This blog is the second extract from our eBook, “A Short History of Bitcoin Myths”. You can download your copy here or read other extracts over here:
Part 1: A Short History of Bitcoin Myths
Part 2: The Genesis of Bitcoin
Part 3: Myth I - Crypto Anarchy
Part 9: The Rebirth of Bitcoin
In the introduction to our new eBook “A Short History of Bitcoin Myths”, we promised to unmask and expose the parasites that have gained a hold of the Bitcoin brand name and steered the project in the opposite direction that Satoshi Nakamoto intended.
To establish who the frauds are and to substantiate our claim that Bitcoin was not created for anonymity and secrecy, for getting rich without making any contribution, or for anarchy, we need to start at the beginning.
For this reason, today’s edition of our series, A Short History of Bitcoin Myths, will take a look at:
The Bitcoin whitepaper defines the most well-known and first groundbreaking application of blockchain technology as “A Peer-to-Peer Electronic Cash System… A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
Sounds very dull to a non-techy like me, but wait until you understand how it relates to the socio-economic context of its (and our) time!
On organisational, national and international levels, financial accounting systems are non-transparent and almost impossible to audit with absolute accuracy. In practice, it means that those we entrust with financial record-keeping have plenty of opportunity to enrich themselves at the cost of society.
In recent history, we’ve seen criminal organisations and political groups operate from within the banking system through off-shore channels to fund undemocratic interventions, criminal activities, terrorism and laundering the profits of their illegal businesses.
The 2008 financial crisis was another example of how relatively easy it is to manipulate banking systems for criminal gain at the cost of national welfare.
The crash, in summary, was caused by a number of ‘bad apples’ spread throughout the echelons of major investment and commercial banks across the world. This network of fraudsters set up a scheme that employed predatory lending methods to pump the housing market then glamming up the resulting junk bonds (with the help of reputable credit rating agencies) to sell them on as low-risk securities. The derivatives trading scheme they concocted was so intricate that it bamboozled all but a few.
When the scheme finally crashed, the US government bailed out the banks and let the economy take the fall instead. Hard working, honest citizens paying the price of corporate greed and corruption.
At the end of the same year, Satoshi published the Bitcoin Whitepaper, and in January of 2009, Bitcoin’s Genesis block included this line of text along with the transaction data:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
Although the Bitcoin project is said to not be a direct response to the 2008 financial crisis, the scenario is a repeat on the theme:
As long as accounting systems and ledgers remain obscure, easy to manipulate and difficult to audit, shady characters will be drawn to the opportunity.
Experiments have suggested that the placement of additional lighting or CCTV camera equipment in public spaces could reduce criminal activity merely through its presence. Could the same results hold if a light is shone on accounting ledgers and a permanent recording is made?
Nakamoto Tominaga was a merchant and philosopher that wrote during the Tokugawa period of Japan and taught that “concealment is the beginning of the habit of lying and stealing.”
Craig S Wright, the person behind the Satoshi Nakamoto moniker, explains what it was about this Japanese philosopher that inspired him to create Bitcoin:
“He was an anti-traditionalist, a logician, and an early capitalist in the days of mercantilism. He once said, ‘our age today is one of corruption by liars and robbers. We remain in such an age. Money has been corrupted. We create synthetic systems of synthetic systems designed with nothing more than a goal to move numbers between systems. Money from Main Street to Wall Street and away from where it’s needed.”
Traditional financial systems that rely on the integrity of third-party verification and covert ledgers are a lure for those who itch to get their hands in the cookie jar.
With Bitcoin’s birth, organisations had a better option for the first time: an immutable ledger system that provides a transaction infrastructure that is easy to audit and impossible to manipulate.
"Bitcoin is sunshine. It is the cure for the festering wound that is corruption, be that from government or from criminal groups." Dr Craig S Wright on Medium
Where traditional financial corporations generally exclude the neediest, extort the vulnerable, and abuse their power to censor, Bitcoin’s distributed nature prevents any individual or agency from accumulating enough power to rule the roost.
From the ashes (Satoshi) of the traditional financial system, rose an immutable evidence system to operate (for a start) as a backbone for digital cash: Bitcoin.
NOW FOR THE TECHNICAL PART:
Although several other projects had been experimenting with the concept of digital cash, Bitcoin was the first to figure out how to overcome a complex problem: Double-spending!
If you think about electronic communications, like email or text messages that are sent from one party to another without the involvement of any central verifying body (peer-to-peer), there’s no way to know for sure how many copies of the same data have been created or distributed.
The situation is all good and well if I’m sending you a newsletter by email, but it just would not work if I tried to sell you a one-of-a-kind document, like an original and uncopied digital artwork, or a property deed.
Should I decide to involve a central party to record, verify and update transaction records via their in-house ledger, I’d have to trust in their integrity. I’d have to trust that they won’t be bribed. I’d have to trust that they won’t sell duplicates as a side business.
The moment you involve that trusted central party, you’re back to the dilemma of having nothing more than the word of an organisation run by fallible people, promising that deals being made and recorded in their ledger system is above board.
To pull off a peer-to-peer communications network that transfers sole rights like the ownership of a coin without a third-party, you need a mechanism to ensure that the data in question hadn't been spent or sent somewhere else already.
Satoshi Nakamoto solved the riddle by introducing the concept of a distributed network of actors, miners (or supercomputers) who would verify transactions in chronological order and record the results in an immutable and publically accessible ledger; the blockchain.
Once a data transaction has been processed, the ownership rights are transferred to the receiver who is now the only party who can submit a request to transfer the ownership of the same piece of data to a new owner. Ownership rights are recorded in a time-stamped ledger that is impossible to undo or manipulate without getting caught.
To incentivise miners to act in their role of verifying transactions and securing the network, Satoshi introduced a block reward (a bitcoin prize) for the first of the network miners to successfully solve its Proof-of-Work algorithm. Transaction fees, while negligible for the sender, also get added to the prize pool.
Double spending problem solved!
As network activity increases, so does the total value of the miner reward (set block reward + increased sum of transaction fees) making it more lucrative for new people to use their supercomputers to compete for the prize. As the number of miners grows, the computing power does as well. This boosts the network’s security, but also the potential processing power and speed of operations.
This bit is essential, and you’ll want it to keep it in mind further down the line:
The moment you split the blockchain into various competing blockchain systems, they’re all competing for a limited volume of transactions. As the (globally available) volume is insufficient to sustain them all only one can survive, or they’ll all collapse.
Bitcoin can do many things, but its primary focus is to create an alternative to the shady world of finance we presently have, where dodgy elements within organisations can manipulate ledgers to channel funds into their own pockets.
Bitcoin creates a system for those that seek to earn an honest living - the middle-class working person.
While the Bitcoin infrastructure can be used to transfer monetary value, its immutable ledger is also a breakthrough for securing and transferring other forms of ownership data, like property rights, intellectual property and artistic creations. Paper-based ownership records are easy to destroy and electronic records easy to manipulate, and both are costly to transfer.
One of the most fundamental rights of humans is the right to own and trade property, and the Bitcoin network provides an infrastructure that allows us to fairly generate, protect and dispose of property rights without manipulation or risk of confiscation.
Because of the Bitcoin network’s distributed nature, it prevents any party or organisation from accumulation the power to censor or interfere with communications. The individual who holds the keys to their private wealth, property right or any other data, holds their financial sovereignty safely in their pocket.