<nettime> de Jong, Lovink, and Riemens: 10 Bitcoin Myths

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10 Bitcoin Myths

By Eduard de Jong, Geert Lovink and Patrice Riemens

"Pigs will fly, but not in the next 100 million years." Johan Sjerpstra

1. "Bitcoin is a peer-to-peer system."

In order to transfer value from one Bitcoin account to another, the 
owner of bitcoins uses the services of a collective of operators known 
as 'miners' who validate the transaction on the Bitcoin distributed 
database also known as "the ledger." The relationship between these 
operators and an individual user, i.e. owner of bitcoins, is hence one 
between merchants and customer and not one of equals. Only miners are, 
and then only operationally speaking, peers, since they all perform the 
same software program. However, they are also, and mostly, in 
competition which each other because they need revenue to pay for the 
equipment they operate.  Also, any time an update to the database is 
made,  only a single miner is actually adding the transaction records 
with Bitcoin value transfers to the ledger, and gets the financial 
rewards for doing this. In this way, the incentive for miners to support 
each other is limited, and one cannot speak of a peer-to-peer 
relationship in the traditional sense.

Over the time Bitcoin has been operational the inherent hierarchical 
relation  between miners and users has become more pronounced by an ever 
rising technical and financial barrier to becoming a miner. Investments 
and operating costs of the necessary equipment  rise in tandem with the 
continuously increasing difficulty of adding a new record to the 
database that is built into the Bitcoin protocol.

Conclusion: Bitcoin is not a peer-to-peer system, but an on-line 
merchant-customer transaction market place.

2. "Bitcoin does away with intermediaries and fees."

To make a payment using bitcoins a Bitcoin user needs a "Bitcoin 
exchange" and these exchanges charge a fee. The sole exception is if the 
user is a data base operator (a.k.a miner), having aggregated some 
bitcoins by mining and exclusively pays other users who have decided to 
accept and keep bitcoins.

There is an other intermediary in Bitcoin, the operators of the 
distributed data base, the Bitcoin miners. A miner also needs to charge 
for its labor and expenses. For the time being, a miner is rewarded with 
newly created bitcoins"that is why updating the database is called 
'mining'. By design, the available amount of bitcoins that can be mined 
is restricted, and it is expected to be exhausted somewhere around 2040. 
After exhausting the lode miners can only earn money by explicitly 
charging a fee.

Conclusion: De-facto, Bitcoin users need to engage services of 
intermediaries and do pay fees for their transactions.

3. "Bitcoin is an alternative currency."

An alternative currency, by definition, is designed to _entirely_ 
displace and replace existing currencies. Complementary currencies  
intend to _partially_ displace and replace existing currencies, usually 
in a local setting.

By design, Bitcoin is  an alternative currency. Real world observation 
however, shows that most transactions in bitcoins translate, either at 
the point of purchase, or at the point of sale, in transactions in 
existing currencies. Only miners can create bitcoins, non-miners need to 
acquire them, usually by way of purchase.

In practices Bitcoin transactions are often intended to avoid high 
transfer fees or bypass local restrictions in making international 
payments. In such cases, bitcoins are purchased, swiftly change hands, 
and are just as fast converted again in another currency. In this 
'cash-in cash-out' scheme Bitcoin operates then as a facilitator in the 
circulation of existing currencies and not as a replacement of these. 
Cash-in cash-out has been shown the most common mode of operation in 
bitcoins. A Bitcoin transaction can also be speculative in purpose,  to 
hoard bitcoins  expecting a raise in their value. In this case Bitcoin 
can be considered an alternative to other currencies, comparable to an 
speculative investment in dollars or in commodities, like iron ore, gold 
or grain.

Conclusion: Bitcoin does not actually operate as an alternative 
currency.

4. "Bitcoin is not a fiat currency."

In practice, acceptance of Bitcoin payments takes place before the 
(irrevocable) recording of the transaction in the distributed database. 
That is, without formal confirmation of its validity. Apparently, the 
parties involved in payments in bitcoins _believe_ in their eventual 
recording. The payee therefore trusts the _eventual_ availability of 
received funds.

This looks distinctly similar to the way traditional instruments of 
payments, such as coins, banknotes and bank transfers, operate. The 
users trust, based on  experience and social convention, the correct 
operation of the system such that received funds are available for 
further spending. This 'systemic trust' in traditional, fiat, currency 
is underpinned by a mix of technical features such as hard to copy bank 
notes, fraud detection software in financial institutions and government 
imposed and enforced regulations.

Conclusion: Where in practice the 'systemic trust' in Bitcoin is no 
different from that of traditional currencies, Bitcoin operates _de 
facto_ as a fiat currency.

5. "Bitcoin is anonymous."

The central database with transactions in bitcoins is publicly 
accessible. This is an essential Bitcoin design property to, at least in 
theory, allow any party to participate as processing node (miner) in 
order to get involved in updating the distributed database. The parties 
in a transaction are identified by unique numbers, and a payment 
transaction is linked through this number to the transaction wherein the 
spend value was received.

But as most Bitcoin transactions effectively constitute a payment in 
traditional currency at one end or the other, or both, they involve well 
known parties that exchange bitcoins for and against these currencies, 
the Bitcoin exchanges. Hence, payments in bitcoins can be traced as the 
value flows between these exchanges. Identification to the humans 
involved in a payment, e.g. by law enforcement, are therefore 
_potentially_ possible.

Conclusion: Bitcoin is not an electronic form of cash and does not 
protect privacy.

6. "Bitcoin is secure and cannot be hacked."

Security for electronic payments has several parts: first to make sure 
that only the rightful owner can make a payment, secondly to make sure 
that the intended recipient actually receives the moneys paid and 
finally that only money can be paid that is actually owned by the payer 
and hence can not be spend twice.

In the Bitcoin sphere a payer uses a password to initiate a payment from 
her computer. The password unlocks a private cryptographic key stored on 
the computer to send cryptographically protected messages to be recorded 
in the Bitcoin database to make the payment. Yet, computers can be 
hacked, and a hacker can gain control of the private key and hence 
initiate a fraudulent payment. A loss of the private key, for instance 
by a crashed hard disk, does not just lose access to the money, it 
actually loses all the moneys controlled. Indeed one of the design 
features of Bitcoin is that payments, once made, cannot be reversed or 
recalled.

For the ordinary user, this represents a much higher level of risk than 
in traditional banking, where losing the bank card or PIN does usually 
not result in losing the whole balance held in the bank account.

On the functional side, the operators of the processing nodes in the 
distributed implementation of the shared Bitcoin database use a protocol 
to  agree on the next version of the database. This is required to 
correctly incorporate the payment transactions made since the last 
update. The software in each of the processing nodes must verify the 
correctness of the transactions by inspecting previous transactions 
where the payer has received the value to be spend. Yet, servers can be 
hacked (e.g. with a virus) and the continued operations can therefore 
not be guaranteed.

By design, the blockchain protocol does not guarantee that all past 
transactions remain stored for ever or can be available to each of the 
processing nodes (miners) for inspection in a fail-safe way. The 
protocol does also not guarantee that a processing node actually 
verifies the transactions it records. The blockchain protocol cannot 
prevent that fraudulent transactions get recorded, and does not provide 
a way to remove or correct fraudulent transactions.

Conclusion: using Bitcoin is more risky than the traditional payment 
infrastructure.

7. "Bitcoin operates without trust."

Bitcoin literature is adamant that the Bitcoin set-up successfully 
substitutes 'objective' 'algorithmic' trust for less reliable, because 
human error and trickery-prone, 'subjective' institutional or political 
trust.

As described previously, the blockchain protocol used to synchronize 
updates to the Bitcoin central database (or ledger) does not guarantee 
the correctness of the updates made. Most processing nodes that update 
the database, use the same open source implementation, the Bitcoin 
"miner" program.  This program  includes verification of transactions, 
but transaction verification by the miner program might be compromised 
either accidentally, by a software bug, or maliciously, e.g. by a virus, 
or by a miner intent on undue gains. Users engaging in Bitcoin 
transactions implicitly trust that the miner programs continues to 
operate correctly, that the equipment is protected against virus attacks 
and that the miners will not subvert it.

Also, protection of the stored value at the level of the individual 
owner is not very strong in the Bitcoin set-up. As a consequence, 
Bitcoin service providers have emerged offering enhanced payment 
security, in the form of managing their clients' wallets. This service 
can be provided both online and with physical tokens like smart cards. 
Making use of 'wallet providers' evidently entails trust in the 
continued correct and honest operations of the online service or of the 
physical device.

Conclusion: Bitcoin substitutes one form of 'subjective' trust in 
traditional institutions for another in new organizational forms.

8. "Bitcoin is politically neutral."

British prime minister Margaret Thatcher, in a famous "last words' 
speech against the Euro, affirmed that decisions about money and 
currency are all essentially political in nature. In this context 
politics must be understood as more than what politicians do, essential 
politics is about the citizens and the state they live in. The  decision 
that is embodied in Bitcoin's design  to limit the issuable volume of 
bitcoins to 21 million units can only be seen as political.

Other characteristic Bitcoin features, such as it rewards for early 
adopters and big operators, its essentially deflationary and 
hoarding-inducing nature (also due to the designed scarcity of 
bitcoins), its rejection of regulatory oversight and consumer protection 
and of state intervention generally, all resonate with political beliefs 
of "techno-libertarians". Conversely, it is difficult to imagine how 
Bitcoin could effectively function in a capitalism-unfriendly political 
dispensation.

Conclusion: like any other monetary system, Bitcoin, in its technical 
design reflects explicit or implicit political choices.

9. "Bitcoin is a sustainable system."

The whole Bitcoin set-up is, and especially the functioning of the 
distributed implementation of its central database with the 
compute-intensive blockchain protocol, is dependent on increasingly 
sophisticated and trouble-free network infrastructure resulting in an 
ever increasing consumption of resources. This clearly is at variance 
with the ever more forceful, and inescapable calls for less consumption, 
foremost in the energy sector.

Conclusion: Bitcoin does not fit well in the required transition to 
sustainability. This contrasts with traditional financial institutions 
that can reduce energy consumption a pace with improvements in IT 
technology.

10. "Bitcoin can scale to world size."

Both the limited number of possible units of bitcoins and  inherently 
severe technical limits to the operational speed of the blockchain 
protocol pose such insurmountable obstacles to a global economy that 
would run exclusively with bitcoins. In the absence of governance of 
Bitcoin, even a technical modification to increase transaction capacity 
are very hard to implement.

For consumer payment transactions,  for instance, it is hard to conceive 
how the  blockchain protocol in Bitcoin can be made to  operate 
effectively at the same speed and volume as systems maintained by, e.g., 
VISA, Mastercard, AmEx, JCB and such.

As shown in Argentina or Greece  Bitcoin can be useful in some specific 
situations. In these cases it has been  a mediator between traditional 
monetary systems. For Bitcoin to 'scale up' to a true global scale, 
while maintaining (a semblance of) stability and security would for 
quite some time to come require such large amount of resources as to 
defeat any short or medium term perspective of attainability.

Conclusion: As Yanis Varoufakis, the economist and former finance 
minister in Greece, formulated it: "Bitcoin is not capable of 
"powering" an advanced, industrial society."

The authors thank Boudewijn de Kerf for a quick review, while keeping 
full responsibility for the substance of the argument

Amsterdam, November 30, 2015, for MoneyLab #2, December 3/4, 2015, 
Pakhuis de Zwijger, Amsterdam (NL). URL: 
http://networkcultures.org/moneylab/.


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