The Illusion of Scale in Segregated Witness

Abstract

Money gains value through use. As a limited quantity of money chases a set value of wealth, we see the price increase linearly with the velocity of the system. The more use, the higher the price. Likewise, as use cases are limited we can expect a decline in price. This effect can be coupled together with scarcity. Bitcoin is a scarce economic good. Its value is retained from its use factor which as a settlement layer alone is severely limited. When proposed changes such as segregated witness are introduced into the system, value is not added into the system, rather than value being added, it is distributed between aspects that are detrimental to the growth of the system. This occurs because schemes such as segregated witness allow for the introduction of fractional reserve systems into bitcoin. With these, the velocity of the system is lowered and bitcoin becomes a pure settlement system such as Swift. In this, value was transferred from bitcoin into sidechains.