Schelling Points in Defense of Bitcoin


So you got your Bitcoin full node synced and ready. Now what?

As some people wrongly have put it: "While government currencies are vulnerable to politics and human error, Bitcoin is instead backed strictly by math". The same sentiment was recently reiterated by Tyler Winklevoss. Although a catchy thing to say, it is not true. Math does nothing to stop bad pull requests from getting merged to the Bitcoin protocol in the future, and so every time this empty phrase is uttered it rather just adds to general confusion. The notion that math protects Bitcoin from politics or human meddling furthermore causes some Bitcoiners to be less vigilant than they ought to be. So let's instead be clear: some of Bitcoin's most important defenses are social, and referred to as Schelling points.

What is a Schelling point?

Consider a city surrounded by two armies currently cut off from each other - one in the west and one in the east. The generals of these two armies have earlier agreed upon the exact day but not the exact hour they are to attack the city. And now, having no way of coordinating anymore, each general has to make the most of the situation. A Schelling point is the facilitation of an above average probability that the same decision is taken by involved parties, absent communication. In this case, the strongest Schelling point is arguably noon.

What is stopping Bitcoiners from eroding monetary properties of Bitcoin are such Schelling points. The many Bitcoin network participants have no way of perfectly coordinating what Bitcoin is, or is supposed to be in the future. Neither are they themselves coordinated from above due to the fact that the network is decentralized. Bitcoiners have instead rallied around certain Schelling points that in practice have lowered the threat of monetary mismanagement. We know this because, had they not, Bitcoin would likely not have survived as money to this day.

Schelling points and commodity money

The scarcity component of Bitcoin does not really come for free, as was the case for most commodity money historically. Gold, silver, copper, cattle, sea shells and so on are and were by nature unequal in their scarcity - a property that has proven to be the major deciding factor of what ends up being used as money. Schelling points for commodity money is in other words relatively unimportant since humans can't simply wish an alternate physical reality in to existence. Bitcoin on the other hand is not scarce or abundant by nature, but by, among other things, the determination of network participants to cluster around certain Schelling points that have formed since the network's inception.

Schelling point #1: 21M Max Supply

Consider the following scenario: well-known entities like large exchanges or mining farm operators, out of the blue, propose a change in Bitcoin's issuance schedule which would result in an increase in the total number of coins. Parallel with uncoordinated discussions on-line and off-line, there would have been a strong, independent rejection-movement based on a specific Bitcoin Schelling point alone. The advantages of having a limit on the maximum number of coins are well-known to most Bitcoiners, who understand that increasing this number would dilute their Bitcoins. The Schelling point of 21M coins, then, can then be represented like this:

In light of limited communication and coordination, as is the case with any decentralized network, this Schelling point is clearly strong enough to be extremely effective in dismantling a crude threat to Bitcoin as scarce money. A blatant request of increasing the maximum supply of Bitcoin is akin to asking two prisoners, who will only be released if picking the same square, to chose between the four squares above. Absent any communication or prior coordination, the prisoners will pick the red square and be released.

Schelling point #2: Decentralization

Let's imagine a somewhat harder scenario. The same prisoners, with the same conditions, are presented with the following four squares:

SegWit2x was slightly more akin to this. The proposed changes had nothing to do directly with the 21M max supply limit, which in a limited coordination environment made the first Schelling point ineffective. In the case of SegWit2x, an understanding within the NO2X minority movement of the centralization aspects of bigger blocks, was what kept the network from changing into something more vulnerable. Full nodes that at the time lazily clustered around only the 21M max supply Schelling point would have missed this and were in other words worthless from a defense point of view. Arguably, this second Schelling point then is understanding properties and merits of decentralization in money. It is more multi-faceted and complex than the first Schelling point, and demands a deeper understanding of how Bitcoin works under the hull.

Both the first and second Schelling points are arguably solid after ossifying over many years. Bitcoiners now often know centralization when they see it, and so full nodes these days are vigilantly clustering around this second Schelling point as well. But these two are not enough. Bitcoiners need a third Schelling point around which full nodes utilize an even broader framework and so can meet sophisticated attacks that fail to be dismantled by the two first ones. After Saifedean Ammous' release of 'The Bitcoin Standard' in 2018, and after the many 'hard money'-framework discussions that followed, a critical mass has arguably been reached for this youngest Schelling point to properly take shape.

Schelling point #3: Hard Money

Again, consider the same prisoners, with the same conditions. This time they are each presented with the following four squares:

Which one will they choose? Which one would you have chosen? Although the chance of them both picking the same square at first would have seemed to be around 25%, that is probably too small. Schelling points come in interesting forms, and it is here more likely that the upper left square is chosen, given that the prisoners are both accustomed to reading texts from upper left to lower right. What does this have to do with a hard money Schelling point?

Some future detrimental Bitcoin Improvement Proposals (BIPs), maybe even presented by well-meaning, technically adept and well-known figures in the space, will not be rejected on the basis of the first and obvious Schelling point. No serious BIP will ever try to push the network to increase the 21M limit, because such a change will just never get accepted. The future detrimental BIPs might also pass the full nodes of the second Schelling point unnoticed, and defense strategies attached to the understanding of decentralization would in other words never activate. Bitcoiners need the Schelling point of understanding properties and merits of hardness in money. Only with such understanding will they minimize the risk of ending up in a low coordination situation where they have to try to converge on the same blue square. The better Bitcoin full node operators understand hard money, the more likely it is that they can coordinate a rejection of changes that, absent touching the max supply or decentralization properties, would erode Bitcoin's hardness in the long run.

Money can not be considered hard without a limited supply. Money can also not be considered hard without decentralization. And so the framework of this Schelling point is a superset of the first two, and they are consequently made more or less redundant.

Implications of a 'hard money' Shelling point

By converging on the concept of hard money, Bitcoiners further set up defenses against future monetary mismanagement that may come in surprising forms. One basic property of money is an inverse relationship between the number of large protocol changes, and value. In other words, an essential property of money is property hardness itself. Even if a future BIP does not touch the maximum supply, nor any property that causes decentralization to deteriorate, the change itself, depending on size, can lower Bitcoin's hardness. Some changes are unavoidable; various important technical optimizations and bug fixes are still added to the Bitcoin protocol with or without soft forks. But then there are larger changes, soft- as well as hard forks, that would erode the trust in the notion that a single Bitcoin today will be more or less identical to a single Bitcoin a decade from now. Bitcoin needs to mimic gold in this regard to be considered truly hard; one gold bar tucked away today will, other than becoming slightly diluted, have the exact same properties when it is obtained from the vault a decade from now. It will not have shifted color, shape or melting point.

The window to change the Bitcoin protocol with soft- or hard forks, other than for important bug fixes, obvious technical optimizations, or certain attack counter-measures, ought to stay closed. Consequently, the benefits of new, shiny base-layer toys that stems from soft- or hard forks must always be ensured to, by a magnitude, dwarf any cost that manifests itself as Bitcoin hardness deterioration.

How the 'hard money' Schelling point solidifies

Bitcoiners, especially those running a full node, should educate themselves on, and think about, the concept of hard money. Hard money has its root in Austrian economics, and was popularized among Bitcoiners by Saifedean Ammous in The Bitcoin Standard. Saifedean is also running The Bitcoin Standard Academy - a series of online courses on the economics of Bitcoin and on the Austrian school of economics in general. Stephan Livera produces excellent interview episodes, mostly on Bitcoin economics from an Austrian point of view. Noded Bitcoin Podcast is run by two Austrians and Bitcoiners, Michael Goldstein and Pierre Rochard, who talk Bitcoin current events and technical news. Tales from the Crypt has a long-running history of Bitcoin discussions with many good guests.

Furthermore on the subject of this article, I suggest Pierre Rochard's piece 'Bitcoin Governance', and Willem Van Den Bergh's piece 'Schelling points, network effects and Lindy'.

In addition to the Bitcoin-related material listed above, Austrian economics as a more generalized hard money framework can be taught on Mises Institute.