The Identity Crisis and Governance Paradox of Bitcoin

Compilation: Plain Blockchain

Bitcoin is facing a fundamental identity crisis, which goes far beyond technical debates about block size or data storage. The core issue is not just about what Bitcoin “is,” but what it “should be.” Is it peer-to-peer electronic cash, a settlement layer, an immutable archive, or a store of value?

This distinction is crucial because the design choices around these questions will determine Bitcoin’s long-term viability, level of decentralization, and resistance to censorship. The tension between different visions reveals deep governance challenges that could define Bitcoin’s future.

What is Bitcoin?

Essentially, Bitcoin is information. When you send Bitcoin, you are not physically moving objects through space. You are transferring data: a string of numbers and letters, and Unspent Transaction Outputs (UTXOs), from one address to another. Because this information represents stored energy and value, we call it currency.

Bitcoin’s functionality depends on how you use it. As a protocol with limited scripting capabilities and data storage, it can serve multiple purposes. This flexibility is both Bitcoin’s greatest strength and the root of its identity crisis.

Figure 1: The Genesis Block of Bitcoin and its famous embedded message.

The Bitcoin white paper begins by describing it as a “peer-to-peer electronic cash system.” Its intent is clear: Bitcoin aims to facilitate the flow of monetary information and transfer of value. But Bitcoin has never been limited to monetary data. Its protocol is non-discriminatory; it simply records information.

For years, this has been uncontroversial. But recently, we’ve seen increasing amounts of non-monetary data stored on Bitcoin: JPEG images, videos, websites, and other permanent information added to the blockchain. Some praise this as a victory for “censorship resistance” and “information preservation,” while others call it “spam,” arguing that useless data causes blockchain bloat.

Spam Paradox

The core issue isn’t the images or data stored on the blockchain per se, but Bitcoin’s intended purpose. Is Bitcoin primarily a payment network designed for financial transactions, or an immutable ledger capable of permanently storing any information based on market demand?

Figure 2: Network spam from late 2023 to 2024 has significantly boosted miner revenues.

The Bitcoin protocol can handle arbitrary data and OP_Return outputs, but this can be abused. However, Proof of Work (PoW) ensures that attacking the network with spam is costly. If you want to do such things, you must pay the price.

Currently, there’s no conclusive evidence that long-term storage of non-monetary data harms the network enough to threaten other users, nor that running nodes entails legal liabilities.

Block Size Wars

This isn’t Bitcoin’s first identity crisis. As early as 2015, Bitcoin faced a genuine philosophical split.

• Large Block Camp: Some developers and miners advocated for bigger blocks to accommodate more transactions, aiming to make Bitcoin a mass-market currency with scalability similar to Visa or Mastercard.
• Small Block Camp: Many opposed this. They wanted to keep small blocks to maintain decentralization and relied on Layer 2 solutions for scaling. They believed Bitcoin’s primary responsibilities were security and finality, not transaction speed.

Figure 3: Bitcoin Cash (BCH) addressed some concerns about block size and speed but failed to gain significant market share.

These positions are irreconcilable. Ultimately, Bitcoin experienced a fork. Bitcoin Cash emerged as an alternative with larger blocks, while Bitcoin retained its small-block network.

In the end, market forces and users decided Bitcoin’s direction. This precedent shows that Bitcoin’s governance is inherently chaotic and anarchic: anyone can freely use any code and attempt to enforce their governance preferences.

Node Dilemma

This is critical for Bitcoin’s future: Bitcoin’s decentralization depends on node operators, who verify transactions and enforce rules. Nodes are the core of decentralization.

However, the economic incentives for running nodes have always been unclear. Miners receive block rewards and fees, users want to verify their own transactions, but for those running nodes purely out of conviction, it’s a selfless voluntary act.

Figure 4: The number of Bitcoin network nodes has declined by nearly 60% from its 2018 peak.

This poses a long-term threat. Bitcoin’s decentralization relies on ordinary people willing to verify the network for free. But human nature tends toward specialization and outsourcing to trusted third parties, which is especially evident in Bitcoin custody services. If most of the ecosystem moves toward custodial solutions, it could introduce significant centralization and systemic risks.

Conclusion

Bitcoin’s identity and governance challenges are not just about code but about how to balance competing interests. It’s an art of compromise: users want low transaction fees, node operators want a lightweight blockchain, developers want an easy-to-build foundation, and miners need economic incentives to secure the network.

The block size wars did not fully resolve this debate, nor did the discussions around spam and Ordinals. The current censorship-resistance paradox also cannot fully resolve these deep-rooted conflicts.

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