Bitcoin is a Three Ring Circus

Danno Ferrin
Nov 3, 2015 · 6 min read

With a title like this you are probably expecting a diatribe about the politics of the block size debate, or about getting bitcoin more integrated into the financial sector, or even about the intersection of politics and bitcoin in general. But it’s not, I’m talking about the technology behind Bitcoin. Whenever I need to describe to someone what Bitcoin is and they are somewhat technically savvy but hasn’t looked into the tech side of Bitcoin I like to draw a Venn diagram, because doesn’t everyone love Venn diagrams?

Bitcoin is a Three-Ring Circus

But this isn’t just a Venn diagram. It’s a three-ring circus of modern technology. The intersection of all three of them powers bitcoin, the “lower case b” bitcoin, as the primordial instance of all things Bitcoin and blockchain. But each of these three rings are interesting in and of themselves.

The Rings Stand Alone

The oldest of these ring is actually the Crypto Ledger. For the most part this is twentieth century technology relying on blind signatures and public key cryptography. The principal breakthrough occurred in 1982 by David Chaum, even though many details have changed since then including things such as using twenty first century cryptographic algorithms like ECDSA and RIPEMD. This is the technology that makes bitcoin a currency. Although the devil is in the details since no one really owns the tokens on the ledger, but there usually is only one person who knows or can get at the encryption keys that lets you make changes to those tokens.

The next oldest ring is the P2P ring. Specifically the Peer-to-Peer networking popularized by Napster and BitTorrent. Not quite twenty first century technology, but almost. The bulk of it’s useful life is overwhelmingly occurred after we realized we could stop freaking out over Y2K causing the apocalypse. But this ring is also just as important as the crypto ledger ring. Because what is the point of pseudonymous money if you have to work with a single centralized gateway?

The final ring is the only ring that is truly twenty first century technology: the Proof of Work Chain. Most times when you see this mentioned the chain part gets left off. You see it mentioned as Proof of Work, which is something Adam Back invented and published in 2002 as a means to combat email spam. But in what is potentially the only singular novel piece of technology, Satoshi decided that the proof of work would be chained together in blocks. The proof of work on one chain building upon the chain behind it.

In some ways I think that chain is the wrong word for this structure. It convokes the image of a series of links going from point A, the genesis block to point B, the point on the block chain the transaction you are interested in resides. If any one of those links breaks then the chain no longer connects those two points. The analogy holds well because a chain is only as strong as the weakest link. But repairing that breakage is where the analogy loses its value. Ordinarily when repairing a chain you have to replace the one failed link. But with a Proof of Work Chain you have to replace the broken link as well as every link between the broken link and the destination block with a new link that has a suitable proof of work. Breaking a link destroys not just that link, but every link in the chain that follows.

This is where we see the subtlety in the genius of Nakamoto’s device. Normally when adding a link to a chain you add weight to the chain which when continued without limitation will weaken and break the chain, or at a minimum provide some limitation to the useful length. Adding a link to Proof of Work Chain actually strengthens the whole chain by creating more work that needs to be performed in order to revise and replace a prior link in the chain. So the end effect is that the effort to replace a link closer to the genesis block will take as much work to recreate the chain as it took to create the following links in the chain. The cost to commit fraud is equal to or greater than the cost to record the data and all the data that followed.

It is entirely feasible to rebuild the broken chain, but by modern practical measures it is all but impossible to rebuild the chain before it becomes outdated. Such a tradeoff is the crux of modern cryptography. Reversing or brute forcing an encryption key is not impossible. But the amount of time you would need to spend with modern techniques renders the information useless by the time the secret is revealed.

The Whole is Greater Than the Sum of Its Parts

The novelty of bitcoin is not seen just in the Proof of Work Chain, most of the novelty extends to the interaction between those three rings. Like any good three ring circus the action in all of the rings is important, and their interactions can be somewhat surprising. These aren’t all the interactions, but do point out how well each ring plays off of the others.

First lets consider one of the interactions between the Proof of Work Chain and the Peer to Peer network. Miners are (at least to some degree) competing to create and add new blocks to the block chain. On occasion multiple blocks will be found at the “tip” of the chain. Which one does a peer share? The block with the most proof of work will be shared, which is typically the longest chain known to the network. This behavior is only true of honest nodes, but some more of the deeper interactions between these two rings will drive the consensus.

Next there is the interaction between the Proof of Work Chain and the crypto ledger. How does a miner claim a reward for providing the proof of work for a new block? The miners are responsible for generating the first transaction in each block they provide proof of work. In that transaction they can create a certain amount of bitcoins from thin air, but only up to a limited amount based on a predetermined schedule. They also get to pick and choose which other transactions get placed in the block, which has implications beyond fees that each transaction offers to the miner in order to be recorded.

Finally there is the interactions between the P2P network and the crypto ledger itself. The simplest interaction is that only transactions that are viable according to the current state of the network should be shared between peer nodes. Even there some transactions are of more importance than others, transactions spending “old coins” are less likely to be forgotten by the network before being committed to the crypto ledger.

But the greatest interactions come from the interactions of all three rings. The traditional crypto ledgers have always had a problem with double spending of their tokens. Digital cash is more akin to digital checking, where instead of passing around coins made of physical metal you are creating checks based on fancy math equations. There is no incentive inside the crypto ledger itself that keeps you from overdrawing your account, other than the confusion and distrust it would create. Add in a peer to peer network and a double spend transaction becomes more of a crisis. Which transactions does a peer propagate and which ones does it discard? This is where the proof of work chain comes in. By providing a single, high value, view of the state of the block chain peers will have a final arbiter to determine which transactions are true and faithful and a part of the crypto ledger, and which ones should be discarded.

Like any good circus, there are also other side shows and freak shows that accompany a technological marvel like bitcoin. But all those other attractions exist because of, and in context of, the three ring spectacle occurring under the big top.

Danno Ferrin

Written by

... and they shall know me by my speling errors.

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