Actors in the Bitcoin Network

Who Plays What Role & Why it Matters

Bitcoin is two things. An open, public, permissionless network for the transfer of value & a natively digital asset for storage of value (BTC). Meaning that anyone, at any time, can participate and nobody can stop them from doing so. This then begs the question; who are the participants on the Bitcoin network?

Obviously, in an ideal world, every person on the planet is a participant (direct or indirect) of Bitcoin. However, in order to build a properly organized mental model, we can classify participants by their relationship & level of involvement/contribution to the network.

When inspecting the bitcoin network at the highest level, there are two categories of participants; Internal & External. Each category is further granulated by archetype; The internal category archetypes include three general roles that directly impact the technology; those being Miners, Developers, & Non-mining Nodes/Users. The External archetypes are all user-facing profiles; namely Traders, Investors, Custodians, & Entrepreneurs. Each role provides its own unique set of risks/benefits to the network & asset.

Without further ado, a look at the roles:

Miners are the metaphoric heart of the Bitcoin network. Miners are nodes that contribute to the progression of the network by converting electrical energy into the computational demands for establishing consensus & appending valid blocks to the chain. They can be thought of as the clearinghouse for all the activity that is processed by the network. Simply put, Miners are the processors of the network & Bitcoin cannot exist without miners.

The benefits: Consensus
Miners are the gears of the machines that establish the most valid, truthful state of the network, in turn giving Bitcoin its most important value proposition; trust.

The shortcomings: Risk of Centralization
Given the quintessential role that miners play (and the amount of profit they potentially produce) it is a role in which many people will compete for domination. While the competitiveness is baked into the consensus (after all, it is the design property that drives decentralization [in theory]) how that competitiveness materializes through human social life puts the network at risk of being overly controlled by a single financially equipped operator.

Nodes are a general term borrowed from the field of graph theory used to identify points of interest in a network. The Bitcoin network is a host to three variants of nodes (the Miner nodes; which are the processers of the network & not part of this section) & there are the non-mining Full nodes & Light Nodes. Full nodes act as servers that store the entire history of the Bitcoin blockchain; the transactions, the blocks, the addresses, the chain, all of it. Light nodes are also known as SPV (simplified payment verification) nodes are basically all known wallet applications; the light nodes only store the most recent state of the chain & focus on the transactions & activities that are relevant to their nodes addresses; light nodes are linked to & fetch data from the full nodes. Both types of nodes act as information relayers/hubs that receive updates from other nodes & spread updates to their neighboring nodes.

Developers are the metaphoric brains of the network. They are the gatekeepers of the technology. Developers are arguably the most valuable contributors to the network in the sense that without them there would be no innovation. Since the network is based on software, a high degree of programming & computer science expertise is required in order to understand the system at the lowest level.

The benefits: Protection from Malicious Sovereign takeovers
Every verticle of society is interested in providing value & making money; whether from an altruistic standpoint or a malicious one. The Bitcoin Developers protect the codebase from being tampered with against the public’s knowledge.

The shortcomings: Risk of Centralization
As in the case with miners, the developer’s role is quintessential to the Bitcoin network; therefore it is a liability in the sense that multi-party entities with advanced organizational aptitude (and technical know-how) can exert their powers & ultimately dictate how the technology operates/progresses.

Traders are perhaps the most actively involved market participants. They are the lifeblood of volatility & poster-children of high-risk financial appetites.

Traders are characterized by their frequency of entering & exiting their bitcoin positions; for purposes of simplicity & as a rule of thumb a trader is anybody who looks to hold Bitcoin for 1 month or less.

The benefits: liquidity & fluidity
Liquidity is the cornerstone of any healthy market & the constant activity of value transfusion between assets creates a liquid market. Moreover, Traders allow for price discovery to happen.

The shortcomings: Choppy price action
Liquidity is the cornerstone of any healthy market & the constant activity of value transfusion between assets creates a liquid market. Moreover, Traders allow for price discovery to happen.

Investors (also known in the crypto industry as hodlers) are the foundation of the Bitcoin network’s economic wellbeing. They are the last frontier when it comes to price; This category of participants does not react to the daily market volatility & by doing so provide a “lower-bound” on Bitcoin’s price.

To be considered a hodler, participants must commit to secure value for a prolonged period of time, no less than 1 year.

The benefits: Lower Price Bounds
With a known amount of actor, holding a known amount of Bitcoin’s, that are not willing to leave their positions carves a model to the potential levels at which selling stops. For instance, if there are a total of 100,000 accounts across 19,000,000 btc & we know there are 10,000 hodlers (wallets that do not spend for at least 365 days) holding 10,000,000 btc and the price is $200,000. Then we would also know that there are 90,000 accounts prone to moving 9,000,000btc. Using this data we can draw out possible scenarios to price floor potentials.

The shortcomings: Asset Velocity is reduced
Investors/hodlers take Bitcoin away from the open markets & trade; meaning that once Bitcoin enters a Hodler wallet, it will not be used for providing liquidity. The reduction in liquidity is a reduction in velocity. Moreover, as liquidity dries up the volatility increases & makes it more difficult for retail consumers to navigate the landscape.

Custodians are the necessary evil of the crypto space. They are the bridge to onboard the corporates & the masses. The main service custodians provide is the simplification of storage; they handle Bitcoin on behalf of their clientele.

The shortcomings: “Not Your Keys - Not Your Coins”
As the old crypto adage goes, not your keys, not your coins. Custodians require the right to sell, send, or spend as they find fit (“in the best interest of their clients”) and in order to do so they must possess the private keys to the wallets where the coins are stored. This of course imposes the risk that the custodians will act against morals & laws to violate the true owner of the Bitcoins.

Entrepreneurs classify as all the above. Entrepreneurs create the products, build the communities & spread the narratives of Bitcoin. They provide solutions that help all the verticle of the network’s participants such as custody solutions & they create the new material hardware to increase miners efficiencies & strengthen the network.

The benefits: Enabling the future of a digital-social economy
Entrepreneurs are the caliber of individuals that have the potential to displace legacy systems & create a more robust, fair economy; they bring to market new ideas & practices which ultimately propel society forward. (plus; they create tremendous wealth opportunities)

The shortcomings: Unintended Impacts on Unsuspecting Retail Individuals
Entrepreneurs move at the speed of innovation. Sometimes the experimentation & innovation in Bitcoin go bust before they can fully even materialize themselves. One such dual-sided case is the infamous Mt. Gox. Entrepreneurs saw a gap in the market, they serviced the market & grew out of control; moral hazards impeded their operations and thousands of early retail participants are feeling the impact almost a decade later.

As the race to the future continues it will serve of great value to understand which role you want to play.

May Bitcoin bring us freedom 🥂

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