Bitcoin and blockchain – definitions and meaning
Someone once said that a story is just data with a soul. I like that analogy, because I think we forget that as humans, we need to transform raw data for it to make sense to us. So, let’s start with some definitions/descriptions, and then get into why it matters.
What is a blockchain?
A blockchain is an immutable data structure that operates in a Byzantine environment. It has the following properties:
It consists of blocks of transactions and other data, each referencing the hash of the blocks that came before it (with the exception of the first block of course, the genesis block). Each transaction in a block has a timestamp to prevent double spending It broadcasts all blocks to all nodes It is slow, expensive, and its scaling cannot outstrip advances in storage and bandwidth (at the first layer) It is usually secured with proof of work (PoW)
What is Bitcoin?
Bitcoin (BTC-USD) is an electronic peer to peer cash system proposed by Satoshi Nakamoto in 2008. It has the following properties:
The software is open source The network is permissionless It uses strong cryptography It includes a distributed ledger known as the blockchain, secured by a network of miners using proof of work, which ensures that effort must be expended to increase the supply of Bitcoins It has a supply cap of 21 million and a predictable issuance schedule that decreases over time until about the year 2140 It resists censorship and ignores national borders It is not issued by a central bank or the government The consensus rules are difficult to change There is no counterparty risk (as far as we know it’s not possible to send someone fake Bitcoin)
Why do the properties of Bitcoin matter?
The reason we went through this exercise is to illustrate a key point. Blockchain is not the technology that powers Bitcoin, it’s just one of the components that makes it unique and interesting.
While it’s true that Bitcoin (OTCQX:GBTC) does need its blockchain, the same can be said about its other parts. To unpack this further, let’s try to remove a single property from Bitcoin (COIN) and see what would happen (some new cryptocurrencies are doing just this in order to solve governance or scaling issues).
What if we removed the decentralized part, so Bitcoin could process thousands of transactions per second like VISA?
If we want to fix the problem that Bitcoin is slow, we could remove the decentralization and just appoint some people that we trust to validate the transactions. Now, we can process thousands of transactions per second, but what have we given up?
Well, now instead of having thousands of people around the world maintaining the ledger, we have only a few and we have to trust them. This creates a new attack vector, and in essence removes “trustless” as a feature (yes I know that Chinese mining manufacturers could slip a backdoor into miners, and yes, the military could show up at every Bitcoin mine and take them over by force so we still have to trust to a certain extent). Essentially, if we remove decentralization, we reintroduce the need to trust a third party, and we’re back to square one, because Bitcoin would no longer be “peer to peer.”
What if the Bitcoin software was hidden away, like that of the banks?
If Bitcoin was not open source, it would be much less robust and trustworthy. Open source projects have a way of growing organically and attract a community of like-minded individuals. If you were to launch your own blockchain project and keep the code a secret, you would be completely insane to think that it was as secure as Bitcoin. Bitcoin is getting attacked constantly, and it has to adapt and just deal with it.
Image Source: Twitter
Having a project that is open source means that all mistakes and triumphs happen in public. Developers act more cautiously when their reputation is on the line. You could take the point of view that the value of the network is a giant bug bounty, in which any hacker who could compromise the system might be able to simply take that value for themselves. Of course, doing this would likely crash the price of Bitcoin, reducing the value of the attackers’ efforts, but surely people will try if they think it might be profitable.
Andreas M. Antonopoulos put it best when he talked about bubble boy and the sewer rat. It boils down to this, if you live in a bubble and it gets popped, you’re in trouble. This is how banking systems and security models based on concentric circles of access and control operate today. As we know, many of the bad actors end up coming from inside the organization itself, invalidating the use of the bubble when the ones we trust on the inside end up acting in a way that we trusted them not to act.
Bitcoin is different. By publishing its software for all to see, making its blockchain open and permissionless; essentially doing the opposite of bubble boy and choosing to live in a sewer. In the sewers of the internet, Bitcoin faces…