--- /dev/null
+---
+postid: 027
+title: Bitcoin as infrastructure [iii]
+date: August 9, 2014
+author: Lucian Mogoșanu
+tags: cogitatio
+---
+
+Also read: [Part I][1], [Part II][2].
+
+## Part III: Bitcoin as infrastructure
+
+Now that I have described "the bigger picture", I can finally focus on the
+subject that I've set out to dissect. I promised that I wouldn't get into
+details pertaining to finance and economics; however, I feel that I must
+provide some background, especially that I myself wasn't very aware of Bitcoin
+at the time when it appeared.
+
+The idea of "electronic money" isn't by any means new; it had been an
+interesting research subject in the field of distributed systems before 2009,
+the year when the anonymous Satoshi Nakamoto published his Bitcoin white paper.
+The main idea behind virtual currencies is that currency is in itself a token
+whose value is (theoretically) determined by the value of various resources in
+the market[^7]. In other words, money has no intrinsic value and it's used only
+to quantify the value of useful stuff: for example I cultivate tomatoes and
+sell a bunch of them for $x$ coins. Then I buy some other stuff I need, say,
+computer games (since I don't produce computer games), for $y$ coins, and since
+I only possess $x$ coins, I can only buy computer games for $y \leq x$. Thus
+coins are a mediator, and a useful one indeed, since I don't know (and don't
+care) whether computer game producers need or want to acquire tomatoes or not.
+
+So virtual currency is, despite what some people might think, the ideal form of
+currency, if we assume that energy spent on running computers has less value
+than the costs of producing paper and/or metal tokens. The open problems before
+2009 remained: who decides how many monetary units go into the market, and who
+intermediates transactions?
+
+The obvious answer to that would be the state and banks respectively. However,
+we should note that banks are institutions traditionally used for depositing
+and withdrawing money, plus credits and the such. Allowing them to intermediate
+each single transaction would turn them into a single point of failure, and
+it's stupid, to say the least, to assume that the system is infallible. The
+same could be argued about the first problem: the state could in theory decide
+how much money gets to be produced, e.g. instead of tying it to some scarce
+resource, but we can't expect the state to make decisions that will [satisfy
+everyone][3]. Thus Satoshi proposed an alternative design which is
+decentralized, i.e. it eliminates the state and banks from the equation, and
+which eliminates some technical problems, i.e. double-spending, by design.
+
+The way it does that is still poorly understood by most people, therefore I
+will attempt (and hopefully will not fail) to explain it[^8]: assuming that the
+network contains money, a number $n > 0$ of accounts are open at a given time
+and that the sums of money in all accounts are represented by a set
+$A = \{a_1, a_2, \dots, a_n\}$, we could in theory create a transaction
+$t_{ij}$ from $a_i$ to $a_j$, $a_i, a_j \in A$; thus $i$ transfers $x$ units to
+$j$ and $a_i$ and $a_j$ get updated[^9].
+
+Assuming that all the information above is accurate, the question is, how do we
+prove that the transaction was made? i.e. that $a_i$ loses $x$ units and $a_j$
+gains the same amount. The natural solution proposed by Satoshi involves
+keeping a public database $T$ of transactions, which records all the
+transactions from the beginning of the world to the current moment. Thus, if
+$i$ updates his copy of the database and $j$ does the same thing, and $k$ and
+so on do the same, then eventually the majority of the network will agree on
+the transaction; as a consequence, all transactions are public. This is not
+entirely dissimilar to the way DNS works, the main difference being that DNS is
+structured hierarchically, while Bitcoin is implicitly peer-to-peer.
+
+Having said all the above, the Bitcoin database, known as the
+"blockchain"[^10], didn't start as I described it earlier. There was no money
+in the system, which Bitcoin solves by introducing a "proof-of-work" framework:
+to create money, one must "mine" it by solving a cryptography problem, e.g.
+finding the transaction block which encodes to a particular hash. The problem's
+difficulty increases as the database grows, and thus virtual coins, i.e.
+bitcoins, become more and more scarce as the monetary mass grows. Miners are
+however central to Bitcoin by providing transaction validation (the "agreement"
+mentioned above) and are incentivized through transaction fees.
+
+I won't discuss the model's validity and soundness[^11] here, but it's safe to
+say that the community of Bitcoin enthusiasts are testing it and discussing its
+problems since its beginnings, which doesn't automagically make the system
+perfect, but it shows that it has worked in practice until now. I will leave
+the technical debates to people more knowledgeable than myself.
+
+It should be noted that while Bitcoin rests on top of the Internet's
+infrastructure, it doesn't specifically require it: in theory, one could
+validate transactions using pen and paper, although computers and the Internet
+make it practical. It should also be noted that Bitcoin as I've described it is
+more than a currency in the usual sense: it is in fact a protocol for
+distributed transaction validation through voting.
+
+In other words alternative blockchains can be created to use the same
+infrastructure for various other applications, e.g. voting, file storage,
+social networks and so on, and so forth. The possibilities are quite hard to
+imagine, but we could begin with every piece of centralized software that would
+naturally run in a decentralized fashion[^12] using a blockchain. Granted, this
+would probably break the Web as we know it, but it would also break the [feudal
+model][4] of the current Internet.
+
+In the end this could prove to be an impractical dream, a dream which I'll
+remain skeptical of just for the sake of pragmatism. But this aside, I can't
+help but recognize the potential of this thing, since it's not so different
+from how telephones looked in the '60s, personal computers in the '80s or the
+Internet in the '90s. And to prove that I'm not the only crazy person thinking
+about this, and more, that I'm not the first, nor the last, getting the idea of
+Bitcoin-as-infrastructure, I will provide some examples of interesting
+applications based on the infrastructure provided by Bitcoin before drawing a
+conclusion to my essay.
+
+**Next**: Examples and conclusion
+
+[^7]: Rigorously speaking it is in fact established by the agents, based on the
+value of other resources. E.g. if the demand for apples is high but the supply
+is low, then the price-per-unit of apples in some arbitrary currency will
+necessarily rise; on the other hand, if no one wants to use said currency for
+exchanging apples, then the (non-intrinsic) "value" of said currency will
+plummet. As far as economics go, this is mostly empirical evidence, although
+the reasoning itself is sound.
+
+[^8]: Not unlike many Haskell programmers attempt to explain monads and fail.
+But it's the attempt that matters the most, as it crystallizes the idea in the
+head of the storyteller.
+
+[^9]: This is from an imperative rather than a formal mathematical point of
+view, since identifiers never "get updated" in mathematics, rather they are
+different at different (explicitly given) points in time $t$. The two views are
+equivalent though, and one can be expressed using (subsets of) the other.
+
+[^10]: Due to it being a chain of signed cryptographic hashes of transactions.
+
+[^11]: Here's an interesting question: what would happen if a single entity
+managed to achieve more than half of the network's mining power? And what if
+that entity happened to be the state? I guess we're back to square one then.
+
+[^12]: Facebook, most Google services and a plethora of other web applications
+that kill their users' privacy for the sheer purpose of serving better ads.
+
+[1]: /posts/y00/01f-bitcoin-as-infrastructure-i.html
+[2]: /posts/y00/022-bitcoin-as-infrastructure-ii.html
+[3]: /posts/y00/017-the-mechanics-of-socialism.html
+[4]: https://www.schneier.com/blog/archives/2012/12/feudal_sec.html
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