Bitcoin is Dead. Long Live Bitcoin!

Bitcoin is a technology that has been active since 2009, just over 14 years ago. It enables anyone with a computer or smartphone to send value to anyone else in the world, without a third party to facilitate the transaction. It was originally referred to as digital cash, facilitated by miners and stored publicly on the distributed ledger in the Bitcoin whitepaper¹.

[1] In 2008, Satoshi Nakamoto created and released the Bitcoin Whitepaper. Whitepapers are used today, to declare aims and technical specifics of a project.

In my eyes, Bitcoin is a revolutionary technology for both computer science and economics. So, we will answer the question here, why Bitcoin?

Bitcoin as a Vault of Value (System Security)

The Computationally Rate Limited Mint

Bitcoins are inherently secure due to the mining process. Approximately every 10 minutes a new block is validated by a miner. This has been happening since its inception 14 years ago. Each block requires a massive amount of computing power (currently 270 Exahash per second, or 270,000,000,000,000,000,000 hashes² at the time of writing) to add it to the blockchain. All of these hashes per second contribute towards securing your Bitcoin and transactions on the blockchain.

[2] Hashes are the result of a one-way function. You put a value into the function and it returns a hash unique to the input. Hashes are a method of checking the veracity of something. Here’s an example table, feel free to check the sha2 sum on Cyber Chef with a size of 256 and 64 rounds (standard for sha256).

Input	SHA256 Hash
Apples	007f1d79a45f16841559163c2b80f037f03b3c5a644764ae9559a2cbed78218d
ApPLeS	a00a00d7879be8f20103e6b6b71daedd4a238752e84d367709de40f2f6ba084b
APPLES	ec836c5b8554fb2f92cc8fb9a43bc5ec4471cf1afde135d6a40a3cbea7e9d370
Apples, please	5885e1cc75be47201820508ddd0d973feeabd3ab3f72fc6bcd6a0cfae5851d41

No matter what input was provided:

• The length of the hashes stays the same
• The hashes themselves differ significantly

So, why does the network need so many hashes per second to mine each Bitcoin block? This comes down to the current difficulty target, which gets adjusted every two weeks on average. Bitcoin was designed to meet the 1 block per 10 minutes requirement, so the difficulty of mining scales according to the amount of processing power present. Miners are responsible for these tasks:

• Adding transactions to a block
• Finding a valid hash of all the transactions and nonce (special number) that meets the current difficulty target
  • Read: guessing and checking combinations of values until they get it right
• Broadcasting their hash to get confirmed by the rest of the network
  • Upon successful mining, they receive the block reward
• Upon adding the block to the blockchain, they begin mining the next one

The Stone Spreadsheet (The Blockchain)

The blockchain is a globally distributed public ledger. It is possible to view every transaction that has happened in the history of Bitcoin on the blockchain. All parties are pseudonymous, sharing only their public keys with others and the world.

Let’s start with the ledger. In simplest terms, it is a record of payment between parties. It tracks where the payments went, where it came from, and the amount. In ‘blockchain’, blocks can be thought of as bundles of transactions - a continuation of the ledger from the previous block. What about those public keys?

Public / private key cryptography, also known as asymmetric cryptography, is primarily used to transmit messages or data securely between parties. When using public / private keys, the first step is to generate the key pair. For Bitcoin and other cryptocurrencies, this is automatically done when you create a wallet. The public key is linked cryptographically to the private key, but the keys themselves cannot be derived from each other. In order to send a secure message to someone else, you would need to encrypt the message with their public key. Once they receive the message, they can decrypt it with their own private key. This is exactly how Bitcoin is sent from one person to another. Your Bitcoin wallet address is the public key! Your private key should never be shared with anyone, period. Jot down those 12-24 words that represent it and secure them as best you possibly can.

Now, how do blocks become the blockchain through mining? Let’s think about the blockchain with a simple analogy - a chain. In order for a chain to form, you need a beginning (the genesis block), the existing chain links, and the end (the most recently mined block). Mining a new block is just like adding a new link to the chain. It requires specialized machinery to complete (miners and Application Specific Integrated Circuits (ASICs)), relies on the prior links (previous blocks), and the robust material used to create it (the time and physical energy required to mine).

The new links are formed in the blockchain by continuing to leverage hashes. Each new block mined contains the hash of the previous block in its header. Therefore, in order to change the chain you would need to re-mine at least one block and the current block. This is shown in the bottom right corner of the Bitcoin system diagram from earlier.

The Vault (Self Custody)

With a 21 million Bitcoin supply limit, it represents digital property - but only when using a software or hardware wallet. When using a software (hot) or hardware (cold) wallet, this is considered self-custody. You are the custodian of your own assets rather than someone else. And that’s the crux of it - your Bitcoin. If holding cash is a guarantee that a bank has your money, self-custody is a guarantee that an exchange has your Bitcoin or cryptocurrency.

Self-custody achieves a few things:

• Certifies ownership: It is impossible to hold paper Bitcoin (read: Bitcoin on exchanges / IOUs) through self-custody.
• Eliminates direct counterparty risk: The only way for your Bitcoin to be lost is if you lose your private key, period.
  • Note: There is indirect counterparty risk through market volatility - keep this in mind when considering your risk tolerance.
• Enhances security: Utilizing your own piblic / private key pairs is an industry standard practice that secures the world wide web and countless open protocols.

The Value (Utility)

For these reasons, each Bitcoin (or even each Satoshi³), is a representation of both network ownership and a value capsule. These secured units of account currently have a relative value to the total supply as well as their USD (or other FIAT currency) value. I watch the BTC-USD charts to determine when we are in an accumulation range; not because I intend to sell at a higher price, but because I get more Sats (Satoshi) per dollar. Keep in mind, that Bitcoin - which continues to utilize mining, the blockchain, and public / private keys - can be sent anywhere in the world, at any time, with full settlement in less than half an hour.

[3] Satoshis, also abbreviated as Sats are named after the creator of Bitcoin (Satoshi Nakamoto) and represent the smallest denomination possible. There are 100 million Satoshis per Bitcoin. An easy way to think about this is that 1% of a Bitcoin is 1 million Satoshis.

Theoretical Attacks and the Practical Shortcomings of Them

Why does mining provide security? In order for someone to revert or change the blockchain (read: our transactions) they would need to do 1 of 2 things:

• Re-mine the blocks in question and all that follow it on their own
• Control over 51% of the total hashing power

Block Rewriting

OK, let’s look at the strategy of re-mining the specific block. If you successfully mined the block in question, that’s great and all, but you still need to mine the new blocks in the blockchain. Just mining the block in question wouldn’t make it valid. The official Bitcoin blockchain assumes that the longest chain provided is the valid one, since all nodes and miners confirmed that all the existing blocks are valid already. Changing the transaction inside of that block changes the hash of that block, and it wouldn’t be a valid Bitcoin blockchain until all the hash links form a valid chain, longer than the current one. This would require an adversary to complete, approximately (c*60*10)*n+1 hashes, where n is the number of blocks backwards and c is the current hashes per second. This is an infeasible number for any existing individual or supercomputer to achieve, even when n=3. Therefore, we can be very confident after at least 3 blocks that our transaction is, computationally, irreversible⁴.

[4] That is, unless P=NP.

Majority Network Ownership

Now, controlling 51% of the hashing power could be marginally easier. This is where one party or multiple cooperating parties have the majority of hashing power on the Bitcoin network. This would allow them to unequivocally create the longest chain, which would be assumed as truth by the Bitcoin protocol. Luckily, the scale of this operation would still be massive. If not massive, then counterintuitive to miners. As a competitive industry, each corporation seeks to have its own ‘edge’ over the others. The adversary would require more capial than many of the largest mining firms combined if operating alone. Not only that, but they would need the following:

• Enough electricity to power the miners
• Cheap enough energy to stay afloat until 51% is achieved
• Physical storage space (i.e. large-scale datacenters) to hold the miners (ASICs)

With all of these factors in view, Bitcoin is the perfect example of computational infeasibility from an adversarial perspective. Bitcoin makes the difficulty of attack so steep through computational asymmetries that attempting to do so is almost guaranteed to be futile.

Bitcoin as a Protocol

With open documentation, an active developer base, and open source software, Bitcoin also provides a foundational protocol to build on top of. One of the most prominent examples of this is the Lightning Network.

Fees on the Bitcoin blockchain are relatively high, but do not scale relative to the transacation amount, but rather the transaction size. Therefore, the base blockchain of Bitcoin could be considered a settlement network that provides finality of transactions. The Lightning Network is considered a layer 2 protocol, since it is built on top of Bitcoin as the layer 1. The Lightning Network without Bitcoin would be almost useless. This follows a similar structure to the OSI model in computer systems and networks, where computing foundations and protocols build on top of each other to form a usable and powerful system.

The Lightning Network utilizes channels to establish connections between users. These channels require a balance of Bitcoin to be present because a ledger is maintained, much like Bitcoin, but with unconfirmed transactions. Once the parties want to settle transactions, only one of them needs to provide the shared ledger to the Bitcoin network - the transactions are already recorded on the ledger, they just need to be officially settled. At a very high level, it can be thought of as a bar tab - record purchases and balances, run the check when closing or as requested.

I’m no expert on the Lightning Network, but I intend to learn more about it throughout 2023. One promising use case that has gotten a lot of buzz in the Bitcoin community has been Nostr, a social network built on top of the Lightning Network.

Bitcoin as a Speculation

As a commodity that can be traded on many different exchanges, the price of Bitcoin has been known to swing wildly both up and down. There are a number of cases for each direction looking to the future.

The Bullish Future

Over the years, Bitcoin has proven to be a resilient and powerful technology. The bullish future of Bitcoin is one where more people understand the value proposition and innovate around the already novel technology.

Sound Policy in an Unsound World

Bitcoin’s given properties lend it to be a sound monetary asset, similar to gold. Arguably, it is significantly easier to handle than gold. Instead of arranging for shipping of gold bars, you can send Bitcoin. Mining and scarcity are what make both Bitcoin and gold sound. With the U.S. Dollar, its fate is in the hands of the Federal Reserve and U.S. monetary policy. The cost to print is negligible compared to the value created out of thin air, which is unsustainable in the long term.

The future looks bleak for global markets in the near term. Central banks all around the world are rushing to tighten monetary policy after loosening it since the financial crisis of 2008. We have been living in a credit-driven society for too long and now the debt is catching up, fast. We see a recession on the horizon after U.S. Government Bond yield curve inversion⁵. We see layoffs picking up, especially in tech. We see the debt ceiling being reached and are on the precipice of a literal $1 trillion dollar coin mint. No, that is not a joke. These strategies and impacts of federal policy are far-reaching and collossal in scale.

[5] Yield curve inversion is a financial anomaly, indicating lack of confidence in the market to meet interest rate quotas on government bonds. Typically, the yield curve looks healthy - increasing duration bonds have increasing yields.

This makes sense, right? If you lend the government your money for longer, you should get a higher return back.

Inverted yields, on the other hand, are where the return of a long term bond like the U.S. 10 year has a significantly lower return than shorter duration bonds like the 2 year or 3 month. It is typically a harbinger of an approaching recession.

It is possible to see Bitcoin as a breath of fresh air in such a chaotic environment. What does Bitcoin have that the U.S. monetary system doesn’t? Accountability. We can view the blockchain with truth and veracity, churning out a new block and ₿6.25 every 10 minutes, knowing that it represents debit instead of credit in the system.

Increasing Adoption (For Better and Worse)

Millions of people use Bitcoin. If this technology is anything else like other revolutions in history, there could be billions of users in due time. Given the ability to send Bitcoin anywhere in the world, it is a global technology. With large institutions and even countries adopting Bitcoin, we could see not only an influx of individuals using the technology, but also nation states and large scale trade networks.

Recently, Saudi Arabia expressed interest in pursuing oil deals in currencies other than the U.S. Dollar [Bloomberg]. The ‘petrodollar’ has been in existence and exclusively used in oil trade since the 1970s. This could be the beginning of a tide shift for international trade. Why wouldn’t they allow for Bitcoin in the future? The fees are extremely low for large transfers of value between parties, with 24/7 settlement. There are no bounds to the trade that could be settled using Bitcoin in a highly globalized world. Unfortunately, we see worldwide trade forming around economic spheres of influence primarily due to the war in Ukraine. Bitcoin is a software project, not a political ideology.

The Bearish Future

While Bitcoin has an attractive value proposition, there are hurdles that it needs to overcome in the future.

Inclusion in ‘The Everything Bubble’

When interest rates were low, borrowing money was easy - not just for individuals, but for startups, large corporations, local businesses, and the U.S. Government. We took this easy money for granted, letting the pile of low interest debt accumulate while monetary gains rocketed to new highs in the economy, equity markets, and cryptocurrency. If what we have seen in 2022 is the pop of a 14 year bubble, Bitcoin is between a rock and a hard place.

Up until now, Bitcoin hasn’t existed in a high interest rate environment. It is impossible to know its resiliency until the effects of interest rate increases are fully integrated into the economy. We may never see the full pop of this bubble if it causes the Federal Reserve to start lowering interest rates and turning towards Quantitative Easing (QE) again to stimulate the economy.

Decreasing Mining Rewards (The Halving)

Every 4 years, the block reward for mining gets cut in half. Below, we can see the block reward schedule for Bitcoin over time.

Year	Block Reward, ₿
2009	50
2012	25
2016	12.5
2020	6.25
2024	3.125
2028	1.5625
2032	0.78125
2036	0.390625

As we can see, the block reward will fall below a whole Bitcoin in 2032. The question is, will that block reward be enough to motivate miners to secure the network? So far, this halving schedule has been bullish for the price and network security. Each halving is abrupt, decreasing the supply while maintaining or increasing demand. Naturally, the price of Bitcoin rises once supply decreases.

But what if the supply issuance and demand drops? Well, then mining is no longer an attractive industry. The operating costs would be too high for miners to continue, leaving only those who have negligible electricity costs. Currently, the success of Bitcoin relies on an increasing price to remain sustainable as a network. In my opinion, we will know whether or not this is a valid concern in either 2032 (once the block reward is less than ₿1) or 2036 to 2040 (once the block reward is comparable to the amount of fees per block). Network health of any sort past this point, either through low cost and renewable electricity or other means would be extremely bullish for Bitcoin leading into the second half of the 21st century.

What would this downfall look like? Well, there would be a series of cascading dominos:

1. Majority of miners stop mining 1-2 years after the halving
   1. Lack of demand fails to ignite bull run
2. Hash rate decreases, without an immediate difficulty adjustment
3. Blocks are mined significantly slower than they should be
4. Bitcoin gets sold off on exchanges and self-custody users are left unable to sell their holdings for extended periods of time

Now, that is the worst case example. An intermediate (and more likely) case would be that the hash rate slowly declines and the difficulty adjustment scales accordingly. This would result in a less damaging sell-off but would mark the demise of Bitcoin until all miners can utilize extremely low cost electricity or other catalysts.

Bitcoin as Freedom

When using Bitcoin, you declare that decisions around money are your own. You understand the risks, but you also understand Bitcoin. There is no functionality in the Bitcoin network that would freeze your assets or deny transactions, period. Contrast this with the current monetary system, where bank accounts can be frozen and transactions can be limited.

Bitcoin detaches itself from the siloed institutions of FIAT money. When you buy or earn Bitcoin, you take a stance against established financial institutions and outdated practices. Committing to buying Bitcoin is a reallocation of capital to a new world of money and governance. Your dollars aren’t really yours, but your Bitcoin really is.

Bitcoin as Innovation

Remember how we were talking about the mining death spiral in a bearish future for Bitcoin? If we can anticipate the failure points in advance and shift the industry now, we don’t need to worry about it.

Let’s think about it this way. Energy production at any given time must at least meet the demand of everyone currently using it. Individuals pay for what they use and the energy providers continue operation with their profits. Many miners are consumers of energy too - they pay for the electricity they use to mine, which must be factored into their margins from block rewards. What if they didn’t need to do that at all? There are a number of Bitcoin mining operations that utilize excess supplies of energy. Without Bitcoin mining, that energy just wouldn’t be utilized. Instead of paying to use it, miners can use the excess for free and provide a cut of the block rewards to the energy producers.

Personally, I hope to see continued advancement of mining where energy supply exceeds demand through wind, solar, geothermal, and nuclear power through the rest of the 2020s. A recent podcast episode of What Bitcoin Did talked with a small mining company in Africa facilitating mutually beneficial agreements with micro grid energy providers: YouTube.

Ethereum as Competition

Ethereum is a different cryptocurrency that was created in 2014 by Vitalik Buterin. While it still utilizes a blockchain, the specific mechanics are drastically different. For starters, it isn’t sound money. With Ethereum, there isn’t a supply limit. The total supply of Ethereum increases or decreases depending on how active the network is as a whole. Additionally, it uses Proof of Stake (PoS) rather than Proof of Work (PoW; mining), which encourages easy money much like the printing of U.S. Dollars.

One thing that Ethereum has going for it is the usage of smart contracts. The Ethereum blockchain was designed so that it could be developed on top of, behaving as a distributed computer. There are very few cryptocurrencies that resemble Bitcoin, but many that resemble Ethereum - competition is very high within the PoS smart contract project category.

While transactions are fast and developer involvement is high in Ethereum, I have a number of concerns:

• Ambitious development goals
  • Provides an increased attack surface for adversaries
• Not fully censorship resistant (fund freezing / U.S. software sanctions enforcement / denied transactions / special capabilities given to validators)
• Steep requirements to participate in the network as a validator (32 ETH minimum, over $40,000 at the time of writing)
  • The cost of running your own Bitcoin node should be less than a few hundred dollars each year
• Developer disagreements
  • Recenly, developers have been debating whether or not to allow validators to withdraw their staked Ether in the next upgrade
  • Allowing withdrawals during this upgrade has always been the plan, but they are not all on the same page of how to proceed; What happens when more complicated decisions need to be made?
• Presence of a de-facto CEO: Vitalik Buterin
• Risk of being considered a security by the SEC (U.S. Securities and Exchange Commission)

Crypto as an Immature Space

Bitcoin has carried the torch for 14 years and doesn’t look like it will be giving it up anytime soon. Through the onslaught of alternative projects using Bitcoin as a jumping off point, many projects from previous market cycles have already faded into obscurity. The projects that stick around and never seem to go away - namely Bitcoin and Ethereum - show the value that they provide to the world by existing for the amount of time they have existed.

Many projects are dubbed ‘Ethereum Killers’, promising increased efficiency of the blockchain and lower transaction fees. If or when Ethereum kills Bitcoin, ‘Ethereum Killers’ still have a long way to go.

There are others considered ‘Meme Coins’ - the likes of DOGE (Doge Coin) and SHIB (Shiba Inu). These cryptocurrencies are purely hype driven with a lack of utility and use cases.

Who knows which cryptocurrencies will still be around in 10, 20, 50 years, but it doesn’t always pay off to bet on the underdog in financial markets. 14 years is a short period of time, and the air of permancence around Bitcoin and Ethereum with statements like ‘Bitcoin, not crypto’ is exclusionary and unrealistic. Bitcoin keeps it simple, and its simplicity is a major benefit. At the same time, who are we to say whether or not it will be around to carry the torch for eternity?

Conclusion

In summary, Bitcoin exists. It chugs along every minute of every day, working to make the network the best place it can be to store value. It works tirelessly to provide clarity and security in a centralized and ingenuine world. Other cryptocurrencies exist, but their fate is in the hands of the SEC and whoever leads their development. Bitcoin might be one of the only commodities in the cryptocurrency space, and that speaks measures to its 14 year throne. It dares other projects and protocols to achieve what it has, forging ahead with simplicity and grace.

Acknowledgements

Written and sketched by Jesse Walling with help from:

• Isabella Graziani (Editing, Sketching)
• ChatGPT for the following:
  • Word choice for 1 section heading
  • Clarifications on details of Bitcoin’s inner mechanics