What is the “irreducible core” of Bitcoin?

Or… why is it so hard to come up with a simple, yet accurate, explanation of Bitcoin and its importance?

I am a firm believer in the following rule-of-thumb:

“If you can’t explain something clearly, it means you don’t understand it.”

Put more positively, we could perhaps say:

 “Only when you understand something deeply can you make it sound simple”.

Many of my colleagues will recall situations where I have been almost fanatical in driving for intense clarity of expression. And so it concerns me deeply that there is no good, simple, accurate and comprehensive explanation of Bitcoin that helps people understand what makes it so unique.

Here’s what I mean:  I want a description that doesn’t lead the listener to say:

  • “So how is that different to my electronic bank account?”
  • “So how is that different to airline miles?”
  • “So how is that different to m-pesa?”
  • “So how is that different to Mondex?”
  • “So how is that different to Ripple?”
  • … and so on.

And no cheating is allowed….   You can’t refer to these systems in your description…. Your description has to be so good, it has to be so precise and it has to be so comprehensive that an attentive listener cannot possibly confuse Bitcoin for anything else.  In other words, you need to get to the irreducible core of this bewilderingly complex system.

Here’s a sample of existing explanations that show how hard it is. I typed “What is Bitcoin?” into google.co.uk and clicked on the first five hits:

  • We Use Coins.com
    • The video is helpful but I’m looking for prose that meets my text above.   The closest we get are three boxes that mention “secure”, “open” and “fair”.  These things may or may not be true but they don’t really explain what’s going on
  • Wikipedia“Bitcoin is a peer-to-peer payment system and digital currency introduced as open source software in 2009 by pseudonymous developer Satoshi Nakamoto”
    • OK – perhaps this is accurate but it doesn’t give me any indication that this could be the most important invention of the last decade and an intelligent reader could legitimately confuse it any number of pre-existing centralized systems.
  • The Washington Post“It’s an electronic cash system that allows online payments to be sent directly from one person to another without going through a financial institution (like a bank) or a third party (like PayPal).”
    • This is actually pretty good.  It brings out the “directness” and uses the word “cash” to evoke the idea of a bearer instrument and finality.  But note that it doesn’t tell me anything about how it works or why it’s so revolutionary.
  • Children’s BBC“Bitcoin is a new type of money that is completely virtual. It’s like an online version of cash.”
    • Pretty good – but limited (I’ll go easy on them given their demographic!)
  • Bitcoin.org“Bitcoin is an innovative payment network and a new kind of money.”
    • This is true and is probably enough to pique interest – but you have to go over to the FAQ to get this:
    • “Bitcoin is a consensus network that enables a new payment system and a completely digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, Bitcoin is pretty much like cash for the Internet. Bitcoin can also be seen as the most prominent triple entry bookkeeping system in existence.”

Of all these descriptions, I like the last one the best from the perspective of technical accuracy but it focuses only on the “payment” use-case.    For day-to-day usage, I think the Children’s BBC or maybe Washington Post versions are also pretty good.

But did you notice how many concepts were packed into these descriptions, how much knowledge they assumed and how none of them really explained why this was so revolutionary?

I think this is because there are really three independent concepts all competing for attention at the same time and we need to step back to unpack them.

The world’s first internet-scale decentralized platform for value exchange

First, Bitcoin is the world’s first true system of digital cash, which allows peer-to-peer value exchange over the internet with no reliance on third parties.   This is the key feature of Bitcoin as a currency and payment system and explains most of the current infrastructure build-out.

 … implemented on a decentralized global asset register…

Secondly, Bitcoin works because it is based on a new concept: decentralized global asset registers.

Decentralised global asset registers are also an entirely new invention. They can be used to register and transfer ownership of any digital asset.

It is this that people are talking about when they say things like “currency is just the first application” for the Bitcoin platform.

… which is a decentralized consensus system

However, the story doesn’t stop here.  There’s a third element: how do these asset registers work?   They work because of a third breakthrough: the invention of “decentralized consensus systems”.  That is: internet-scale systems that can reach and maintain a common state without the involvement of any third party and in the presence of malignant adversaries.   This is a breathtaking breakthrough in computer science; we should expect to see the most forward-looking computer science schools undertaking active research in this space.

Putting it all together

“Bitcoin is the world’s first system of digital cash, which allows peer-to-peer value transfer over the internet with no reliance on third parties.  It is built on a new invention, the decentralized global asset register. This global asset register is the world’s first decentralized consensus system.”

I’m still working to refine this description, but I think it’s getting close…  although it’s very technical and not suitable for everybody.

Digital Scarcity

Or, at least, I thought was getting close until I listened to this wonderfully informative interview of Adam Back by Andreas M. Antonopoulos on the “Let’s Talk Bitcoin” PodCast.

Adam invented “Hashcash”, the inspiration for Bitcoin’s mining function and contributed to the years of experimentation and prototyping that ultimately led to Bitcoin’s invention.

In the PodCast, he used an interesting phrase.  He described the idea of “digital scarcity”.  That is:  how to create a system that allows you to make objects in the digital world “scarce”.  The obvious intuition here is to think of .mp3 files.  If I email one to you, it hasn’t been transferred, it has been duplicated and is no longer scarce.  We know what happened to the recorded music industry when this happened on an industrial scale.   Back’s concept, thus, is the problem of how to enable transfer without duplication.  Clearly, this property is key to making Bitcoin work and Back’s phrase captures it perfectly: “digital scarcity”.

So, my challenge is to consider how to update my “three concept” model to incorporate this key idea: “digital scarcity”.

Perhaps Digital Scarcity is the irreducible essence….

Is this the single concept that captures what makes Bitcoin so utterly unlike anything that came before?

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28 thoughts on “What is the “irreducible core” of Bitcoin?

  1. Bitcoin is world’s first digitally scarce currency and a payment network on which individuals have complete ownership and control of their money.

  2. Richard, I agree that there is still a lack of understanding among the general public about how and why Bitcoin works. But I think the reason is that most explanations out there are either:
    – fairly technical (e.g., here is how the protocol works), written by developers for developers, or
    – vague (and sometimes wrong), written by journalists or people that only know the basics

    I think there is still a lot of room in between. Most (as you point out) don’t *really* know why Bitcoin is a system that actually has value (through both doing valuable work and scarcity). Your attempt to boil this down to a few sentences is a good one and would give someone new to Bitcoin a good sense of what it is. But I think there is one more level down, that gets to some of the innards of how it works, but without the technical details. This is what I attempted here:

    http://www.thebusinessofbitcoin.com/2014/01/the-nature-of-bitcoin.html

    Of course, it is significantly longer than a paragraph, but it hopefully gets the points across.

    David

  3. just a little add maybe, you can also save proof of data in the bloockchain not only “asset” (see this: http://cryptostamp.net/), I think that the blockchain is a commodity that have value for the property that you list (finite easy to send and verify) plus difficult to mine, so because of this difficulty to obtain bitcoin the mined bitcoin measure AT LEST the work to obtain it…and this is the value of it as a commodity
    sorry for painful english

  4. The scarcity attribute adds a profound foundation to the belief system supporting BitCoin as a digital currency. This reflects the choice of Gold for early (physical) coins: being sufficiently scarce, unreactive (did not corrode easily), and identifiable – not just a luscious shine.

    You have done well to distill the essence of BitCoin into such brief terms. How “Parmar-varian” of you in approach! (Tip hat towards Rashik Parmar)

    The designed mesh of attributes has estalished a financial resource on which to support a shared trust system. The sarcity (granting trusted uniqueness), the ledger (transparent information yet anonymous provenance), the mechanism of direct transfer (no central authority nor clearing house).

    Please update with your refreshed insights and contemplations!

  5. @david – thanks for the comment and the link to your blog… very interesting. Added to my reader :-)

    Agree with you that there could well be a tradeoff between technical accuracy/completeness and comprehensibility.

    I particularly liked your distinction between the two *different* two-sided network effects we have in Bitcoin… (i.e. consumers/merchants and transactors/miners)… I hadn’t seen that before…. very nice.

  6. @rodomonte – thanks for this…. When I was writing the post, I was trying to find an example of something *else* you could do with each of my three “layers” (currency/value exchange — asset register — decentralised consensus). I struggled with the last one and I was worried that it might not be a true layer…. since if it only has one use-case, it’s not very generalisable!

    However, you’re right…. proof-of-existence, etc., is an example of decentralised consensus that is independent of the need for an asset register. Thanks :-)

  7. 1. I think you can understand something without being able to explain it. These are two very different skills. David Beckham understands the movement of a ball but probably can’t explain it.
    2. I think there’s a little confusion here between invention and innovation i.e. the thing itself and the application of it. It sounds like you want to include both and have made a step towards it. You say “this could be the most important invention”. Bitcoin say it’s “is an innovative payment network”. I think that means its the application of an invention to achieve a payment network? You refer to it as a system. Bitcoin sounds like a really bad name. So it’s not like a pound coin it’s more like the whole financial environment of technology and human and business processes? It’s a system built around a thing and yet the system and the thing both have the same name and neither encompass the broader impact of it or the other uses like asset register. Is it the coin or the system around the coin or the concensus network around the system around the coin or the impact of the network…..
    3. “implemented on a decentralized global asset register” or “based on a …decentralized global asset registers” or is it a system that includes the register or does it act as the asset register itself. If it’s implemented on on then which one is it?
    4. “We know what happened to the recorded music industry when this happened” – don’t get me started on this. Well you can read my thoughts on this here http://samjgarforth.wordpress.com/2012/03/09/the-internet-killed-the-music-industry-not/

  8. The core for Bitcoin is different for different people. Bitcoin to the person in Iran who sells shoes online will describe Bitcoin’s “irreducible core” different from what TigerDirect’s CEO will.

    A Silk Road user (or whatever equivalent service is patronized today) will describe Bitcoin’s “irreducible core” different from what the WInkelveii do.

  9. Some adults won’t get it. That’s too bad. But you better believe that the
    young will get it. And there are 3 entrepreneurial tweens (sisters aged
    13, 12 & 10) who already get it and have written a 3 book primer under
    the title “Bitcoin For Kids”. It is available in eBook form from their
    website- http://bitkidz.com/bitcoinforkids/. Book 1: Putting Money In
    Kids’ Hands Today For A Better Tomorrow; Book 2: How To Earn, Save,
    Spend and Share Bitcoin; Book 3: Wise Words From the World’s Best
    Bitcoiners. Pricing?- [Click here to buy with fiat currency on Amazon, $2.99]
    [Buy with Bitcoin for only $1.99] or- Best Deal: Buy The Trilogy
    Only $5.97 (Bitcoin) $7.97 (Fiat). Each payment option given as a “Pay
    with Bitcoin” click through button underneath it- they already have
    their merchant account set up with Coinbase.

  10. Richard,

    The mass public gets lost easily — once you get to words like ” distributed consensus” or “distributed asset ledger” eyes will start glazing over unfortunately. Even the word “digital” carries deep meaning beyond the surface level understanding of the public. Understanding the implications of “digital” needs quite a bit of thought, even for smart fairly technical people.

    I took a crack at it last year and wrote an “Explain it like I’m Five” styled article. It was fairly successful – some big founders in SV tweeted it out etc. and I got mostly positive feedback. While it’s not 100% accurate from a technical/semantic stand point, I think painting the broad picture first may be the better approach. Once they get the gist of it, people get that “aha!” moment. From there they can go more technical and refine the “accuracy” of their semantics. For what it’s worth: https://medium.com/future-of-currency/73b4257ac833

    Btw, big fan of your posts. Your ibm/banking video on youtube was a lightbulb for me and I used it as further reading on my post. Cheers and keep em coming!

  11. Bitcoins, the currency may be scarce, but bitcoin the protocol is infinite. 1/infinity = ~zero. For now, the bitcoin protocol is dependent on the value of fiat currencies that also have no intrinsic value other than government force and the perceived value of Bitcoins, a digital fiat cryptocurrency. You cannot perform a use the bitcoin protocol without having the Bitcoin fiat currency. To understand this concept, imagine if TCP/IP transactions were finite and transient. TCP/IP would have intrinsic value because after each use you’d reduce the number of available TCP/IP transactions until finally there were none left and no Internet! Now imagine that TCP/IP transactions are both infinite and transient (which they are). What is the intrinsic value of a TCP/IP transaction? It’s zero, just like any other protocol like SAML 2.0, VoIP, HTTP and 802.11n. The assumption you’re making is that Bitcoin is finite (which it is, at 21 million coins). However, the protocol can be copied infinitely (Litecoin, Peercoin, Dogecoin, etc.) such that there are now over 80 different cryptocurrencies. That means that the currency is theoretically infinite. Though the bitcoin transaction is stored in a ledger by added it to the blockchain, the transaction itself is transient just like TCP/IP. Therefore, no intrinsic value.

  12. I think you’re right: Digital Scarcity is the essence of Bitcoin (and all other crypto currencies).

    As NYSE et al aren’t pushing paper anymore since quite some time, we can say that it’s already a proven concept. So Bitcoin is not the first implementation of digital scarcity. But, for the first time, cryptocurrencies like Bitcoin make the concept feasible on an Internet scale.

    Two years ago, with my old and now quite defunct company, we dabbled around scarcity concepts for music and other media. We used a stock market metaphor with a centralized SQL db at its core to introduce a native digital scarcity into the system. And we realized pretty early: this won’t scale. Stupid us looked at Bitcoin, and saw just a strange currency concept.

    Digital scarcity works, I guess, because understanding (and fearing and leveraging …) the impact of real world scarcities is a concept hardwired into us humans. In this context, the grand Bitcoin experiment should be a boon for all behavioral economists: as for us humans, the basis of economic value seems not to be some intrinsic feature of a commodity or asset, but the consent on a mutually perceived value, which can increase due to the market powers of a now even in the digital realm somewhat limited supply and a hopefully increasing demand.

  13. @Marshall — I think that’s a very good point that gets to the heart of the matter. “Digits” by nature just aren’t scarce. Does anything digital thing have “intrinsic” value in the end?

    Digital “gear” for the latest video game RPG character has infinite supply (and yet people willingly pay $2~ it, silly or not…). Value in the end is a human construct — it’s not inherent to an object. Value does arise from the object’s “intrinsic”, unique properties, but only in relation to what man applies to it, and only from our perspective. If there were no human beings on earth, it’s fair to say nothing would have a “price”.

    I would also argue that “scarcity” in the digital world is a human construct as well. “Digits” are not inherently scarce — but you can make them scarce within a “network” (via the rules, defined by Bitcoin for example). But that network in turn can actually be “scarce”. Anybody can create a functional wiki-site. Anybody can lift code (and there are a million wikis out there), but it’s really hard to create THE Wikipedia that everyone uses. THE Wikipedia is scarce. Likewise, the protocol can be copied, but the network around it cannot. Or at least it’s much much harder. What makes Bitcoin rare is the infrastructure being built specifically around it and for it.

    My 2 cents. But fascinating questions and interesting times indeed.

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  15. Yes, Bitcoin is at its core, and most distinctively, about digitally simulating scarcity — that seems the gist that you have valuably emphasised in previous posts.

    But people should then be asking: why is that good? Why simulate material-like limitedness/scarcity? The underlying purpose here is not (or should not be) to simulate money, it is to make systems for economic interaction. What is there in allocating supply and demand that means we have to organise it around simulating the movements of a limited set of tokens, i.e. money? Why use highly advanced information tech to simulate the very primitive information tech of money (for that is what it is)?

    There seems something in the idea of digital ‘asset register': something useful along the lines of mapping the material world to the digital. Material things really are limited, and they need to be represented (partly in that aspect) digitally. Those two fundamentals seem to give a firm grounding to some sense of ‘asset register’.

    But why use money/currency as a *general* device anymore? Why confuse a specific need to express limitedness with everything else? That is where Bitcoin is not the future but decidedly of the past — it is an odd anachronism. We ought to be using current information tech to think beyond money as a mechanism of economic allocation and organisation.

  16. @nik5ter – love your “apple” explanation…. I think your post really captures this idea of how to recreate the “transfer” semantics of the real-world when applied to the “copy/duplicate” default on the internet. (@sander – thanks also for linking to it)

    @marshall – agree you lose scarcity when you consider alt-coins… but, to me, value is also a function of *utility* — if one cryptocurrency becomes more *useful* (perhaps because of network effects, infrastructure, regulatory advantage, whatever) then it has, in effect, created a barrier that distinguishes it from the others…. so I would argue you may also have scarcity (and hence value) in such a world, too

    All others – sorry I haven’t replied to all comments; they’re great…. thanks for taking the time to contribute.

  17. This was a great article.

    To me Bitcoin is a non-duplicative encrypted piece of a computer file. We love it, so we give it vale and there is only so much of it, which increases its value.

    Its like a diamond which is just a rock, but we love it, and there’s only so much if it, so we as humans give it value because of this…. A dolphin could care less.

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  21. What is the “irreductible core” of bitcoin? The blockchain. Readable by anyone, writable only by maths. We don’t trust people. We trust maths because only maths are beyond suspicion.

    Bitcoin is an implementation* of the blockchain. And the blockchain is a way to achieve consensus among people who don’t trust each others.
    * any other altcoins are just derivation of the blockchain, even Cryptonote-based cryptos like Bytecoin and bitmonero. The only exceptions are Ripples and Timekoin

    From the blockchain comes trustless consensus, which itself lead to several agreements:
    – money (the whole Bitcoin-accepting world recognizes your purchasing power is legit and when you will transfer it to me, I could in turn transfer it to someone else in exchange for a product).
    – voting
    – contracting
    – storing directory data at a much lower cost (asset managment companies are very interested into this)

    Money is just, as Napoleon I could have said) baubles for men. The Bitcoin currency is the trojan horse of the blockchain (like the individuals is the carrier for the gene and Apple is the carrier for Nexstep).

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