Zug, Switzerland. The home of modern cryptography.

Solving the Bitcoin Problem

Deconstructing non-deterministic math to get to the real promise of the blockchain.

Gunther Sonnenfeld
Jan 31 · 8 min read

INTRODUCTION

As long as financial instrumentation has been used to drive economic transactions and growth, inflation has been a critical factor. Volatility has been the mechanism by which financial players arbitrage the deltas in yield to create profit.

In the case of Bitcoin, it was originally designed as a disinflationary instrument, but it behaves like a speculative commodity. As it inflates in value, it is spent less. It is a classic example of demand side inflation.

As such, Bitcoin must be distinguished from its underlying blockchain.

Bitcoin is exchanged or traded as a unit of account, while its blockchain is the ledger used as a record book for its transactions.

The former is a digital token intended to replace normal money (FIAT), while the latter is designated to amortize risk.

The problem is that neither is properly understood, nor utilized, to do either. Not yet, at least.

This is an excellent glimpse into the trading collusion (fraud) that has been going on with Bitcoin in particular.

This snapshot perspective will frame the problem clearly, and then provide examples of solutions that show how cryptocurrencies can be designed to stabilize the assets they represent.

THE BITCOIN MATH PROBLEM

While its intended design is to act as a decentralized currency, Bitcoin is a commodity that is being arbitraged by institutions for those who hold the biggest positions.

More specifically, it is designed as a disinflationary instrument, yet as it is fractionated, it actually decreases the probability of those holding it in smaller positions to profit from it.

Many Bitcoin enthusiasts and hodlers contend that it has no top, or price ceiling. Whether Bitcoin’s price goes to $50K or $1M in the near term, they are correct.

It also has no floor. Which means that in the physical world, it is actually worthless. It is mathematically designed to inevitably go to zero. How soon that happens is anyone’s guess. With market makers like Mastercard, Amazon, BNY Mellon and various institutions buying up all of its inventory and centralizing demand, that could happen a lot sooner than people think.

Meanwhile, this math problem is an NP problem of “non-deterministic polynomial time”.

So, the postulate is that if a problem is solvable in N squared time, and you double the size of the input, then the amount of time it would take to solve it would go up by 4.

This is based on linear factorization which establishes that P = NP for all values of P where N = 1.

This also means that for any numerical value that is dependent on P where N = 1, the answer could be 4, 7, 17 or 42, based on the coefficient of N squared.

Linearly, any 2 numbers at 2²⁵⁶ bits have no limit — it does not exist. Therefore, you can’t actually store them and you can’t actually multiply them while proving their physical value. This is why no one has been able to solve the NP problem using linear factorization.

While it is true that the point of a cryptocurrency like Bitcoin is to establish that the network itself is its inherent value, it is also true that as the number of nodes that enter the network increases, it weakens. This is known as provable collisioning, a way of using math (factorization) to at once substantiate an “unsolvable problem” and perpetuate it.

In other words, SHA-256 — the protocol the Bitcoin blockchain is based upon — is a math problem that perpetuates itself by being divisible of itself. As it further divides, it actually has less value, because it moves closer to zero (which is infinity).

That movement is perceived to be a higher and higher value in price, until of course it cannot hold that value in polynomial time, or what is known as real time.

SOLVING THE NP PROBLEM

In the world of cryptography, non-linear factorization shows us something different about the NP problem, and more specifically, how to get around it.

Just as any 2 numbers at 2²⁵⁶ have no limit, it is also the case that any number of linear operations required to perform a preimage or “meet in the middle” attack on SHA-256 has a breaking point at which any deficient number or natural number is strictly larger than the sum of its divisors.

This means that as deficient numbers are multiples of themselves, they inevitably get to zero. In the process of factoring them non-linearly, natural numbers are ordered as pairs, and non-linear prime factors are paired, such that they can bypass the encryption used to secure keys or nodes.

This is more formally known as super prime factoring.

With this approach, what would normally take years if not decades to perform in a linear manner, takes hours or days to perform in a non-linear way.

The author will not show readers how to perform the operations themselves, as my companies do not support theft or dubious hacking practices of any kind.

Rather, it is this author’s intention to highlight the mathematical flaws in Bitcoin’s design with this framework so that people can become aware of the realities of investing in these kinds of speculative assets.

To be clear, we see Bitcoin as a fantastic invention toward moving the world in the direction of encrypted, decentralized financial solutions. We also want to make clear that this is only the beginning in what amounts to the responsible economic design of said solutions.

AMORTIZING RISK

As blocks are simply containers of data, and chains connect those containers of data, it is important to emphasize how chains and ledgers must amortize risk.

Contrary to conventional wisdom, most blockchains do not actually prevent counterparty risk. In the case of the Bitcoin blockchain, much of this has to do with transactions being pseudo-anonymous. If transactions are pseudo-anonymous, and 60% of all identities are synthetic or fake (and they are), you can’t possibly avoid counterparty risk.

Risk amortization is the unsung hero of the blockchain. Ledgers, when constructed properly, amortize risk in real-time.

With digital currencies specifically, the real goal is to hedge against inflationary, deflationary, reflationary and disinflationary risk.

In the case of Bitcoin, the goal is amortize risk in three key areas:

1. As it inflates in value, it is spent less. (example: hodling coins while exchange fees skyrocket)

2. As it is tokenized, its fractions head towards zero. (example: coin splitting or halving)

3. Zero equals “scarce infinite value”. (example: a $1M moonshot on 21M coins in issuance, leaving small investors with increasingly worthless fractions)

So how might one amortize Bitcoin’s inflationary and disinflationary risk?

  • Bundling data into instruments such that transactions are not purely pseudo-anonymous (60% of online identities are synthetic or fake)
  • Writing better smart contracts such that externalities (side effects) are factored in
  • Providing far better provenance such that Bitcoin or Bitcoin products aren’t priced out of the market

STABILIZING DIGITAL ASSETS

Also contrary to conventional wisdom, volatility will never actually sustain Bitcoin’s value over time.

The same can be said of any digital asset that is backed only by the network it relies on for transacting or trading.

As we transition into a true decentralized digital economy, it is critical that we start to look at any digital currency, or any digital asset, as one that can stabilize its value over time.

Hedging against flationary risk (inflationary, deflationary, reflationary, disinflationary) requires that we see financial instruments as those which put opportunities directly into the hands of more people, more and more on their own terms.

If we consider that more and more people are in need of essential resources like land, food, energy, medicine or water, then we can truly understand what it means to hedge against flationary risk.

As asset inflation will likely eclipse 20% in the coming months, those of us providing financial alternatives have an unprecedented role in structuring financial instruments that reflect sound economics. We are tasked with offering responsible ways to amortize risk, securing transactions and stabilizing assets for sustained returns on investment.

These are just a few examples of platforms we’ve had a hand in developing that utilize unique, customized blockchains and distributed ledgers.

CONCLUSION

These are incredibly exciting times, provided that we can properly see what the risk and responsibilities are in making the blockchain a technology for doing good things in the world. Our intention with the blockchain is to create platforms and products that redistribute profits, without incurring costs to other market actors, common people, or the environment.

  • amortizing risk in real-time
  • hedging against flationary risk
  • sustaining value and profits over time

For more information on how we think and how we work, please visit us at:

Our New Nature

Natural logic. Natural economics. New ways for businesses to better the world.

Our New Nature

An applied exploration of unique insights and innovations that help us transform our lives and our work. This publication is a compilation of edited excerpts from the upcoming book, “Our New Nature”, available soon for redistribution and resale revenue on the RAIR platform.

Gunther Sonnenfeld

Written by

Quantum Systems Architect .:. CEO of RAIR .:. Partner at Novena .:. Author of “Our New Nature” .:. https://www.novena.tech/ https://rair.tech/

Our New Nature

An applied exploration of unique insights and innovations that help us transform our lives and our work. This publication is a compilation of edited excerpts from the upcoming book, “Our New Nature”, available soon for redistribution and resale revenue on the RAIR platform.

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