Bitcoin Theories & Concepts

nuclear bomb explosion

Mutually Assured Destruction

Mutually Assured Destruction is when two nations won’t have a serious conflict with each other because both sides have the potential to destroy the other. Like a nuclear war between superpowers, there can be no winners. The Bitcoin network lives on the same principle. Too many people have investments in Bitcoin to allow it to fail. Nobody would benefit from somebody breaking the integrity of Bitcoin. If someone pulls a 51% attack, then people would lose the trust in the system and bitcoin would lose all of its value. The perpetrators would make now gains because the system would be destroyed. Any parties that are interested in Bitcoin will attempt to prevent such an attack. The overwhelming majority of the Bitcoin network and their supporters will back the integrity of the system.

Governments will back the integrity of the system because they are obligated to protect their citizens’ interests. However, there will be controversy when governments attempt to freeze wallet addresses on the blockchain that contain illegally obtained bitcoin. The protocol does not currently support these freezes, but could governments force such a change? Scroll down to read about the proposed Hot List.

Network of Trust

If all the parties can come to a fair agreement of how much hashing power is needed, then there wouldn’t need to be a race to the bottom by wasting efforts on mining. It is naturally competitive as to reward the parties with the most hashing power. This agreement will not come as a verbal agreement between the parties but it will be agreed upon naturally through the price of a bitcoin.

Like in real life, no one party will want to take over more than 51% of the network because the value of the system would dwindle and their profits would dwindle. There will always be several large competitors that will prevent any one entity from controlling 51% of the network.

Someone that has control of 51% of the network will want to keep the integrity of the transactions – they would not benefit from altering any information in the network. The system will maintain a natural balance between people around the world – they will want to be friendly with each other. A majority of people are good and the network is an image of the miners and users of Bitcoin. It is a natural trust based system with laws to hold integrity.

The price of a bitcoin will be worth what people will make it worth. People will naturally make the Bitcoin network worth the services that it provides. If it does provide all the services of banking and credit cards and a whole lot more, then it will be extremely valuable. All parties that are involved with Bitcoin will want it to continue to succeed. An attack from outside the bitcoin network would be the most likely since Bitcoin competitors would benefit from the system failing. However, it would be cheaper for an outside party to buy into the network and try to control it from within. Terrorists will not ever acquire enough power to take down 51% of the network. Governments may have the power to do this. But, the governments that have that much power would be able to acquire control of much of bitcoin through mining and purchasing bitcoin. Also, governments are obligated to protect their citizens’ assets.

Bitcoin vs Manual Audits

A transaction and store of value system like the current financial institutions use manual audits to ensure the integrity of their network. Any business can be audited to make sure all transactions are accurate and complete. If they are not, they will suffer legal consequences. Is the current setup of audits more efficient than Bitcoin mining? I would say no since the credit card and bank fees are so high. A competitor, like Bitcoin, will ensure that the financial institutions are working as efficiently as possible because if they don’t, then their customers may leave. The financial institutions will have to be able to compete with the services that Bitcoin is offering and they have to do it with either more quality, better security, or for cheaper. Options are always a good thing for consumers. It will force the financial sector to compete for customers. They may use many methods to compete.

Attention in Media

It can be profitable for news agencies to report on the fallacies of Bitcoin. These reports, in turn, make Bitcoin less valuable. It is a downward spiral. However, people communicate with each other. There are lots of more people using Bitcoin and their are statistics to prove it. They will teach their friends of its’ advantages. Their friends will teach their friends and that cycle will continue until the general public is educated about the facts of Bitcoin.

Community Agrees To Update

If a general consensus among the Bitcoin miners agree to change the protocol, then this could have significant implications for the digital currency. This happens a lot for minor updates and is discussed in the Bitcoin community for major changes. A hypothetical scenario where Bitcoin miners might want to change the having of Bitcoin rewards to every 8 years instead of every 4 years is possible, but it is unlikely that a majority of people would agree to that. It would be profitable for the miners to do such a thing. But, this would cause belief in the system to dwindle and hurt them more than reward them.

People value bitcoin as a store of wealth and unethical changes to the protocol would cause the price to plummet. Many miners are deeply vested into Bitcoin and they do not want this to happen because it would not be beneficial to them. If something like this did happen, there would probably be a fork and the existing version would run in parallel to the new version. That would be terrible for the system for everyone involved. People would have to decide which fork to choose between. Current holders would want the old version and people that want to get on board might want the new version. I think that the community would see all the struggles that taking such an action would cause and they would not want to damage the market that they exist in. These scenarios are hypothetical and not practical.

Fork

A fork in Bitcoin is when there are two separate versions that have been worked on and they share a previous point where they were the same – they share a common ancestor. For example, github hosts software projects for developers and when someone has a public project up there, someone else could fork a copy of the current version and start working on it in parallel. The original developer would also be working on the original version. They could both save their copies and they would be different and not share the changes that were made by both of the parties. Some people suggest that a fork in the bitcoin could be used. It would take a majority of the miners to approve a different version that will be accepted by the community. In practice, there would be an overwhelming majority that agrees to any updates because it would not be beneficial to anyone otherwise. It would be a guaranteed loss for everyone!

In the event that a successful 51% attack on the system happens, there would be a fork with the 49% that maintains the integrity. Users would have to ensure they are using the “good” fork. This attack is theoretically possible but in practice, it is impossible.

Hot List

Hypothetically, there could be a hot list added to Bitcoin. If enough miners agreed to update the core code, then a hot list of addresses holding stolen bitcoins could be frozen. They would then be able to use them for legitimate uses. This would render those bitcoins nearly useless and it would make it not so profitable for bad people to steal bitcoins from people. This would be hard to maintain and it should be hard for a person to place addresses in a hot list but it would be beneficial for the entire system and help it be accepted in the mainstream. The original holder of the bitcoins would have to prove that the bitcoins do indeed belong to them. Once it is on the host list, it would be worth little to nothing. This might even influence some hackers to give the bitcoin back for an agreed small percentage of legal bitcoin. This hot list would probably only be feasible for large thefts.

Charitable Donations

When you donate money to a 3rd world country, not all of that money reaches there. If you wanted to donate $1, probably about $0.10 will reach the hungry child that you wanted to feed and the other $0.90 ends up going to the 3rd parties in between. With Bitcoin, it will be possible to donate $1 to starving children and $1 will reach its targeted donation. The implications of what Bitcoin could do for the world are huge. It is arguably free to use! There will be 3rd party applications that will absorb any costs to send money. The applications will generate revenue with the traffic to its’ services just like Gmail provides free e-mail and Facebook provides free social networking.

Bitcoin Can’t Be Used to Pay Taxes

I have heard a lot of arguments stating that Bitcoin is useless because it can not be used to pay taxes. This is currently the case, but it is easy to convert bitcoins to USD and possibly in the future, the IRS might reconsider. NYC is proposing allowing people to pay parking tickets with bitcoins. This would save the people and the city a lot of money in financial fees with credit cards and the costs associated with mailing checks. Bitcoin would be useful for collecting tolls on highways for the same reasons. People could get a sticker on their car and have the payment automatically go through. This would save the highway management and people money by cutting out the banks from the middle of the transaction.