Featured Quick Take
Bitcoin’s innovations are centered on extensiveness (decentralization), incentivized honesty, and public verifiability
Challenges and Opportunities for Bitcoin
Looking forward to the day when Bitcoin can integrate the zk-STARK technology through a soft fork
Bitcoin means different things to different people. I’d like to share what bitcoin means to me and explain what I think is the core innovation of Satoshi Nakamoto. First, I want to make it clear that the true essence of Bitcoin’s innovation does not lie in cryptography, the Internet, or computer technology. These emerging technologies are merely means to an end. What Satoshi Nakamoto is really revolutionizing is one of humanity’s most important inventions: social structure.
Social structure requires integrity and consensus
“Integrity: doing the right thing even when no one is watching.”
— C.S. Lewis
When it comes to social structure, friendships, cultural traditions, or today’s popular social media may come to mind. However, it is often overlooked that money is also a social structure. In fact, the very nature of money is social structure.
Money is a system that carries great value, and the existence of that value is entirely dependent on all people agreeing that money should ‘work like money’. Therefore, to understand the nature of money as a social structure, we need to be clear about two issues: what it means for money to “work like money” and why it needs to be agreed upon by everyone.
There are some basic expectations about money: you can’t print unlimited amounts of money at will; your holdings don’t disappear or increase for no reason; you’re free to use your own money, and so on. These characteristics constitute what I call the inherent
integrity of money. In other words, the nature of money is such that even if you don’t monitor it all the time, it will still work as you expect it to.
However, the inherent integrity of money is only one aspect. On the other hand, money needs credibility (i.e., perceived integrity), which means that there must be a broad consensus in society about its integrity, or else it won’t hold its value. For example, if there is a rumor in the community that the government will force banks to freeze their assets, this will seriously undermine the credibility of the currency. Even if the rumor is false, the currency may begin to depreciate.
In short, the value of a currency depends on both its intrinsic integrity and its credibility. Any structure whose value is based solely on intrinsic integrity and credibility is a social structure. And money is one of the most surviving and influential forms of social structure (other forms will be discussed at the end of this article).
Human society has been constantly inventing and redefining money. In the simplest way, a homogenized and scarce physical resource is selected by society to serve as money. In my elementary school days, that physical resource was gum wrappers. In prisons, cigarettes were currency; in some societies, it was shells, salt and stones; and for millennia, until the eve of modern times, the role of money was played by gold. Today, however, money is mostly digitized, its scarcity depends on the state’s endorsement, and the management of this resource is entrusted to a few specific companies (i.e. banks). To a large extent, the value of money depends on how much we trust the integrity of the state and its mechanisms that run that monetary system.
Bitcoin is a completely new way of realizing the social structure of money. Its innovation is not so much in its use of computer and Internet technology, but in how it uses the Internet to realize the social structure of money. Specifically, Bitcoin follows three unprecedented principles: (1) extensiveness (i.e., decentralization), (2) incentivized integrity, and (3) public verifiability. We will explain each of these principles next.
Extensiveness (decentralization)
Bitcoin is defined by a protocol, which is a set of programs run in conjunction with a multitude of computers connected via the Internet. Traditional currencies also rely on protocols (e.g., the
SWIFT
system), but Bitcoin differs in that its protocol invites all people to participate as equals in the operation of the system. Each of us is free to download the open-source software that defines a Bitcoin miner, participate in the creation of new blocks through our own computers, and update the status of the Bitcoin ledger (i.e., who owns how many Bitcoins). Furthermore, widespread participation is not just out of convenience; the security, integrity, and value of Bitcoin is directly related to the breadth of nodes it operates on. The more people who participate in mining, the more secure the Bitcoin network becomes, and the more the public trusts its integrity.
Imagine a world in which banks offer equity (shares in the bank) or income (a portion of the bank’s fees) in return to an extensive and open network of operators; and in which the state opens up participation in the operation of the national monetary system to its citizens and rewards them for their contributions with newly issued currency. I believe that this is a superior and more democratic way of operating a national currency. I believe that countries that adopt this higher standard will have more autonomous citizens and more vibrant and free societies. Perhaps one day, inspired by Satoshi Nakamoto’s invention of ‘Bitcoin’, nations will move towards this more desirable system. But at least today, this is not yet a reality – and if society ever makes this leap, it will be entirely due to Satoshi Nakamoto’s invention.
Public Verifiability
The third and final core part of Satoshi Nakamoto’s innovation is public verifiability. This means that anyone can verify the complete integrity of Bitcoin, including all transactions recorded since the creation of the Genesis block in
2008
. What’s more, verifying all of this doesn’t require a supercomputer, just a laptop! This means that I can verify the latest block of Bitcoin in real time on the same laptop that I’m typing on right now, and participate in this broad and democratic integrity and the social consensus on which it depends. Whenever someone tries to undermine the integrity of Bitcoin (i.e., the integrity of the network), all of us will know about it as well.
Here again, a comparison with traditional payment networks is necessary. In traditional systems, centralized institutions (e.g., banks, credit card companies, etc.) rely on huge computing nodes to process transactions. We ordinary users, on the other hand, do not have any way to directly verify the integrity of the system. Even if we were able to gain some sort of viewing access, the sheer volume of computation could never be done on an ordinary laptop.
Bitcoin’s Innovation – Challenges and Opportunities
Let’s summarize. The innovation of Bitcoin is that it reimplemented the ancient social structure of money in a completely new way. This new realization draws on new technologies such as the Internet and the low-cost computer devices that have become commonplace, but at the heart of its innovation is the idea of basing the social fabric of money on three new principles: pervasiveness, incentivized integrity, and public verifiability.
The Perpetuity of Extensiveness?
Extensibility is the most fragile and worrisome attribute in Bitcoin, and the one that worries me the most. Creating a new Bitcoin block consumes a lot of power or relies on a great deal of luck. Obviously luck is not controllable, so one can only focus on the power problem. It is possible to imagine an anti-utopian future in which the operation of the Bitcoin network
- and in particular the large amount of power consumed to secure the network –
is entirely controlled by a single or a few powerful entities, such as countries or large corporations. This worrisome future is not far-fetched for two reasons: (1) economies of scale may give larger operators the advantage of progressively controlling a larger percentage of the arithmetic power (i.e., bitcoin’s power consumption); and (2) as bitcoin becomes more and more important to our lives and economy, powerful forces such as states and large corporations will inevitably attempt to take control of bitcoin. If this happens, i.e., if Bitcoin mining is controlled by a single entity or a small number of collaborating entities, the consensus around Bitcoin’s integrity will be weakened. These consensuses include, for example, its resistance to censorship, the absence of a barrier to entry, a mintage cap of never exceeding
21 million, and a payment mechanism that does not require additional information to be reported to a centralized institution. Once these core principles are eroded, Bitcoin will lose its value as a result.
Bitcoin’s widespread nature is not naturally guaranteed by Satoshi Nakamoto’s invention. Preserving this character is a constant battle that must be fought by all who care about Bitcoin’s value and mission. Even if extensibility is destined to be short-lived, the spirit of freedom it demonstrates will be a beacon in history, like the short-lived but glorious democracy of ancient Greece, that will continue to illuminate and inspire all those who care about human freedom.
Bitcoin’s Global Scalability
The feature of public verifiability is costly for Bitcoin. In order to ensure that transactions can be verified on common devices, we must limit the amount of computation required to verify bitcoin transactions. It is based on this principle of “public verifiability” that Bitcoin’s processing power is limited to a maximum of approximately
10 transactions per second (10
TPS). This is a significant limitation on Bitcoin’s throughput, and partly explains why so few people in the world use Bitcoin for everyday purchases. Simply put, the current Bitcoin network lacks the bandwidth to support everyone using Bitcoin for everyday transactions. For this to happen, we need a bitcoin network that can handle thousands or even millions of transactions per second.
So we seem to be stuck in a dilemma
Either we stick with the public verifiability of Bitcoin, but are therefore limited by low bandwidth for global use, or we increase the scalability so that everyone can use Bitcoin to buy everyday things, but with that comes a loss of transparency in the transactions, as ordinary devices can no longer easily verify all of the data, and we are once again forced to rely on those powerful centralized institutions. And this is where math and cryptography come in.
The Payment Channel and Lightning Network is a brilliant cryptographic solution that has been used on Bitcoin since
March 2018
. It extends Bitcoin’s throughput capacity to near-infinite levels by allowing both parties to a transaction to settle directly. The situation is somewhat analogous to a grocery store allowing customers to take credit and settle their accounts in one lump sum at the end of the month, except that the entire process requires almost no assumption of trust, with the Bitcoin network itself acting as the arbiter in case one of the parties tries to cheat.
However, there are two main drawbacks to this option:
Financial inefficiency. Both the grocery store and the customer must pre-lock a sum of money at the beginning of the month, and the locked-in amount often needs to be higher than the customer’s monthly spending budget in order for the payment process to go smoothly;
requires constant monitoring. Both parties must keep an eye on the status of their payment channels, and if one party fails to do so in a timely manner, the other may take advantage of the gap to steal funds.
Although a modification to the Bitcoin protocol would be required (i.e., a soft fork), a different and better solution already exists. This is the Bitcoin solution I have dreamed of for over a decade and what drives me to work on the blockchain every day. zk-STARK
protocol was co-invented by me 15
years ago when I was a full-time academic professor of theoretical computer science. This protocol allows all of us to verify all of Bitcoin’s blockchain, and even a million times as much data, on our smartphones without having to trust any of the third parties responsible for processing Bitcoin transactions. This solution completely solves the two major drawbacks of the Lightning Network mentioned earlier. It is capital efficient and no longer requires users to be on their toes. I first introduced this groundbreaking blockchain technology at the
2013 Bitcoin Conference and co-founded StarkWare
in 2018 to drive the technology to the ground practically. Since then, working together with a growing ecosystem of zero-knowledge researchers, we have succeeded in making the zk-STARK
technology the ultimate solution for ethereum scaling. I look forward to the day when Bitcoin can integrate zk-STARK technology through a soft fork, and I’m working with many people in the ecosystem to do just that.
Beyond Currency Bitcoin
Currency is socially constructed to fulfill a specific social function. As a social construct, the value of money relies on two factors: (1) it must operate in good faith; and (2) society generally recognizes its credibility.
Money is perhaps the most typical example of a social structure, but it is by no means the only one. Indeed, there are many other systems, datasets, and programs that serve society equally well and carry great value, all of which are based on a broad social consensus about their credibility. For example, land, property, and automobile registration systems are social structures; electoral and governance processes are social structures; marriage registration systems, social titles, religious titles, and academic titles are equally social structures. Even our personal reputations, such as credit histories and health records, are part of social structures.
Most social structures are administered by monopolistic entities and centralized agencies appointed by national governments or nation-states. This leads to a question I will pose at the end of this article: could these social structures, in a completely new way, be Satoshi Nakamoto’s way? And this approach is founded on the three principles of extensiveness, incentivized honesty, and public verifiability.
