@ Sydney Bright

A shared experience amongst many involved in the Bitcoin industry is that most have moved past the phase where they advocate for Bitcoin and other so-called cryptocurrencies. Eventually, most understand that all so-called cryptocurrencies are illegitimate and that the only legitimate system is Bitcoin. The reason is fundamentally an engineering question; explaining this difference can be challenging in a short conversation. When speaking with clients, friends, and family, I have found that the distinction between Bitcoin and ‘crypto’ is difficult to transmit without an unfortunate touch of blind faith on their part. Furthermore, there are minimal resources for someone to read that can help articulate this understanding. The following is my attempt to remedy this issue.

The subject of cryptocurrencies is shrouded in misleading language and narratives. First, it would be best to describe what Bitcoin is not; Bitcoin is not the invention of blockchain technology. Today, many people who pontificate cryptocurrencies do so under the banner of blockchain technology, allowing for the decentralization of internet infrastructure. Not once does Satoshi Nakamoto use the term ‘blockchain’ in his paper “Bitcoin: A Peer-to-Peer Electronic Cash System”1. Also, Stuart Haber and Scott Stornetta invented the technology in 1991, roughly two decades before the invention of Bitcoin2. The technology was first invented to cryptographically timestamp a digital document as it was changed and edited over time. Why wasn’t Bitcoin invented in the 90s? As of the invention of what is now known as blockchain technology, there was no clear way for a distributed system to agree on the actual state of the system. We could have a distributed and decentralized blockchain database, but how would all the independent nodes agree on the truth? If there are 1000 nodes, each with slightly differing claims on what the blockchain database looks like, how do we reach a consensus on the correct version? Haver and Stornetta could not have answered this question because blockchain technology does not solve this dilemma.

Satoshi Nakamoto solved this problem by fusing blockchain technology with another technology known as proof-of-work, which Adam Back invented. Proof-of-work was first proposed in 1997 and was a way of preventing issues such as email spam by creating a physical and financial cost to computation3. Anyone that knows someone’s email can send them countless spam emails because there is no cost to sending an email. However, by forcing a computer to perform some computations beforehand, the physical costs of sending an email would likely prevent spam. This concept was never implemented, but its conceptualization paved the way for a much better use case. Before moving forward, it is crucial to understand how the invention of Adam Back’s proof-of-work imposed physical and financial costs on computer systems. The following example is how Bitcoin’s proof-of-work system functions. Anyone reading this article should use this link to experience an online SHA-256 hashing calculator for themselves. Here, any input results in a 256-bit string of numbers and letters. Your task is to find the correct input so that the random numbers and letters that result begin with five 0s. Rather than getting a hash that looks something like:

“8e35c2cd3bf6641bdb0e2050b76932cbb2e6034a0ddacc1d9bea82a6ba57f7cf”

It must instead look like:

“000002cd3bf6641bdb0e2050b76932cbb2e6034a0ddacc1d9bea82a6ba57f7cf”

This would take anyone, including a computer, a very long time to guess the correct input. There is no way to speed up this process algorithmically. A computer performing a proof-of-work computation must simply churn through guesses until the correct guess has been found. Therefore, the more complex the guess, the more electricity and financial costs are needed to execute the proof-of-work. This is why it is called ‘proof-of-work’; a computer that has found the correct guess has proved to everyone else that it performed work that has physical consequences in the real world. This is key to understanding Bitcoin.

Again, the various components of Bitcoin, such as blockchain and proof-of-work technology, were not the invention of Satoshi Nakamoto. All Satoshi did was combine them in an elegant way to solve the Byzantine Generals Problem. Imagine a group of generals, each commanding a portion of a Byzantine army, encamped around an enemy city. They need to coordinate their attack or retreat. Still, some generals may be traitors who will send conflicting messages to confuse the loyal generals as they send couriers back and forth to communicate. The problem is to devise a strategy for the loyal generals to reach a consensus despite the presence of possible traitors, ensuring that they either all attack or all retreat at the same time, even if some of the messages they receive are false or misleading. This problem is significant in distributed computing and consensus algorithms, where nodes in a network need to agree on a shared state despite the possibility of faulty or malicious nodes. To solve this problem in Bitcoin, Satoshi designed a system clearly stating that the longest blockchain was the valid chain. Proof-of-work computations are required to add a block to the chain, so the longest chain had the most energy backing it.

The idea that the longest chain has the most energy backing it may initially seem inconsequential. However, as the system develops, the chain becomes longer and longer, with more and more energy backing it. The only way to alter, or hack, the chain in any way that changes what happened in the past is to individually come up with the total equivalent amount of energy ever expended into the system by everyone else. A single bad actor must outcompete the entire global community’s effort starting from the first block 2009. It is a game theoretical setup where the time and energy used to hack the system potentially would be more beneficial, from a cost and benefit point of view, to simply contribute to the same chain everyone else is working with. Satoshi Nakamoto fused the computer system with the earth’s energy to solve the Byzantine Generals Problem, which plagued distributed computer network systems. The energy from the earth is what we trust to ensure we are all working with, and can come to a consensus about, the same set of information.

The property Bitcoin has of being backed by nature as its source of truth allows it to be a valid candidate as money. Understanding the history of money will also help us understand the engineering flaws among the so-called ‘cryptocurrencies. Money can be considered a ledger or recording device that tracks transactions or exchanges of human beings across time. Imagine two separate tribes, where one tribe will have a more bountiful hunting game during the summer and the other during the winter. The two tribes would benefit from trade, as each requires the different tribes to share meat during their respective off-season. However, they exist as two tribes where trust is hard to come by. Now, imagine there is some sort of commodity in their immediate environment that is incredibly rare and hard to find. For the sake of argument, let us say this is a seashell. The two tribes could gather and collect enough seashells to create a necklace of seashells. This neckless will represent a token of trust where the neckless is exchanged at each seasonal cycle. During the summer, the chief of Tribe A hands off the necklace to the chief of Tribe B in exchange for Tribe B to give a portion of their hunting game to Tribe A to feed them for the summer. When winter comes, the chief of tribe B can then pass the necklace back to the chief of tribe A in exchange for meat throughout the winter. This tradeoff occurs cyclically. This system is helpful because not only are they passing in between themselves a token of trust, but if one chief were to die, and the next time a meeting between the two tribes occurs, a new chief approaches the old chief wearing the necklace, the old chief can trust that this new chief is the proper heir because s/he bears the token of seasonal exchange. This allows the chiefs not to trust the individuals themselves but simply trust that the token is legitimate. This token is trustworthy because it is tough to reproduce. Of course, as societies developed, more challenging to find commodities began to dominate trade as the primary form of money.

The key takeaway from the example above is that the two tribes could not trust one another, so they used something from nature backed by energy in the form of the cost to find the seashells and record trustworthy transactions. Gold and silver were no different. Bitcoin has the same properties.

Finally, a comparison between Bitcoin and other so-called ‘cryptocurrencies can begin. First and foremost, there are two distinct families of altcoins: proof-of-work copycats of Bitcoin and proof-of-‘something else’ chains. Many famous altcoins, such as Ethereum, Cardano, or Solana, do not use a proof-of-work consensus mechanism. These systems do not use the energy from the earth to act as an arbiter of trust to solve the Byzantine Generals Problem. Like any human system, if they are not using Mother Earth to act as the source of truth, then a third party is. Humans and human-controlled code are the final judge. This trend also means that most systems have companies overseeing them, which Bitcoin does not. In the case of Ethereum, there is the Ethereum Foundation. The central control over Ethereum has been known to reverse the record of the ledger, something that is practically impossible on Bitcoin.

The DAO hack was a significant event that occurred in 2016 in the world of Ethereum. DAO stands for “Decentralized Autonomous Organization,” it was a complex smart contract on the Ethereum blockchain designed to act as an investor-directed venture capital fund. The idea was to allow people to invest in Ethereum and have a say in what projects the money would be used for, all governed by smart contracts without any central authority. In June 2016, someone found a vulnerability in The DAO’s code, allowing them to siphon off one-third of The DAO’s funds to a subsidiary account. This amounted to about $50 million worth of Ethereum at the time. As a result, the Ethereum community effectively reversed the transaction, by creating a fork in the chain that erased all transactions that happened after the hack. This is something that is unheard of in Bitcoin. The only way this was possible, that the community chose to use a shorter chain, was because the decision was headed by the central authorities that rule over Ethereum.

Without a source of truth outside of humans, there will always be a group of humans who have control. This is why bitcoin is sometimes articulated as a commodity while other altcoins are considered securities. It becomes increasingly unlikely that anyone can change the ledger of Bitcoin, whereas the few at the top hold such control over Ethereum. Anyone with electricity, a computer, and some internet can mine and receive bitcoin. It is permissionless, with very few barriers to entry. This is not the case with Ethereum, which would require someone to find an exchange and use some form of currency to purchase Ethereum. To run a Bitcoin node, the requirements are even less than it is to mine, given the low electricity cost. To run an Ethereum node, one needs to have 32 Ethereum (roughly $96,000 at today’s price). Ethereum is a plutocracy, and ETH is not different than a security issued by that plutocratic elite.

There are, of course, some altcoins that use a proof-of-work system like Bitcoin does. Many altcoins are nearly the same as Bitcoin except with slight changes to the code, which results in a different chain. The critical distinction here is, again, the energy backing the system. Bitcoin’s chain is long and supported by much more energy. Though these other altcoins, such as Bitcoin Cash, Litecoin, and Dogecoin, are similar from an engineering point of view, they lack the security provided by more than a decade of energy being pumped into the network. Storing wealth here would be comparable to putting wealth in a wooden box when an equally valid metal safe is available for use.

Hopefully, it will be apparent that Bitcoin is more of a trust machine than a blockchain machine. It utilizes the physical energy supplied to it to ensure a tamperproof and trustworthy record for all people to use in a permissionless manner. A fan of altcoins may concede and agree that Bitcoin is the only system that is secure and sure to exist long into the future. Therefore, it is the only system capable of using money globally for generations. Nonetheless, many proponents of altcoins, such as Ethereum, will suggest they can be used for other use cases. One may argue that Ethereum’s ‘smart contract’ capabilities will open the door for Web3 use cases that will decentralize the internet and create a net good for society. However, circular logic is involved in this reasoning. The blockchain underneath must be secure and reliable for applications to be built on Ethereum. For it to do so, ETH, the token of Ethereum, would require monetary value.

Bitcoin does not need monetary value for it to work. In fact, in the early days of Bitcoin, there was no price associated with it. This is not the case for systems like Ethereum. The existence of their system relies upon circular logic. Highlighting this flaw in the game theory, or lack thereof, of the fundamental infrastructure of Ethereum explains why no application or wealth placed on the system is safe. When Bitcoin was invented, a node did two things: store the entire blockchain while validating transactions and mine new blocks, which settle transactions every 10 minutes. No permission is required whatsoever to do so. In Ethereum, for example, there is no mining. They use a system called proof-of-stake. In Bitcoin, electricity is expended to produce blocks, and bitcoin is received as a reward. In Ethereum, for someone to be given the right to create a new block and receive ETH, they need to have 32 ETH already. Once someone can acquire 32 ETH, which can only be obtained by buying someone else’s ETH, they can freeze their ETH into a staking pool, which allows them to participate in the block creation and reward process. In Bitcoin, the pure randomness of nature decides who will mine the block and receive the reward. In Ethereum, pools are probabilistically chosen based on who has the most ETH by code alone. Those with the most ETH are more likely to be rewarded, meaning they will be more likely to earn more in the future. The rich will get richer. It is an inherently centralizing force, and this flaw in proof-of-stake systems is well known. However, none of this explains quite why the game theory of Ethereum staking doesn’t even work in the long-term.

Many in the ‘crypto’ world propose that Bitcoin is money and an actual store of value, while Ethereum will act as this new layer of internet infrastructure. Let us assume this is true momentarily and imagine a world where this is the case. For Ethereum to work, there needs to be people who operate the Ethereum pools. They will have operating expenses, mainly paying a cloud service provider to host their node. Of course, they must have also purchased 32 ETH. Their profitability relies upon the income generated from individuals using the Ethereum network. A network fee is paid whenever someone executes any function on Ethereum. These network, or gas, fees are then paid to the staking pool operators. Now, imagine a world where Bitcoin is money. Everyone holds bitcoin as their savings, their salaries are paid in bitcoin, and they buy their coffee with bitcoin. Bitcoin is increasing in value relative to goods and services as a proper sound money that is not being debased. However, whenever they want to execute a ‘smart contract’ on the internet, they must convert their money (bitcoin) into ETH to pay the gas fee.

Imagine if every time you wanted to send an email, you had to purchase an email token first. You wouldn’t have a bank account for email tokens; you would buy the email tokens as needed when you sent the email. The asset that appreciates due to its monetary properties is bitcoin; you hold onto bitcoin because it will make you wealthier. With the email token (ETH), you buy it as minimally as needed. Where would you buy the ETH from? The staking pools, of course. Staking pools are the central custodians and largest owners of ETH and need to sell ETH to pay their operating expenses. Now let us put this fully into the picture: a staking pool’s business is to operate a server where they have invested an incredible amount of money into it, only to act as a kind of exchange that sells ETH tokens to users as needed when they want to use Ethereum, only to receive that ETH back once the customers have used the network.

Everyone is playing a game of hot potatoes, trying to use ETH tokens as soon as they purchase them because they are losing value in comparison to their money. At the same time, staking pools are sitting on all the ETH that no one wants beyond a short period. Their business is only profitable if the value of the ETH they receive as rewards can outperform their operating costs. Over time, only a few staking pools will exist as they compete. This system leads to an incredibly centralized database where a few operators have control over this blockchain, which is only being used because it was claimed to be a decentralized and immutable trustworthy system. ETH only has value if people trust the blockchain to store their data, information, or wealth securely. If the system starts to look centralized and untrustworthy, demand for the product erodes. This slow revelation of the false claim of decentralization will lead to further devaluation of the token in terms of bitcoin, and node operators will cease doing business as there will be more profitable ventures elsewhere, where their assets are denominated in BTC rather than ETH. The system will crumble because it was not designed with the correct game theoretical engineering principles.

Hopefully, this article has helped articulate in a small way the clear distinction between Bitcoin and all the other falsely mimicking systems. These so-called ‘cryptocurrencies’ claim to be decentralized and immutable systems, relying upon the narrative surrounding Bitcoin while being utterly different from an engineering point of view and ultimately failing to be anything decentralized and, therefore, trustworthy. To make a blockchain system decentralized, there must be a genuinely neutral arbiter of truth. There is only one such judge: Mother Earth. With such a disruptive innovation as Bitcoin entering the market, it is understandable that such a considerable misunderstanding has led to the promotion and growth of fraudulent blockchain systems. As we move forward in this ever-changing world, we must help protect each other’s wealth with integrity and honesty.

References

1. Nakamoto S. Bitcoin: A Peer-to-Peer Electronic Cash System. Published online 2008. Accessed November 16, 2021. http://www.bitcoin.org

2. Haber S, Stornetta WS. How to Time-Stamp a Digital Document. Vol 537. Springer-Verlag; 1991.

3. Back A. Hashcash-A Denial of Service Counter-Measure.; 2002. https://www.researchgate.net/publication/2482110