Bitcoin and the Benefits of 'Coopetition'

Jameson Lopp is a software engineer at BitGo, creator of statoshi.info and founder of bitcoinsig.com.

In this opinion piece, Lopp makes an impassioned argument for the need for more cooperation between the players in the bitcoin space and the putting aside of vitriol and rivalry in the interests of growing a system to last for many years to come.

As I have extensively argued in my writings, it's not possible for any of us to fully understand bitcoin, and it may not even be possible for us to steer it onto a course we desire.

We're learning more about the system as we go along.

Regardless of what point you may be at on this chart, we’re all huddled together on this life raft in an ocean of financial turmoil, trying to figure out how to build it into a battle cruiser.

We all know how the story begins. On an obscure cryptography mailing list in 2008, someone using the pseudonym Satoshi Nakamoto posted a white paper, stating, "I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party."

Nakamoto was far from the first to propose electronic cash, and many cypherpunks had grown weary of the slew of failed attempts over the decades.
Many of those who responded to Satoshi poked and prodded the proposal, claiming that it could never work in practice due to fundamentally flawed assumptions in the scalability or game theory of the system.

The names of those first few respondents to Satoshi will be lost to history. The name of the man who responded differently shall never be forgotten: Hal Finney.

Where most cypherpunks cynically saw only the potential for failure, he saw the potential for success. Never mind that Hal had previously devised his own system of digital money called Reusable Proof of Work, which was also based upon Hashcash.
Hal realized that he too had once thought that systems would fail for similar reasons, but he had been wrong before and wasn't going to make that mistake again.

Hal cooperated with Satoshi over the coming months, finding many bugs in Satoshi’s code and making it more robust. He mined many bitcoins with his CPU and received the first ever bitcoin transaction between peers. Hal went a step beyond being an adversary to the proposal; he brought a builder’s mindset to the game.

I bring this all up because today I see many bitcoiners acting like the first respondents to Satoshi – overly pessimistic from years of adversarial thinking. When you're involved in public discourse about the future of bitcoin, I hope you’ll ask yourself: "What would Hal do?"

Several years ago, Balaji Srinivasan [CEO and co-founder of 21] gave an introduction to bitcoin presentation in which he stated that bitcoin mining is a "coopetition." What he meant by this was that miners are competing 24/7/365 to find the next valid block and yet simultaneously they are cooperating to secure and extend the same blockchain.

This got me to thinking: perhaps we've been going about this all wrong. Perhaps we've fallen into a trap of our own making because we're too focused on competition and, by throwing cooperation out the window, we are missing opportunities to grow this ecosystem.

Complementary components

I make no claim to being an expert in game theory, but my understanding is that every game is comprised of the same basic elements:

Players
Rules
Strategies
Payoffs
Let's have a look at the players and rules with respect to the game called bitcoin.

The four types of players in games of capitalism are customers, suppliers, competitors and complementors. It is important to realize that none of the players in the game are fixed.

An effective strategy may entail bringing in new players or pushing out existing ones. For example, if you only have one supplier, you may want to pay for other suppliers to enter the game in order to make the raw material market for your business more competitive, or even to commoditize your supplier's products. On the other hand, if you are considering becoming a new player as a supplier, you should try to get compensated up front by your future customers for the competition you create, because you’ll be saving them money.

Within the players element, we can use the concept of the "value net" to express the relations amongst the players.

The value net is a way to explain the interdependencies amongst the players. There are both vertical and horizontal symmetries in the value net.

Vertically, it demonstrates that users and suppliers are both value creators. Organizations should listen to the needs of both players in order to maximize the value of the system.

Horizontally, complementors are just the mirror image of competitors. Customers value your product more when there are many complementors, whereas they value your product less when there are many substitutors.

Understanding this relationship highlights a deficiency in common competitive practices: only focusing on how to eliminate one's competitors. Instead of thinking of business as war, organizations should also attempt to develop commodity complementors, which in the long-term increases the overall value to their customers.

By understanding these two symmetries, the value net gives us greater potential for successful application of game theory.

Instead of focusing on only the conventional players like customers and competitors, the value net shows that organizations actually have four player types to target when developing strategies.

Value net specifics

I brainstormed a bit, trying to think of what some of the different players are in bitcoin's value net. This is by no means a comprehensive list, and I hope some of you can contribute to it so that we can improve our understanding of bitcoin's game theory!

Users increase the value of the system by creating demand and network effect:

A huge number of use cases. Potentially everyone in the world who is old enough to use money
The unbanked use bitcoins to store and transact value because there are few other available options
Those seeking shelter from inflation find appeal in bitcoin's well-defined money supply
Those seeking financial privacy and censorship resistance seek an electronic form of cash
High-risk speculators "HODL" bitcoins, decreasing the supply available on the market
Entrepreneurs seek to build upon bitcoin as a platform
Libertarians and anarchists seek freedom from the controls of nations and central banks.
Suppliers increase value by adding resources to the system:

Developers add utility to bitcoin by writing software
Miners dedicate capital to securing bitcoin from computational attacks
Full nodes validate and replicate blockchain data, distributing it across the globe and securing against Sybil attacks
Traders and market makers provide liquidity to the markets and help them to grow.
Competitors decrease the value of system by acting as substitutes:

Fiat
Other payment rails
Precious metals and stores of value
Other crypto assets
Central banks.
Complementors increase the value of the system by bundling other utility with bitcoin. These include:

Consumer apps and use cases on top of bitcoin
Wallets, tumblers or even non-monetary apps like time-stamping services
Merchants that accept bitcoin, especially unique merchants like darknet markets
Second-layer networks make transactions faster and cheaper and enable many new use cases.
An interesting revelation we see from the value net is that there are three player types we can target to increase the value of the system without having to threaten our competitors. I pose to you that these paths are probably easier and will have a greater return on investment.

Remember that we are vastly outnumbered and out-capitalized by our competitors at this point. We've heard that 21, Bitmain, Blockchain, Blockstream, Coinbase, nChain, and plenty of other entities in this space have hundreds of millions of dollars in their coffers, but that's still a drop in the bucket compared to what we are facing.

I pose to you that we don't want strong competitors to feel threatened by bitcoin until it's too late for them to respond.

The crypto asset industry is in competition, but not just within itself – we’re in competition with many other industries. For example, we’re in competition with all high-tech industries over a limited supply of software engineers.

As such, we should desire to foster a welcoming community for developers. I'd point to ethereum as a good model in that regard.

Development

In terms of software development, we already see "coopetition" amongst developers on a single team.

Unlike corporate software development, there are no project managers or architects passing down feature requirements and specifications from on high. Instead, multiple developers may propose similar competing changes that attempt to solve the same perceived problems. If a proposal begins to gain traction, other developers will jump in and probe the idea, trying to find weaknesses and cooperating with the proposer to improve it.

On a related note, I’ve observed a fundamental conflict between how the vast majority of software development works versus how public consensus networks operate.

Most software developers take the approach of envisioning how they want the system to work, writing the code, and then deploying it. In bitcoin, you have some groups of developers who also take that approach, historically with poor results. Then you have other groups of developers who consider the existing rules of the system to be constraints within which they have to work in order to be able to deploy changes; that methodology tends to be more successful.

Now, I'm sure that this is a particularly contentious point and many of you have changes you desire to see implemented in bitcoin that have been frustratingly failing to activate.

Perhaps we can just dismiss it as another inefficiency of a decentralized system, but it seems that it could have a chilling effect upon development and result in a lot of wasted resources working on features that end up never being used.

As a former supporter of Bitcoin XT, I know full well the feeling of seeing months of work and waiting go up in smoke.

I hope that we can break out of this cycle of failed initiatives.

Bitcoin businesses

A plethora of businesses based upon the bitcoin platform have emerged and many of them are in direct competition with each other for customers seeking to fill specific use cases.

And yet, many of these businesses form partnerships and trade services with each other in order to form mutually beneficial relationships that leverage the strengths of each business.

I can tell you that this is certainly true for us at BitGo as we wish to provide our services to as much of the ecosystem as possible.

It's clear that the root cause of the rift in the scaling debate is conflicting needs between different types of bitcoin users, and enterprises that service users who transact smaller values are feeling the pressure to improve their customer experience.

As a result, many are trying to change the rules of the bitcoin game, while other players in the game consider a rule change to be hazardous to the value of their own use cases. Due to the strength of the status quo in this game, we find ourselves at an impasse.

A plethora of businesses based upon the bitcoin platform have emerged and many of them are in direct competition with each other for customers seeking to fill specific use cases.

And yet, many of these businesses form partnerships and trade services with each other in order to form mutually beneficial relationships that leverage the strengths of each business.

I can tell you that this is certainly true for us at BitGo as we wish to provide our services to as much of the ecosystem as possible.

It's clear that the root cause of the rift in the scaling debate is conflicting needs between different types of bitcoin users, and enterprises that service users who transact smaller values are feeling the pressure to improve their customer experience.

As a result, many are trying to change the rules of the bitcoin game, while other players in the game consider a rule change to be hazardous to the value of their own use cases. Due to the strength of the status quo in this game, we find ourselves at an impasse.

Mining

I mentioned that this presentation was inspired by a reference to mining coopetition, though at this point I think it's worth digging deeper into this example so that we might compare it to the other forms of coopetition already covered.

In the early days, folks were solo mining with CPUs and then GPUs, but it didn’t take them long to figure out that cooperating and pooling resources offered more consistent returns. Pooled mining also expanded the crypto economy by creating a business opportunity for people with the operational skills to maintain a reliable and trustworthy pool.

As you're surely aware, there are a handful of companies that now control a significant portion of bitcoin's total hashing power. You're also aware that any entity that gains over 50% of hashing power (or possibly around 30% with selfish mining strategies) can effectively control which blocks get added to the tip of the blockchain over a long period of time.

So, it's not a stretch to imagine that a handful of mining companies could communicate in private and decide to form a cartel by working together to orphan all blocks minted by entities other than themselves. They could thus shut out the rest of the competition and split a larger slice of the block rewards and fees amongst a smaller number of miners. Why don’t we see this cartelization happening?

I pose to you that it’s because they know that bitcoin is more valuable when are building on top of each other's work rather than throwing away large chunks of work for a short-term gain.

Miners are cooperating to secure and extend the same blockchain; if some miners change their protocol to be incompatible with the rest and the blockchain forks as a result, these two sets of miners are no longer in coopetition – they are only in competition. This drastically changes the game theory and equilibrium of the system and also reduces security because they’re no longer cooperating to extend the same chain, thus making each new chain fork cheaper to attack computationally.

This is but one of many reasons why we should be cautious to avoid contentious forks.

Coopetition

n highly segmented industries with strong network effects, such as the technology industry, coopetition may be the only way to avoid stagnation.

It is often difficult in the tech industry to get new products off the ground; the market demands technical standards but it can take years of fruitless, cutthroat competition that inhibits the overall health of the market before a clear winner emerges.

Coopetition can help us avoid that by finding win-win scenarios.

I'm sure you’re all familiar with this chart showing the tech adoption lifecycle. Personally, I think we’re still in the innovation phase.

Coopetition can be an extremely valuable strategy for technology dependent upon network effects when they're still trying to bootstrap. Since the early market is small, competing for market share does not make much sense. Instead, in the early market stage, we should focus on creating demand and getting past the tipping point. Coopetition can create a win-win situation for all involved by actually lowering the tipping point for reaching the mainstream market.

If we accept the premise that we don't have the resources to quickly ramp up the entire ecosystem to mass adoption, how do we find the path to get there? I'd argue that once you convince someone to store value in bitcoin, they are incentivized to use their skills and resources to help make the system more valuable. In this manner, we can bootstrap the system organically.

What if, instead of targeting low-value use cases during this bootstrapping phase, we adopted a Tesla-esque strategy instead? That is: court the wealthiest of entities to be early adopters in this system and thus incentivize them to pay for the hard part – innovation of the ecosystem.

This could be high-net-worth individuals looking to diversify their assets, hedge funds, or even tiny nation states with currencies that are now dwarfed by bitcoin. At time of writing, there are 140 countries with M1 money supplies smaller than bitcoin's money supply. Surely some of them have far more to gain than to lose by taking a first mover advantage in the global transition to crypto assets.

The tricky part here is that bitcoin doesn’t have a marketing department. It's up to each of us to spread it like a mind virus; we would need to find people already in the community who can build a bridge to these high-value networks we may wish to target. If you think you fit this criterion or are interested in pursuing the idea, please contact me.

Some people argue that there's an incentive problem with protocol development. Many contributors are unpaid volunteers; so what if, instead of relying upon a poorly defined process for funding protocol development with a scattering of grants and hires by for-profit companies, we created a multisig fund to which enterprises and high-net-worth investors contribute and control in order to hire full-time protocol devs and/or post bounties for feature development?

I don’t think such an idea necessarily needs to be baked into the protocol itself as some cryptocurrencies have done.

These are just a few random thoughts; there are certainly many more unexplored possibilities. I suppose what I'm really trying to say here is that we should take a long-term view of how to play the bitcoin game. We aren't building a technology that we want to take down a path that causes it to fail or become obsolete in a decade. We're building a system that must last for generations.

The lifespan of the average fiat currency is 27 years – imagine the global confidence bitcoin will acquire if we can exceed that mark. I'm confident that we can find safe ways to take us down the path to mass adoption – all that is required is creativity and perseverance.

Source: http://www.coindesk.com/bitcoin-benefits-coopetition-adversarial-environments/

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