Crypto
How Satoshi Nakamoto And Bitcoin Mirror The United States’ Founding Principles
This is an opinion editorial by Buck O Perley, a software engineer at Unchained Capital helping build bitcoin-native financial services.
This is Part Two of a two-part article set that describes crypto-governance and the dangers of faction. Part one can be found here.
What Does All Of This Have To Do With Cryptocurrency?
Most of this discussion so far has been theoretical. A lot of it has been about the nature of humanity and how that should be considered when devising governance schemes. What I’d like to do though is to try and tie this into cryptocurrency as it is presently thought about and implemented (or should be), and I’d like to touch on this in two respects.
The first is how I believe the structure of the Bitcoin ecosystem, including much of its political divisions, reflect the ideas and concerns outlined above by the U.S. founders and other Enlightenment thinkers, and how this is one of its greatest strengths.
Second, I will look at the ongoing block size and hard fork debate that has been raging for the past two years.*
*Editor’s note: Part One of the series details that this article was originally written in 2017.
I make no claims to Bitcoin being a perfect implementation of human governance in code or for being a Bitcoin maximalist. I am simply making a comparison between the two systems and how the parallels lend themselves to Bitcoin’s strengths.
Bitcoin’s Checks And Balances
Comparing Bitcoin to the United State’s system of government is not a new idea, but I think it bears repeating in the context of the philosophy that gave birth to that system as outlined above.
First are the remarkable number of parallels between the contexts in which they came about. Neither was the first attempt at a radically different view of human liberty (non-governmental, digital currencies had been worked on for decades prior to the advent of Bitcoin) and thus reflect many decades of work, research and thought. Both were launched in response to what their respective creators viewed as overreaches of the prevailing systems they would later seek to subvert and both came about in adversarial circumstances such that every contingency had to be taken into account in order to assure their respective survivals.
The Declaration of Independence was an airing of grievances against the crown and a declaration of intention of the colonies for self-governance. Similarly, in Satoshi’s original white paper, the inadequacy of our legacy payment systems are laid out and a proposal for rectification put forward.
Just as the Constitution and Bill of Rights were the realizations of the vision put forward in the Declaration, so too was the open-source reference implementation of Bitcoin the realization of the ideas from the white paper by Nakamoto. In another parallel, neither remained in their original form with both subject to needed change (Amendments for one, Bitcoin Improvement Proposals, or BIPs, for the other).
For the past 20–30 years we have been used to thinking of code as a product. Even open-source projects are often run as if they are proprietary, just with more transparency. Maintainers decide the road maps, choose which changes do and don’t get incorporated, and address (or ignore) the issues of the users at their discretion. Code, like laws, can be changed and as code increasingly comes to take on more of the responsibilities previously handled by laws (read Nick Szabo’s writing on “wet” vs. “hard” code for more on this) it is important to consider how changes can and should be affected.
So how does this work in a distributed network where a code change often isn’t as simple as an automatic upgrade to your iPhone? How do you account for a system meant to take a diversity of opinions and priorities into account, where it’s not clear who has the “right” answer, and how do you coordinate changes where if the network isn’t in unanimous agreement it suffers a split that can cause real financial harm?
Just as the U.S. Founding Fathers devised mechanisms to allow for change in a system absent an absolute ruler, so too did Satoshi Nakamoto take this problem into account:
“The proof-of-work also solves the problem of determining representation in majority decision making. If the majority were based on one-IP-address-one-vote, it could be subverted by anyone able to allocate many IPs. Proof-of-work is essentially one-CPU-one-vote. The majority decision is represented by the longest chain, which has the greatest proof-of-work effort invested in it.”
The analogy would be:
Proprietary code = absolute dictatorship.
Open-source projects for non-distributed systems = parliamentary monarchy.
Decentralized consensus networks (like Bitcoin) = constitutional republic (or popular democracy depending on the implementation).
“If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary.” — James Madison, Federalist No. 51
The Branches Of Governance
The system of checks and balances devised by the founders represented an important mechanism to both enable governance while also inhibiting overreach from any of the competing branches of government.
In Bitcoin, full nodes are those “participants” in the network that contain the full history of the blockchain and the verified unspent transaction outputs (UTXO) set that are needed to verify transactions. Like the executive branch of the U.S. government, it is their job to “faithfully execute” the rules of the underlying protocol and “to the best of [their] Ability, preserve, protect and defend” the network.
Next up is the proof-of-work security provided by miners. While they don’t make the rules, similar to the American judiciary, miners enforce the rules of the network and ensure its continued smooth operation. Without the security brought by miners to the transmission of transactions, the value of the underlying token (e.g., bitcoin) decreases thus decreasing the value of the rewards they receive for bringing the security in the first place. This is a dual incentive relationship that undergirds much of the game theory for most stakeholders in the system.
Finally, we get to the third branch of a constitutional republic — the legislature. Much as in the U.S. system, this has evolved into a two-pronged, and sometimes competing, structure. Playing the role of the House of Representatives are the entrepreneurs, businesses, infrastructure developers (wallets, graphical interfaces) and investors. Like their government counterparts in the U.S., these will tend to be the most “democratic” of the branches representing the widest diversity of viewpoints as they are in more regular and direct contact with everyday users of the currency. Some conflicts may arise in the area of short-term profits versus long-term health of the system, but, overall, businesses both bring long-term viability to the network by providing services such as exchanges, marketplaces, wallets and accessible security and most benefit the more useful the currency becomes in the long term.
The final arm of the legislature in the U.S. system is the Senate, a role played in Bitcoin by the developers. As originally envisioned by the founders, this chamber was meant to be one more step removed from the people than the House of Representatives as they were elected by the state legislatures (until the very misguided 17th Amendment which transitioned to direct popular election of Senators and is likely a large contributor to our present increased partisanship and misguided populist movements). Similarly, developers can be supported by companies in the ecosystem or can contribute from their own free time. Much of their authority comes from their experience in the industry.
A very rough and simplistic diagram of Bitcoin’s governance model.
The incentives of developers, however, are less straightforward than the other “branches.” Value for them is derived from two primary sources — first are any holdings of the cryptocurrency token (bitcoin) which they already hold and will correspondingly be worth more as the utility of the token and demand for it increase and second is the power and influence that comes with being a lead developer for a project worth billions of dollars.
This comes with three areas of asymmetric incentives.
First is that developers are the only economic stakeholders (aside from full nodes which play a purely passive role in the system) that do not earn more of the underlying token that they are supporting. This skews incentives towards incumbents being more conservative (not necessarily a bad thing, especially as it can counterbalance any tendency towards short-termism of businesses) as they benefit from the value of their holdings increasing — something that can be manipulated with the perception of value — rather than increased utility. This can result in its own form of more narrow, short-term thinking.
Second is it incentivizes the crowding out of new developers from entering the space as the bias is towards incumbents. Developers are attracted by interesting projects and welcoming environments and, in fact, more short-term profits can be realized by new developers who move to newer projects where the potential short-term gain from the launch of a new cryptocurrency token is much higher. Incumbent developers meanwhile are incentivized to have their proposals take precedence while also being incentivized to increase complexity which further increases the barrier to entry of competing and newer developers entering the space (thus further increasing the value of their expertise).
The final risk of this incentive scheme is the potential to foster cults of personality. As experience becomes more concentrated and more scarce, there can be a tendency to put trust in the hands of those who we believe are the most altruistic, doing things for the longest time for the good of the system. The problem though, in the words of C.S. Lewis, is:
“Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron’s cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience.”
This comes with the added risk that it makes the “citizens” of that system dangerously complacent towards leaders with whom they agree, and more antagonistic and partisan towards those with whom they disagree, dividing the community further by rewarding and promoting the loudest, and usually more extreme voices (something the U.S. and much of the world is currently experiencing as well).
Again, the lesson of the U.S. founders is that all power must be distrusted, no matter how good the motives. Conversely, differing opinions should be welcome or at least understood to be inevitable and do not necessarily come from malicious motives.
The last piece of this comparison has to do with the mechanisms for change. As outlined earlier, it should be hard to make changes in a governing system. In the words (again) of Calvin Coolidge: “It is much more important to kill bad bills than to pass good ones.” In Bitcoin these mechanisms take two forms — first are forks (both soft and hard forks) for implementing changes and second is the proof-of-work difficulty adjustment for making any contentious change expensive.
The difficulty adjustment essentially acts as Bitcoin’s barrier to overcome for “Constitutional Amendments” (i.e., protocol updates) in order to be passed ( deployed to the network). The way proof-of-work difficulty works as a disincentive is that without a supermajority of mining power and an economic majority backing it, the rate of blocks mined can drop precipitously which means that the rate at which transactions can be confirmed also drops and thus the utility of the coin itself goes down (usually though not necessarily leading to the value also decreasing, which often depends on the motivation behind the fork, i.e., forks viewed as malicious or untrustworthy are less likely to hold higher value). The difficulty for mining new blocks adjusts based on a target of a new block being mined on average every 10 minutes. If there are more computers mining Bitcoin, the cryptographic difficulty goes up in order to maintain this average, and down if miners leave. This “retargeting” only happens every 2,016 blocks though, which means that a fork with a significant minority of hash power could be stuck at hour-long wait times for weeks or even months.
This makes the cost of a fork without significant buy-in from more than one branch of the governance system prohibitively expensive. Several upgrade proposals such as BitcoinXT, Bitcoin Classic and Bitcoin Unlimited had some buy-in by miners (never over 40% though) and very little from the business ecosystem or developers and thus never activated. Segregated Witness was an upgrade deployed on the network by the Bitcoin Core developers in 2016, but, due to a lack of mining support (never much more than 30%) stemming from a distrust some held towards the developers most vocally in support of the change, it went a year without activation. It was finally activated only after some “parliamentary” shenanigans, a compromise between the business community, some developers and miners for a later hard fork in exchange for activation and threats of a “user-activated soft fork” initiated by full nodes on the network which promised to reject blocks from miners not in support.
It wasn’t until Bitcoin Cash forked in August 2017 that a contentious fork was finally executed and sustained a split. Notably though, in order for their fork to survive, they had to change proof-of-work retargeting so that miners would be able to find blocks faster than the default retargeting time would allow. This resulted in some crazy price swings and price manipulations by miners jumping between chains making the chain less reliable and its token less valuable. And even with the change, Bitcoin Cash miners were losing money, hundreds of thousands of dollars by some counts, for the first couple weeks by forgoing mining on the main chain.
Most importantly to me though about the Bitcoin Cash fork is that by making it easier for a minority of miners to break off from the majority of the ecosystem, it is, therefore, easier for those in the future who want to similarly break off (which we now know with the benefit of hindsight is exactly what happened). This makes consensus essentially irrelevant and breaks one of the primary governance mechanisms of Bitcoin.
If it’s hard to fork and prohibitively expensive to impose contentious changes on the network, you are more protected from making bad decisions, more likely to be inclusive of differing opinions and more able to adapt for the long term regardless of whoever is governing in the short term. While forks can be harmful and disruptive to the network, the threat of forks is an important governance mechanism that should be respected and leveraged to make a more universal and inclusive system.
The Risks Of Factions
The final point I’d like to make on all this is an attempt to tie all of the above together with regards to how viciously partisan those in the community have become, seemingly to the point of religious fanaticism. Debating about what Satoshi Nakamoto’s “original vision” for Bitcoin was or that the Real Bitcoin™ is the one supported by some subset of the best known developers completely ignores the quite effective, and frankly proven, governing system that has been put into place.
Reasonable people can disagree while still having the best intentions for the network as a whole at heart. Character assassinations do nothing but divide the community to the point where, when you feel you have nothing left in common, the community decides it’s better off splitting rather than coming to some common ground. It makes no sense to, on the one hand, say that the Real Bitcoin™ will be enforced by the economic majority and then at the same time say you will leave the community and sell all holdings if the economic majority chose a path you did not agree with. Price, utility, public perception and checks and balances that assume disagreement and lack of 100% consensus are demonstrably built into the governance mechanism.
If there is no way to deviate from a path that you may happen to agree with but the economic majority deems harmful to the network, then there is conversely no mechanism to defend against bad actors you do see as harmful. These mechanisms must be objective to the point where your side is equally capable of being a target of them. Anyone who thinks the experiment failed because their side lost is being dogmatic and ultimately leaves themselves open to tyranny. Instead, you should make your case as best you can and, after that, simply trust the system.
If you don’t trust the system, then we’ve already lost.
Jameson Lopp wrote a great article earlier this year on how no one can truly claim to know what the Real Bitcoin™ is. See these tweets that seem to be inspired from said post, “Nobody Understands Bitcoin (And That’s OK).”
Link to embedded Tweet one and two.
One Final Observation:
Satoshi Nakamoto Is Our George Washington
It is often taken for granted today how revolutionary it was at the time for George Washington to step down as the head of the U.S. government. When the news made it to Great Britain, Rufus King quotes King George III as saying that the resignation “placed him in a light the most distinguished of any man living, and that he thought him the greatest character of the age.”
Of course, in Bitcoin, we have experienced a similarly unique phenomenon, when, in 2010, after having been developing and helping to run the live Bitcoin network for two years, Satoshi Nakamoto’s online accounts went black. Not only that, but as the first and only miner on the network, Bitcoin addresses associated with Satoshi have funds that are today worth around $20.5 billion. The most remarkable thing is that these funds haven’t moved since Nakamoto went silent.
It is unclear why Nakamoto left the community or if it was even voluntary since we don’t even know who he/she is (while there are plenty of theories and there have been several “unmaskings,” none have been definitively proven and none have been widely accepted by the community). But what is clear is that like George Washington, Nakamoto left the Bitcoin ecosystem in a very unique circumstance. Just as it was unique for a person who was in a position to grab ultimate power to abstain from grabbing it (as Napoleon later would take power in France), Bitcoin remains the only major cryptocurrency where the creator is not just unknown but retains zero influence over the direction of the community. As outlined above, experienced developers hold an inordinate amount of power over the direction of a cryptocurrency, and none have more experience or influence than the original developers who can affect massive swings in the market with a simple announcement.
Ray Dillinger did one of the first code reviews and security audits of the Bitcoin code back in 2008, and he writes an incredible piece reflecting on how monumental what Satoshi built was and how unique it was that he left. In “If I’d Known What We Were Starting” he writes:
“[T]he Trustless nature of Bitcoin was the main thing that convinced me Satoshi wasn’t scamming. He built a highway with no toll bridge. People could use Bitcoin without creating any obligation to pay him anything ever. He wasn’t selling coins, he was giving them away for solving hashes. He reserved nothing for himself.”
“He wasn’t trying to line his own pockets at the expense of others. In fact I don’t think I’ve ever encountered someone so completely uninterested in personal wealth. You know the old saw about being able to get a lot done if you don’t care who gets the credit? Satoshi doesn’t want the credit. Two years later he walked away and left the pseudonym behind. And hard as this may be to believe, it looks like he doesn’t even want to be paid for it. As far as we can tell he mined approximately a million Bitcoins and has never sold a single one of them.”
Many decry the fractious environment that exists in Bitcoin today, but I would argue that much like how the messiness of political debate in a free society can feel exhausting when compared to the surface efficiency of authoritarian states, to abandon that messiness can also leave you vulnerable to the risks of tyranny itself, even one exercised for our own good. So while being without a uniting “supreme leader” may leave a community at each other’s throats, it is also important to remember that divisions are an opportunity to make us stronger as long as we avoid the temptation to view opposition as an existential threat and retain a sense of common purpose.
“The Mischiefs Of The Spirit Of Party” And “The Duty Of A Wise People”
This was a long essay series. If you made it this far, I commend you and thank you for bearing with me! There’s plenty I tried to address in here and hopefully at least some of it came across coherently enough to add something constructive to the discussion.
Unfortunately, it feels like Enlightenment political philosophy and the lessons of the founding of the U.S. have become increasingly niche areas of interest despite the immeasurable contribution they’ve made towards advancing human liberty across the world. Hopefully I was able to make the case for their relevance today even in as bleeding-edge a space as Bitcoin. In fact, as this technology leads us into a new stage of the evolution of human self-governance, it’s probably more important than ever to look back and reflect on lessons already learned but easily taken for granted.
To close off, I’d like to share George Washington’s remarks from his farewell address on September 17, 1796. In his speech, the first president devoted much time to a farsighted admonition against the dangers of faction and offered a sobering reminder of its consequences. It is a warning that I believe resonates even today and even in the crypto world (and especially in Bitcoin). It presents a strong and enduring indictment against the all too human temptation of putting “party” over principle and the damage this can ultimately inflict on liberty.
“The alternate domination of one faction over another, sharpened by the spirit of revenge, natural to party dissension, which in different ages and countries has perpetrated the most horrid enormities, is itself a frightful despotism. But this leads at length to a more formal and permanent despotism. The disorders and miseries which result gradually incline the minds of men to seek security and repose in the absolute power of an individual; and sooner or later the chief of some prevailing faction, more able or more fortunate than his competitors, turns this disposition to the purposes of his own elevation, on the ruins of Public Liberty.”
“Without looking forward to an extremity of this kind (which nevertheless ought not to be entirely out of sight), the common and continual mischiefs of the spirit of party are sufficient to make it the interest and duty of a wise people to discourage and restrain it.”
None of this is by any means a settled debate but hopefully it can become a more civil one. If you have any thoughts of agreement or contention I’d love to hear your comments and to further the discussion for a better and freer future!
This is a guest post by Buck O Perley. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
El Salvador’s Minister of the Economy Maria Luisa Hayem Brevé submitted a digital assets issuance bill to the country’s legislative assembly, paving the way for the launch of its bitcoin-backed “volcano” bonds.
First announced one year ago today, the pioneering initiative seeks to attract capital and investors to El Salvador. It was revealed at the time the plans to issue $1 billion in bonds on the Liquid Network, a federated Bitcoin sidechain, with the proceedings of the bonds being split between a $500 million direct allocation to bitcoin and an investment of the same amount in building out energy and bitcoin mining infrastructure in the region.
A sidechain is an independent blockchain that runs parallel to another blockchain, allowing for tokens from that blockchain to be used securely in the sidechain while abiding by a different set of rules, performance requirements, and security mechanisms. Liquid is a sidechain of Bitcoin that allows bitcoin to flow between the Liquid and Bitcoin networks with a two-way peg. A representation of bitcoin used in the Liquid network is referred to as L-BTC. Its verifiably equivalent amount of BTC is managed and secured by the network’s members, called functionaries.
“Digital securities law will enable El Salvador to be the financial center of central and south America,” wrote Paolo Ardoino, CTO of cryptocurrency exchange Bitfinex, on Twitter.
Bitfinex is set to be granted a license in order to be able to process and list the bond issuance in El Salvador.
The bonds will pay a 6.5% yield and enable fast-tracked citizenship for investors. The government will share half the additional gains with investors as a Bitcoin Dividend once the original $500 million has been monetized. These dividends will be dispersed annually using Blockstream’s asset management platform.
The act of submitting the bill, which was hinted at earlier this year, kickstarts the first major milestone before the bonds can see the light of day. The next is getting it approved, which is expected to happen before Christmas, a source close to President Nayib Bukele told Bitcoin Magazine. The bill was submitted on November 17 and presented to the country’s Congress today. It is embedded in full below.
This is an opinion editorial by Joakim Book, a Research Fellow at the American Institute for Economic Research, contributor and copy editor for Bitcoin Magazine and a writer on all things money and financial history.
I don’t.
That’s it. That’s the article.
In all sincerity, that is the full message: Just don’t do it. It’s not worth it.
You’re not an excited teenager anymore, in desperate need of bragging credits or trying out your newfound wisdom. You’re not a preaching priestess with lost souls to save right before some imminent arrival of the day of reckoning. We have time.
Instead: just leave people alone. Seriously. They came to Thanksgiving dinner to relax and rejoice with family, laugh, tell stories and zone out for a day — not to be ambushed with what to them will sound like a deranged rant in some obscure topic they couldn’t care less about. Even if it’s the monetary system, which nobody understands anyway.
Get real.
If you’re not convinced of this Dale Carnegie-esque social approach, and you still naively think that your meager words in between bites can change anybody’s view on anything, here are some more serious reasons for why you don’t talk to friends and family about Bitcoin the protocol — but most certainly not bitcoin, the asset:
- Your family and friends don’t want to hear it. Move on.
- For op-sec reasons, you don’t want to draw unnecessary attention to the fact that you probably have a decent bitcoin stack. Hopefully, family and close friends should be safe enough to confide in, but people talk and that gossip can only hurt you.
- People find bitcoin interesting only when they’re ready to; everyone gets the price they deserve. Like Gigi says in “21 Lessons:”
“Bitcoin will be understood by you as soon as you are ready, and I also believe that the first fractions of a bitcoin will find you as soon as you are ready to receive them. In essence, everyone will get ₿itcoin at exactly the right time.”
It’s highly unlikely that your uncle or mother-in-law just happens to be at that stage, just when you’re about to sit down for dinner.
- Unless you can claim youth, old age or extreme poverty, there are very few people who genuinely haven’t heard of bitcoin. That means your evangelizing wouldn’t be preaching to lost, ignorant souls ready to be saved but the tired, huddled and jaded masses who could care less about the discovery that will change their societies more than the internal combustion engine, internet and Big Government combined. Big deal.
- What is the case, however, is that everyone in your prospective audience has already had a couple of touchpoints and rejected bitcoin for this or that standard FUD. It’s a scam; seems weird; it’s dead; let’s trust the central bankers, who have our best interest at heart.
No amount of FUD busting changes that impression, because nobody holds uninformed and fringe convictions for rational reasons, reasons that can be flipped by your enthusiastic arguments in-between wiping off cranberry sauce and grabbing another turkey slice. - It really is bad form to talk about money — and bitcoin is the best money there is. Be classy.
Now, I’m not saying to never ever talk about Bitcoin. We love to talk Bitcoin — that’s why we go to meetups, join Twitter Spaces, write, code, run nodes, listen to podcasts, attend conferences. People there get something about this monetary rebellion and have opted in to be part of it. Your unsuspecting family members have not; ambushing them with the wonders of multisig, the magically fast Lightning transactions or how they too really need to get on this hype train, like, yesterday, is unlikely to go down well.
However, if in the post-dinner lull on the porch someone comes to you one-on-one, whisky in hand and of an inquisitive mind, that’s a very different story. That’s personal rather than public, and it’s without the time constraints that so usually trouble us. It involves clarifying questions or doubts for somebody who is both expressively curious about the topic and available for the talk. That’s rare — cherish it, and nurture it.
Last year I wrote something about the proper role of political conversations in social settings. Since November was also election month, it’s appropriate to cite here:
“Politics, I’m starting to believe, best belongs in the closet — rebranded and brought out for the specific occasion. Or perhaps the bedroom, with those you most trust, love, and respect. Not in public, not with strangers, not with friends, and most certainly not with other people in your community. Purge it from your being as much as you possibly could, and refuse to let political issues invade the areas of our lives that we cherish; politics and political disagreements don’t belong there, and our lives are too important to let them be ruled by (mostly contrived) political disagreements.”
If anything, those words seem more true today than they even did then. And I posit to you that the same applies for bitcoin.
Everyone has some sort of impression or opinion of bitcoin — and most of them are plain wrong. But there’s nothing people love more than a savior in white armor, riding in to dispel their errors about some thing they are freshly out of fucks for. Just like politics, nobody really cares.
Leave them alone. They will find bitcoin in their own time, just like all of us did.
This is a guest post by Joakim Book. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
This is an opinion editorial by Federico Tenga, a long time contributor to Bitcoin projects with experience as start-up founder, consultant and educator.
The term “smart contracts” predates the invention of the blockchain and Bitcoin itself. Its first mention is in a 1994 article by Nick Szabo, who defined smart contracts as a “computerized transaction protocol that executes the terms of a contract.” While by this definition Bitcoin, thanks to its scripting language, supported smart contracts from the very first block, the term was popularized only later by Ethereum promoters, who twisted the original definition as “code that is redundantly executed by all nodes in a global consensus network”
While delegating code execution to a global consensus network has advantages (e.g. it is easy to deploy unowed contracts, such as the popularly automated market makers), this design has one major flaw: lack of scalability (and privacy). If every node in a network must redundantly run the same code, the amount of code that can actually be executed without excessively increasing the cost of running a node (and thus preserving decentralization) remains scarce, meaning that only a small number of contracts can be executed.
But what if we could design a system where the terms of the contract are executed and validated only by the parties involved, rather than by all members of the network? Let us imagine the example of a company that wants to issue shares. Instead of publishing the issuance contract publicly on a global ledger and using that ledger to track all future transfers of ownership, it could simply issue the shares privately and pass to the buyers the right to further transfer them. Then, the right to transfer ownership can be passed on to each new owner as if it were an amendment to the original issuance contract. In this way, each owner can independently verify that the shares he or she received are genuine by reading the original contract and validating that all the history of amendments that moved the shares conform to the rules set forth in the original contract.
This is actually nothing new, it is indeed the same mechanism that was used to transfer property before public registers became popular. In the U.K., for example, it was not compulsory to register a property when its ownership was transferred until the ‘90s. This means that still today over 15% of land in England and Wales is unregistered. If you are buying an unregistered property, instead of checking on a registry if the seller is the true owner, you would have to verify an unbroken chain of ownership going back at least 15 years (a period considered long enough to assume that the seller has sufficient title to the property). In doing so, you must ensure that any transfer of ownership has been carried out correctly and that any mortgages used for previous transactions have been paid off in full. This model has the advantage of improved privacy over ownership, and you do not have to rely on the maintainer of the public land register. On the other hand, it makes the verification of the seller’s ownership much more complicated for the buyer.
Source: Title deed of unregistered real estate propriety
How can the transfer of unregistered properties be improved? First of all, by making it a digitized process. If there is code that can be run by a computer to verify that all the history of ownership transfers is in compliance with the original contract rules, buying and selling becomes much faster and cheaper.
Secondly, to avoid the risk of the seller double-spending their asset, a system of proof of publication must be implemented. For example, we could implement a rule that every transfer of ownership must be committed on a predefined spot of a well-known newspaper (e.g. put the hash of the transfer of ownership in the upper-right corner of the first page of the New York Times). Since you cannot place the hash of a transfer in the same place twice, this prevents double-spending attempts. However, using a famous newspaper for this purpose has some disadvantages:
- You have to buy a lot of newspapers for the verification process. Not very practical.
- Each contract needs its own space in the newspaper. Not very scalable.
- The newspaper editor can easily censor or, even worse, simulate double-spending by putting a random hash in your slot, making any potential buyer of your asset think it has been sold before, and discouraging them from buying it. Not very trustless.
For these reasons, a better place to post proof of ownership transfers needs to be found. And what better option than the Bitcoin blockchain, an already established trusted public ledger with strong incentives to keep it censorship-resistant and decentralized?
If we use Bitcoin, we should not specify a fixed place in the block where the commitment to transfer ownership must occur (e.g. in the first transaction) because, just like with the editor of the New York Times, the miner could mess with it. A better approach is to place the commitment in a predefined Bitcoin transaction, more specifically in a transaction that originates from an unspent transaction output (UTXO) to which the ownership of the asset to be issued is linked. The link between an asset and a bitcoin UTXO can occur either in the contract that issues the asset or in a subsequent transfer of ownership, each time making the target UTXO the controller of the transferred asset. In this way, we have clearly defined where the obligation to transfer ownership should be (i.e in the Bitcoin transaction originating from a particular UTXO). Anyone running a Bitcoin node can independently verify the commitments and neither the miners nor any other entity are able to censor or interfere with the asset transfer in any way.
Since on the Bitcoin blockchain we only publish a commitment of an ownership transfer, not the content of the transfer itself, the seller needs a dedicated communication channel to provide the buyer with all the proofs that the ownership transfer is valid. This could be done in a number of ways, potentially even by printing out the proofs and shipping them with a carrier pigeon, which, while a bit impractical, would still do the job. But the best option to avoid the censorship and privacy violations is establish a direct peer-to-peer encrypted communication, which compared to the pigeons also has the advantage of being easy to integrate with a software to verify the proofs received from the counterparty.
This model just described for client-side validated contracts and ownership transfers is exactly what has been implemented with the RGB protocol. With RGB, it is possible to create a contract that defines rights, assigns them to one or more existing bitcoin UTXO and specifies how their ownership can be transferred. The contract can be created starting from a template, called a “schema,” in which the creator of the contract only adjusts the parameters and ownership rights, as is done with traditional legal contracts. Currently, there are two types of schemas in RGB: one for issuing fungible tokens (RGB20) and a second for issuing collectibles (RGB21), but in the future, more schemas can be developed by anyone in a permissionless fashion without requiring changes at the protocol level.
To use a more practical example, an issuer of fungible assets (e.g. company shares, stablecoins, etc.) can use the RGB20 schema template and create a contract defining how many tokens it will issue, the name of the asset and some additional metadata associated with it. It can then define which bitcoin UTXO has the right to transfer ownership of the created tokens and assign other rights to other UTXOs, such as the right to make a secondary issuance or to renominate the asset. Each client receiving tokens created by this contract will be able to verify the content of the Genesis contract and validate that any transfer of ownership in the history of the token received has complied with the rules set out therein.
So what can we do with RGB in practice today? First and foremost, it enables the issuance and the transfer of tokenized assets with better scalability and privacy compared to any existing alternative. On the privacy side, RGB benefits from the fact that all transfer-related data is kept client-side, so a blockchain observer cannot extract any information about the user’s financial activities (it is not even possible to distinguish a bitcoin transaction containing an RGB commitment from a regular one), moreover, the receiver shares with the sender only blinded UTXO (i. e. the hash of the concatenation between the UTXO in which she wish to receive the assets and a random number) instead of the UTXO itself, so it is not possible for the payer to monitor future activities of the receiver. To further increase the privacy of users, RGB also adopts the bulletproof cryptographic mechanism to hide the amounts in the history of asset transfers, so that even future owners of assets have an obfuscated view of the financial behavior of previous holders.
In terms of scalability, RGB offers some advantages as well. First of all, most of the data is kept off-chain, as the blockchain is only used as a commitment layer, reducing the fees that need to be paid and meaning that each client only validates the transfers it is interested in instead of all the activity of a global network. Since an RGB transfer still requires a Bitcoin transaction, the fee saving may seem minimal, but when you start introducing transaction batching they can quickly become massive. Indeed, it is possible to transfer all the tokens (or, more generally, “rights”) associated with a UTXO towards an arbitrary amount of recipients with a single commitment in a single bitcoin transaction. Let’s assume you are a service provider making payouts to several users at once. With RGB, you can commit in a single Bitcoin transaction thousands of transfers to thousands of users requesting different types of assets, making the marginal cost of each single payout absolutely negligible.
Another fee-saving mechanism for issuers of low value assets is that in RGB the issuance of an asset does not require paying fees. This happens because the creation of an issuance contract does not need to be committed on the blockchain. A contract simply defines to which already existing UTXO the newly issued assets will be allocated to. So if you are an artist interested in creating collectible tokens, you can issue as many as you want for free and then only pay the bitcoin transaction fee when a buyer shows up and requests the token to be assigned to their UTXO.
Furthermore, because RGB is built on top of bitcoin transactions, it is also compatible with the Lightning Network. While it is not yet implemented at the time of writing, it will be possible to create asset-specific Lightning channels and route payments through them, similar to how it works with normal Lightning transactions.
Conclusion
RGB is a groundbreaking innovation that opens up to new use cases using a completely new paradigm, but which tools are available to use it? If you want to experiment with the core of the technology itself, you should directly try out the RGB node. If you want to build applications on top of RGB without having to deep dive into the complexity of the protocol, you can use the rgb-lib library, which provides a simple interface for developers. If you just want to try to issue and transfer assets, you can play with Iris Wallet for Android, whose code is also open source on GitHub. If you just want to learn more about RGB you can check out this list of resources.
This is a guest post by Federico Tenga. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
