Holy bitcoin, mother of blockchain

holly bitcoin .png
By Koen Vingerhoets (KBC)

For reasons unknown to me, I was invited to the "Cashless World" blockchain panel. The tagline had a promising and pleasant ring: "Blockchain, separating hype from reality". As I’m always in for some discussion, you could find me there during that rainy evening, on a long table, next to bitcoin-aficionado's and someone from IBM.

The discussion/debate turned out to be quite hefty… While I support bitcoin (through holding, mining, trading, hosting a node), I still consider myself in touch with reality. To some however, bitcoin became nothing short of a Religion, in which this Magical Coin is the nec plus ultra. Let's go through some points these Holy Warriors postulated to promote Bitcoin as the new Messiah.

Bitcoin provides an identity

Often I hear the claim that the bitcoin blockchain gives people an identity. Projects like onename.com even built on the bitcoin blockchain to establish a “proven” identity.

Now, a colleague asked me if a two year old could trade bitcoin. I said "yes". "But he's not allowed to do that", she added. "I know", I replied, "but the bitcoin blockchain doesn't know".

The bitcoin blockchain doesn't give you an identity that is usable in the real world. It merely offers you a portal to "internet funnymoney". Identity goes far beyond that, it's one of the core concepts of Law.

The bitcoin blockchain only provides proof of existence of a wallet at the moment a payment is made from that wallet. Wow. That’s a lot?

1.       Every payment has to be made from a wallet with coins. Of that we are sure: an address that sends bitcoin, exists.

2.       You can pay to any hash (or to “1BitcoinEaterAddressDontSendf59kuE”), only when a private key exists, the coins can be claimed. There is no way of knowing if someone has access, unless when (1) happens.

3.       A wallet exists, but it could be created through a computer program, the owner could have several wallets, the owner could have lost his key, the owner could have given away his key, it could be inherited (or stolen),… There is no 1 to 1 relation between a wallet and its creator.
 

Bitcoin is the/a solution for the unbanked

Bitcoin is put forth as the solution for the unbanked, as you only need a mobile and internet access to use it. However, a bitcoin core developer already (jokingly) said that bitcoin would have wide adoption if everyone would have a degree in applied informatics.

Financial illiteracy is not going to disappear after installing an app. Technology doesn't replace knowledge, advice, liability. Things a financial institution is often obliged to offer.

Furthermore, one could argue that having a bitcoin account still keeps you "unbanked". There's merely an account with an intermediary coin on your mobile. You're still not related to a bank and all the additional services a bank is able to provide.

Last but not least, using bitcoin increases the dependency of the unbanked on the banked. Or where do you think the miners, nodes, developers are located? Amongst the unbanked?
 

Bitcoin replaces financial institutions

The bitcoin whitepaper of Satoshi Nakamoto clearly states it's a way of paying peer to peer without going through financial institutions. While handling payments is an important tasks for a bank, a lot more happens in those huge, thick buildings.

We're providing insurance. Loans. Shares. Safeguard your gold. Finance companies. Support communities. Assess risks. Cover liabilities. Facilitate trade. A lot of activities way beyond the bitcoin.

People rely on financial institutions because they trust these companies to at least hold the value of the money they deposit. Bitcoin remains a volatile coin. It rather replaces a high risk investment than a financial institution.
 

Bitcoin blockchain is the only safe distributed ledger

Let's start with the truth: the bitcoin blockchain is very secure. This amount of security translates in an enormous consumption of electricity, used to create calculation power in the miners. Due to its public character, securing the bitcoin blockchain is of the highest importance. It's open for attack all the time… but surely, in theory, well fenced.

Now, most of the power to protect the bitcoin blockchain is located in China. The miners are produced there, labour is cheap and energy for free. With over 80% of the hashing power located in one country, one has to trust the Chinese mining companies to not collaborate and rewrite history. If they do… we won't even see it. Lovely.

Financial institutions, with all the regulations they’re facing, tend to setup private and permissioned blockchains. This means the blockchain node is located behind the company firewall and connected through secured channels with other financial institutions. That's private, or rather consortium as they call it nowadays. Setting up a blockchain for own use, is futile.

In these private system, we'll set up a rules based engagement system with a central steering party. That's called permissioned. Wouldn't that be a lot safer, less prone to errors, etc? We’ll of course back it up with legally binding documents to ensure we have a responsible party in case of calamities.
 

Bitcoin blockchain is all you need for business

As there is no (or little) legal liability in the bitcoin blockchain ecosystem, it's rather impossible to organize large scale business to business deals on it. The "What if…" scenario has no clear ending. Bitcoin of course offers a purpose for business, several shops accept it as payment, left and right some ATM’s appeared,… Focus is on urging bitcoin hoarding consumers to start spending.

Reversing the question (i.e. does business offers a purpose for bitcoin?) seems to yield a different reaction. When you trade a bitcoin, the only thing you can be sure of, is the actual asset/value being traded. Take for example a company A that sends another company B a bitcoin: as soon as the transaction is confirmed, A has one bitcoin less and B has one more. The transfer is settled immediately.

Now assume A sells 1000 barrels of oil to B and adds this as a message to the transfer on one bitcoin (the so called "colored coin"). As a result… A has one bitcoin less, B has one more. That's the only thing they can be certain of. Furthermore, B has high hopes A actually has 1000 barrels of oil or… there would be no business deal.

The downside of using an asset based transfer of value, is that only the transferred asset holds value. Insofar that bitcoin is used as a mean of payment between two parties, it does an excellent job (outside legal bounds). If other assets are tokenized and replaced by a satoshi and a message… you’re actually trusting your trading partner rather than the blockchain technology. Ouch?

Conclusion

Yes – bitcoin has value (it even has been rather constant around the 725$ mark for some time now). As by far the oldest public blockchain, it delivers a tremendous support to distributed ledger technology principles and working. But unlike a deity, it does have shortcomings.

“Faith must be enforced by reason. When faith becomes blind, it dies” (Mahatma Ghandi). Amen.

About the author

Koen Vingerhoets combines a Master in Law with a sound passion for IT. He caught an interest in bitcoin early 2013 and currently works in the core blockchain team of KBC. He is often praised for making difficult items understandable through vivid keynotes and clear texts.