Theory of Bitcoin: The Bitcoin Whitepaper ‘Title, Author, Abstract’ key takeaways
As I emphasized in my CoinGeek “coming out” piece, it’s important to stay on top of the latest technology and for me, this technology is Bitcoin (BSV) and its blockchain. I set a goal for myself to learn more about Bitcoin this year, and I’ve already finished the BSV Academy Bitcoin Theory course, a challenging, yet incredibly rewarding experience. Everything I hear, see and read about Bitcoin is so much clearer to me now.
In an effort to further understand why Calvin keeps saying Bitcoin SV (as opposed to other blockchains) is a perfect fit for the gaming industry, watching Ryan X. Charles’s “Theory of Bitcoin Whitepaper Series” is next on my list. In this series, Charles goes line by line with the author of the whitepaper, Satoshi Nakamoto aka Dr. Craig Wright, with the first video covering the title, author and abstract of the whitepaper. I will be providing key takeaways from the discussions, including insights into how Bitcoin actually works and how the technology relates back to the gaming space.
Bitcoin is a cash system, not a money system
Bitcoin is a cash system and was not designed to replace banks as a money system. Cash does not replace everything, nor does it become the world’s money.
As Wright defines it, “Cash is something that is purely yours. When you put money into a bank, you no longer have cash at all. What you have is a debt. The bank owes you that money. So your account is actually a debt owed by the bank.”
Despite what many of the Bitcoin proponents might have preached in the early days, Bitcoin was never meant to replace banks, and as Wright points out, banks are actually useful in a number of ways, for example providing loans. He also points out the majority of financing is not done in the banking system anymore, think hedge funds and currency traders.
Banks can be served by Bitcoin
In fact, banks as they exist today can actually be served by Bitcoin. Take these two examples:
So what is the difference between gold and Bitcoin and why is Bitcoin superior? First of all, we know how much Bitcoin there is in total, with gold we do not. Also, Wright, who reveals his past experiences as a statistician and gold auditor, confirms it is an incredibly difficult and expensive process to audit gold. Bitcoin is far more “auditable” than gold as it’s out there in public view, he points out.
Benefits of an electronic payment system
Bitcoin is an electronic payment system that provides benefits to individuals, but also to banking organizations and governments. Bitcoin technology allows for governments to simplify taxation by automating the processes and allows for a level of tracing and analysis even if the transactions are private.
With Bitcoin, you can execute data analysis on the money- where it is, how it is being used. You can “poll” Bitcoin and related assets to determine whether it is moving a lot, or if it is sitting idle. Wright points out how with USD and GBP, for example, no one knows how much is actually being used, how much is sitting in a vault, how much is overseas.
The “peer to peer” in the title does not refer to users
I was shocked when Wright confirmed the “peer to peer” in the whitepaper’s title does not refer to users. This is most certainly a point of confusion for many people, including myself until now.
The reality of it is that users exchanging with users are not truly peer to peer. Rather, the broadcast mechanism between nodes is peer to peer and that’s what the “peer to peer” is referring to in the whitepaper. Bitcoin is a person to person exchange, but not peer to peer as defined in computer science. The term “direct user to user” is more accurate than “peer-to-peer” when referring to the user.
Bitcoin is not a purely peer to peer system
Now that we’ve established the “peer to peer” is in reference to the nodes—get ready for it—Bitcoin is not purely a peer to peer system. This is because a peer to peer system is an ideal that is possible only on a small scale. When Bitcoin started, using the term “peer to peer” was technically correct for the first three years or so, until the network started growing significantly.
Bitcoin can operate as a pure peer to peer system in a small group of 1,000 people trading items of low value. Today it’s defined as a “Mandala network”, a combination with SPV (simplified payment verification) of peer networks, overlay networks and more.
Users can send payments to one and other without the use of a central party, but the nodes act as a distributed entity. It’s important to note that nodes cannot intercept money—they can process it, but they cannot sign it. Nodes don’t hold money for users. Rather than having a central organization that could have problems, i.e. getting attacked, breaking rules until everything collapses, etc., with Bitcoin, you now have a system that is “resilient and self-healing.”
Remember Bitcoin is an economic system, primarily. Generally, an entity won’t be a majority. For example, if 1/3 of the network gets attacked, the remaining 2/3s becomes more profitable, being more profitable attracts node operators back in and so on. If a big node goes bankrupt, no one cares…in fact, the other nodes will invest in more equipment as they will now get more money back from mining.
Nodes who attack the system can be shut down by law
It’s starting to sound like nodes have all the power, right? Well, if you’re a malicious attacker on a peer network, the law is super strict. According to Wright, attacking a peer to peer network is one of the worst things you can do in computers. No malicious node will survive, even if they have majority hashpower and this is because of the law. The law can request the servers get shut down. Not to mention the operational costs required to maintain the longest chain tip, plus the evidence trail. The malicious miner surely will go bankrupt.
Private vs. anonymous
Bitcoin transactions are private, but they are not anonymous. When we first started talking about Bitcoin in the gaming industry around 2012/2013, proponents touted Bitcoin as an anonymous way to fund gambling accounts, something that was frowned upon by governments and regulators. According to Dr. Wright, Bitcoin transactions are actually not anonymous. Bitcoin is, after all, a record keeping system.
Digital signatures in Bitcoin require identity, but a user’s identity doesn’t need to be public. A legal identity is necessary for a signature if you’re buying a house, but there are also use cases for a partial identity. For example, an author who uses a pen name can still get paid…but no one knows who he actually is.
The structure of the network is simple
While the Bitcoin network appears to be incredibly complicated to the average person, in reality, Wright designed the structure of the network in a simplistic manner. The large nodes will always be connected, the smaller nodes (1%) connect to the larger nodes. It’s all built on economic incentives. The bigger nodes don’t need to “watch” the smaller ones. Algorithms are not needed to find the shortest path, natural economic incentives just make it all fall into place.
People misunderstand Bitcoin so much because they want something else
So why is so much of the information out there about Bitcoin contrary to what is stated above? The above is straight from the original Bitcoin whitepaper, so how can it be wrong? Well, it’s not. The answer is simple—anyone who says differently than the above wants Bitcoin to be something else, not the original innovation that Wright outlined so clearly in the whitepaper.
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