Bitcoin, the Dumb Network – 2 November 2017

More Than a Currency

It’s easy to get caught up in Bitcoin’s price. Bitcoin’s meteoric rise and substantial volatility can grab headlines, but currency is just one application built on top of the Bitcoin protocol. The protocol allows for the transfer of divisible units of Bitcoin over a decentralized, Peer-to-Peer network. Yes, transfer of value is a killer application, but equally important is the fact that transfers of Bitcoin are timestamped and confirmed in a public Blockchain. Using Bitcoin, you’re able to prove that a specific transaction took place at a specific time, and that proof is immutable and indisputable due to Bitcoin’s implementation of emergent consensus and proof-of-work security.

The implications of immutable, indisputable transactions are immense. The Bitcoin blockchain can be used to prove existence of not only transactions, but also records, contracts, titles and more. Bitcoin is a network, Bitcoin is a technology, and Bitcoin is a currency. These three things cannot be separated. The combination of these characteristics will lead to disruptions in commerce, finance, storage, notary services, and other industries. Many smart applications are being built on top on Bitcoin, but Bitcoin is itself a “dumb network”.

Smart Networks vs. Dumb Networks

When building a network, designers have a choice to make. Do they make a dumb network that supports smart devices, or a smart network that supports dumb devices? When people first learn about Bitcoin, they are often quickly overwhelmed by the jargon and implied complexity. In reality, Bitcoin is not a smart network. An example of a smart network is the telephone network. No, not the smartphone in your pocket, but the bulky wired telephone you remember from your parent’s house. The end-user device on the telephone network is as dumb as it gets. A phone is simply a bulky piece of plastic with a speaker, a microphone and a way to enter tones. All of the intelligence of the phone network is contained in the phone company’s switching buildings and with its operators. If a new feature is desired, it has to be added to the network itself, which is controlled by a centralized phone company. Take caller ID for example. This feature had to be built into the phone network and deployed on every company switch. This change incurred maintenance costs, and that cost had to be pushed to subscribers.  These hurdles to innovation resulted in only the most popular and profitable services to be implemented on the phone network.

Utilizing a centralized smart network has some major implications. Not only is it difficult to build new features in from outside of the company, but in some cases it is even illegal. Until 1968, AT&T actively fought against any new devices being added to their network. It wasn’t until the FCC ruled in favor of Carterfone, a company that designed an acoustic coupler device for connecting two-way radios to telephones, that entrepreneurs and small business could begin implementing solutions on the telephone network. Shortly following the Carterfone ruling; answering machines, fax machines, and eventually the modem were invented and implemented on the telephone network.

In contrast, the internet is an example of a dumb network. The internet’s protocol, TCP/IP, simply serves as a vehicle for moving data from one point to another. The protocol does not offer services, make decisions about content, or even distinguish between types of media. Most importantly, the internet does not have an approved list of applications. No single entity controls the internet, and that has allowed for innovators from across the world to build endless solutions without asking permission from a central authority. Centralization stifles innovation. Decentralization and permissionless systems make innovation flourish.

Bitcoin, the Dumb Network

Bitcoin is a dumb network. Bitcoin does not require membership or identification. Bitcoin does not offer applications. Bitcoin uses a very simple scripting language. Bitcoin does not even offer financial services. In fact, the concept of a “balance” isn’t even built into Bitcoin. Wallet software must be built on top of Bitcoin in order to aggregate unspent transactions into a spendable balance. Bitcoin really only offers one service: secure, time-stamped scripted transactions on a peer to peer network. The concept of the network is simple, but the applications that can be built on top of Bitcoin are immense.

Like the internet, Bitcoin treats all users and transactions equally. Bitcoin is not controlled by a central entity, and developers do not need permission to build applications or connect devices to the network. This means that innovations are made at the edge, by the users themselves. Applications do not have to be profitable or popular to be considered for implementation, they simply have to be built. This allows not only for explosive growth in obvious areas (wallets, financial services, etc.) but also in applications that may have not been envisioned or possible to build at the time that Bitcoin was created.

Financial Services

The obvious solutions being built on Bitcoin will disrupt the financial industry. Bitcoin is fast and borderless, making it an ideal mechanism for transferring value, particularly across borders. Bitcoin transactions will disrupt the slow, expensive remittance industry. Remittance apps can be built on top of Bitcoin without the users even realizing that they’re using Bitcoin! Decentralized exchanges are also being built on the Bitcoin protocol. Decentralized exchanges allow for the trading of all types of assets without the need to trust (or pay) a third party exchange. The Bitcoin blockchain can also be used as a settlement layer, with trading taking place on sidechains, eliminating third parties and reducing counterparty risk. Bitcoin will also disrupt the crowdfunding industry. With Bitcoin, users are able to create a fundraiser transaction, where anyone can contribute but the funds can only be claimed if a certain goal is met.

Bitcoin’s scripting language also allows for time locked and condition locked transactions. This allows for automation of trust funds and escrow services. Bitcoin also allows for multi-signature transactions, requiring either a majority of parties (n of n+1 multisig) or all parties (n of n multisigs) to sign transactions. Applications are being built on top of bitcoin to allow for more complex smart contracts, payments that will be made only when certain parameters of a contract are satisfied.

Proof of Existence

All Bitcoin transactions are public; anyone can look up a transaction on a blockchain explorer and confirm the sender and recipient. All Bitcoin transactions are time stamped, proving the exact moment the transaction took place. All Bitcoin transactions are secure. Bitcoin can only be transferred by the owner of the applicable private key, which cannot be faked. Bitcoin transactions are immutable. Within minutes, the world’s largest consensus mechanism (Bitcoin nodes) confirms the state of the network, and the world’s largest source of computing power (Bitcoin miners) cements the history of the blockchain. There is no other network in the world with these features, at this scale. In contrast, bank transactions are hidden from public view, corporate servers are centralized, and competing digital currencies have a tiny fraction of the security (hashpower) of the Bitcoin network.

These fundamental principles of Bitcoin can be used to build some incredible applications. Take government construction contracts as an example. Let’s say that New York City needs a new water main system. They decide to award the renovation contract to the construction company with the lowest bid. The city provides a deadline of January 1^st for sealed bids. Two companies respond. In the current system, the companies deliver sealed paper copies to the City Treasurer. Company A delivers their sealed bid in November and Company B delivers their bid in December. On January 1^st, the City unseals their bids. Company A’s bid is $200 million. Company B comes in at $199 million. What a close bid! Upset with the results, Company A calls the process into question. Company B’s bid was suspiciously close Company A’s bid, and they suspect foul play. Did company B see company A’s bid? Can the seals be trusted? Can the treasurer be trusted?

Bitcoin offers a solution to this problem. Company A could draft up their bid and use a hash function to condense the document into a bunch of letters and numbers. This very specific series of letters and numbers can only be generated by the exact bid that Company A put in, it cannot be faked. In addition, Company A can submit their bid publicly on the Bitcoin blockchain as a hash function without identifying any of their data or trusting the NYC treasury. Their submission can be built into a public, timestamped transaction that the entire public can see. Company A would not be able to edit their bid without affecting the hash value of the bid. Company A cannot edit the transaction without rolling back the history of the Bitcoin blockchain, which would cost hundreds of millions of dollars in computing power and electricity.

Bitcoin can be used to build proof of existence applications for sealed bids, proof of ownership (titles), notary services, and even news content. These applications can be built to operate faster and cheaper than existing solutions in a truly trustless way.

Conclusion

Bitcoin is a dumb network. Bitcoin is relatively simple, and puts the burden of smart applications on the end users. This type of network structure allows for unbounded innovation and permissionless expansion. The fundamental building blocks of Bitcoin are basic, but extremely powerful. Bitcoin is a currency and a store of value, but it is also a worldwide ledger. As the Bitcoin price rises, it attracts more users which strengthens the network’s consensus mechanism. A high price also attracts more miners, increasing the security of the network.