Bitcoin is Dead (long live IBIT.)

The possibility of abandonment has been crucial to the security of Bitcoin. Without it, what forces Bitcoin to maintain its character?

Achim Warner
13 min readJan 18, 2024

Bitcoin is very excited about the ETF approval. Last summer, when a former SEC chair described the approval as inevitable, Bitcoin’s price was hovering around $25k. Price rocketed up in the ensuing months. The approval has conferred some traditional legitimacy to the asset class, and allows billions of dollars (or maybe $30 trillion according to Grayscale) in traditional investment to flow in from a wider pool. For those interested in Number Go Up, the last few months have offered nothing but fantastic news. But if a significant fraction of that $30 trillion does come in, it will destroy Bitcoin as we know it. It will fundamentally change the economics: The game theory behind resisting financial hegemony and building intergenerational wealth are fundamentally different and incompatible.

Bitcoin takes on two very ambitious and distinct goals. One is to create a widely accepted store of value with a fixed programmatic supply. The other is to create a decentralized electronic cash system. In the evolution of Bitcoin, these two objectives have played mostly hand-in-hand; the accepted viability of Bitcoin as a store of value creates a liquid market, while use of Bitcoin as electronic cash creates demand, which in turn gives Bitcoin value. At smaller scales the incentives are aligned.

The existence of the Bitcoin blockchain is quite remarkable. The ledger apportioning bitcoin has slowly invaded all corners of the global economy, representing what has been described as a slow-moving immaculate conception. A centralized actor trying to create this from scratch would undoubtedly fail. The distribution isn’t perfect, but there’s no “fair” way to airdrop a new asset across the planet without doing something odious like eyeball-scanning. A slow distribution over 15 years is the best one could hope for. There seems to be agreement among diverse market participants that this thing is useful and desirable and that the appetite for shares in the ledger will persist in the future.

If we, “we” being everybody and anybody who is interested in such a thing, want there to be a fixed supply digital asset than can be traded as an ETF through our brokers, we now have this thing. It’s a unique occurrence that will not happen organically again. Moving forward, however, the existence of this thing itself has very little to do with how it is mined, how shares in the ledger are recorded, or where it came from. This is simply a Schelling point that everyone in the world who values a fixed supply asset can trade. The belief that 21 million is important is enforced by the belief that 21 million is important, not a particular block size or mining protocol.

Given any cryptographic payment system, there are many methods for coming to consensus over the canonical ordering of transactions. The easiest and most efficient way is to choose a single entity as the arbitrar. Bitcoin mining is the opposite: clunky, competitive and expensive. The downside is that this process is costly. The upside is that it’s extremely difficult for any one entity to arrogate control over the ledger. Miners, who historically have benefitted from the popularity, have no desire to damage the ecosystem by colluding with other miners or otherwise trying to game the system with untoward behaviors. This is how the virtuous cycle began.

To bootstrap this virtuous cycle, we had to have Bitcoin’s initial use case: Peer-to-peer electronic cash. Money for those not well-served by the traditional financial system and those who want to be financially self-sovereign. Money without gatekeepers. The fact that the payments are censorship resistant is a backbone feature here: This property gives Bitcoin non-zero value, allowing people to begin trading and distributing it not just as something they can use to buy drugs, but soon also something to hold onto, and eventually, a speculative investment. An actual functioning censorship-resistant currency is worth something. This was the bedrock of Bitcoin’s value; if this fails, the Bitcoin experiment has failed.

But today, the necessary economic supporting role that has been played by censorship resistance has been usurped: this role is played by the linchpin of institutional demand, manifested in the ETF. The former is along for the ride, but only until it can be conveniently jettisoned.

Think of Bitcoin like a papier mâché piñata that you build from a balloon, paper and paste. To start the process, you need to inflate a balloon. Carefully, over time, you cover the balloon with paste-drenched strips of paper or string, adding layers, one at a time, pausing after each layer to let it dry, repeating the process, until the balloon is completely covered by a solid surface. Then, you pop the balloon and extract it from a hole in the bottom, which you can then fill with candy or whatever. In the initial stage, you must be very careful not to pop the balloon (don’t use a hairdryer!) if you do so the whole project will be a soggy mess. In the latter stage, once the papier mâché has hardened, the balloon is just some extra thing you need to dispose of.

At this point, perhaps you are mouthing something about the Blocksize War, wondering if perhaps the author of this essay has not read the book. Yes, in fact, several times and the author has even spent three weeks discussing it in a university course he instructed. There is no single lesson to be learned from Blocksize War; it was a complicated story, filled with blunders, turnabout, well- and poorly-played hands. The idea that the team that won in 2017 is forever the victor is silly. Just like winning the Super Bowl in 2017 did not confer the New England Patriots with eternal infallibility, the victory by the small-blockers in 2017 does not mean every future battle will have the same outcome. The idea that 2017 proved the good guys will always win is one of the most non-sensical tenets of Bitcoin dogma.

It is worth looking closer at the Blocksize War and asking what happened and what realities do persist. The dominant takeaway seems to be that users — Bitcoin’s grassroots plebs, ultimately had the stronger hand. They flexed this muscle with the UASF, forcing the corporations and miners on the large-block side to capitulate.

There is a crucial piece of game theory to dig into here. If large-blockers had elected to call the bluff on the UASF, it would have been catastrophic for Bitcoin. The miners had capital investment they could not afford to abandon, so they had no choice but to swerve in this game of chicken. In 2017, without the support of the grassroots small-blockers and their decentralized ideals, Bitcoin would have faced a disastrous constitutional crisis. In this sense, the users did have the upper hand. Part of the genius of Bitcoin is that it was designed with failure as a possibility. To take the failure mode off the table fundamentally changes the game theory.

What happens today? The economic locus has shifted drastically away from raspberry pi hobbyists and towards large financial institutions who are doing Bitcoin for Wall Street. When retail consumers, pension funds, sovereign wealth funds, etc., are buying shares in the fixed supply currency through traditional finance channels, they are cementing a demand for shares in this ledger that does not depend on its decentralized maintenance. If the ETF invites an influx of such investment, any cartel of corporations who would attempt a takeover can now safely ignore the threats of Bitcoin purists; these early adopters can no longer claim to be the crucial pillars propping up the system. If there is another game of chicken, Wall Street can stay the course. Would Michael Saylor sabotage his investment by dumping his stash because he doesn’t like a miner-backed OFAC enforcement? Wall Street is empowered to call the bluff.

If Bitcoin becomes no more than an agreement by major financial players and their clients that tradeable entries in this ledger are valuable, it becomes less important how we keep track of who has what share, provided the process is efficient, predictable, and legible to regulators. The current Bitcoin mining process was designed to be the opposite. Basic forces of economics suggest this inefficiency eventually will be shed.
Every round in which institutional investors ape into the ETF is like another layer on the papier mâché balloon. Enough of these and the balloon is no longer necessary.

Why not have 8 MB blocks? Or 256 MB blocks? The retail ETF investor buys shares because they believe that someone in the future will want to buy their share, presumably because these future investors in turn believe that a future demand exists for their share. This may very well be a good bet, but vanishingly little of this self-fulfilling dynamic relies on the minutia of how the transactions are ordered. When registered market participants are trading shares through registered brokers, uninterested in double-spending or shielding activity from authorities, the mining process becomes an expensive and obsolete Rube Goldberg machine, at least as it applies to an economic preponderance of activity. The costs associated to mining leak billions of dollars out of the Bitcoin ecosystem, and confer no value to ETF holders. Without a clear reason for this expensive process to exist, the financial sector will seek to end it. A thriving ETF market, especially when celebrated by Bitcoin holders, provides a sturdy structure and leverage for this attack.

Mining is a huge economic drain on the system, and all it accomplishes is censorship resistance. If censorship resistance isn’t worth tens or hundreds of billions or dollar per year to the corporations; they will find a way to end it. When they do try to end it, they can point to the enduring appeal of the ETF and ignore any constitutional brinkmanship from Bitcoin purists who threaten to reject any changes.

Mining itself represents a huge arbitrage opportunity available to someone who can leverage capital or organize a cartel. To illustrate with numbers, take Cathie Wood’s $1.5 million in 2030 case. Counting only the block subsidy and not fees, this is over $100 billion per year vaporized to keep the network censorship resistant. These same transactions could be processed for a microscopic fraction of that cost. If a corporate entity can come in and monopolize the process and lower the difficulty without destroying the game, this is $100 billion per year of free money.

It’s a valid question to ask, how? Corporations can’t just change the code or fire the miners, right? They don’t need to. Remember than miners don’t protect us from out-of-frame boogeymen who are covertly amassing hashrate to attack the network: Miners protect us from other miners.

There will be two sets of conversations going forward. One is the usual one, on Twitter spaces, delvingbitcoin, or other open venues, where we argue about the relative merits of OPCAT versus CTV as means to enable protocols that will make Bitcoin a self-sovereign option to billions of people. But there is another set of conversations, which may have already begun, happening in private board rooms. Think Dragon’s Den, but more like Vulture’s Roost. The folks in the Vulture’s Roost also want to make Bitcoin an option to billions of people, just without the self-sovereign part. Rent-seekers gonna rent-seek, and this isn’t simply about holding the asset and watching the number go up: It’s about re-intermediating the financial sector.

So for the next part of the exercise, put yourself in the Vulture’s Roost. What are your incentives? What tools do you have available to you? What risks are you trying to minimize? Who else is on your team? In the Vulture’s Roost, you are free to say, without judgment from maxis, things like “will no-one bankrupt these turbulent miners?”

Note that this does not require secret collusion; market players can openly engage in these pursuits knowing where they all lead. In fact, openly signaling intentions is a part of the game. Those who want to be part of your coalition can join. Those that resist will fall away to attrition. There will be a psychological element: you will slowly convince investors that not only is centralization inevitable, but it’s actually-not-so-bad. “After all,” hodlers will say, “what’s really important is 21 million, and they won’t DARE touch that!”

The goal from the Vulture’s Roost will be to hollow out mining and replace it with an inexpensive cartelized process that routes all transaction fees directly to a small group of insiders (instead of towards miners’ energy bills) and puts insiders in positions to do insider things, like profit from rich data streams or fancy financial products. Step number one is to make L1 obsolete.

If you face a high fee regime, you will use the idea of economic density of payments to your favor. Reluctant to pay heavily for each transaction, users will pile into custodial options (which you will happily make available). If functional self-custodial options present themselves (after appropriate ingenuity or upgrades) your job is to outcompete them in cost, UX, simplicity, sexy brand ambassadors or even using FUD.

For those wary of custodians which can’t be audited, you build a sidechain or rollup, perhaps lightly permissioned, but auditable. Put together a network with critical economic mass, backed by small amount of trust, but mostly backed by Delaware’s Court of Chancery. For example, a cartel of corporations can use multisig UTXOs on the mainchain to bridge to a sidechain. This could be something as simple as a Fedimint or Liquid. You can also offer some self-sovereignty (modulo L2 network topology) with something fancier like Ark, time-out trees, or BitVM with rollups. As long as nobody thinks the corporate block validators are going to rugpull (and get sued in a meatspace court), people can treat virtual or sidechain UTXOs like actual Bitcoin UTXOs. Anyone who wants to transact in a near zero fee regime can simply slide through certain access points over to this sidechain or L2, saving perhaps millions of dollars in fees. For institutions who want to cut costs, this is a no-brainer. It’s orders of magnitude better than traditional Lightning, and plus, if it goes wrong, you have someone to sue. The financial sector is too smart to sit around and pay billions of dollars of year in transaction fees.

Has this started happening? Recently we have seen dozens of corporate backed sidechain, rollups, state channels, trying to move quickly and capture the market. Some of these are claiming to provide self-sovereign options — but it’s a bit unclear who is backing these and what precisely is their competitive angle.

There are other ways to route things away from the decentralized mempool. If you take ownership in a mining corporation, you can undercut the mempool by offering frequent corporate users not only a discount, but an opportunity to avoid fee volatility. Even for non-frequent users you may undercut the mempool openly with transaction accelerators priced below market rate. If you undercut the mempool market deep enough, you can begin to force many of the other miners out of profitability. You do this openly and brazenly: The goal is that any would-be home miner considering spending $15,000 on the latest ASIC will read the writing on the wall and think twice. You don’t need to make a profit; you only want to force out the decentralized miners who are operating on thin margins.

Here it will be convenient that many of the transactions are brokered by corporations (high economic density), not random self-sovereign people from around the world. It will be easier to capture a large chunk of the transaction volume if most transaction volume is handled by major corporations or generally KYC’d high-wealth individuals. But this isn’t a stretch; if fees are high, many folks will be priced out anyways.

Has this started happening? Slipstream was designed to allow transactions to be routed around filters, but will probably go beyond that as mining corporations explore the competitive advantages of offering out-of-band payments.

So while we still may have a fixed supply of coins asymptotic to 21 million, the practical ways in which transactions are recorded will mushroom. The ETF is part of this process as it offers an easy way to “hold” Bitcoin without using L1. Once you have moved a large volume of transactions away from L1 and towards the traditional financial sector, you can go after mining itself. If Step 1 was successful, the decentralized miners are beginning to see less fee revenue. Your next task to scare up enough hash power to force them out for good. At this point, you can be open about your intentions. Miners can see where this is headed and when you offer to buy them out, they say “yes,” at least if they are rationally motivated. After your cartel gets to 34% you can begin selfish mining, commencing the snowball phase towards 51%. After 51% is achieved you now have full control and can ease down the hashrate, turning it back on if necessary to break the will of any stubborn decentralized miners. Soon, hashrate is minimal but your cartel is still receiving the full block reward.

But wait! Won’t everybody abandon Bitcoin when you start selfish mining and everyone sees that you’re selfish mining?

That’s exactly the point here. Once the retail and institutional ETF investors are propping up the price with their 1–5% IRA allocations, nobody cares, nobody budges.

But also wait! Won’t all of the miners fight back? Here is where the dynamics of wars of attrition, dollar auctions, and coalitional game theory come into play. The decentralized miners have no way to do selfish mining without coordinating somehow. If some subset of miners tries to selfish mine in retaliation, it will push all the anonymous miners out for good, making your job easier. Your job is to send a strong enough signal that you have centralized resources behind your back, and so will win a war of attrition. Once you send this signal, it’s a prisoner’s dilemma among the remaining miners: Sell ASICs and walk away with something, or get nothing in 6 months.

From the Vulture’s Roost, you haven’t broken any rules yet, nor pushed any hardforks. But after arrogating full control, you are free to hardfork at will. At this point it will be a formality. After years of telling people what you were going to do, and then doing it over the objections of the purists, The Hard Fork is just the final step. Not that you have to worry about blowback; whatever hard fork the corporations agree upon will be widely celebrated as the next step in bringing sound money to everybody.