The Bitcoin Standard

TL;DR

Chapter 9

What Is Bitcoin Good For?

Store of Value The belief that resources are scarce and limited is a misunderstanding of the nature of scarcity, which is the key concept behind economics.

The absolute quantity of every raw material present in earth is too large for us as human beings to even measure or comprehend, and in no way constitutes a real limit to what we as humans can produce of it. We have barely scratched the surface of the earth in search of the minerals we need, and the more we search, and the deeper we dig, the more resources we find. What constitutes the practical and realistic limit to the quantity of any resource is always the amount of human time that is directed toward producing it, as that is the only real scarce resource (until the creation of Bitcoin).

In his masterful book, The Ultimate Resource, the late economist Julian Simon explains how the only limited resource, and in fact the only thing for which the term resource actually applies, is human time. Each human has a limited time on earth, and that is the only scarcity we deal with as individuals. As a society, our only scarcity is in the total amount of time available to members of a society to produce different goods and services. More of any good can always be produced if human time goes toward it. The real cost of a good, then, is always its opportunity cost in terms of goods forgone to produce it.

In all human history, we have never run out of any single raw material or resource, and the price of virtually all resources is lower today than it was in past points in history, because our technological advancement allows us to produce them at a lower cost in terms of our time. Not only have we not run out of raw materials, the proven reserves that exist of each resource have only increased with time as our consumption has gone up. If resources are to be understood as being finite, then the existing stockpiles would decline with time as we consume more. But even as we are always consuming more, prices continue to drop, and the improvements in technology for finding and excavating resources allows us to find more and more.

Oil, the vital bloodline of modern economies, is the best example as it has fairly reliable statistics.

Mastering Bitcoin

TL;DR

CHAPTER 10

Bitcoin Security

Securing bitcoin is challenging because bitcoin is not an abstract reference to value, like a balance in a bank account. Bitcoin is very much like digital cash or gold. You’ve probably heard the expression “Possession is nine tenths of the law”. Well, in bitcoin, possession is ten tenths of the law. Possession of the keys to unlock the bitcoin, is equivalent to possession of cash or a chunk of precious metal. You can lose it, misplace it, have it stolen or accidentally give the wrong amount to someone. In every one of those cases, the end-user would have no recourse, just as if they dropped cash on a public sidewalk.

However, bitcoin has capabilities that cash, gold and bank accounts do not. A bitcoin wallet, containing your keys, can be backed up like any file. It can be stored in multiple copies, even printed on paper for hard-copy backup. You can’t “backup” cash, gold or bank accounts. Bitcoin is different enough from anything that has come before that we need to think about bitcoin security in a novel way too.

Security principles

The core principle in bitcoin is decentralization and it has important implications for security. A centralized model, such as a traditional bank or payment network, depends on access control and vetting to keep bad actors out of the system. By comparison, a decentralized system like bitcoin pushes the responsibility and control to the end-users.

Since security of the network is based on Proof-of-Work, not access control, the network can be open and no encryption is required for bitcoin traffic. On a traditional payment network, such a credit card system, the “payment” is really open-ended because it contains the user’s private identifier (the credit card number).

After the initial charge, anyone with access to the identifier can “pull” funds and charge the owner again and again. Thus, the payment network has to be secured end-to-end with encryption and must ensure that no eavesdroppers or intermediaries can compromise the payment traffic, in transit or when it is stored (at rest).

If a bad actor gains access to the system, they can compromise current transactions and payment tokens that can be used to create new transactions. Worse, when customer data is compromised, the customers are exposed to identity theft and must take action to prevent fraudulent use of the compromised accounts.

Bitcoin is dramatically different. A bitcoin transaction authorizes only a specific value to a specific recipient and cannot be forged or modified. It does not reveal any private information, such as the identities of the parties and cannot be used to authorize additional payments. Therefore, a bitcoin payment network does not need to be encrypted or protected from eavesdropping. In fact, you can broadcast bitcoin transactions over an open public channel, such as unsecured Wifi or Bluetooth, with no loss of security.

Bitcoin’s decentralized security model puts a lot of power in the hands of the end-users. With that power comes responsibility for maintaining the secrecy of the keys. For most users that is not easy to do, especially on general purpose computing devices, such as Internet-connected smartphones or laptops. Whereas bitcoin’s decentralized model prevents the type of mass compromise seen with credit cards, many end-users are not able to adequately secure their keys and get hacked one by one.

The Book of Satoshi is apparently a convenient guide to what Satoshi Nakamoto wrote over the span of the two years before he disappeared.

The Book of Satoshi

TL;DR

Satoshi makes a reference to the ability of governments to shut down any centralized system. Pure peer-to-peer network systems like the Bitcoin and the Nostr, have been demonstrated to be more resilient.

Satoshi Nakamoto Fri, 07 Nov 2008 09:30:360800 [Lengthy exposition of vulnerability of a system to use-of-force monopolies ellided.] You will not find a solution to political problems in cryptography. Yes, but we can win a major battle in the arms race and gain a new territory of freedom for several years.

Several questions and answers were covered in this post. Hal Finney, the first recipient of a bitcoin transaction, posed the questions. In the first part, Satoshi explains how miners retain transactions until they form them into a block.

In the second, he explains how double spending cannot occur on the Bitcoin Blockchain and how only one blockchain will prevail given that two miners solve their blocks simultaneously.

To the third question, he describes what an attacker would have to do to “rewrite history”, i.e., reconstruct and change the blockchain. To add or remove transactions in prior past blocks would require rewriting them faster than all miners on the network still working on the existing blockchain.