What Bitcoin Did

Bitcoin as a computer system just turned 10 years. Satoshi Nakamoto fired off the system by hand-coding the first block in the system, block #0, and the rest is history. However, the history is still short, and we still do not know what impact cryptocurrencies and blockchain technology will have on our society as a whole, or the financial sector in particular.


Guest blog by Svein Ølnes, Vestlandforsking

Bitcoin as a computer system just turned 10 years. Satoshi Nakamoto fired off the system by hand-coding the first block in the system, block #0, and the rest is history. However, the history is still short, and we still do not know what impact cryptocurrencies and blockchain technology will have on our society as a whole or the financial sector in particular.

It is useful to make a comparison with the development of the Internet since blockchain technology is a generative technology establishing an infrastructure for possibly new disruptive applications. It took a decade from the concept of Internet technology to the first popular application in the form of an email. Then a new decade of development led to establishing the current Internet core components of TCP/IP. Fast forward another decade and we had mass uptake of Internet technology with the web. It thus took more than 30 years from outlining the concept to mass adoption was achieved. Another important lesson from the Internet development is that no government would approve it as a global communication standard. It became the standard despite, not because of, governmental policy.

Like most emerging technologies blockchain technology is also subject to a range of misunder­standings and downright false information. We struggle to understand distributed or decentralized systems. Bitcoin’s main innovation was the elimination of the middleman in an online trade, and the Nakamoto Consensus was the brilliant solution. Contrary to common belief, the blockchain structure itself was not the core innovation, but rather an ordinary storage structure. Hash-linked and time-stamped documents had existed for 20 years when Bitcoin was invented.

Another common misunderstanding about Bitcoin is that the energy consumption required for the “proof of work” is to “mint” new bitcoins. The energy use is to secure the overall system and new bitcoins are only payment for the work. The crypto society must bear a lot of responsibility for the misleading “mining” term. It gets very serious when political decisions are made based on these misunderstandings. The recent decision of cutting out cryptocurrency-based computer services from the reduced energy tax is unfortunately based on the false premise of energy being used to mint new crypto-coins.

Bitcoin has no spokesman or council or PR management. That is a good thing, but it is also a problem when information gets distorted and misinterpreted. There is no one in charge of righting the wrong information. Information responsibility is also distributed, like the system itself.

«Bitcoin is a tool for freeing humanity from oligarchs and tyrants, dressed up as a get-rich-quick scheme», says well-known Silicon Valley entrepreneur and writer Naval Ravikant. Unfortunately, the get-rich-quick part has gotten too much attention and pushed the real potential to the background. With decreasing exchange rates and overall value, it is reason to hope that development of both the infrastructure and useful applications will continue with less distraction. MIT Technology Review predicts 2019 as a boring year for cryptocurrencies. And boring is good!

5 replies on “What Bitcoin Did”

As the energy consumption related to bitcoin is high both when you mine for new bitcoins or are processing bitcoin transactions, in its current form a crypto currency like bitcoin will always be problematic. With the focus on climate change and increasing pollution, a product that dramatically increases global energy consumption and by doing this drives global warming and pollution levels upwards, while delivering no tangible benefits for society, cannot expect to get special treatment, rather we would expect the opposite, as has happened in Norway with the exclusion from the reduced energy tax.

As it is, we should look at the exclusion of bitcoin energy consumption from the reduced energy tax as good for bitcoin and other crypto currencies (and the blockchain technology), as this should help to drive a technology change, to move to less energy intensive methods for mining and processing transactions. Of course, for this to really have an impact, we will need other countries to also raise the taxes on cryptocurrencies energy consumption.

I don’t agree that cryptocurrencies should be treated different from other ICT services. Blockchain technology has the potential of becoming an important part of the future Internet infrastructure. It is also debatable that Bitcoin does not deliver any tangible benefits for society. I would argue it holds a great promise for improvement in several sectors.

We can hope for more energy efficient consensus methods than proof of work, and research in this area is important. But today’s situation is that no other method can provide the same level of security as PoW. It is enough to look at Ethereum’s struggle to see that a shift of consensus method is not easy.

I should have said: “delivering no tangible benefits for society TODAY”. I quite agree that the technology behind bitcoin, blockchain, probably will bring very tangible benefits in the future. However, without new and less energy consuming consensus methods than today’s proof of work this will be difficult.
In addition to challenges relating to energy consumption, today’s blockchain technology suffers from a terrible lack of transaction speed. Blockchain cannot hope to compete, or replace for example today’s existing payments solutions without a much more energy efficient and faster proof of work method.

I think the “blockchain, not bitcoin” deserves a separate piece and discussion 😉
Satoshi made a deliberate choice when sacrificing speed/capasity over censorship-resistance and decentralization. One cannot have speed/scalability, security, and decentralization in one solution – that’s the well-known trilemma of blockchain technology.

Bitcoin has chosen to make its blockchain a settlement layer where censorship-resistance and decentralization are the paramount goals, while handling payments on a different layer (Lightning network) that compromises on the two aforementioned properties. That is an architectural choice you can agree on or not (Bitcoin Cash and Bitcoin SV disagree, obviously). I think it is the right choice.

The “blockchain, not bitcoin” debate deserves a special treatment, I think we have to leave it for later..
Satoshi sacrified speed & capacity for censorship-resistance and decentralization. You cannot have all three at the same time, that is the well-known blockchain trilemma.

Bitcoin chose to preserve the main blockchain as a settlement layer where censorship-resistance/security and decentralization is the key parameters. Most payments must be done off-chain in another layer (e.g. Lightning Network). The LN solution is, of course, quite immature as for now, but will probably evolve to be a very important part of Internet payments in the future. Of course, other forks and BC systems have bet on the blockchain as the scaling solution, but I am quite convinced that is a dead end.

Leave a Reply to Tor Cancel reply

Your email address will not be published. Required fields are marked *