The Social Contract of Bitcoin: Seeking Sovereign Balance in a Decentralized Network
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The Social Contract of Bitcoin: Seeking Sovereign Balance in a Decentralized Network
We all have a responsibility to ensure the system remains strong, adapts to new threats, and is not undermined from within.
Navigating Web3 tides with focused insightsAuthor: Jameson Lopp
Translation: TechFlow
Bitcoin enthusiasts often talk about sovereignty; it's a value we cherish. By holding your own keys, operating as a sovereign entity within the Bitcoin economy, auditing blockchain history, and enforcing the rules you agree to, individuals empower themselves.
However, since the scaling debate six years ago, as I've delved deeper into Bitcoin protocol governance, the nuances of this perspective have become clearer to me. Consider this:
“Privacy cannot be widespread unless it is part of a social contract. People must agree together to deploy these systems, for their common good. Privacy only extends so far as the cooperation of others in society.”
— Eric Hughes, "A Cypherpunk's Manifesto"
You might bristle at the term “social contract,” but we'll delve into that shortly. I find Eric’s statement highly relevant because it touches on an issue of network effects. While we are all individuals, if we want to live in ways that require interaction with others, then we depend on some level of cooperation. This holds true for economic interactions, communication, and any other network activity reliant on protocols.
I propose to you that if you substitute “sovereignty” for “privacy,” Eric’s statement applies equally well.
What Is Sovereignty?
Sovereignty means independence; the freedom to operate without seeking permission. Usually attributed to nations, an individual can also be a sovereign person, albeit in limited capacity.
Individuals can possess sovereignty in many aspects of life. Of course, Bitcoin enthusiasts focus on financial sovereignty.
In today’s interconnected society and economy, complete individual sovereignty is nearly impossible. This stems from task specialization: productivity increases when individuals focus on doing one thing well. Thus, we outsource many aspects of our lives to third-party specialists who professionally provide specific goods and services.
Even someone living remotely, seemingly independent of the world, is unlikely to live primitively. Most still rely on supply chains to occasionally deliver raw materials and high-tech products they cannot manufacture from scratch.
Achieving Sovereignty Through Mathematics and Game Theory
From a practical standpoint, how do we achieve financial sovereignty? We must start with the basics.
What is a blockchain? It’s a chain of blocks.
I’m a technologist. When people say “blockchain,” I hear “database.” When people talk about “solving problems with blockchain,” they almost always overlook critical details in system architecture.
Creating a blockchain merely involves forming a linked list of data—a new data structure where entries are cryptographically tied together. This structure gives us tamper-resistance. Beyond an ordered historical record, you essentially get only “this happened after that.” Still, strictly speaking, you can’t be certain whether the ordered history you’re viewing is the true history derived from the blockchain data structure.
Much of what people associate with blockchains isn’t actually guaranteed by the blockchain itself. What is a blockchain not?
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It is not a network of nodes.
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It is not a consensus protocol.
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It is not an immutable history.
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It certainly isn’t an arbiter of truth.
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It isn’t even a trusted timestamping service.
A blockchain alone provides only tamper-evident proof. You need PoW, PoS, or another consensus mechanism to make rewriting the blockchain prohibitively expensive. You need a network of nodes to ensure historical accuracy. You need specific consensus rules to guarantee timestamps fall within defined ranges.
How does a blockchain system enhance individual sovereignty? Cryptography allows users to create an asymmetric defense barrier. That is, the cost for an attacker to breach data protected by cryptography is orders of magnitude higher than the cost for the user to defend it.
Likewise, by running software that verifies no one violates system rules, we gain a degree of sovereignty because we don’t need to trust third parties to be honest.
Within these networks, each of us enforces agreed-upon rules, deciding which data to accept and propagate to peers and which to reject, thereby achieving consensus. When participants disagree on rules or data acceptance, the network automatically partitions. Consequently, the “society” of interacting participants splits, and the entire network’s “governance” proceeds seamlessly.
In my view, the fairest system allows any participant to veto anything they wish. This enables us to build systems not optimized for the majority’s benefit (as in democracy).
Instead, this architecture creates a system optimized for minimizing harm to the entire user base.
Traditional Governance
Let’s consider how human civilization has evolved to its current state. Over thousands of years, we’ve created hierarchical command-and-control systems that help organize us and enable greater specialization, freeing you from worrying about growing food or basic survival.
Instead, you can delegate these specific functions to other professionals, possibly working within companies or other hierarchical organizations, efficiently and productively focusing on just one or two tasks.
The result is a system where power concentrates at the top, used primarily to coordinate personnel at lower levels who actually perform the work. This applies to both public and private sector organizations.
This is quite efficient, but of course, there are trade-offs. I believe as a society, we haven't truly considered these trade-offs. While we gain efficiency and convenience, we lose robustness.
Social Scalability
You often hear people discussing technical scalability solutions and all the performance issues we face on blockchains, as blockchain may be the least efficient and lowest-performing database structure to date.
But I think many overlook the issue of social scalability. So, what is social scalability?
“Progress in civilization consists of an increase in the number of important operations which we can perform without thinking about them.”
— Alfred Whitehead, British mathematician and philosopher
If you reflect on bureaucracy and how civilization advanced through these command-and-control hierarchies, the central issue becomes clear: the trade-off between efficiency and the systemic risks we create by concentrating power in few hands.
Therefore, I believe blockchain-based consensus networks can enable us to build socially scalable systems, meaning the cost of joining and remaining in the network is significantly lower.
I don’t mean cost from a technical perspective, but rather cognitive cost. If you're familiar with Dunbar’s number, it refers to the fact that before experiencing cognitive overload, the human brain can only maintain roughly 100 to 150 meaningful relationships at any given time.
When you're in a system where other participants hold enough power to undermine your position, change the rules, or even alter the system itself, you must spend considerable time worrying about those participants and their potential impact on your sovereignty.
But if we can build robust platforms where power is sufficiently decentralized to create a more resilient and trustworthy system, people can interact with each other and use the system with minimal cognitive burden. Through public permissionless networks, we can create truly socially scalable free markets by building systems where you don’t have to worry about power dynamics and behind-the-scenes maneuvering.
We actually create new forms of networked societies by subverting and automating bureaucracy.
“When we can secure the most important functions of financial networks using computer science instead of traditional accountants, regulators, investigators, police, and lawyers, we move from a manual, local, and inconsistently secure system to an automated, global, and much more secure one.”
— Nick Szabo, “Money, Blockchains, and Social Scalability”
Property Rights
In a sense, property rights within systems secured by cryptographic protocols are very clear. Either you can present sufficient proof to the network that you own an entry on the distributed ledger and operate it, or you cannot.
Yet at a higher level, game theory comes into play. While you can ensure your assets aren’t stolen or frozen by some random authority, the broader ecosystem may still pose threats. Due to game theory and the inverted nature of governance in public permissionless networks, such changes are extremely difficult to coordinate and thus highly unlikely—but not impossible.
Take Ethereum’s response to the DAO hack as an example. This is the best-known case of reacting to what was perceived as a massive threat, but it wasn’t the only time the protocol changed due to actions by malicious entities.
In the DAO hack, a significant amount of value was removed from the control of a substantial number of entities on the network, creating sufficient incentive to coordinate a protocol change to return funds to their original owners. The DAO attacker successfully controlled 3.6 million ETH, then about 5% of total supply. Logically, one could argue the DAO hacker simply followed protocol rules and legitimately owned those tokens, but this shows not all rules are written down.
Note that something similar occurred in Bitcoin, although the ecosystem was smaller at the time. On August 15, 2010, block 74638 was found to contain a transaction creating 184,467,440,737.09551616 BTC distributed across three addresses. This was possible because the code checking transactions didn’t account for output values so large they caused overflow during summation.
Within five hours of discovery, a new client version was released, including a soft fork change to consensus rules rejecting transactions with overflowed outputs. The blockchain forked. Although many unpatched nodes continued building on the “wrong” chain, at block height 74691, the “correct” chain overtook it, and all nodes accepted the “correct” chain as the authoritative source of Bitcoin’s transaction history.
On one hand, whoever exploited the bug had their bitcoins taken by the entire network. On the other hand, if rules were only patched from that point forward, the exploiter would have ended up owning 99.9886159% of all bitcoins. The incentives were crystal clear.
Social Contract
There's a paradox: a social contract fundamentally cannot be written because no authority exists to enforce it. I believe government legal systems are attempts to encode a social contract.
“Everyone carries a part of society’s burden; no one can rid himself of his share by the efforts of others. If society is moving toward destruction, no one can find safety in reserve. Therefore, everyone must take an active part in the intellectual struggle. No one can stand aside; everyone’s interests are at stake. Whether he chooses or not, everyone is drawn into the great historical struggle, the decisive battle of our age.”
— Ludwig Von Mises
To me, a “social contract” is merely a euphemism for “the lowest common denominator of shared human beliefs within a given organization.” It’s intangible, hard to define, and easily changeable. Despite our progress in advancing machine consensus to automate enforcement of social rules, we seem forever bound by the messy, unquantifiable nature of human consensus.
Opt-in vs. Opt-out Societies
By creating publicly accessible, permissionless networks secured by cryptography, those who choose to participate do so in their self-interest. Anyone using Bitcoin today does so because they opt into this system of rules. Though this may change in the future if more countries adopt it as legal tender.
In contrast, projects like the Free State Project essentially “invade” existing societies (e.g., New Hampshire) and attempt to subvert them from within. The latter is undoubtedly a more challenging path, fighting against entrenched stakeholders, compared to “settling” unoccupied territory.
Bitcoin’s Social Contract
What is Bitcoin’s social contract? I often refer to widely recognized “inviolable properties.”
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Consensus, Not Command and Control: Governance is based on rough consensus among cypherpunks and running code.
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Minimize Trust: Trust makes systems fragile, opaque, and costly. Trust failures cause collapse; orchestrated trust creates inequality and monopolistic lock-in; naturally occurring trust bottlenecks can be abused to deny due process.
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Decentralization: Many attributes exist, but power distribution is paramount.
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Censorship Resistance: No one should have the power to prevent others from interacting with the Bitcoin network. Nor should anyone have the power to indefinitely prevent confirmation of valid transactions. While miners are free to choose not to confirm transactions, any valid transaction paying competitive fees should eventually be confirmed by economically rational miners.
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Anonymity: Owning or using Bitcoin should not require official identification. This principle enhances censorship resistance and fungibility, as it becomes harder to identify “tainted” transactions when the system itself doesn’t track users.
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Open Source: Bitcoin client source code must always remain open for anyone to read, modify, copy, and share. Bitcoin’s value rests on system transparency and audibility. The ability to audit any aspect ensures we need not trust any particular entity’s honesty.
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Permissionless: No arbitrary gatekeepers should prevent anyone from participating in the network (as transactors, nodes, miners, etc.). This follows from minimized trust, censorship resistance, and anonymity.
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Legal Indifference: Bitcoin should not care about national laws, just like other internet protocols. Regulators will have to figure out how to respond to capabilities granted by Bitcoin technology, not the reverse.
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Fungibility: Fungibility is a crucial attribute of sound money. If every user must perform taint analysis on all incoming funds, the system’s utility drops drastically.
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Forward Compatibility: Bitcoin supports signing transactions without broadcasting them; there’s a principle that any currently possible signed but un-broadcast transaction should remain valid and broadcastable. Bitcoin’s adherence to this principle instills confidence in the protocol. Anyone can protect their funds via any scheme they envision and deploy, without needing permission.
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Resource Minimization: To reduce validation costs, block space is limited. Thus, consuming large amounts of block space should be expensive. Validation should be cheap because it supports trust minimization—if more users can afford to audit the system—and cheap validation also makes resource exhaustion attacks expensive.
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Convergence: If any two Bitcoin clients connect to an honest node, they should eventually converge on the same chain tip.
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Transaction Immutability: Each additional block added after a given block should greatly reduce the likelihood of that block being orphaned via chain reorganization. While technical immutability cannot be guaranteed, we can ensure that reversing a transaction becomes impractically expensive once it’s buried under sufficient proof-of-work.
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Conservatism: Currency should remain stable over the long term. We should approach change conservatively, both to minimize risk and to allow people to continue using the system as they see fit.
Sovereignty Within the System, Not Against It
Systems like Bitcoin are superior because their incentives and governance are more transparent, despite governance processes and power distributions being poorly defined. Some would argue this ambiguity itself is a feature.
We all have limited capacity for sovereignty, yet we depend on cooperation with others in society for trade and access to products of their labor. Remember, our Bitcoin has value because some people globally share our belief in its value. Recall, “No man is an island.”
While opt-in network societies may be better than traditional states and city-states governed by violence-backed coercion, what if the concept of opt-in societies ultimately fails on generational timescales?
For years, I’ve pondered questions related to cycles we observe in civilization.
I see a moral dilemma: a society may choose to reorganize and form new governments and legal systems. But these laws often persist indefinitely, imposed on future generations. If society evolves and decides these laws no longer align with their desired social contract, peacefully changing them may be extremely difficult.
This is because defaults tend to be stubborn. Observing the rise and fall of empires, we often see them collapse under increasing bureaucracy until people revolt or the system collapses from resource exhaustion and inability to adapt to environmental changes. I often wonder if it would be fairer if defaults required re-approval every generation or few decades.
Where Do We Go From Here?
After covering all these points, I believe an open question remains: how do we guide the evolution of the social contract? I think this is fundamentally about culture, narrative, and memes.
“My prediction is that libertarians will turn to Bitcoin. This will happen in about two years, and it will go mainstream. I don’t know how you get edge tech without edge people and politics… you just have to go through a maturation process where the technology becomes mainstream on the other end. In that process, the edge politics will leave.”
— Marc Andreessen, 2014
Although Marc’s prediction didn’t materialize, he did identify something. If an opt-in society transitions from niche to mainstream, new entrants may bring their own cultures and values, potentially altering the unwritten social contract and leading to attempts to change written and codified rules. Since libertarian ideals are “edgy,” Bitcoin’s mainstream adoption could certainly lead to the system’s social contract evolving into something weaker.
I think Bitcoin has a lifeline: early adopters hold strong ideological convictions, possess significant Bitcoin holdings, and wield considerable influence and power over industry players. They won’t easily shift positions. How game theory plays out here remains an open question.
Dear reader, what can you do to contribute to the ongoing integrity of Bitcoin’s social contract and the inviolable properties we hold dear?
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Run your own node to enforce the rules governing your funds.
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Safeguard your private keys.
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Educate your friends and family.
We all bear responsibility to ensure the system remains strong against new threats and isn’t undermined from within.
“Vigilance is not only the price of liberty but the price of any success.”
— Henry Ward Beecher
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Jameson Lopp
