If Bitcoin would be a mechanical watch, the fee market would be the most important mechanism that makes everything tick.
Here is where everything starts and where everything ends.
Here is where censorship-resistance comes from and where the precious resource of block space gets priced into energy consumption.
The Bitcoin fee market is the first man-made free market that ever existed.
Free market meaning:
- no entity can skew the pricing, except by participating in the market
- no one can stop you from participating
- participation is voluntary.
Most of the emerging markets in the universe are actually free, the man-made ones usually struggle with this property.
If you believe in the EMH Efficient Market Hypothesis, and you should then you know how important markets really are and how they can help us solve a lot of problems.
Most of the problems that humans have ever faced were some form of a coordination problem. One obvious solution is to create a dominance hierarchy and elect a leader on top of it. This worked wonderfully for a long time but as soon as our world became complexBecause we made it this started being less and less effective.
Another issue with such structures is that there is one single point of failure and this makes the system prone to corruption.
Markets have the same issue if they are not built on trustless and censorship-resistant infrastructure.
Bitcoin — an analog to digital converter function
There are 2 worlds:
1) The realm of the tangible, the real, the land of thermodynamics
The “real” world, has its constraints enforced by the laws of physics. I can’t put my hand through a wall, or if I do, I need to push through the wall with a force bigger than the forces that hold the wall together, and my bones need to be able to resist the force I use to push through the wall.
If there is a coin on a table I can’t really copy it. Best option is to get some material and then spend some amount of time and energy crafting a new identical coin.
As we evolved in this world, we learned to use these constraints to our advantage.
2) The realm of the intangible, the abstract, the digital.
Here, rules are different and almost nonexistent, and that is great. That’s why we created computers in the first place, to escape the limitations of our physical reality.
Here you can listen to the Joe Rogan on 2x speed.
Here you can send nudes across the world the only limitation being the speed of light. Also, the nudes can be copied with minimal effort and get leaked on the internet.
Most of the time we don’t really need to have a solid connection between the two worlds as there are clear delimitations and expectations. It would be absurd to presume that the girl in the pr0n you’re watching will jump out of the screen and suck your dick.
With money it’s different.
Money is also a coordination problem, but it’s the most important coordination problem.
And even though there is a delimitation between the two worlds, sometimes we need a solid and common context.
Bitcoin provides this context by enforcing the same hard properties of the real world without losing the flexibility of the digital.
Bitcoin is converting analog energy into digital blocks, and this is done through the mempool.
Let’s take a look at the process
An ASIC(application-specific integrated circuit) machine is connected to a power source. Through the wall socket electricity powers the machine. This machine is incredibly dumb as it can do only one thing. Calculate as many SHA256 hashes as possible per unit of time. As a result of this heat is dissipated.
The miner runs its own node.
Going through the pile of unconfirmed transactions(aka the mempool) with a capitalistic desire the miners sort the transactions by who pays more and then pick the ones that are the smallest. At this point, they have a rough idea of what goes into the block.
In the block header, there is also other data that is added. A reference to the past block, a magic number that’s not that magic, and some non-specific data. All the data is hashed by the machine.
All of this is done at an incredible speed(about 110,000,000,000,000 tries per second per machine) and in a very competitive environment, as everyone wants to get the 6.25 BTC given by the network, in addition to the juicy transaction fees they get to pocket.
The winner is the first one to find a block that has the hash smaller than the current mining difficulty target.
This is what we call proof of work.
In this process, we transitioned from a very hot mining farm in some part of the analog world where electricity is cheap, to the digital blockchain. The transition was very subtle somewhere along the way, the two worlds merged, somewhere in the mempool.
Bitcoin and the Creation of Adam
The Sistine Chapel resembles Bitcoin in a lot of ways. It had a lot of people contribute to it, it’s wonderfully complex and no matter what angle you look at it from, there is some insight that will amaze you. It withstood the test of time and even though updated, it was always done in a backward-compatible way.
But for whatever reason, most of the time when the Sistine Chapel is referenced, one specific part gets more attention than others, The creation of Adam.
Why is this? Is it just because that’s when we started to exist as a human species?
No. It’s much more than that. In this inception moment, it was more obvious than ever that we are not only touched by the divinity, we are divine, we are made by it and of it, and as such we inherit all the characteristics of God. And for a short moment, we almost look the same.
Ever since God created us that small gap between the fingers grew bigger and bigger and the flow of energy was unidirectional, from God to humans, or as portrayed in the painting from right to left ←.
The reason God is impressive is not just because he created something, we do that every day, but because he created a world that has solid anchors, immovable objects.
Now if we are to get specific about reality, there is no such thing as immovable objects, there are just objects that require big amounts of energy to be changed. The same thing is true for Bitcoin transactions.
By inventing Bitcoin we did the same thing God did. We created an immovable digital object and as a result, started closing that gap between us and divinity. We are getting closer and closer to our noble origins.
On the 3rd of January 2009 at 18:15:05 it all changed. That’s when the 1st Bitcoin block was mined. That’s when we become Gods of the digital world.
And for the first time ever the flow of energy changed direction, from left to right →.
Bitcoin is the link between the two worlds, chaos and order, real and digital, unsure and certain, unconfirmed and confirmed.
Even though we talk about these two different parts there is no clear separation between them. You can’t really say where man ends and God begins, as it is up to every man to draw that line for himself, and the truth is that there is no actual line, there is just a gap that you close or not.
In the same way, there is also no such thing as the mempool, there is only your mempool, each node decides what unconfirmed transactions he will store locally on his hard drive and propagate further through the network, and thus deciding how thick the line between unconfirmed and confirmed is.
And it is here in the mempool, where man becomes God.
Also here is a Twitter thread where I make a case that Bitcoin forces us to update our ethical firmware.