Blockchain Revolution

Breakthrough: Satoshi expected participants to act in their own self-interests. He

understood game theory. He knew that networks without gatekeepers have been vulnerable to Sybil attacks, where nodes forge multiple identities, dilute rights, and depreciate the value of reputation.¹⁶ The integrity of the peer-to-peer network and the reputation of its peers both diminish if you don’t know whether you’re dealing with three parties or one party using three identities. So Satoshi programmed the source code so that, no matter how selfishly people acted, their actions would benefit the

system overall and accrue to their reputations, however they chose to identify themselves. The resource requirements of the consensus mechanism, combined with bitcoins as reward, could compel participants to do the right thing, making them trustworthy in the sense that they were predictable. Sybil attacks would be economically unviable.

Satoshi wrote, “By convention, the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block. This adds an incentive for nodes to support the network.”¹⁷ Bitcoin is an incentive for miners to participate in creating a block and linking it to the previous block. Those who complete a block first get a quantity of bitcoins for their efforts. Satoshi’s protocol rewarded early adopters handsomely with bitcoin: for the first four years, miners received 50 bitcoins (BTC) for each block. Every four years, the reward per block would halve: 25 BTC, 12.5 BTC, and so on. Because they now own bitcoin, they have an incentive to ensure the platform’s long-term success, buying the best equipment to run mining operations, spending energy as efficiently as possible, and maintaining the ledger. Bitcoin is also a claim on the blockchain, not just as an incentive to participate in mining and transacting with others but through ownership in the platform itself.

Distributed user accounts are the most basic element of the cryptographic network infrastructure. By owning and using bitcoin, one is financing the blockchain’s development.

Satoshi chose as the economic set the owners of computing power. This requires these miners to consume a resource external to the network, namely electricity, if they want to participate in the reward system. Every so often, different miners find two equally valid blocks of equal height, and the rest of the miners must choose which block to build on next. They generally pick whichever they think will win rather than building on both, because they’d otherwise have to split their processing power between the forks, and that’s a strategy for losing value. The longest chain represents the greatest amount of work and therefore participants choose it as the canonical state of the blockchain. In contrast, Ethereum chose owners of coin as its economic set.

Ripple and Stellar chose the social network.

The paradox of these consensus schemes is that by acting in one’s self-interest, one is serving the peer-to-peer (P2P) network, and that in turn affects one’s reputation as a member of the economic set. Before blockchain technologies, people couldn’t easily leverage the value of their reputation online. It wasn’t only because of Sybil attacks, where a computer could inhabit multiple roles. Identity is multifaceted, nuanced, and transient. Few people see all sides, let alone the subtleties and the arc of our identity. For different contexts, we have to produce some document or other to attest to some detail of our identity. People “without papers” are confined to collaborating with their social circle. On blockchains like Stellar, that’s an excellent

start, a means of creating a persistent digital presence and establishing reputation that is portable well beyond one’s geographic community.

Another breakthrough to preserve value is the monetary policy programmed into the software. “All money mankind has ever used has been insecure in one way or another,” said Nick Szabo. “This insecurity has been manifested in a wide variety of ways, from counterfeiting to theft, but the most pernicious of which has probably been inflation.”¹⁸ Satoshi capped the supply of bitcoins at 21 million to be issued over time to prevent arbitrary inflation. Given the halving every four years of bitcoins mined in a block and the current rate of mining—six blocks per hour—those 21 million BTC should be in circulation around the year 2140. No hyperinflation or currency devaluation caused by incompetent or corrupt bureaucracies.

Currencies are not the only assets that we can trade on the blockchain. “We’ve only begun to scratch the surface on what’s possible,” said Hill of Blockstream. “We’re still at that 1994 point in terms of applications and protocols that really take advantage of the network and show the world, ‘Here’s what you can do that is totally groundbreaking.’”¹⁹ Hill expects to see different financial instruments, from proof-of- asset authenticity to proof-of-property ownership. He also expects to see bitcoin applications in the Metaverse (a virtual world) where you can convert bitcoin into Kongbucks and hire Hiro Protagonist to hack you some data.²⁰ Or jack yourself into the OASIS (a world of multiple virtual utopias) where you actually do discover the Easter egg, win Halliday’s estate, license OASIS’s virtual positioning rights to Google, and buy a self-driving car to navigate Toronto.²¹

And, of course, there’s the Internet of Things, where we register our devices, assign them an identity (Intel is already doing this), and coordinate payment among them using bitcoin rather than multiple fiat currencies. “You can define all these new business cases that you want to do, and have it interoperate within the network, and use the network infrastructure without having to bootstrap a new blockchain, just for yourself,” said Hill. ²²

Unlike fiat currency, each bitcoin is divisible to eight decimal places. It enables users to combine and split value over time in a single transaction, meaning that an input can have multiple outputs over multiple periods of time, which is far more efficient than a series of transactions. Users can set up smart contracts to meter usage of a service and make tiny fractions of payments at regular intervals.