTC ever created but it hasn’t been created all at once. The first BTC was created (mined) on January 3rd, 2009 when a small group of cryptographers took the bitcoin whitepaper and built the distributed network it describes. New BTC are issued by the network each block. The new BTC is used to compensate the miner who created that block for the electricity expense incurred during the mining process. The total amount of new BTC created in each block is set on a schedule which, like the total supply cap, is enforced by code.
The first Bitcoin block mined granted the miner a reward of 50 BTC. Every four years that mining reward is cut in half following that same schedule until all 21 million BTC has been mined. The process is known throughout the Bitcoin Community as the “halving.” Since the first block was mined a halving has occurred three times: first in 2012 to 25 BTC, then in 2016 to 12.5 BTC, and most recently in 2020 to 6.25 BTC. Following this issuance schedule, all 21 million BTC will have been created by the year 2140. Increasing the supply of BTC at an ever-decreasing rate is a way to both ensure that there is no price shock from a massive increase in supply and allows BTC to serve as the best store of value because the increase in the supply will not outpace any increases in demand.
Proof of work
BTC might be created in every block, but every block must be created by miners. We have discussed mining in the past, but the basic concept is that a market participant (miner) will operate a specialized computer to solve a math puzzle (hashing). When the math puzzle is solved, a new Bitcoin block is added to the blockchain. The cost of running a mining computer is the electricity it consumes. The BTC created in each block is used by the miners to recover the cost of operating their machines. Mining is vital to the securing of the Bitcoin network because without a way to both incentives block creations (ie. Transaction processing) and ensure that miners do not cheat. If a miner behaves incorrectly their block will not be accepted, they will not receive the new BTC, and will have incurred an expense for no reason.
Mining has recently come under attack primarily because of the amount of electricity the network uses. Multiple studies have come out making claims that the Bitcoin network uses more electricity than Sweden or accounts for 0.55% of the world’:s energy consumption. Climate activists are catatonic over these claims, but Bitcoin maximalists cheer it on. The virtues of energy consumption depend on what the energy is being spent on. Most of the arguments boil down to: “the energy being spent by BTC is not worth the value created.” The traditional financial system uses 56x the amount of energy that BTC consumes.
One alternative to PoW that is often suggested is proof of stake (PoS). A POS is an incentive model where instead of miners incurring an electricity cost, “validators” put some kind of valuable asset at stake. If a validator acts inappropriately their stake will be destroyed. Bitcoin maximalists laugh at the concept of PoS. These systems usually rely on some form of digital asset to be the item of value put “at stake.” Bitcoin maximalists look at other assets, many of which do not have a total supply cap or any set issuance schedule as a poor form of “value.” Couple that with the ability of an ultra-rich individual or government to simply buy up a critical amount of the item required for staking, and PoS looks like a poor system for securing a network. Said differently, PoW requires the miner to take on the risk of acting unfairly while in PoS, the network assumes that risk.
Tying it all together
Looking at these six principles you see some commonalities. The first three are philosophical focused and the last three are centered in economics. A network built with the philosophy of self-custody, organic growth, and ability for anyone to participate coupled with a currency that is limited in total supply, deflationary, and secured by a system of expense and reward is a powerful combination. Bitcoin maximalists believe that BTC is the best, most reliable form of value because it is created with code and protected by people with unwavering conviction about its principles. You can either trust Bitcoin’s code and the people who support it, or you can trust Jerome Powell and the other FED board members to not print too much money.
So this holiday season thank a maxi for upholding the values of good economics and individual freedom often deprioritized in the traditional financial system.