Immutable History and Final Settlement

Not a story with kings, princes, presidents, wars, discoveries or conquests, but a simple story of transactions: in a certain block, some coins that were in one address were sent to another address.

Once new transactions are made and published in a valid block, this new piece of history will forever be recorded and stacked in the nodes that maintain and verify the network. This makes every Bitcoin transaction also a decentralized process of verifying that there is only one true story to be told.

This is quite different in other instances. Imagine that I receive 100 grams of gold in payment for a calf that I sold. In this act, a transaction has been made, but not necessarily a verification. The gold I received may not be gold, it may be yellow painted tungsten.

I can pass on these 100 grams of yellow tungsten thinking it was gold and only after a few transactions does someone decide to verify that it was really gold. An entire history of transactions can retroactively be deemed illegitimate or mistaken because, in the case of gold, not every transaction is a verification process. The error or fraud in the transaction may not be noticed until weeks, months and years later.

This type of problem never occurs with Bitcoin. Every transferred satoshi is a “legitimate” satoshi, because there is no way to transact Bitcoin without all nodes verifying the veracity of the transacted satoshi.

The Bitcoin story is always true and everyone can follow it happening live by running their own node or by simply clicking here or here.

The government currency system is no longer as secure or transparent. I can receive a fake R$100 bill and buy wine with it without knowing I was using a fake bill. Every day courts of law deal with problems of this kind. Scams and mistakes can invalidate entire chains of transactions and we can never say with certainty which story is correct and which transactions were legitimate. You can make a payment one day and years later a judge can overturn it on the grounds of fraud. The legal uncertainty is enormous. At the limit, the judges themselves may suffer strong political pressure to change an understanding already considered “pacified” by the courts, something not very rare in Brazil.

But someone might object: gold and banknotes (paper money) are archaic monetary technologies compared to most of our everyday transactions. Today we use the electronic system of financial institutions to carry out our transactions, which are verified and regulated by the Central Bank. Wouldn't that be a system that works well?

Let's look at the case of PIX, which was recently implemented in Brazil. When I receive a PIX payment, can I say that a payment was actually made and that I own the money I received? Let's see what the new statement from the Central Bank says:

This notice lists the mechanisms by which banks can block their customers' funds and even reverse payments already made. All this is possible because the money you have in the bank is not really yours, and the records they keep about your account are just promises, or, more precisely, credits that you have against a certain financial institution.

If the money is not actually yours, banks may impose conditions on you having access to it. Therefore, they can say the following: ok, you received a payment, so there is a credit of R$ 5 thousand here, but, to release this credit, you must present documents x, y, z, otherwise the resources will be blocked . And, even a week later, everything that was accomplished by the PIX can be undone by the banks using what they called a “special return mechanism”. A system that was implemented to “speed up” bank transfers is becoming increasingly time-consuming, insecure and bureaucratic. That is the fate of any solution built on the fragile foundations of government currency and a system that works on the basis of fractional reserves.

Bitcoin is an asset that belongs solely to the holder of the private keys, very different from the money you have in the bank. When you make a payment via bank transfer, you are actually transferring a credit that you have against a bank to a third person, who now has a credit against another bank. The “money” you think you have there is fractionated to be passed on as a loan to other people. The Central Bank is the institution that tries to bring some order to these chaotic systems where nobody really owns the money and everybody owes everybody else. When something goes wrong, for example, when a bank fails to honor its debts, the Central Bank intervenes as a “lender of last resort”, injecting more liquidity (= creating more money) and diluting purchasing power. of who holds that government currency.

A common criticism of Bitcoin is its alleged delay in confirming new transactions in blocks, which can take around 10 minutes. A criticism that makes sense for certain everyday transactions: waiting 10 minutes to buy a loaf of bread at the bakery is certainly not an unreasonable time.

But this relative delay only applies to on chain transactions and, as every monetary system evolves in layers, the tendency is for the second layers (such as the Lightning Network) to be used for small everyday payments and for on chain transactions to be used for final settlement.

It is Bitcoin's on chain network that, without a doubt, will tell who really owns the coins. Without this absolute certainty, it is impossible to create a strong and reliable monetary system. Every satoshi is where it should be and there is no political authority in the world that can retroactively change its history.

This article was posted on the substack by Guilherme Bandeiras