The introduction of the Ordinals protocol in January 2023 marked a significant turning point in bitcoin’s history. 

This development allowed users to inscribe data onto individual satoshis, the smallest unit of bitcoin, creating non-fungible tokens (NFTs) on the bitcoin blockchain—a capability that sparked a wave of digital art, collectibles, and even meme projects within the bitcoin ecosystem.

Building on this, developer Domo introduced the BRC-20 token standard in March 2023, enabling the creation of fungible tokens on bitcoin that are not bitcoin itself. This led to the creation of the bitcoin token ecosystem, admittedly almost completely meme coins.

While BRC-20 was a step forward in principle, it suffered from stifling inefficiencies, including high transaction fees and network congestion. These difficulties led to controversy; many bitcoin believers were offended by non-bitcoin tokens clogging the network and taking away from the real purpose of bitcoin. 

These issues prompted Casey Rodarmor, the creator of Ordinals, to develop the Bitcoin Runes protocol. Bitcoin Runes aimed to improve upon BRC-20, providing a more efficient, scalable, and user-friendly solution for tokens on bitcoin.​​

Although the Runes Protocol also saw its fair share of meme projects, this innovation finally also brought serious thinkers into the bitcoin token ecosystem and sparked ideas for diverse use cases.

This article will go over these core use cases as well as provide an overview of the current Runes infrastructure and token ecosystem.

But first, a quick recap on how Runes work.

How Bitcoin Runes Work

At its core, the bitcoin Runes protocol operates using bitcoin's UTXO model, similar to its predecessor BRC-20. However, instead of relying on Taproot-enabled wallets and the inscription-heavy process of BRC-20 , Runes uses a special area in bitcoin transactions known as OP_RETURN and skirts the Ordinals protocol altogether.

The process of creating a Rune is known as etching, where a "genesis UTXO" containing all the necessary token details is embedded in a bitcoin transaction. Once etched, these Runes can be minted, transferred, and split into smaller pieces.

This space within a bitcoin transaction stores important token information, such as the Rune's name, symbol, quantity, and the actions required for management. This method is more efficient because it avoids junk UTXOs that clog the network with BRC-20. It also reduces the overall size of transactions, leading to lower fees and better scalability. ​

The advent of Runes meant that having a full token ecosystem on bitcoin was now not only possible but viable on a practical level.

Key Use Cases For Bitcoin Runes

Bitcoin Runes have opened up a wide array of potential applications, bringing bitcoin into sectors that were previously dominated by Ethereum and other blockchain networks. 

Although most of these use cases are not yet realized, they show that bitcoin-based tokens can be used to bring diverse subsectors natively to bitcoin.

Stablecoins

Runes facilitate the issuance of stablecoins directly on bitcoin. These types of tokens can represent stable shares, i.e., digital versions, of fiat currencies. The inherent security and immutability of bitcoin provide a robust foundation for issuing and managing these tokens, while the efficiency of the Runes protocol minimizes the on-chain footprint and transaction costs.​

Decentralized Finance

The Runes protocol empowers various DeFi applications by creating a token ecosystem directly on bitcoin. DeFi activities, including lending, borrowing, and staking, can all be facilitated directly on the bitcoin network using Rune platforms. By leveraging the Lightning Network's low-cost, fast transaction capabilities, Runes platforms could offer near-instant transfers and minimal fees, enhancing bitcoin's competitiveness in DeFi​.​

Meme Coins

Although much decried, memecoins have become a significant part of the cryptocurrency market, and the Runes protocol ensures that the creation/trading of these tokens does not disproportionately clog the bitcoin network.

At the time of writing, the largest projects by market cap and by far the most popular Runes are meme coins (more on this in "Major Bitcoin Runes Tokens"). Projects like WZRD and PUPS have even moved from BRC-20 to Runes due to the protocol's efficiency. By doing this, meme coins can engage communities through airdrops, rewards, and governance mechanisms while also benefiting from bitcoin's security.​

Real-World Asset Tokenization

Bitcoin Runes can be used to tokenize real-world assets, such as real estate, art, and commodities. These tokenized assets can be securely traded and transferred on the bitcoin blockchain, offering fractional ownership and improving liquidity in traditionally illiquid markets, while being protected by the bitcoin network.

Governance Tokens And Voting Mechanisms

Governance tokens issued through Bitcoin Runes enable decentralized decision-making in projects and protocols. Holders of these tokens can vote on protocol upgrades, funding allocations, and other critical decisions. By integrating governance into bitcoin's secure and decentralized network, Runes-based governance systems are transparent, immutable, and highly resistant to tampering.​

Gaming And Digital Collectibles

The gaming industry is another area where Runes shine. Developers can create in-game currencies using Bitcoin Runes, which players can trade, sell, or use within gaming ecosystems.

The secure nature of bitcoin ensures that these assets are protected from fraud or hacking, giving players confidence in the value of their digital assets.

The Runes Ecosystem

Although many of these use cases have yet to be realized, Runes infrastructure has started to bud in the last year, and many existing tools have added Rune support.

Marketplaces And Exchanges

The Runes ecosystem has rapidly grown with multiple platforms emerging to support the trading, minting, and management of Runes. Marketplaces like OKX, Magic Eden, and UniSat offer users the ability to create, manage, and trade Runes tokens, each with unique features.

Several decentralized exchanges have also popped up for Rune traders. Platforms like Dotswap and Runes DEX offer automated market-making systems that allow users to trade Runes with minimal friction. Fluid BTC and Saturn BTC provide peer-to-peer platforms for exchanging and lending Rune tokens.​

Rune Wallets

Rune wallets play a crucial role in managing and storing Runes tokens on the Bitcoin blockchain. Two prominent wallets supporting Runes are Leather and Xverse. These wallets connect to hardware like Ledger, providing an extra layer of security for users engaging with the Runes ecosystem​. Such tools make it easy for users to securely manage their Runes tokens, perform transactions, and engage with decentralized applications within the Runes ecosystem.

Lending Platforms

Lending platforms like Liquidium allow users to borrow and lend Runes, providing liquidity and generating interest on BTC holdings. Borrowers can use Runes as collateral, while lenders earn interest from lending out their bitcoin. The success of Liquidium foreshadows the potential future for DeFi projects on bitcoin.

Launchpads

Magic Eden and Meta Runes operate launchpads for new Rune projects, helping developers issue and distribute Runes tokens. These platforms support a wide range of initiatives, from community airdrops to strategic partnerships with global brands.

Analytics Platforms

Runealpha and Ord.io are analytics tools that track Rune transactions, trading volumes, and performance, providing valuable insights for traders and developers.​

Major Bitcoin Rune Tokens

The Bitcoin Runes ecosystem is filled with popular and high market cap projects. However, at the moment, all top Rune projects are meme coins. This disparity between use cases and popular Rune tokens demonstrates how much room for growth exists in the market.

DOG•GO•TO•THE•MOON (DOG) is one of the most prominent Runes, with a current market cap of around $250 million. As the first meme coin launched on the Runes protocol, it has a strong following and has generated millions in trading volume since its launch. It was airdropped to holders of the Runestone Ordinals project and now boasts over 74,000 holders, making it the most widely held Rune​.

RSIC•GENESIS•RUNE (RSIC) is another major project within the ecosystem, with a market cap of around $14.5 million. Known for its symbolic value (being the eighth Rune and connected to the number 8 for "luck"), RSIC is particularly popular for its game-like token mining experience, where users can compete to earn tokens. It has a growing community and over 21,000 holders​.

SATOSHI•NAKAMOTO is a tribute to bitcoin's creator. This token's supply is capped at 21 million, mirroring the total bitcoin supply, and it has over 19,000 holders. ​These projects not only reflect the growth of the Runes protocol but also showcase the variety of assets that can be created within this ecosystem, from meme coins to symbolic tokens tied to bitcoin's history.

BILLION•DOLLAR•CAT (BDC) This project combines meme culture with the aspirational "billionaire lifestyle" narrative, attracting a loyal following and generating substantial trading volumes.

Side Note: Why Runes Have Long, Unusual Names

The names of Runes often appear in all caps and can seem strange or lengthy, but there's a reason behind this convention. Built into the Runes protocol is a minimum name length requirement to prevent name squatting—the practice of registering commonly recognized names or trademarks to later profit from their value. This safeguard ensures that names like "PEPSI" or "APPLE" aren't immediately claimed by opportunistic users.

Rune names must be between 1 and 28 characters long, using only uppercase letters from A to Z, and must be unique—even spaces matter. The naming rule starts with longer names, which are then shortened by one character every 17,500 bitcoin blocks, creating a dynamic environment for naming Runes.​​

The Future of Bitcoin Runes: Expanding Utility and Adoption

Bitcoin Runes mark a pivotal evolution in Bitcoin’s functionality, addressing the inefficiencies of previous token standards like BRC-20 while enabling a diverse range of use cases. From stablecoins and DeFi to gaming and governance, Runes introduce a scalable and efficient way to create and trade tokens on Bitcoin—without compromising the network’s integrity.

While meme coins currently dominate the ecosystem, the underlying infrastructure for more sophisticated applications is steadily taking shape. The growing support from marketplaces, wallets, lending platforms, and analytics tools signals that Runes are becoming a lasting fixture within Bitcoin’s broader financial ecosystem.

As the protocol matures, the real test will be whether Runes can move beyond speculation and power meaningful financial instruments, decentralized applications, and real-world asset tokenization. If adoption continues at its current pace, Bitcoin could emerge not just as digital gold, but as the foundation for a fully-fledged token economy.

Bitcoin’s security model removes trusted third parties, relying on cryptographic hashing, decentralization, and proof-of-work mining to ensure transaction integrity. While this provides censorship resistance and user autonomy, it also demands personal responsibility for safeguarding private keys and securing funds.Bitcoin security is one of the more interesting new phenomena in computer science, as it involves a complete reversal of the security model found in traditional digital financial systems. While the old systems involve trusted third parties who operate and control centralized databases of everyone’s assets and transactions, the bitcoin model flips the script and gives each individual user full autonomy over their digital money. While this altered security model is also what enables bitcoin’s underlying utility as a digital cash and apolitical monetary system, it can be difficult for new users to understand this financial paradigm shift.

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Through the right combination of preexisting technologies, such as cryptographic hashing and public-private key encryption, bitcoin creator Satoshi Nakamoto was able to create a revolutionary new model for digital money. And since 2009, Nakamoto’s experiment has turned into a resounding success up to this point, with more than $1 trillion worth of value now held on the network, and increasing interest coming from the largest asset managers in the world such as BlackRock and Fidelity.

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But how is this new model even possible? And how can we know that bitcoin is secure? Let’s take a look at how security works on the bitcoin network from both a high-level and a deep, technical perspective.

What New Users Need To Understand About Bitcoin Security

The first attribute of bitcoin security that must be understood by users is that, unlike traditional digital financial systems like PayPal, users are put in full control of their own security at the base layer. While systems like PayPal involve trusted third parties who are able to hold their users’ hands and provide customer support when something goes wrong, bitcoin is a system where each user has complete control over their assets at all times. And while the full control users have over their bitcoin is the general point of the decentralized digital cash system in the first place, it also creates a situation where they must accept a much larger degree of personal responsibility when it comes to the security of their assets.

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The best analogy for bitcoin security is physical cash. If you’re going to hold a large amount of physical cash, you must also be able to secure it yourself, as there is no one who is able to reverse the transaction in a situation where the cash is lost or stolen. In the case of bitcoin, users must protect the private keys associated with their public bitcoin addresses.

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Unlike bitcoin, traditional banks have a number of measures, such as chargebacks and identity verification, to add a number of safety nets for their users. Again, these additional safety precautions come with trade-offs, as they effectively mean the bank is in control of the customer’s assets rather than the customer themself. As a side note, those who prefer the extra assistance found in the traditional banking system can still use bitcoin banks to gain a similar level of ease-of-use with the cryptocurrency; however, this setup also removes many of the benefits of using bitcoin as a store of value or medium of exchange (more on that later).

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Understanding this key difference between bitcoin and traditional online financial systems is a key piece of education that should be viewed as a prerequisite for using the cryptocurrency network in the first place. Otherwise, financial loss is bound to occur.

Best Practices For Users Securing Their Bitcoin

So, how are users supposed to take responsibility for their own financial security in bitcoin? The first step is to not fall into the same traps that are found in the traditional financial system, namely handing over one’s bitcoin to a “trusted” third party. While this structure is problematic enough in traditional systems, the reality is it can be even worse in bitcoin because there are oftentimes less avenues for practical legal recourse when something goes wrong. For example, former customers of bankrupt cryptocurrency exchange FTX were only able to recover a fraction of their cryptocurrency holdings through the bankruptcy process, and there have been plenty of situations throughout bitcoin’s history where third parties were able to successfully run off with other people’s money.

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Of course, general education and awareness of how bitcoin works is also necessary before deciding to take full control over one’s own digital finances. There have been plenty of instances of people who try to bite off a bit more than they can chew when they first hear about bitcoin and end up making a mistake that leads to a loss of funds, so newcomers are advised to educate themselves first and play around with small amounts of money before diving into the deep end.

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In terms of general tips for users to successfully secure their own bitcoin, it’s important to understand a variety of concepts such as non-custodial wallets, multisig addresses, and cold storage. These avenues for secure storage of private keys, which are what allow users to move their bitcoin, are the best way to make sure one’s money remains secure without the assistance of a trusted third party.

Fundamentals Of Bitcoin Network Security

When talking about the security of the bitcoin system itself, rather than individual users’ private keys, there are a variety of different aspects of the system that must be understood. That said, the key ingredient that keeps the bitcoin network, and thus the transactions that take place on that network, secure is decentralization.

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As covered previously, the key innovation with bitcoin is that there is not a trusted third party that controls everyone’s account balances and payments. Instead, everyone on the network participates in coming to consensus on the current distribution of bitcoin and future valid transactions.

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Each node on the bitcoin network checks and verifies that every transaction published on the network is valid according to the consensus rules, which were effectively set in stone by Nakamotoo when the first version of the node software was released. This is what prevents things like someone creating new bitcoin out of thin air or spending some coins that they don’t actually own.

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By operating a node, a bitcoin user can confirm that the bitcoin they receive are legitimate and valid. This system where everyone checks the legitimacy of transactions and blocks of transactions is what enables the system to remain decentralized, and the relatively low number of on-chain transactions that can be processed per second (compared to traditional, centralized systems) makes it much easier to connect to the network and participate in the consensus process. In this way, the cost of operating a node on the network can be viewed as a very rough measure of the level of decentralization found on the network.

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The health of the bitcoin network can be tracked by the percentage of economic activity that is taking place via individual users operating their own nodes. If too many people start outsourcing the verification of network rules to a third party, the system starts to look very much like traditional online banking.

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To understand this point, just imagine a scenario where all bitcoin users are outsourcing their connection to the network to a third party, that third party would be able to make up whatever version of bitcoin transaction history they’d like. They would be able to do things like create bitcoin out of thin air and block certain types of transactions from happening, as no one would have the ability to verify what is actually happening behind the scenes. Economically relevant nodes could also more easily alter the rules of the network in a situation where too many users are outsourcing their node operations to someone else. Therefore, in addition to running a node to check the validity of the payments they receive, bitcoin users should also run their own nodes for the overall health of the network.

The Role Of Miners And Proof Of Work

Of course, not all nodes on the network are in charge of processing payments into new blocks of transactions, which are finalized roughly every ten minutes. Special nodes on the network, known as miners, earn the right to participate in the bitcoin accounting process by provably expending computational resources.

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While miners are sometimes mistakenly referred to as the new type of trusted third party that still exists in the bitcoin network, the reality is their power is extremely limited, and kept in check by the nodes. This is due to the fact that the nodes on the network are what provide value to the asset that miners generate through their work.

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Miners are only able to cause issues on the network if they become too centralized and a single party or multiple nefarious parties working together account for 51% of the network hashrate, which is the total amount of computing power that is pointed at the network at any one point in time. This is what is known as a 51% attack.

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Even then, miners are unable to do things like steal users’ bitcoin or inflate the bitcoin supply. Instead, they’re basically only able to implement a denial of service attack on bitcoin transactions, which would be extremely costly due to the large amount of resources that go into the industrialized bitcoin mining process these days. In fact, the system is built to incentivize a bitcoin mining cartel to continue acting in the best interest of bitcoin users in a situation where they gain a majority share of the network hashrate, as that should be more profitable for them. That said, there is still plenty of room for further decentralization of bitcoin mining.

How Does Bitcoin Mining Work?

Miners expend energy on the bitcoin network via the proof of work (PoW) mining process. PoW is the consensus mechanism used in bitcoin, meaning those miners that are willing to expend energy in exchange for newly issued bitcoin and transaction fees are the ones who process transactions and package them into blocks. They “prove” their worth to the network by “working” on figuring out the answers to complex mathematical problems with their computer hardware. The specific hashing algorithm that miners work on in bitcoin is known as SHA-256.

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Essentially, miners gather a group of unconfirmed transactions and combine them into a “block.” To validate this block and add it to the blockchain, they must find a hash—a unique, fixed-length alphanumeric code—that meets specific difficulty criteria. The miners achieve this by inputting various possible “nonces” (random numbers) into the SHA-256 algorithm until the resulting hash starts with a certain number of leading zeros, set by the network’s current difficulty level. In other words, it’s a guessing game, and having more computational resources allows someone to make more guesses.

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While some commentators have espoused the view that the computing power that goes into the bitcoin mining process is wasteful, the reality is it plays a critical role in the bitcoin network. In fact, it would not be possible for bitcoin to exist without it. In short, the use of PoW mining in bitcoin solves the double-spending problem seen in previous digital cash systems, and without the introduction of a trusted third party. The centralized parties that controlled the transaction ordering process to prevent double spending in previous systems were effectively security holes that could be targeted with regulation or other forms of attacks. In other words, the PoW mining process is what enables bitcoin’s accounting system to operate in a decentralized manner, thus enabling the entire value proposition of the system as a whole.

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Put another way, PoW mining is what ensures that the decentralized accounting ledger on the bitcoin network, known as the blockchain, can be trusted. While bitcoin transactions are never finalized in the true sense of the word, they become increasingly difficult to reverse over time due to the chaining of transaction blocks in a way that requires an increasingly large amount of computing power to reverse. In other words, it takes exponentially more computing power to rewrite 100 blocks of bitcoin transaction history than it does to rewrite one block due to the cryptography that underpins the network.

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Once a transaction is included in a block and confirmed by miners, that block is linked to the previous block through a cryptographic hash. Each subsequent block reinforces the transaction’s validity, creating a deeper chain that would need to be altered in order to reverse the transaction. To tamper with a confirmed transaction, a malicious actor would have to re-mine not only the block containing the original transaction but also all subsequent blocks, which would require vast amounts of computational power. The more blocks that follow a transaction, the more secure it becomes. This concept of "block depth" or "confirmations" is why a transaction is generally considered irreversible after six confirmations, as the cost and effort to modify the blockchain grows with each new block added.

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If PoW mining were not used in bitcoin and each node was given an equal vote in the consensus process, the network would be open to Sybil attacks where the operator of the most nodes is able to corrupt the accounting process. Instead, PoW mining creates a situation where only those who are willing to provably expend resources (and therefore need the bitcoin block reward to recoup their expenses) are able to participate in consensus. The miners are thus financially incentivized to act according to the demands of the nodes on the network that are using bitcoin and providing its monetary value in the first place.

Bitcoin Is Secured By A Structure Of Incentives

This point regarding miner incentives helps illustrate the point that the bitcoin network as a whole is able to operate successfully due to the way in which its technical aspects are implemented rather than the simple use of technology itself. The economic incentives at the core of the system have a lot to do with why bitcoin has been able to function properly without many hiccups for more than a decade.

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These incentives were most clearly demonstrated during the bitcoin block size war, especially when it came to the role of PoW miners in the system. While many prominent users of the bitcoin network, such as Coinbase and the vast majority of miners, claimed that miners effectively have the power to vote on hard-forking changes to the bitcoin protocol rules, the revolt that ensued from bitcoin node operators indicated that these entities were wrong. A lot about bitcoin security can be learned from the blocksize war, and our article on the history of the event should be seen as complementary reading to this article.

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Public-Private Key Encryption

In terms of the security of bitcoin transactions themselves, everything is based around the concept of public-private key encryption. Each user’s public bitcoin address, of which a user can have an unlimited number of, also has an associated private key. The structure here can be seen as similar to a username and password in traditional online services. The public bitcoin address is shared with others for the purpose of receiving payments, and the private key associated with the bitcoin address is required to sign off on any transactions being sent from that address. This aspect of the bitcoin system is closely associated with the “not your keys, not your coins” mantra that is often touted by the cryptocurrency userbase.

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As a technical sidenote, it should be pointed out that a bitcoin address is not actually the public key derived from the private key. Instead, it is a hashed derivation of the public key that has effectively shortened the public key’s character length.

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This public-private key encryption method relies on complex mathematical problems—typically factoring large prime numbers or using elliptic curve cryptography—that are easy to compute in one direction (encryption) but extremely difficult to reverse without the corresponding private key (decryption). Most notably, this encryption method does not involve sharing private keys or encrypted data with a trusted third party, which is a critical reason as to why it is used in bitcoin. A system where a trusted third party also had access to users’ private keys would be a complete departure from the philosophy behind bitcoin and more similar to the traditional online banking system.

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Public-private key encryption is a rather old concept that can be traced back to the 1970s when cryptography moved from being the exclusive domain of military and government institutions to the wider world of academia and technology. In 1976, Whitfield Diffie and Martin Hellman introduced the concept of public-key cryptography in their paper “New Directions in Cryptography,” which proposed a method allowing secure communication over insecure channels. Their innovation centered around the idea of using two keys—one public and one private. Shortly after, in 1977, Rivest, Shamir, and Adleman developed the RSA algorithm, a practical implementation of public-private key encryption. RSA relies on the difficulty of factoring large prime numbers to ensure security, and it quickly became one of the most widely adopted encryption methods in digital security. This encryption method underpins the modern security of online communications, from email encryption to secure financial transactions.

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In addition to being used in on-chain bitcoin transactions, there are also a variety of alternative use cases of public-private key encryption in bitcoin. For example, a private key associated with a particular address can be used to sign any kind of message, not just a protocol-compliant bitcoin transaction that transfers some bitcoin to another address. This can be useful for proving ownership over some bitcoin associated with a particular address without moving the bitcoin. Additionally, nonbroadcasted bitcoin transactions are critical infrastructure for various bitcoin Layer 2 networks, such as the Lightning Network.

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Varying Degrees Of Security In Different Bitcoin Layers

There are also technical differences in bitcoin security found at different layers of the overall bitcoin protocol and application stack, as bitcoin can be held in a wide variety of different ways and forms. For example, as previously explained, many of the most important security features of the bitcoin asset are lost when it is held in a bank-like structure, such as Coinbase or another cryptocurrency exchange, rather than a non-custodial wallet that is not directly connected as a node on the bitcoin network.

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The differences between interacting with bitcoin directly as opposed to the bitcoin banking layer found in traditional financial structures are quite clear, but there are also different layers of the bitcoin network as a whole that are more directly tied to the initial intentions of Nakamoto’s creation. In other words, there is a spectrum of security and decentralization found in various bitcoin applications.

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The most well-known Bitcoin Layer 2 network is the Lightning Network, which is effectively a system of cached bitcoin transactions that is able to lower costs and increase the speed at which bitcoin-denominated payments can happen. Since this Bitcoin Layer 2 network is literally just signed transactions that have not yet been broadcast to the greater bitcoin network, the Lightning Network is able to retain much of the security that is found at the base layer.

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However, there are still notable trade-offs made here. Perhaps most notably, loss of funds can occur if a counterparty on the Lightning Network cheats, and a cryptographic proof of that cheating cannot be published to the blockchain, due to either congestion on the network or nefarious intentions from a majority of miners. Many other Layer 2 bitcoin networks that are currently live or in development, such as Ark, also rely on the ability to get a message included in the blockchain in order to prevent loss of funds. Additionally, a light bitcoin client that is not directly connected to the network can be lied to by their middleman node if that node is also colluding with a majority of the network hashrate.

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There are also various sidechains to bitcoin that come with alternative security models than what is found at the base layer. Many of these sidechain systems, such as Liquid and Rootstock, effectively rely upon trust in a federation of entities, as the bitcoin that is used on those sidechains are held in multisig addresses.

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Recently, it was found that an innovation known as BitVM may create a situation where only one of the entities in the federation needs to be honest in order to guard against potential theft or a hack of the federation. Additionally, there are now sidechains based on proof of stake (PoS), such as Lorenzo Appchain, rather than multisig federations. When using any sidechain, it’s important to understand the trade-offs in security that are made as compared to bitcoin’s base blockchain.

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At the end of the day, there are serious trade-offs made when it comes to balancing security with convenience in bitcoin, and it’s critical for these details to be understood in order to use bitcoin properly.

Challenges To Bitcoin's Security

Indeed, making bitcoin easier for the average person to use is a major challenge for the security of the cryptocurrency network. While the Coinbase app makes it much easier for the average person to store and transact with their bitcoin, the reality is they aren’t really interacting with the bitcoin network at all. There is an inherent challenge in making bitcoin more user friendly due to the fact that the whole point of the system is to allow users to take more personal responsibility over their digital finances. Due to the need to preserve decentralization, there is also a limit to the amount of activity that can take place at the base layer, which can also make the system more costly and less user friendly. Scaling the system to more users is a closely related security challenge; however, the current plan is to allow bitcoin to scale via multiple layers for specific use cases, allowing users to opt into different security models depending on their needs.

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Mining centralization also poses significant security risks to the bitcoin network, as a small number of mining pools controlling the majority of the network's hashrate undermines the decentralized ethos of bitcoin. When just two or three mining pools dominate the network, they can theoretically collude to launch a 51% attack. This would allow them to double-spend coins, deny anyone from using the network, steal coins from certain types of Bitcoin Layer 2 networks, and more.

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Perhaps more troubling, mining centralization also increases the risk of regulatory interference if governments target these pools, potentially forcing them to comply with rules that have previously been applied to traditional banks, such as identification requirements for every bitcoin user. In terms of potential solutions to the challenge of mining centralization, changes to mining protocols, such as ones that give individual miners more power over the transaction selection process, could be helpful. Additionally, privacy improvements at the base layer would make it less possible for certain types of bitcoin transactions to be discriminated against, as all transactions would effectively look the same.

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In addition to the security challenges that bitcoin already faces today, there are longer-term issues that could eventually materialize in the future. For example, the potential development of quantum computing could break the encryption that secures the bitcoin currently associated with bitcoin addresses on the network today. However, there is at least one proposal for fixing this potential issue via a soft fork.

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Additionally, there are concerns regarding the long-term security budget of bitcoin in terms of the incentive for miners to point their computing power at the network. The block reward currently includes a subsidy that is cut in half roughly every four years, and eventually the system will need to be secured by nothing more than transaction fees. A lower economic incentive to mine bitcoin means it could become less costly for a malicious party to gain enough of the network hashrate for the purpose of attacking bitcoin. While many predict that the further development of Layer 2 bitcoin networks will allow on-chain fees to dramatically rise, while keeping fees relatively low for end users on secondary layers, this is not something that is definite.

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Another lurking concern is the potential introduction of technical bugs when upgrading critical, consensus-level software such as Bitcoin Core, which has happened multiple times in the past. Such a development could potentially force a hard fork of the bitcoin protocol rules, which would not be an easy task in an increasingly decentralized environment. However, if a hard fork were to succeed in the future, it would likely be one where the bitcoin network is literally broken without the implementation of the hard-forking change. That said, there exists a hope that the bitcoin protocol will eventually ossify, meaning that the base layer can remain completely unchanged while more experimentation and technical development takes place on upper-layer protocols.

The Future Of Bitcoin Security

To review, bitcoin’s security operates fundamentally different from traditional online banking, relying on decentralization and cryptographic methods instead of trusted third parties like banks. Each bitcoin user is in control of their private keys, which allows them to own and transact their assets independently. This shift from central control to personal responsibility is underpinned by bitcoin’s decentralized network of nodes, which is key to bitcoin’s security.

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By distributing the process of transaction validation across a large number of participants, the network becomes more resilient against attacks and failures. However, as scalability becomes a challenge, especially with bitcoin’s base layer only processing a limited number of transactions per second, Bitcoin Layer 2 networks, such as the Lightning Network and Lorenzo Appchain, offer a path forward. These secondary layers enable faster and cheaper transactions while retaining a sufficient degree of decentralization necessary for the security of various financial activities.

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In the long run, ossification of the base layer could play a crucial role in preserving bitcoin’s security, ensuring that its core protocol remains resilient while allowing innovations to continue at other levels. Either way, the health of the network will continue to rely upon individuals taking the initiative to run their own nodes and take full responsibility for securing their digital assets.

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2015 to 2017 was an incredibly significant time in the history of bitcoin due to the crisis that emerged in the form of the bitcoin Block Size War.

This crucial technical debate over the future of bitcoin development put the cryptocurrency network’s decentralization and unwavering ruleset to the ultimate test, providing an educational moment for the entire world regarding how bitcoin works and what makes it valuable at the most fundamental level.

During this period, some were unsure if bitcoin would survive the turmoil and wondered if the cryptocurrency experiment was about to fail; however, at the battle’s resolution, bitcoin emerged much stronger and more credible thanks to this test of its stability and security.

While some may see the bitcoin Block Size War as nothing more than a technical debate over a simple parameter on the network, it was much more complex than that. Let’s take a look at the entire history of the Block Size War from start to finish and the lessons that can be taken from it going forward.

Bitcoin Becomes Too Successful

It’s difficult to state the exact time when the bitcoin Block Size War first began, but one place to start is when the technical debate over bitcoin’s block size limit went outside of the normal bitcoin development process and into the world of social media. In particular, wider recognition of the block size issue began when then bitcoin developer Mike Hearn announced a new, alternative piece of bitcoin software, known as Bitcoin XT, in August 2015, which had implemented a way of increasing the block size limit via a hard fork, known as Bitcoin Improvement Proposal (BIP) 101.

The block size limit is the amount of data that can be included in each newly mined block on the network. It is also effectively a limit on the number of transactions that can take place, as each individual bitcoin transaction takes up varying amounts of space in the blocks. A hard fork is a type of backward-incompatible change to the network consensus rules that requires all bitcoin users to update their software and effectively move over to a completely new network with a different set of rules.

Fellow bitcoin developer Gavin Andresen had previously promoted BIP 101 for inclusion in Bitcoin Core; however, the change was unable to gain consensus among developers. Andresen, Hearn, and others were concerned that bitcoin would become unusable as it became more popular because network congestion would lead to unreliable transactions and high fees.

In other words, the perceived problem at hand was that bitcoin was becoming too successful. Obviously, this was a good problem for the network to have; however, the increase in transactional activity on the network meant that bitcoin was approaching the capacity limit. Bitcoin creator Satoshi Nakamoto had previously limited the amount of data that can be included in each bitcoin block to 1 megabyte (MB), possibly as a way to prevent denial-of-service attacks on the network.

While bitcoin transactions had been practically free when there was less usage on the network, hitting the block size limit would create a situation where users were effectively entered into a bidding war to get their transactions included in the next block. This was extremely problematic for a currency that had been heavily promoted as a cheaper alternative to traditional online payment methods. Andresen even predicted that the block size limit would never be hit even if it was not increased because users would abandon the network as it became less user-friendly and more expensive to use.

Fortunately for bitcoin, his prediction did not come true.

Multiple Bitcoin Hard Fork Proposals Fail

Andresen’s plan via BIP 101 was to first increase the block size limit to 8 MB, then have that new limit automatically increase regularly over time at a rate that amounted to a doubling roughly every two years. If this plan had been implemented at the time, the block size limit would be around 128 MB at the time of writing in summer 2024.

While this may seem like a simple solution to an avoidable problem at first glance, there were two key issues with this plan brought up by other developers. First, increasing the block size limit would also increase the computational resources for operating a bitcoin full node. This was a rather severe concern, as bitcoin’s entire value proposition comes from all participants being able to validate transactions on the network. This is what allows bitcoin to remain decentralized, uncontrollable, and trusted.

Secondly, BIP 101 was a plan to implement this clearly controversial and contentious increase in resource requirements via a hard fork. Over time, this issue of hard forking would arguably become more contentious than tweaking the block size limit parameter itself, partially due to the risk of bitcoin splitting into two separate, incompatible networks.

While fees were still low when the original Bitcoin XT announcement post was made, things hit a breaking point in 2017 when the bitcoin network started to near its capacity limit for the first time. The effects of this network congestion were tumultuous, as bitcoin transaction fees skyrocketed and wallet users began complaining about payments being stuck on the network due to the low fees users had grown accustomed to attaching to their transactions. Many large bitcoin exchanges and wallet providers, such as Coinbase and Blockchain.com, began to publicly support various hard forking block size limit increase proposals around this time.

Bitcoin XT kicked off the Block Size War, but several other alternative bitcoin software clients that implemented block size hard forks were also tried after Bitcoin XT failed to gain sufficient traction. Bitcoin Classic was an attempt to implement a relatively small, one-time increase to 2 MB, while Bitcoin Unlimited promoted the philosophy of removing the block size limit entirely, putting control over the parameter into the hands of the miners creating the blocks. However, these other attempts to increase the block size limit via a hard fork also failed. While Satoshi had written about how the block size limit increase could be phased in at a later date post-creation, his other prediction about users becoming “increasingly tyrannical” about limiting the size of the bitcoin blockchain also came true.

Enter SegWit

Of course, most other developers were not in favor of making no changes to bitcoin at all in the face of this issue of transaction congestion. In fact, a hard forking increase to the block size limit was not completely off the table. Instead, these other developers were focused on using the currently available block space as efficiently as possible before opting for an increase to its 1 MB block size limitation.

Indeed, major users of block space, such as exchanges, could implement changes to their own internal practices, such as transaction batching and proper fee estimation, to be less wasteful with block space. On top of that, these developers supported a multilayer approach to scaling bitcoin payments, most notably via the Lightning Network, which was mostly theoretical at the time.

Multiple soft forking changes to bitcoin that improved the functionality of the Lightning Network, namely OP_CHECKLOCKTIMEVERIFY (CLTV) and OP_CHECKSEQUENCEVERIFY, had already been implemented at this point in time, but another key change that was needed was a fix to transaction malleability, which was a bug that made chains of unconfirmed bitcoin transactions unreliable. The proposed fix was known as Segregated Witness (SegWit), and it was combined with an effective soft forking (backward compatible) block size limit increase.

While SegWit was mostly noncontroversial as a bug fix for transaction malleability, some participants on the bitcoin network, namely a large portion of miners, held back on implementing the change in an effort to force a larger increase to bitcoin’s block size limit via a hard fork. This decision from miners was particularly problematic because part of the process of activating SegWit on the network was first getting 95% of miners to signal that they had updated their software with the SegWit upgrade. In addition to philosophical opposition to SegWit, some miners may have been benefiting from a mining efficiency gain known as ASICBOOST, which would have been broken by SegWit.

The bitcoin user base was now at a crossroads where activation of both a hard forking increase to the block size limit and the combined soft forking increase with SegWit seemed unlikely.

The Messy Resolution To The Bitcoin Block Size War

In an effort to find a resolution to the various proposals for bitcoin’s development path going forward, key entities in the bitcoin exchange, wallet, and mining industries met during a cryptocurrency conference in the spring of 2017. Notably, Bitcoin Core developers were not at this meeting. At the conclusion of this meeting, a document known as the New York Agreement was published. The document outlined a plan to activate SegWit and then implement a hard forking increase to the block size limit some months later in a proposal that became known as SegWit2x.

While some bitcoin users were happy at the perception that the multiyear Block Size War had finally been resolved, others noted that bitcoin governance was now seemingly being controlled by a small number of bitcoin-related companies, which was problematic for the system’s underlying value proposition. In other words, there were concerns that bitcoin had come under corporate control. Part of this criticism was based around how the SegWit2x development process was handled, as it was perceived more as a corporate decree rather than a proposal made to the bitcoin user base.

At around the same time, a grassroots effort to simply activate SegWit on the network with or without miners via a process known as a user-activated soft fork had also gained traction. The SegWit2x plan was made more compatible with this effort via BIP 91 to make sure the SegWit activation process went smoothly. The result was that SegWit achieved activation in the summer of 2017.

While the signers of the New York Agreement had agreed to run code that would activate a hard fork after SegWit had been activated, the reality was there were several signs — perhaps most notably a futures market that enabled betting on a potential split caused by the hard fork attempt — that this backward-incompatible change did not have the consensus that was necessary for it to happen successfully. Ultimately, the hard fork was abandoned by key members of the New York Agreement a few months later. In other words, the bitcoin network received the SegWit upgrade, but a hard forking increase to the block size limit did not happen.

Key Takeaways From The Block Size War

So, what are the lessons that should be taken from the bitcoin Block Size War?

For one, it showed how difficult it can be to alter anything about bitcoin’s protocol rules. While bitcoin’s capacity was increased both on the base chain and via the promotion of secondary payment layers via the SegWit soft fork, implementing such a change via a hard fork was simply out of the question.

Despite the failures of the various hard fork proposals and the resulting short-term harm on the overall bitcoin user experience, the fact of the matter is that people kept using the cryptocurrency. The free market had decided that protecting the digital gold use case was more important than on-chain coffee payments for now, and the bitcoin network’s resistance to a controversial hard fork underscored this value proposition of an apolitical, uncontrollable, and digitally native reserve asset.

Notably, no other cryptocurrency has withstood this sort of attack on its immutability, which is why the Block Size War is the key event that separates bitcoin from the rest of the market.

The difficulties associated with making improvements to the bitcoin network illustrate the sturdiness and soundness of the network and its underlying cryptocurrency. Of course, with it being difficult to change bitcoin at the base layer, it may not adopt new technologies as soon as they become available. Taproot is the only other change that has been made to bitcoin’s consensus rules since SegWit was activated.

There is bubbling demand for the activation of various covenants-focused soft forks that could offer further security improvements to Bitcoin Layer 2 networks; however, the tradeoffs associated with these changes have yet to have been proven worthy of activation. That said, this is the development path that has been chosen for bitcoin by its collection of users — and to be clear, it appears to be the correct one.

While the Block Size War was mostly an argument over whether bitcoin should be more digital gold or PayPal 2.0, the reality is a multilayer approach to scaling enables both use cases. Bitcoin’s stability and security at the base layer enables the bitcoin asset to act as digital gold, while more experimental financial features can be developed and expanded upon on secondary layers, such as the Lightning Network and Lorenzo Protocol.

At the end of the day, the most important takeaway from the resolution of the Block Size War is that bitcoin proved it can withstand an attack of influence from the most prominent stakeholders in the system and maintain its apolitical and neutral ruleset. It is this underlying value proposition of the bitcoin asset that makes every other aspect of decentralized finance (DeFi) possible.

Of course, this is not to say bitcoin will not face similar issues in the future, perhaps coming from nation-states or other similarly sized final bosses.

While many of the supporters of the losing side of the block size debate moved onto alternative projects, such as Bitcoin Cash and Ethereum, in an effort to experiment with their own visions for how blockchain technology should be used, there has recently been an increased interest in building out these sorts of use cases as secondary layers on top of bitcoin itself.

With it now being truly possible for everyone to get what they want on bitcoin via Layer 2 networks, it’s possible for the split in the digital community between bitcoin maximalists and more adventurous experimenters to finally come to an end. With everyone united under bitcoin as the base money of DeFi, the cryptocurrency revolution will become stronger than ever.

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