Many people who don’t know much about Bitcoin, or who have a poor grasp on economics, have severe misconceptions about Bitcoin. I do not attempt to dispel those myths here because many others have already done so. Rather, I’d like to dispel a few myths that are pervasive in many people who are generally knowledgeable about Bitcoin.
While some of you may find that more than a few of these myths are “obvious”, they have all been included because I’ve encountered several otherwise intelligent people who believed them. If they do not enlighten you, at least let them be a reminder to dispel those misconceptions when you encounter them around you.
Myth #1: Satoshi solved the Byzantine Generals problem which was thought impossible to solve!
Fact: The consensus problem isn’t that difficult, it’s about who’s allowed to take part in it.
There is a wealth of literature on the Byzantine Generals problem, and many solutions have been proposed. The solutions to this problem are indeed often quite complex — unless they are synchronous and use public key cryptography. With the use of public key cryptography (such as the elliptic curve signatures used in Bitcoin but also SSL and countless applications) and synchronicity the problem is considered trivial: it boils down to a majority vote. As Ben Laurie points out, the problem that the block chain attempts to solve isn’t how a consensus should obtained but who should be a part of that consensus. If, say, IP addresses, were used as the consensus group, an attacker could control the chain by controlling a large swath of IP addresses, an attack known as the Sybil attack. The consensus group for Bitcoin is hashing power, a scarce resource.
Myth #2: The proof-of-work system is great because it incentivizes miners to upgrade their equipment, thus a lot of computing power is powering Bitcoin.
Fact: These upgrades do nothing to increase the transaction processing capacity of the Bitcoin network.
Let’s start with what upgrades do accomplish. The race to build more hashing power (by developing ASICs for instance) means that the cost to pull off a 51% attack on the network increases. In this respect, the network is more secure. Note however that the amount of money spent on mining and mining equipment must be approximately equal, in the long run, to the amount of bitcoin paid in transaction fees or created through mining. Given off chain transactions, this could dwindle to very low levels in the future. However, the processing power itself doesn’t matter. The only thing that matters is that something expensive is being irreversibly spent, to make it hard to attack the network. Spending money on computing power has the nice property that you can easily prove it online, but the computations themselves are deliberately done on worthless problems. Emphatically, this computational power is not used to validate transactions, an operation which only takes a modest amount of computing power. More hashing power does not mean that the Bitcoin network can process more transactions per second or process them faster.
Myth #3: Bitcoin is a math-based currency / is backed by math.
Fact: Bitcoin is based on a clever set of incentives.
Part of Bitcoin is indeed math based: its cryptography. Cryptography makes computational guarantees based on widely believed (but not yet proven) mathematical conjectures. For instance, Bitcoin payments rely on signatures which are computed using exponentiation (or multiplication, depending on how you think about it) in an abelian group. Faking those signatures would require solving the discrete logarithm problem in elliptic curve groups, a problem that the mathematical, computer science and cryptographic community considers very unlikely to be solvable efficiently on a classical (non quantum) computer. In this context, “not efficient” does not mean “too costly” or “impractical”, it means that the amount of computing power needed to solve those problems reaches literally astronomical proportions.
However, the cryptography in Bitcoin is the easy part. The safety of the Bitcoin protocol strongly relies on the impracticality of forking the block chain. The assumption made is that miners are incentivized to behave honestly with pecuniary rewards. This makes it costly to attack the system, and even gives a would be attacker an incentive to still behave honestly. This set of incentives is carefully balanced to maintain honesty in the system and avoid conflicts of interests. This really is the heart of the block chain, and it relies on game-theory not mathematics. Yes, game theory is a branch of mathematics, but to call Bitcoin a “math-based currency” because of its reliance on game theory would be like calling plumbing “biology based” since plumbers happen to be biological organisms. There are no mathematical or even computational guarantees, only a set of incentives. This isn’t to say that the design of incentives in Bitcoin isn’t clever or even artful, but to call the currency math-based, or worse math-backed, is either dishonest or ignorant.
Myth #4: The proof-of-work system is completely decentralized
Fact: Trust is still involved in the system
One idea behind the block chain is that anyone downloading Bitcoin for the first time can identify the real block chain from its forks by simply looking at the chain starting from the genesis hash and totaling the most hashing power. This means you do not need to extend trust to anyone… once you have downloaded the Bitcoin client. But where should you download the Bitcoin client? How do you know bitcoin.org isn’t controlled by malicious attackers? Well perhaps you could look at the developer’s signature of the binary or at the source code. But how do you know who the official developers even are? You could Google that information and find that many reputable news organization all seem to agree that a certain “Gavin Andresen” is one such developer. But then again, perhaps the Wall Street Journal, the New York Times, Bloomberg, the Financial Times, Al Jazeera, Xinhua, the Guardian, Pravda, Google, Yahoo, Bing, Duckduckgo, etc are all conspiring to trick people into downloading a version of the Bitcoin software with the wrong genesis hash and perhaps a different proof of work function. They could succeed provided that you don’t notice that this network has no Bitpay, no Coinbase, no Bitstamp, etc.
Obviously, I am not trying to argue that you cannot reliably download the “real” Bitcoin client, such a conspiracy is ridiculously unlikely. But this operation isn’t decentralized, it relies on a distributed consensus among reputable peers — something that seems anathema to the ethos of Bitcoin. One could argue that Bitcoin minimizes the reliance on this consensus, by making it a one time thing… but this consensus is required every single time a new client joins the network.
Perhaps the right answer is that the reputation based, distributed trust mechanism works reliably at low frequencies (on the scale of months to years) while the proof-of-work mechanism works best at high frequency (10 minutes for Bitcoin). While I have a lot of sympathy for Ripple’s distributed ledger (which is similar to the mintlets described by Ben Laurie . No, I’m not referring to the network of credit line that ripple maintains, but to the consensus system, which is totally orthogonal to it), I think the right answer is probably a mix of technologies. Bitcoin’s checkpoints for instance, while inelegant, make use of the low frequency trust mechanism to complement the safety of the proof of work system. But this also means that much of the first-principle type of objections to proof-of-stake mechanisms, are too theoretical.
Myth #5: A decentralized system is safe
Fact: not necessarily
Decentralization implies that you do not need to trust anyone a priori, but you may have to trust someone a posteriori. Indeed, the bitcoin ecosystem has degenerated into a distribution of hashing power where ghash.io holds nearly 50% (and recently as much as 51%) of the hashing power. They could collude with any another pool manager (or be forced to collude by an attacker, such as a government) to obtain a majority of the hashing power and launch a 51% attack on the chain. This does not seem particularly safer than explicitly choosing a set of reputable organizations. Is a group such as the Wikimedia foundation, the Swedish Pirate party, Wikileaks, and, say, the University of Hong-Kong more or less likely to collude than the current pool operators? If we are to believe developper Gavin Andresen, this is not such a big deal because ghash’s incentives are to behave honestly. In this case, why bother at all with a cumbersome proof of work system? Let us have ghash sign every block and be done with it; the system would be far more efficient, much cheaper and just as safe.
Myth #6: The Bitcoin ledger is just a technology, it has nothing to do with politics.
Fact: Proof-of-work crypto-ledgers are primarily designed to withstand attacks by governments. It is the only advantage of a proof-of-work decentralized crypto-ledger over a centralized or polycentric one.
A distributed ledger signed by a hundred reputable organisations throughout the world, or a decentralized variant based on stake ownership would be far more efficient than a decentralized one using proof of work. What exactly is the threat model against such a system?
If you think governments essentially are nefarious institutions, and that the Bitcoin proof-of-work ledger could be a powerful tool in liberating the economy from their grip, you may be right. But if you think (as a famous VC does — or at least claims to) that they are a fantastic invention that is much bigger than envisioned by their cooky, fringe, libertarian makers, then you are simply not understanding the technology.