Crypto
Lessons To Consider When Building A Decentralized Future
This is an opinion editorial by Buck O Perley, a software engineer at Unchained Capital helping build bitcoin-native financial services.
This is Part One of a two-part article set that describes crypto-governance and the dangers of faction.
Preface
I originally wrote this post in late 2017, after the “Big Blockers” had forked off to start their own chain with Bitcoin Cash and Segwit activation but before anything had been settled with SegWit2x.
While the debates around the technical merits and risks of the various paths forward were interesting on their own I was finding there to be another aspect of the debate that was both underexplored and in my opinion far more consequential: How human beings make decisions while preserving liberty and minimizing the costs of wrong decisions.
Authoritarianism has a universal appeal. It is easy and comfortable to be taken care of, to put your trust in authority. Liberty is risky. It takes work. It also takes humility. There is a hubris inherent in knowing you are right and aiming for a system that makes it as easy as possible for you to get your way. It is much harder to believe you’re right but to understand you might not be and to live in a system with people with whom you might disagree.
This is the problem of governance. This was the problem at the heart of The Blocksize War and is one we continue to grapple with, whether in talking about Taproot activation or what the next upgrade to the network should be. They are also currently being brought to light in the Ethereum community with questions being raised about transaction censorship and decision making around the merge.
Link to embedded Tweet.
This isn’t a new problem either and what I was finding most missing from the discussions at the time, an absence that continues today, is an appreciation for the lessons of those that had spent years thinking of these same problems centuries before us.
There is a tendency humans have for recency bias. We believe humans of the present know better. We are more advanced. We’ve evolved past the issues and limitations of our ancestors.
The fact is that human nature is constant. It doesn’t represent a problem to be solved but rather a reality that must always be grappled with, harnessed, leveraged and restricted. These are the ideas that I wanted to explore.
A Tale of Two Genesis
On July 4, 1776, Thomas Jefferson wrote in the Declaration of Independence:
“When in the Course of human events it becomes necessary for one people to dissolve the political bands which have connected them with another and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature’s God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.”
What launched from this declaration was one of the most radical experiments in popular self-governance in history, and one that has endured for more than 200 years.
In comparison, since the end of the American Revolution, France has undergone two revolutions of their own, and are currently in their fifth iteration of a republic. To the north, it wasn’t until the Canada Act of 1982 that the Crown and British Parliament’s ability to pass laws over Canada finally ended. This is to say nothing of the plague of fascist and communist regimes that beset the world in the 20th Century as further experiments in alternative governance schemes.
The American Revolution was in many ways the first, if imperfect, realization of the theories of the Enlightenment, debated in Europe for nearly a century before, and the Lockean ideals of self-sovereignty, natural rights and private property.
On January 3, 2009, Satoshi Nakamoto wrote what may eventually be looked on as an equally monumental turning point in the story of human self-governance.
000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f
For those not familiar with the inner workings of Bitcoin, the above is a hash of the Genesis Block of the Bitcoin blockchain.
When decoded, there’s a lot of Bitcoin specific information embedded here, but of note is a newspaper headline from that day, encoded into the coinbase of that first block:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
This pointed reference to the greatest financial meltdown in nearly a century (along with the rest of the data in the Genesis Block), is a part of any and all full nodes that run on the Bitcoin network. This data will continue to be propagated by all participants in the network for as long as even a single machine continues to use it (a testament to the permanence of the blockchain’s immutability).
The launch of the Bitcoin network set into motion an unprecedented movement of innovation and wealth creation, an event akin to the launch of the internet, the founding of a new country and the U.S. leaving the gold standard wrapped in one. In the span of a decade, Bitcoin went from a market cap of a hard drive in someone’s garage to being worth hundreds of billions of dollars, spawned hundreds of other cryptocurrencies and blockchains and gave birth to a new, global, decentralized and non-governmental economy valued in the trillions.
While the mining of the Bitcoin Genesis Block may not quite have been the “shot heard round the world” that the American Revolution was, the challenge issued by Nakamoto to the global financial system was no less ambiguous. On the one hand, in the United States’ founding you have not just the first modern attempt at self-governance, but also the first attempt to codify governance and replace a monarch with a system of laws, (negative) rights and constrained government. On the other hand, with the creation of Bitcoin, you have the first attempt to literally write a system of rules governing human interaction into code run on machines, creating the first objective system of governance the world had ever seen. With the Bitcoin network, you don’t have to guess at the code’s intention or try to interpret it. It either runs or it doesn’t. By running the software and opting into the network, you are agreeing to its rules. Don’t like the rules and you’re free to leave … or free to attempt to change them if the correct mechanisms are put into place.
If money is how we transfer and express value within a society, Bitcoin codified an objective rule set governing that society for the first time ever.
Governance! What Is It Good For?
I bring all of this up because the subject of governance has become both a vigorously debated and yet also under-explored aspect within the cryptocurrency ecosystem and I think it bears comparison with the similar debate from centuries earlier among the architects of the U.S. Constitution.
Most contemporary discussions on this topic, both within and without the cryptocurrency world, tend to focus on how to most efficiently make and execute a decision. What often gets overlooked however is the harder question that will actually enable us to create a truly enduring, inclusive and global financial system: in a society with a diversity of opinions and interests, how do you determine what is the “right” decision to execute in the first place?
In much of the conversations on governance, I’ve noticed a lot of hand waving about fairness, the 99% versus the 1%, “democratized” decision making, what “the community” wants, and protections against “special interests.” Questions of whether code is law or what Nakamoto’s “original vision” for Bitcoin was or what constitutes the “real” or “true” version of Bitcoin litter social media and message boards. Arguments that more closely resemble religious fundamentalism or Marxist-Leninist propaganda have become stand-ins for reasoned debate.
New cryptocurrencies have been developed to create “digital commonwealths” and to allow for direct voting on protocol changes. Some people even claim that systems governing human interaction can exist without governance at all. Incredible research is taking place to explore more efficient rule enforcement mechanisms, such as proof-of-stake versus Bitcoin’s proof-of-work, but even these spend more time discussing how to more efficiently punish bad actors than the mechanisms that decide what constitutes a “bad actor” in the first place. This is like debating the most efficient way to put criminals in jail before discussing how to define and decide what makes someone a criminal in the first place.
To say that governance isn’t necessary at all, or that even wanting governance represents a kind of power play, seems to me to naively misunderstand the nature of humanity. Even in a system governed by code, this viewpoint assumes there exist objective, final truths. The problem though is that we all live in our own subjective worlds with subjective values all of varying degrees of validity. Distribution of information isn’t perfect, and distrust among groups is a natural byproduct. Most importantly, no human is infallible.
Further, to believe no governance is necessary is to ignore that, unlike gold which is physical and immutable, a cryptocurrency is comprised of code that can be improved and innovated on in an infinite number of ways. Even to choose not to innovate is an explicit, human-led choice.
This is something the U.S. founders were keenly aware of in the framing of a constitution — the capacity for humanity to evolve in unpredictable ways. So they created, however imperfectly practiced, a system based on universal and timeless values. In the words of Calvin Coolidge:
“About the Declaration there is a finality that is exceedingly restful… If all men are created equal, that is final. If governments derive their just powers from the consent of the governed, that is final. No advance, no progress can be made beyond these propositions. If anyone wishes to deny their truth or their soundness, the only direction in which he can proceed historically is not forward, but backward toward the time when there was no equality, no rights of the individual, no rule of the people.”
Because of these immutable laws of nature, not only is some form of governance necessary but it is also inevitable. To ignore these facts, especially in a system as complex and disruptive as a cryptocurrency, is not only naive but, as I’ll elaborate below, also dangerous.
What Is “Good Governance?”
If we can agree on this then the next question is if some form of governance will emerge, how do we build a system that can most benefit those it is meant to serve and ultimately protect itself from tyranny? This is where I think the quality of dialogue in the cryptocurrency community has most fallen short.
The problem in my opinion stems from the areas of expertise that our leaders come from. Whereas the leaders of the Enlightenment ranged from philosophers to lawyers to statesmen to religious leaders to economists to landholders and even at least one entrepreneur/scientist (Benjamin Franklin), most cryptocurrency designers and influencers today are either primarily engineers or entrepreneurs (or just shitposters). Where the former were concerned primarily with philosophical and objective questions such as the nature of mankind, the preservation of liberty, and the nature of discourse and compromise, the latter are, justifiably in their respective spheres, most interested in the far more subjective world of unilateral decision making for the good of their project or business. They are those who want to execute the most efficient and effective solution possible given a particular problem, an altogether subjective exercise.
“Put not your trust in princes.” — Psalms 146:3
While the signing of the Declaration of Independence is what most captures our attention today, it is often overlooked how much work, thought and iteration actually went into designing a government of, by, and for the people. The process encompassed the Albany Congress in 1754, three Continental Congresses including the passing of the Articles of Confederation, and finally to the Constitutional Convention and the ratification of the United States Constitution (which superseded the, by then, bankrupt and dysfunctional government under the Articles of Confederation). None of this even touches on the contributions made over the previous century by Enlightenment philosophers including Smith, Locke, Paine, Hume, Rousseau, Kant, Bacon, and many more.
One of the most contentious parts of the debate among the founders of the United States was centered around how best to preserve the liberty of the individual from any would-be attackers (both internal and external) while at the same time enabling the government to carry out its primary functions.
First and foremost they needed to protect themselves from foreign invaders and domestic insurrection (vulnerabilities cryptocurrencies also suffer no shortage of). This would take a certain amount of coordination among and between the states and their citizens. With a government so-enabled to repel these threats, the next priority was how to assemble such a body while at the same time preventing it from infringing on the very freedoms for which it was created to protect in the first place. As Thomas Jefferson said:
“The natural progress of things is for liberty to yield and government to gain ground.”
Now while you certainly could make a defensible claim that the American experiment has failed in the second aim (I would argue that the central failing in present-day America has been a lack of education, particularly decentralized education, which had been one of its defining strengths as noted by Tocqueville in Democracy in America,” but that’s a subject for another post!), the point is that a great deal of thought and debate, going back to John Locke in the 17th Century, went into creating a system of governance that began from the assumption that power was corruptible. It was designed with the acknowledgement that good governance was necessary (and in its absence tyrannical governance would fill the void), that it would need the capacity to change and adapt, that it was not just possible but likely that wrong decisions could be made (even by the “right” people) and that the structure of power in any form should always start from an assumption of mistrust.
One of the best places to get insight into the content of this debate is in the Federalist Papers. A collection of 85 essays written primarily by Alexander Hamilton with contributions from James Madison and John Jay published between 1787–88, the Federalist Papers represent one of the most thorough public defenses of the design of the United States Constitution available. The questions addressed that I think are most relevant to the world of cryptocurrency governance relate to the nature of power and the influence of faction.
The list of their concerns included:
Misguided Faith That Power Would Be In The Hands Of Those With Good Intentions
“It is in vain to say that enlightened statesmen will be able to adjust these clashing interests, and render them all subservient to the public good. Enlightened statesmen will not always be at the helm” — James Madison, Federalist #10: “The Utility of the Union as a Safeguard Against Domestic Faction And Insurrection”
The Tyranny Of The Majority
“The majority, having such coexistent passion or interest, must be rendered, by their number and local situation, unable to concert and carry into effect schemes of oppression.” — Madison, Federalist #10
“It has been observed that a pure democracy if it were practicable would be the most perfect government. Experience has proved that no position is more false than this. The ancient democracies in which the people themselves deliberated never possessed one good feature of government. Their very character was tyranny; their figure deformity.” — Hamilton, Speech in New York (21 June 1788)
Factions
“By a faction, I understand a number of citizens, whether amounting to a majority or a minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adversed to the rights of other citizens, or to the permanent and aggregate interests of the community.
…
“Men of factious tempers, of local prejudices, or of sinister designs, may, by intrigue, by corruption, or by other means, first obtain the suffrages, and then betray the interests, of the people.” — Madison, Federalist #10
Those In Power
“The truth is that all men having power ought to be mistrusted.” — James Madison
And the most notable warning to my mind because of our natural human tendency to fall victim to the allure of paternalism:
Those In Positions Of Power Who Already Have The Trust Of The People
“For it is a truth, which the experience of ages has attested, that the people are always most in danger when the means of injuring their rights are in the possession of those of whom they entertain the least suspicion.” — Alexander Hamilton (The Federalist Papers #25)
What ties all of these points together is they all underscore a distrust of power in any form, even though many of these same people would soon be in a position to wield the power they were at present handicapping (five of the founding fathers would later become president).
They distrusted power in the hands of a selfish tyrant and in those of one with altruistic intentions.
They distrusted the rule of the majority and of the minority.
They distrusted factions and they distrusted philosopher kings.
Accept Compromise, Appreciate Gridlock
If we acknowledge that the point of a cryptocurrency, or at least the point of one whose goal is to be a global and distributed payment system (or world computer), is to create some system that encompasses peoples of a wide range of motivations and differing interests, and if we further acknowledge that engineering often involves the subjective practice of measuring trade-offs, security versus speed, memory versus performance, depth versus breadth of adoption, etc., then you need to take into account that a governing system needs to exist to unite these varying and usually all justifiable interests to push the entire ecosystem further.
“Early in my career as an engineer, I’d learned that all decisions were objective until the first line of code was written. After that, all decisions were emotional.” ― Ben Horowitz, The Hard Thing About Hard Things
This is all to say that if you create a system that will encompass different viewpoints and subjective interests, two things need to be taken into account:
1. Making a change should be very difficult.
2. Change to the system must be possible and under the assumption that it is entirely reasonable to expect positive (or at least non-negative) change to come from a faction with whom you disagree. I.e., trust the system more than your own judgment.
How these points manifest is in a system that should reward compromise with incremental but sustainable progress in order to encompass and promote the most diverse set of opinions and interests, while also punishing strong-arming with gridlock, even if the “pure” progress being proposed may appear to be the best way forward.
While Madison does indeed warn against the perniciousness of faction, in fact, Federalist No. 10 is mostly dedicated to this warning, at the heart of his argument is an acknowledgment that the vices of faction are a necessary evil when governing large and diverse groups of people:
“Liberty is to faction what air is to fire, an aliment without which it instantly expires. But it could not be less folly to abolish liberty, which is essential to political life, because it nourishes faction, than it would be to wish the annihilation of air, which is essential to animal life, because it imparts to fire its destructive agency.”
This is to say that disagreement needs to be accepted as a reality of life and thus a proper governing system must have built into it an understanding that factions will arise and that its effects must be absorbed if the system is to endure.
Indeed, Madison begins this section by pointing out that “[t]here are two methods of curing the mischiefs of faction: the one, by removing its causes; the other, by controlling its effects.” later only to explain that the first cure is “unwise” while the latter is “impracticable” for the promotion of liberty. Madison continues (emphasis my own):
“As long as the reason of man continues fallible and he is at liberty to exercise it, different opinions will be formed. As long as the connection subsists between his reason and his self-love, his opinions and his passions will have a reciprocal influence on each other.”
Part two of this article set continues with, “What Does All Of This Have To Do With Cryptocurrency?”
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.
