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The locked protocol

This post originally appeared on ZeMing M. Gao’s website, and we republished with permission from the author. Read the full piece here.

The nature of Bitcoin is such that once version 0.1 was released, the core design was set in stone for the rest of its lifetime.

— Satoshi Nakamoto, June 17, 2010.

One of the distinctions that BSV blockchain makes in comparison to BTC is that BSV has a ‘locked protocol’ which represents the original Bitcoin.

What does ‘locked protocol’ mean? Does it mean that the Bitcoin blockchain allows no new software development? Of course not.

To explain this, this article clarifies several common confusions about the locked protocol.

(1) ‘The protocol’ is not the same as ‘implementation software of the protocol’. The protocol is not the software, but a set of rules.
(2) ‘The locked protocol’ refers to the ‘base protocol’, not peripheral or high-level protocols for implementations and applications.
(3) The ‘base protocol’ is not the base layer of the blockchain or the so-called layer-1. If you like, you can call it ‘core protocol’ instead of ‘base protocol’. One can approximately say that base protocol is a core of the base layer, but even that is inaccurate.
(4) The ‘locked protocol’ is not a ‘closed protocol’, but an open protocol.

Software needs to be developed to implement the protocol, and further software needs to be developed for specific use cases (the applications). And the implementation and application software is continuously updated if necessary. For this reason, even with a locked base protocol (or core protocol), there must be further development, otherwise it would be a dead system.

Such flexibility for software implementation despite a locked base protocol is a strength not a weakness.

What is in the protocol that is locked?

If the protocol is a set of rules, then what are these rules?

The short answer is that the Bitcoin white paper published on October 31, 2008 set forth the base Bitcoin protocol. When Satoshi himself subsequently created the Genesis Block with the release of the initial version of Bitcoin software on January 8, 2009, the base protocol of Bitcoin was further specified.

The Genesis Block set the total number of bitcoins to be 21 million, each containing 100 million token units called satoshi. The Genesis Block also established coinbase transactions to distribute coins to miners, all according to the rules described in the white paper. Although the whitepaper did not specify such quantities, with the creation of the Genesis Block, the coinbase economics is unequivocally a part of the base protocol of Bitcoin.

Note that, contrary to the public misconception, the Genesis Block was not mined. It was simply created by Satoshi. This has significant implications. First, it means that the Genesis Block is part of the offering of a unilateral contract to the world by Satoshi, rather than an instance of the acceptance of the unilateral contract by a miner. Second, it means that the Genesis Block is part of the base protocol of Bitcoin.

Likewise, the initial version of the Bitcoin software that was released along with the creation of the Genesis Block also contains rules of the base protocol of Bitcoin. Although the specific codes in computer programming language are a mere implementation of the protocol, the basic rules defined and embodied with the opcodes are part of the protocol. Using a low-level script language like Forth to define opcodes as primitives to construct more advanced and flexible transaction codes, Satoshi clearly intended them to be considered as part of the protocol, rather than mere instances of implementation.

Importantly, the primitives defined by the opcodes initially created and released by Satoshi constitute a Turing complete computational system that enables smart contracts. This is part of a unilateral contract offered by Satoshi to the world.

Along with the Bitcoin white paper, all base Bitcoin protocol was set at the time when the Genesis Block was created with the release of the initial version of Bitcoin software. To the Bitcoin community including miners and the developers, it is publicly understood that the base protocol is defined in the white paper, the initial release of the Bitcoin software and the Genesis Block.

It should be further noted that the Genesis block and the initial version of Bitcoin software did not have anything that contradicted the whitepaper. They only further defined the protocol outlined in the white paper. The software enabled mining and the wallet function, but all was based on the protocol.

From then on, all software development was supposed to be an implementation (and updates of the implementation) of the protocol, but not to cause any change to the protocol itself (as a set of rules).

This is why Satoshi said in 2010 that once version 0.1 of Bitcoin was released, the core design was set in stone for the rest of its lifetime.

However, those rules were broken later with BTC. Several major changes such as removing many essential opcodes and introducing SegWit significantly altered the original Bitcoin protocol as well as the original unilateral contract. This fact is not only acknowledged by the BTC Core developers and supporters, but in fact publicly promoted. One concrete evidence of such alteration is that some of the earlier transactions based on the original protocol would not be validated under the new protocol.

What BSV subsequently did was to restore the original protocol, and further mandated that the base protocol defined in the whitepaper and the Genesis block not to be changed by any individual or entity, ever1.

Due to the historical accumulation of unauthorized changes in the software and the blockchain itself, the restoration wasn’t easy. It took almost three years for BSV to complete it. One couldn’t simply go back to the original version of the software, because doing that would have broken the transactions created in the past and rendered the blockchain useless.

But the restoration is done. That the original protocol has been restored on BSV is a fact which is not only embodied in the current BSV software but also in the blockchain data itself including what and how transactions can be verified. This fact is not disputed, not even by the opponents such as the BTC community.

How is the protocol actually locked?

The intention of the locked protocol with BSV was made clear and very public. So the question is, how is the protocol actually locked?

If the protocol were a piece of software, one might imagine that some kind of a code lock is applied to the protocol so that no one can physically change it. But that would be a misunderstanding. The protocol is a set of rules. The only way to lock it is through a legal mandate and a social contract. And this is what the BSV Association is for.

In addition to the public mandate (which constitutes the social contract part), BSV Association is in charge of safeguarding the base Bitcoin protocol under a legal mandate.

It is important to note that BSV Association’s job is not to figure out how to change or improve the base protocol, but to make sure that the base protocol does not change. The BSV Association is also tasked to promote the software implementation of the base protocol and the adoption of Bitcoin blockchain, but such developments are the implementation of the base protocol, both on layer-1 and layer-2, not any change of the protocol itself.

The base protocol defines what Bitcoin is

If you only look for specific language of making an offering in the Bitcoin white paper, as if the white paper were written as an explicit contract, you would be disappointed.

Satoshi’s unilateral contract in Bitcoin is very simple: if you mine a block, you receive 50 bitcoins (the number halves every four years). This is a hard rule embodied in the first version of the Bitcoin software and the Genesis block, and is also an undisputed fact understood by the entire Bitcoin community. The entire Bitcoin world wouldn’t exist without a clear understanding of this unilateral contract.

What the base protocol contained in the white paper and the initial Bitcoin software is not the contractual language for an offering, but the definition of bitcoin.

That is, the base protocol defines what exactly a bitcoin is. This may sound simple, but the definition of bitcoin is (1) an essential part of the unilateral contract, and (2) where the real controversy arises in this whole industry.

Let’s think of a familiar example of a unilateral contract: someone posts a public notice that says, “find my missing puppy, I’ll give you $50.” That is a simple but valid unilateral contract. But implicitly, it must have a description of what his missing puppy is. It can’t be just any puppy in the world.

Now just imagine that the offeror keeps changing his definition of what the missing puppy is. That would invalidate the original contract. The world may either reject the change, or accept it as a new unilateral contract.

This is one of the reasons why Satoshi wanted to lock the protocol. Because he wants to have a fixed definition of Bitcoin such that the ‘bitcoin contract’ has definite meaning both legally and economically.

In the context of the securities laws, the idea is not that ‘because Satoshi made an offer, therefore it is not a securities contract,’ but rather the following:

You first look at Satoshi’s unilateral offer and determine independently whether it is a securities contract or not (which we have concluded that it is not, according to the Howey test). From that point on, the locked protocol ensures that the contract remains the same and does not become the securities contract, and further it does not fall into the hands of another party who has the power to change the contract.

That is the most fundamental part. But there is much more that comes from it.

Control is the key

The essential idea is control. Control has fundamental legal and economic implications.

First, what?  (what is being subject to control?)

Second, who? (who controls?)

Third, how? (how is it controlled, or in what manner is the thing being controlled?)

The key is not to prove that absolutely no one could possibly control anything. A human system will always need to be controlled by human volition. The question is who controls what and in what manner.

In the context of a blockchain, the question of ‘control’ is of the foremost importance, and is also the most misunderstood. The misunderstanding often arises from confusion on the the critical distinction between the base protocol and software implementation of the protocol and use case applications.

In an information technology environment (e.g. Internet or blockchain), the reason why the base protocol is fundamentally different from the rest is because the base protocol determines how other people’s products work, or whether they work at all, while the implementations and applications may only compete with each other but cannot authoritatively, predominantly and absolutely determine the path and fate of others. The base protocol does.

One who can change the base protocol places himself in a godlike position, and has total control.

More specifically, if you and I are both implementation developers or application developers, you and I may collaborate or compete with each other, and you may even defeat me because you have a superior product, but both you and I always have freedom to develop if there is a transparent and reliable base protocol.

But if I can change the base protocol, I can essentially force a standard or a preferred path on you. Your product may be the best in the world, but I can change the base protocol in a way that your product simply doesn’t work.

The above has broad consequences, philosophical, social, political, economic and technological etc.

The economic impact of the locked protocol

The matter of control determines the nature of an economic system. For example, the most important difference between capitalism and socialism/communism is in the controls of each economic system.

A locked protocol is paradoxically a foundation for making the bitcoin economy a free market economy. This is analogous to a political-economic system in which a free market economy depends on a stable and reliable Constitution and the rule of law.

This is because locking the base protocol is codifying and standardizing the core power and removing it from the hands of any individual or centralized entity, such that the system has a core purpose and mechanism that is not subject to arbitrary changes. This does not limit developments of implementations and applications, but to precisely ensure an open and fair environment in which the best implementations and diverse applications can emerge.

An ideal system has a stable, self-consistent and united base that enables a requisite variety of states at upper layers which are in contact with the environment. Even the universe is designed according to this principle, which has an absolutely unified law of physics at the base and unlimited varieties in actual presentations. See One blockchain as the base layer of IoV.

In the context of Bitcoin, it is especially necessary to avoid abusing of the power of control and to ensure free-market competition of developing competitive products. This is because the temptation is further magnified by the fact that the parties who have the control (the Core developers and their hidden sponsors) are incentivized to make changes due to their own financial interests being directly tied to the price of Bitcoin.

Satoshi very carefully tried to eliminate that kind of power, from both his own hands from any other centralized entity. But that power is exactly what the core developers of BTC snatched back into their own hands and in fact exercised. And that is also what many other blockchain creators did. They didn’t understand what Satoshi did and why he did it. They succumbed to their desire to control or simply the need to get rich quickly.

At the same time, the locked protocol is an open protocol, optimized for economic participation and creativity.

When people hear about the locked protocol, people often think about a closed protocol. But the opposite is true. The locked protocol is an open protocol.

‘Open’ does not mean it is open to changes by third parties, but open for everyone to participate without risking inherent discrimination or even elimination.

‘Open’ means permissionless.

In fact, only a locked protocol can truly be an open protocol. If the protocol is not locked, it would be subject to arbitrary changes by another party. This makes business adoption difficult or even impossible, not only because it lacks predictability which all serious applications demand, but also because it creates a prohibitive and unfair environment.

The question of ‘offering’ in the securities law

Whether or not a crypto asset is a security according to the securities law is discussed in detail in Even BTC Has Become a Security. At the same time, I believe the entire discussion about whether crypto assets are securities, broad or narrow, supporters of SEC or promoters of crypto, is fundamentally misguided and misplaced.

Specifically, everyone is focusing on the asset itself, when the real focus should be on the offering instead.

This is not an argument for or against any crypto asset. This is really what the essence and purpose of the securities law are. There is no first principle-based law to define a certain ‘thing’ (asset) as a security, but rather an ‘investment contract’ which offers the thing as a securities offering. When such an offering exists, the thing that is being offered is then called a ‘security’.

That is, the basis of the entire legal theory is the offering, namely a securities offering, on which a thing called ‘security’ sits, and through which an investment contract is formed.

With this view, the thing itself may not be a security to start with, but may become a security if it’s offered in a securities offering.

For this reason, the analysis must look at the entire history to identify distinctive ‘offerings’ and determine if any of the offerings constitutes a securities offering. For that, the Howey test is the standard. But the test is against each underlying offering, not the asset itself.

For example, every crypto asset has an initial offering by the issuer. That is a distinct offering. Some of the initial offerings were clearly a securities offering used for capital raise (e.g., every ICO that had pre-mining and thus the selling of the asset from the issuer to investors to raise capital); some were not a securities offering (e.g., the original bitcoin offered by Satoshi to miners in a unilateral mining contract in which Satoshi as the issuer did not do any pre-mining and did not receive any proceeds of the offering).

Most crypto assets then had a subsequent secondary offering on an exchange. It is my opinion that the crypto exchanges that are centrally operated off-chain are really making securities offerings when they facilitate crypto trading. This converts the asset being offered into a security even if the asset is not security already. See Crypto exchanges convert crypto assets into securities.

Further, some crypto assets made new offerings by changing the original initial offering contract. This happens when the underlying base protocol changes. These are different from secondary offerings made on exchanges. But likewise, these new offerings could transform an asset to a security even if the asset was not already a security to start with (considered in the context of the initial offering and the second or offering). This is what happened with BTC, Ethereum and many other core-developer controlled protocols.

I believe the above is the only right way to interpret and apply the securities law, otherwise not only can an analysis be easily confused and misguided, but also fail to accomplish the purpose of the securities law.

Focusing on the offerings makes sense also because this really is the purpose of the securities law. It explains why the securities law and regulations are almost always related to capital raise, because capital raise and investment contract are always tied together through an offering. That’s also how the four prongs of the Howey test are tied together. They are not separate independent elements. They are tied to a securities offering. Not the thing offered, but the offering itself.

The article Why Cryptoassets Are Not Securities published on Harvard Law School Forum somewhat touched upon the points I make. I don’t fully agree with the analysis in the article, but it’s the only one I have seen on the matter of crypto assets that has the right focus.

If this whole thing is litigated in a courtroom, the BTC community will suffer some serious embarrassment because they can’t possibly defend themselves while still maintaining consistency with what they know and the history.

Only BSV has an honest story to tell, both to the public and in the courtroom.

The above is about mining. The subsequent selling, especially the selling of bitcoin on exchanges, invokes a second offering which may constitute a securities offering. See Crypto exchanges convert crypto assets into securities.

[1] Note, however, the locked protocol may still be subject to changes in the future under two exceptional conditions: (1) when a change is mandated by the law. This is strictly not a change of protocol, because the law is considered part of the base protocol. (2) in the future, if the protocol is adopted as an international standard subject to the decentralized standards committee of global experts, like that for the Internet TCP/IP protocol, changes may be made when the committee deems it necessary. Such a change is not only infrequent, but in fact extremely unlikely. For example, the base portion of TCP/IP protocol has not changed over the last four decades even though theoretically it is subject to changes by an agreement of the international committee.

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