The 5 Solid Powers of Bitcoin and its 5 Tricky Problems

February 17, 2021
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Bitcoin is the first decentralized cryptocurrency, or “the original cryptocurrency”. Satoshi Nakamoto conceptualized Bitcoin in 2008. A vibrant community of enthusiasts from diverse backgrounds grew organically around this concept. And in 2009, they implemented and released Bitcoin into the real world!

Whether you support it or not, Bitcoin has certainly ushered in a new era in the progression of human civilization in the early 21st century. Thus, it is comparable to the invention of the World Wide Web in the late 20th century and to the development of Electricity in the 19th century. We can even compare it to the Steam Engine that sparked the First Industrial Revolution back in the 18th century!

It has become trendy to downplay the powers of Bitcoin. People find it easy to dismiss Bitcoin because of some tricky problems associated with it. As a result, only its underlying Blockchain technology is upheld as the real innovation.

Undoubtedly, Blockchain is a powerful combination of preexisting ideas from computer science and cryptography. It continues to find endless applications every day. But Bitcoin can stand tall on its own. It is a game-changer to our economic, banking, business, and financial sectors!

We can expect the global human society to take its good time for clarifying whether Bitcoin is just a currency or an entire monetary system. But it is clearly evident to the public eye that Bitcoin, the thousands of altcoins that followed it, and the plethora of decentralized apps are together growing into a vibrant ecosystem.

Communities and societies will gradually find practical and optimal ways of adopting this Greater Bitcoin ecosystem into their everyday lives and businesses. Here, we shall look both at its solid powers and the tricky problems around it.

The 5 Solid Powers of Bitcoin:

1. Rules, not Rulers, determine the issuance of Bitcoin

watch-dealers

Human greed is like water: everywhere it can go, it will go! But the designers of Bitcoin have made it “water-tight” and “water-proof”, or rather “greed-proof”. They achieved this by designing Bitcoin’s money supply purely using mathematical and algorithmic rules. The Bitcoin Blockchain implementation has ensured to bake into its source code the rate of creation and the maximum size of the Bitcoin money supply.

History doesn't have to repeat itself!

In the past, rulers have debased their currencies again and again. At times by adding cheaper metals to gold and silver coins. And sometimes by printing a disproportionate amount of paper money to fund enormous government spending during wars. But no ruler can over-print and debase Bitcoin.

2. Decentralization: Let the Markets optimize the prices organically!

bitcoin-fiat-currency

In the mainstream economy, the Government, via its Central Bank, seeks to artificially control and fix prices, rates and taxes. This government intervention in markets distorts the natural prices that would emerge if we allow real supply and demand to function untethered.

With Bitcoin, a natural market emerges from the bottom-up organically, as an emergent property of the distributed global community of miners, exchanges, merchants, and consumers. No central authority can meddle with the functioning of this complex, self-organizing system.

3. Truly International and Fast Settlement Time

Traditional fiat currencies, or the national currencies of various nations, have to convert values according to ongoing foreign-exchange rates. This is a complicated system is held together, as if by duct-tape, by progressively linking assorted database systems using ad hoc or outdated techniques.

Duct-tape Complicated Systems

It involves lots of middle-men in the form of banks, settlement agencies and payment channels. This increases the number of hops required to complete a transaction. At each step, a middleman charges some fee, and also delays the transfer. Thus, it is an unduly complicated system comprising self-serving players.

handshake-bitcoin

Well-designed, self-organizing complex systems

Instead, Bitcoin has been designed to be truly international. It is native to the digital, networked topology of the Internet. It does not belong to any country. 1 Bitcoin = 1 Bitcoin anywhere in the world.

It usually takes several days or even weeks for International Banks working with one another using their traditional systems to settle transactions. But it only takes 10 minutes on average to fully complete a Bitcoin transaction.

To top that, layer-2 implementations like the Lightning Network are achieving near-instant settlement times for small and medium-sized transactions on a global scale. Layer-2 implementation means additional features and services coded on top of the preexisting Layer-1 Bitcoin Blockchain architecture.

4. Bitcoin’s Difficulty Adjustment mechanism makes it better at being Gold than Gold itself!

Gold's power as a store of value is in remaining unchanged over time, its scarcity, fixed supply, and the difficulty of mining.

The Bitcoin Blockchain system issues a fixed, predetermined amount of new Bitcoin whenever the miners make a new block available to the network for recording transactions. We refer to this activity as Bitcoin "mining". This happens every 10 minutes on average, determined by the logic in the source code.

3 factors maintain a foolproof control over the mining of new bitcoins:

1) Halving Event

Factor 1 is the Halving event. Every 4 years, the source code halves the amount of bitcoins issued per block. Thus, this number went from 50 to 25 in 2013, 25 to 12.5 in 2016, and 12.5 to 6.25 in 2020.

2) Max Limit

Thanks to the halving events, the Bitcoin Blockchain system issues fewer and fewer bitcoins per block every 4 years. We will reach the max limit of 21 million bitcoins sometime in the 22nd century. This Max Limit is the Factor 2.

3) Difficulty Adjustment

But it is Factor 3 that is the most powerful: Difficulty Adjustment. Let's suppose that the price of gold were to become a million dollars per ounce. Greater the reward, greater the competition! This big price will attract miners in huge numbers than usual. They will be ready to invest more mining rigs and more labor hours into the goldmining activity.

Thanks to the added collective ability and will power, the goldminers will collectively manage to dig out more gold than ever before. They will also go deeper and to unexplored locations. This increased mining activity, in turn, will drive up the supply of gold into the market. This increased supply will naturally push down the earlier astronomical price of Gold towards its normal range. And as usual, the market forces of supply and demand would have modulated human labor and commodity prices towards "equilibrium".

No Bitcoin "Gold Rush" Possible

But these forces of supply-demand cannot work on the supply of Bitcoins. First, Factor 2 already ensures a fixed upper limit on the total number of bitcoins. Besides, if the number of bitcoin miners and the processing capacity employed skyrockets, the difficulty of the cryptographic problem being cracked also goes up in proportion. This difficulty adjustment mechanism ensures that it will always take 10 minutes on average to crack the code and issue the next block.

Bitcoin-mining

What if the Miners go on strike or something?

Even if the number of miners and the computing power was to drastically fall down for some unexpected reason, the difficulty level would automatically drop down as well. It will take only a few laptops and just about 10 minutes to mine the next block during this "easy" difficulty level. Along with the previous two factors, this ingenious mechanism makes Bitcoin better at being gold than gold itself!

What happens after we finish mining all 21 million bitcoins?

We know that miners earn new bitcoins every time they mine a new block successfully. However, after hitting the Max Limit of 21 million bitcoins in 2140, no new bitcoins will be available to mine. Does the system shut down at that point?

Don't worry! Even after that, we can rest assured that the miners will continue to run the system. This is because they will still receive transaction fees for processing and validating the blockchain transactions.

5. Bitcoin is an attractor for cheap and clean energy generation

Bitcoin is often criticized for requiring massive amounts of computing power driven by fossil fuel energy. Firstly, as discussed in the previous point, there is no real necessity for expending huge computing power to run the Bitcoin Blockchain network. The currently massive computational expenditure is not a function of its source code or design.

Even a few hundred laptops could run the system, as the difficulty level will self-adjust to match the available computation power. The rise in computing power currently used in the Bitcoin network is attributable to human greed. But even such greed has been shown to invariably drive up competition, which in turn sparks innovation.

bitcoin-computing-power

How does the Bitcoin Mining “gold rush” contribute to human society?

For one thing, it has driven up the demand for more efficient and powerful processors and led to the construction of powerful data centers all over the world. With the rising application of deep learning and AI tech in formalizing problem-solving in all walks of life, these Bitcoin Miners could find plenty of alternatives, lucrative and powerful uses. Human creativity, determination and foresight will play a crucial role in taking sound decisions regarding how to put these available powers to the best use! Perhaps the next big innovative idea will be delivered by the readers of this blog? What do you think? 😉

Marching towards The End of Fossil Fuel Profitability

We can reasonably anticipate that fossil fuels will become scarcer and increasingly costly to extract over time. Then, the only way to continue running Bitcoin Miners at a profit will be to utilize clean and cheap sources of energy, such as solar farms, wind farms and hydro. It requires very little human presence on a day-to-day basis to run the bitcoin mining centers. We can construct the bitcoin mining "rigs" in far-flung places that have clean and cheap energy sources.

Solar-farm-energy

This is going to be really game-changing because until now, human settlements first arose near seashores and river beds for the convenience of geography, trading, and agriculture. Then, electricity had to be made available to these settlements, by generating it at the available source and then carrying it using wires to the preexisting settlements and communities.

With Bitcoin and its preference for cheap clean energy however, electricity and computational infrastructures will be the first to arise in new untouched locations. And only later, these areas of clean, cheap energy will attract new human settlements thanks to the market forces of supply, demand and pricing. This trend will create an organic, emergent mass migration of human beings to new areas with clean and cheap energy. Imagine this as a global, real-world algorithm in which entire human communities are getting attracted to cheap and clean energy pools! As we increase our use of clean energy at scale, we will drive down our impact on Climate Change. Is this Elon Musk's game plan? Is this why he is so supportive of Bitcoin?

The 5 Tricky Problems with Bitcoin (quick version):

Government Restrictions

Thanks to its libertarian and decentralized ethos, Bitcoin finds resistance from most central authorities that gatekeep and control the mainstream economics and finance. And if your Government discourages it or even outright bans it, then it disables a major bulk of the citizenry from accessing it, because of the fear of legal action, and also due to the lack of technical savvy among the general public.

Bitcoin-government-ban

It always takes more time to politically and legally establish a new system, even if it is technically much superior to the extant systems. Most of the Governments are trying to regularize this system by implementing their own centralized rules and control measures over it. But doing so distorts and corrupts the original value and purpose of this powerful decentralized technology!

Increase of Dark WEB

The decentralized and anonymized nature of Bitcoin attracted people engaged in illegal or criminal activities. This includes unauthorized selling of illegal drugs, weapons, or money laundering.

Dark-web

Even though intelligence agencies can trace and curtail many such activities using cutting-edge data analysis and surveillance methods, the early history of criminal activities using Bitcoin has already given it a bad name among the law-abiding and ethical citizenry.

Market Speculation & Volatile Nature

While we discussed how the design of Bitcoin is intrinsically greed-proof, human greed does find alternative options of manipulating any available asset. Bitcoin has become a speculative instrument for many. Its frequent short-term buying and selling leads to volatility in its prices w.r.t. mainstream fiat currencies.

Market-speculation-bitcoin

This can change only when a critical mass of users and investors realize Bitcoin is less of an alternative currency. But in many ways, it is a superior monetary, banking, and financial system. The main reason behind it not being used as such, is that of government resistance. This type of cultural and collective imagination shift takes time to grow and find a foothold in different subcultures. That is, until it finally hits critical mass, crosses the tipping point, and arrives in a big way overnight, visible to everyone!

Crypto hasn't become the default platform for day to day transactions

This “infrastructure rather than currency” aspect of Bitcoin discussed in the previous point being poorly understood in the general public, presents several confusions. Are we supposed to use Bitcoin as a speculative instrument for making a quick profit; or as a medium of exchange in everyday transactions (i.e. as “money’); or as something much more valuable that must be held onto for a long time, until the new system makes the old one obsolete on account of its superior design?

day-day-transactions

0% chance of recovery & refunds

Lastly, since bitcoins are encrypted virtual assets and don’t exist physically if you somehow forget or lose the private keys to a wallet, you and everyone else has potentially lost access to those bitcoins forever. These lost coins will become stagnant, unused part of the total money supply. This will reduce the network's liquidity, and even form tragic stories of lost fortunes because of technical glitches or human errors. There is a related tricky problem regarding irreversible transactions, i.e. refunds not being possible for transactions done on the blockchain. This is because since it is a non-editable database.

No-refund-coin

We have been running our economy and society in a suboptimal manner for several decades. The culprit? The slow, costly, inefficient, corruptible, centralized architectures running our banking, finance and governance sectors at present. This has continued to cause frequent occurrences of systemic problems in our markets and lives.

While looking for answers to the 5 tricky problems of Bitcoin, we must remember the 5 solid powers of Bitcoin. We must learn to see Bitcoin not as a currency, but rather as the Bitcoin Blockchain Network. This ecosystem presents a superior, decentralized, citizen-driven, bottom-up, truly international, and natively digital infrastructure. It holds the promise of completely replacing the suboptimal, inhumane and outdated architectures and systems of the past. It surely must be looking forward to leading the entire human civilization towards progress and prosperity!

Devavrat Ravetkar

Always Remember: "You Can Learn Anything!" :-)

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