The following is an excerpt from the book The Layman’s Guide to Bitcoin by Logan Brutsche.
People often ask what they can use Bitcoin for. For most people, today, the answer is “not very much”. But today’s utility isn’t what has drawn in its proponents, and it’s not enough to explain its growing momentum.
So what makes Bitcoin so special? Below are 10 of the boldest claims of Bitcoin.
1. Bitcoin is Trustless
Every Bitcoin transaction is processed and stored forever on the Bitcoin blockchain, a decentralized database that is completely transparent and self-validating. What this means is that any transaction in this history can be examined by anyone, and includes a cryptographic signature that is mathematically impossible to forge and independently verifiable by any computer. Further, each transaction references the coins’ previous transaction, which itself can be validated and traced back again, all the way to the beginning of Bitcoin’s history.
Together, these characteristics allow any computer or user to independently verify the entire history of Bitcoin for themselves—no trust required. In fact, when you run the Bitcoin software for the first time, this is exactly what happens, in a process known as syncing: First, your Bitcoin client downloads the entire blockchain from other nodes piece by piece; second, it tracks and validates all balances and transactions on the blockchain from the beginning of Bitcoin’s history; and finally, it arrives at an independently verified current state and list of balances.
So when you run Bitcoin for the first time and it syncs, the balance displayed wasn’t just fetched from some bank-like server somewhere. Rather, this balance was independently validated and calculated, starting from the very beginning of Bitcoin’s history.
Because this is done without trusting any server, person, or organization as a central source of truth, it’s called a trustless process. The protocol and the network (and your Bitcoin client when syncing) do not rely on trust in any step of the process, and instead discover and calculate the state of bitcoin balances, through cryptographic proof and double-checking every single piece of the blockchain’s history.
2. Open Innovation and Access
A lot of the excitement around Bitcoin comes from the idea of “innovation-at-the-edges”, a concept that continues to play a huge role in shaping the Internet. It means that any developer has low-level access to the system, and can add on their own innovations. These additions can’t break the basic rules of the system, but otherwise they have unlimited power to redirect the basic capabilities into any useful application a developer can dream up and develop.
For the Internet, these have been things like websites, game servers, and social media platforms. These tools and applications took some time to begin appearing, even after the Internet was fully capable of supporting them. For cryptocurrencies, we are only now beginning to see these new augmentations, and they are still in their early stages. Similar to how the Internet began doing things that could no longer be described as simply “electronic mail”, cryptocurrencies are beginning to support new services or financial instruments that would be impossible to implement on the old financial infrastructure,
In both the Internet and Bitcoin, a lot of these augmentations “stack” on top of each other, such that later innovations can harness the utility provided by earlier ones. This leads to a sense of open collaboration rarely seen in other industries, where competing companies often find it in their interests to work on common infrastructure.
Another, related benefit is that user access to the Bitcoin infrastructure (and often the systems built on top of it) is available to anyone with Internet access. This is a huge advantage over the existing banking system, in which a wealthy American stock trader has far more financial tools at his disposal than a poor Cambodian rice farmer without banking access. The former could secure a loan for even semi-plausible uses with ease, but the latter would face numerous significant hurdles in doing so, almost regardless of the individual’s reputation or the proposed venture.
We can compare this to how the Internet changed information-related freedom: to spread a message beyond your inner circle of friends before the Internet, you’d needed access to a radio/TV station or a printing press, but today, one just needs to sign up for a free WordPress blog.
Bitcoin’s proponents don’t expect it to end economic inequality, but it could provide a level playing field at the infrastructure level. Systems built on top of Bitcoin operate in this geopolitical-agnostic context. Many third-world citizens could have greater access to the global economy and economic tools as a result, as the ecosystem matures and its tools are refined.
3. Bitcoin is Indestructible
Bitcoin’s decentralized structure means that to destroy Bitcoin, one must destroy every single node of the Bitcoin network. This is similar to how destroying the Internet would require destroying countless numbers of servers, both tiny and huge, around the world.
If even one copy of the Bitcoin software survives, along with one copy of the blockchain, the network can immediately be reborn with all recorded transactions preserved. Other Bitcoin users can join this new network and verify for themselves that the blockchain is genuine and hasn’t been meddled with because of its trustless nature, and Bitcoin would resume as if nothing had happened.
Practically speaking, destroying Bitcoin would be about as difficult as destroying every copy of the Anarchist’s Cookbook or some popular YouTube video that’s been online for more than a few minutes. When popular data is shared, it becomes decentralized, in that complete copies exist in many different places. This is what makes popular information so difficult to destroy. This force, combined with the blockchain’s trustless nature, virtually guarantees that Bitcoin and its history can never be destroyed as long as it has any number of users.
4. Bitcoin is Immutable
Once a transaction is broadcast, it takes an average of ten minutes to be “confirmed” in a “block” and added to the blockchain. At this point, the security is good enough for the vast majority of use-cases. As more time passes, the transaction is “buried” further, and after a few blocks the transaction becomes irreversible. There is no person or organization in a position to reverse the payment. In this way it’s more like a cash payment than a credit card payment.
Credit card transactions, in contrast, are reversible. The banking system uses this characteristic to reverse fraudulent charges, but there is a drawback to reversible payments. Reversing a payment must always involve a subjective judgment on what counts as fraud in the first place, and can expose merchants to uncertainty as to whether any given payment they receive might be reversed.
By taking a stricter, “no undo” approach at the protocol level, Bitcoin offers a simpler and more dependable system. Developers and entrepreneurs are still free to implement their own refund policies by simply sending the money back themselves. By leaving the detection and reversal of fraud out of the infrastructure layer, both types of services—those that offer refunds and those that don’t—can be built on the system.
5. Bitcoin is Unhackable
Of all of these bold claims, “unhackable” is generally the hardest for people to believe. To explain this, we’ll first need to define what it means to “hack into” a system, then talk about what that means when applied to a decentralized system like the Internet or Bitcoin.
We should first make a distinction between hacking and theft. If you hold bitcoins on your phone and your phone is stolen, that’s theft. We can’t say that Bitcoin is “unstealable” in the same way that we can say it’s “unhackable” (although with techniques like encryption and backups, it can be made much more difficult to steal than cash or credit cards).
When we say someone is trying to “hack into” a system, we mean that they are trying to break the rules of a system or gain control of it. In the case of Bitcoin, the hacker’s aim might be to create money from nothing, spend coins he didn’t receive, or otherwise break some protocol rule—whether for his own gain or just for fun.
When people believe that “anything can be hacked”, they are almost right. Any element in a system could theoretically have some security vulnerability, and an attacker might use this vulnerability to gain control over it. With a centralized system, if the central component has such a vulnerability, then so does the entire system—because the central component controls the system. If a hacker can compromise the central component, the entire system is at his mercy.
But the game is different with decentralized systems. You can’t hack “the Internet” at large, because there is no “server of the Internet” to target in the first place. An attacker could hack into Google, Amazon, or World of Warcraft—but none of these hacks would actually allow the hacker to control the entire Internet. We could say that while the individual nodes or components of the Internet are hackable, the Internet as a whole is unhackable.
Bitcoin is unhackable in the same way that the Internet is—both are decentralized networks, and while the nodes of each might be targeted, such attacks will never provide the attacker with control over the greater system. Just like how Google can easily protect their data even while Sony is being hacked, so too can a Bitcoin user protect their money while another user’s computer or phone is hacked due to their own poor security practices.
A hacked node that breaks protocol rules is simply ignored by its peers, because each node double-checks everything and trusts no other node. To the Bitcoin network, there’s no difference between a node that’s been hacked, a node trying to cheat, and a node that’s simply wrong. All are considered invalid and ignored.
A metaphor of a chess game can be useful here. Imagine playing a chess match at a famous championship. If one player tried to cheat, it would be immediately obvious to all viewers, because the rules are rather simple and everyone will notice an invalid move. During such a tournament, a cheating move could never have any effect on the “real game”, because the game will not continue if anyone cheats.
The Bitcoin network nodes watch each other just like viewers and participants would watch the chess game, and will detect any cheating, because they double-check everything and they all know the rules. If a node tries to operate by different rules or make up money, its peers will detect this easily and just ignore the cheating node—the node would have no effect on the “real game” of Bitcoin transactions.
Of course, if you store BTC on your phone or computer and it gets stolen, and you didn’t back up the data or protect it with a strong enough encryption password, your BTC will be stolen—just like cash in a stolen wallet. The same is true if you allow some company to hold your BTC and they lose it. But that will have been caused by in-house ineptitude, fraud, or inadequate security practices, not a vulnerability of Bitcoin system itself.
(Bitcoin’s decentralized nature is part of the reason it can be called “unhackable”, but the skeptical reader will likely not yet be satisfied. Logan’s book provides a more detailed illustration of how Bitcoin can be impenetrable to such a degree.)
For now, if you want proof beyond the theory, consider this: there are Bitcoin addresses that hold millions of dollars worth of BTC, but haven’t moved for years—even though all a hacker would need to claim the money is the right password.
6. No Arbitrary Inflation
A characteristic of all sovereign currencies is that more can be (and regularly is) created at any point by their respective governments. The introduction of this new money, known as inflation, deflates the value of the old money, which is why the costs of goods and services generally go up with time. In less developed countries with less responsible governments, the rate of inflation shrinks its citizens’ wealth at an incredible pace to inject the newly created wealth into favored groups or programs, but this inflationary process is at work in every modern sovereign currency, to some degree.
Bitcoin cannot be manipulated in this manner. A limit of 21,000,000 BTC is hard-coded into the Bitcoin protocol—a node trying to create new BTC will have no way to explain where they came from. Again, the network will simply ignore this invalid behavior.
To inflate the currency, the community would have to come to consensus on such a protocol change through a hard fork. Because such a change would directly devalue all existing BTC, it’s highly unlikely the community of bitcoin holders would agree to such a change. (editor’s note: this was written before the BCH hard fork)
7. Immune to Censorship
Bitcoin’s immunity to censorship is a direct consequence of its decentralized structure. As discussed earlier, preventing two users on a decentralized network from communicating (or in Bitcoin’s case, sending money) would require either taking down every single node, or completely blocking the sender from the network.
Even a brief connection to any node allows the sender to broadcast his transaction, and at that point it will spread like a rumor, beyond the control of any single person or group to smother it. About ten minutes after the broadcast, it will become cemented in the blockchain—a copy of which exists on every Bitcoin node.
In a centralized system, the central component is the only way a message can travel between users. This gives the central component complete responsibility for delivering any given message, as well as the power to block all communication between these users on its network.
But in a decentralized network, there are many routes available to a message and many places that the message is stored. The recipient can verify the payment anytime after it’s been broadcast: all he has to do is connect to any node long enough to receive a full copy of the blockchain.
8. Immune to External Governance
When describing the nature of Bitcoin, people often bring up the possibility of the government forcing this or that change onto the system. But to do this, there would need to be some centralized point within Bitcoin that could be pressured or forced, which in turn would impose the change on the entire system. Because Bitcoin is decentralized, there is no such point. There is no way to impose tax on transactions, enforce trade restrictions like embargoes or tariffs, inflate the currency, or enforce any other top-down dictate onto Bitcoin.
This is the same reason pirating through the torrent network is not only still possible, but easy and common, even though it’s blatantly illegal. There is no “torrent server” to pressure or shut down.
Of course, people are occasionally prosecuted for pirating via torrents, and torrent library sites are sometimes shut down, because the people and systems that interact with the decentralized system can be targeted. The same is true with Bitcoin: users of Bitcoin can be governed even if the system itself can’t be.
Still, the system itself can’t be directly governed, and an ungovernable money system is a new development that changes the dynamic between the government and the governed significantly. Organizations like Wikileaks accept donations in Bitcoin because it can’t be blocked, hidden sites called “darknet markets” offer illegal items like drugs and weapons for bitcoin (more on this in 1.9.1), and tax potentially becomes much more difficult to enforce.
9. Protocol Changes Only by Community Consensus
This is perhaps the most complex and nuanced of Bitcoin’s claims, even to the point that the cryptocurrency community is still discovering its implications. To simplify it greatly for now, if most of the Bitcoin community agrees on any change to the protocol, the network undergoes a process called a hard fork to implement the change. In fact, this has already happened several times in Bitcoin’s history, and is considered a positive and necessary evolution that should never completely stop.
Because there’s no central server of Bitcoin, only the nodes themselves can initiate and implement any change to their shared protocol. Just as Bitcoin is immune from censorship and governance from outside the system, no one user on the inside of the system, no matter how powerful or good-intentioned, can enforce any change. They can only propose a change and try to persuade a majority of the community to support it.
10. Bitcoin is Antifragile
Something antifragile benefits from exposure to attacks and “rough handling”. For example, we might call an animal’s body “antifragile”, since exposure to sickness or hardship sometimes allows the body to prepare specialized defenses, like callouses or stronger bones and muscles, in response.
Bitcoin is antifragile because it undergoes regular hard forks in response to any bug or exploit revealed—in this way it “learns” from attacks just like our immune system does. Unlike physical bodies, Bitcoin can be reborn if it’s taken down, which gives it an even stronger claim of antifragility.
If an extremely severe bug is exploited or some unprecedented attack occurs—for example, if users’ funds are stolen or new BTC is created out of thin air—a hard fork can roll back Bitcoin’s history, restore the network to a point before the disruption (or simply reverse the invalid aspects), and implement agreed-upon protocol changes. Bitcoin would then continue on with an improved set of rules and a cleaned up history.
This article has been an excerpt from Logan Brutsche’s excellent book, The Layman’s Guide To Bitcoin. Buy it here on Amazon.