Bitcoin was not created by coding, but by an academic approach to a real-life problem. The problem to solve was: how to have sustainable electronic cash? Certainly, not by implementing anonymity and getting taken down via law enforcement eventually.
To create a law-abiding electronic cash system, the inventor of Bitcoin had to pay attention to many details: knowing the history of digital cash, the failures of systems that were proposed and tried before Bitcoin, as well as understanding legal implications and economic incentives.
The hassle with academic literature is that if it is of quality, each sentence is important. Such is the case with Dr. Craig Wright’s new article, “Solving Double-Spending.” In it, Dr. Wright explains the uniqueness of Bitcoin in comparison to earlier electronic cash approaches.
The double-spending problem
Who is making sure a single satoshi is not being double spent? The Bitcoin nodes do, according to the rules laid out in the Bitcoin white paper. Dr. Wright shows in his article that since at least 1994, various authors have discussed the double-spending problem in electronic cash systems.
Some suggested that traceability needs to be implemented to combat double-spending, but with traceability, privacy may be in danger. Others pointed at the role of observers in the network. The observer status would have made a trusted third party necessary, which is a single point of failure and costly, or anonymous observers that are not trustworthy at all.
I recommend reading through the whole article from Dr. Wright. He takes you through the history of electronic cash systems, and this helps on understand what is so special about Bitcoin. Bitcoin as an invention took the suggestions from previous authors into consideration, but nailed it through economics. Dr. Wright states:
Consequently, bitcoin was designed as an economically saleable token. By premising the security on an economic process where the individuals are doing the work to validate transactions—when tokens are paid—a commercial system can be built where economically incentivised nodes compete to validate solutions, deanonymising such observer systems.
This is a passage to meditate on. Let me put it this way so it’s easier to digest:
Bitcoin was designed as an:
- economically saleable token,
- paid to the nodes,
- which means a commercial system,
- and through this commerciality, the nodes are deanonymized
- in their role as observers of the network.
Bitcoin observers are not anonymous
The nodes themselves will not be anonymous through the distribution of satoshis—which were already issued at the creation of Bitcoin—as a traceable payment to the nodes. Dr. Wright points out that the nodes will have to sell the tokens to meet their operational costs.
If a node operator is commercially active, it means the node operator cannot remain unidentified—as everything in commerce above exchanging small change is through legal bodies such as private persons or companies. Enterprise level node operators have invested large sums into their mining capacities and therefore are not hidden somewhere, but plain big businesses with an address and persons as representatives.
All of that is set in stone through Bitcoin as a unilateral contractual offer. Dr. Wright explains how he, as the creator of Bitcoin, is bound:
The nodes validate transactions, but do not decide on but rather enforce existing rules (Wright, 2008, p. 8). This way, users can be assured that the transaction is valid and alerted if a double-spending attempt occurs.
As Wormser (1916, p. 136) demonstrated in an early treatise on unilateral contract, “a unilateral contract is created when the act is done.” In the case of a Bitcoin node, the payment is received as a combination of subsidies and fees when other nodes verify—to a depth of 100 further blocks—the block that a node has created. At this point, the creation of a unilateral contract has occurred (Pettit, 1983). A unilateral contract is accepted as soon as the offer has been completed
Rather, Bitcoin is the first economically incentivised system that distributes payments through a unilateral contract-based automated system that does not require a central operator.
People must investigate Bitcoin concerning its contractual dimension. That is why changing Bitcoin is a problem. We have discussed this topic with Dr. Wright before:
So, with Bitcoin, we have an electronic cash system with nodes as observers against double-spending, but not anonymous observers—plus the traceability of the tokens. However, this incentive system in itself has not solved the privacy concerns that the authors from 1994 and onwards pointed at regarding traceability in a network.
Privacy in Bitcoin, according to Dr. Craig Wright
Dr. Wright points out that many of the previous electronic cash proponents tried to create untraceable, anonymous electronic cash systems to eliminate their privacy concerns. Bitcoin suggests privacy, but not anonymity—through scaling Bitcoin.
The topic of Bitcoin and identity is important to understand in the following passages. In Bitcoin, you are not the private key—you may have access to the private key, and therefore you can use tokens. But the private key itself does not verify your identity.
We can connect identities to private keys, but this must happen outside Bitcoin. In Solving Double-Spending, Dr. Wright states:
Implementing a system that is designed not to reuse keys and to be able to form private key pairs based on the ECDH properties associated with ECDSA (Wright & Savanah, 2022) allows a solution to the double-spending problem. In requiring new keys derived from a master key, privacy is maintained while linking identity. As the participants in a transaction can securely create new keys without interacting, based on information such as PKI-based identity keys, privacy can be maintained between the individuals while broadcasting information to observers.
Bitcoin balances such dichotomy by achieving privacy through scale. While every transaction retains full traceability, the cost of monitoring all users globally is prohibitive. Moreover, suppose users maintain separate keys for every transaction and firewall their identities. In that case, it becomes infeasible for people to randomly determine other people’s identities or even to link identities. The creation of filters, controls, and software can simplify the issue and allow payments that are not joint and hence do not expose the identity of the user or link transactions (Wright, 2008).
Bitcoin ensures privacy if it scales. The millions of transactions seen on the BSV blockchain ensure your transaction cannot be followed by others easily or for free. Anyone who is trying to trace you would have to invest. Law enforcement will make this investment concerning criminal offenders. But random tracing of all or single Bitcoin users is costly and will become more costly over time.
We start with a private key that indeed is linked to your identity—outside of Bitcoin, for example, through a government agency. You then make sure not to reuse the same addresses when transacting in Bitcoin.
This will get better with each transaction we perform on the BSV blockchain. The more transactions in Bitcoin, the more privacy you get—automatically.
The inventor of Bitcoin understands Bitcoin best
The article Solving Double-Spending showed me what I already know: Craig Wright is the inventor of Bitcoin, and Bitcoin is a beautiful tool. BTC has changed the protocol and therefore is not Bitcoin anymore. However, Bitcoin is doing very well in the BSV blockchain.
Nobody in Bitcoin has the knowledge that is being portrayed in this double-spending article we just went through. Check the article for yourself— is Satoshi Nakamoto an academic?
New to Bitcoin? Check out CoinGeek’s Bitcoin for Beginners section, the ultimate resource guide to learn more about Bitcoin—as originally envisioned by Satoshi Nakamoto—and blockchain.