7. Blockchain regulation versus innovation in the EU - 1.2.2

1.2.2 Crypto-assets are not primarily a technological innovation

-56. The Bitcoin database associates large numbers called “addresses” to other numbers: the amount of “bitcoin” that each “address” possesses. The association is ad-hoc: there is no table of addresses, the database records only the transmission of an amount (a number) from one address to the next (which is created on the spot if it had never been involved in a transaction before).

-57. It is this transmission which is secured by cryptography. “Addresses” are also “public keys” in a system called “asymmetric key cryptography”. For the Bitcoin system to allow someone to decrease the amount (of bitcoins) associated with an address, that person must be in possession of a corresponding “private key”. Since the very beginning of the Bitcoin system operation in 2009, no one has ever been able to decrease the amount associated with an “address” / “public key” for which it did not possess the corresponding private key.

-58. This credibly mimics a strong “property right”: if I am the only one to know a certain number (the “private key”) cryptographically connected to another number (the “public key”) which in the Bitcoin database is associated with an amount, then anyone can increase that amount (can “send me bitcoins”) but no one else but me can decrease that amount (no one can take “my bitcoin”). And that, even though the current market value of “bitcoins” should constitute a strong incentive for bad actors to try devising a means of decreasing the balance of an address they do not possess the private key for.

-59. Moreover, in the bitcoin “blockchain” (the database of which all the networked instances running the Bitcoin program have a copy), no one can increase the number of bitcoins associated with a public address unless that increase can be traced all the way back to a “coinbase” transaction. The “coinbase” transactions, of which there is exactly one for each and every block in the blockchain, are the only transactions creating “new bitcoins” (increasing the amount associated with an address) and rewarding them to the address that had managed to create that block. To create scarcity, the protocol ensures that there will never be more than 21 000 000 bitcoins in total. This “economic incentive” contributes to triggering the needed “cooperative behavior” in the participants.

-60. Once a block has been added by one of the nodes, the node sends the block to the peers it’s connected to, which verify it and append it to their copy of the “blockchain” before broadcasting it further to other nodes they are connected to. The system makes no assumption as to the number of nodes who make up the network at a given moment, nor of whether a particular node is still online or if it wants to accept a valid block or not: the network keeps operating according to the protocol described by Satoshi Nakamoto for as long as there’s at least a remaining node. As Böhme et al summarize: _“Anyone can create a Bitcoin account, without charge and without any centralized vetting procedure – or even a requirement to provide a real name.” _

-61. In his 1988 crypto-anarchist manifesto, Tim May was writing: “only recently have computer networks and personal computers attained sufficient speed to make the ideas practically realizable”. However, it took another 20 years for a successful system to appear. For readers interested in a deeper understanding of the Bitcoin system, I recommend Narayanan et al, 2016

-62. If Bitcoin is just an IT system altering numbers in a publicly accessible database (the “blockchain”) according to a set of rules, it becomes important to clarify the origin of the meaning given to those amounts, or balances, associated with addresses – “the bitcoin”. Why are they called “electronic cash” at first, then “virtual currency” or cryptocurrency and crypto-asset? Moreover, when recalling that until the spring of 2010 bitcoins had no monetary value, how can one explain that the number of people running the program and participating in the network kept increasing? Why would more and more people dedicate time, computing power and money to running “nodes” in order to be rewarded with tokens of no value at that time?

-63. It is essential to stress here that, as the properties of “linking” (chaining) digitally signed blocks of data and their cryptographic hashes had been known since 1991, and Napster and bitTorrent had commoditized peer-to-peer distributed computing in the early 2000-s, nothing in the technologies used by Bitcoin provides an answer to that question. In other words, the technologies Bitcoin makes use of are sophisticated, complex and wonderful, but studying and mastering them will not bring us closer to understanding the above phenomenon. It can also be noted that Haber and Stornetta proposed their system as a solution for affirming precedence in ownership of generic “documents” (they had in mind patents), whereas the first successful implementation, Bitcoin, makes specific implementation choices allowing those “documents” to behave like currency notes (“money” or “cash”).
^source

-64. Let’s also recall the findings of Y.N. Harari who, at the beginning of his book, states: “Large numbers of strangers can cooperate successfully by believing in common myths” . He then proceeds to tell “The Legend of Peugeot” to illustrate a perhaps unexpected form which a “common myth” can take: that of a car company. “Peugeot is a figment of our collective imagination. Lawyers call this a ‘legal fiction’.” Like the story of Peugeot illustrates, we are living in a world populated by ‘legal fictions’ which provide predictability and encourage cooperative behaviour.

-65. In this respect, it is worth quoting Böhme again: “Bitcoin’s rules were designed by engineers with no apparent influence from lawyers or regulators.” Indeed, the Bitcoin system has begun and is still functioning today oblivious of laws and regulations, in the spirit of Tim May and Wei Dai’s “crypto anarchy” where government is rendered “permanently unnecessary”. We are going to reflect on that fact further in the next chapter.

-66. As regards Bitcoin’s claim to representing money, I’m turning again toward Y.N. Harari who observes that money was created many times in many places, as its development “required no technological breakthrough – it was a pure mental revolution. It involved the creation of a new inter-subjective reality that exists solely in people’s shared imagination.”

-67. I argue that, beyond cryptographically-secure chaining blocks in an “immutable” (more on that in Part 3, section 3.1.1) and transparent way, having a data object which can be seen by a “large number of strangers” as “money” or an “asset” is pivotal to understanding Bitcoin’s and other crypto-assets’ success.

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[51] R. Böhme, N. Christin, B. Edelman, and T. Moore “Bitcoin: Economics, Technology, and Governance”, Journal of Economic Perspectives, Vol 29, No. 2, (2015) p.213-238. By “account” the authors mean “address”
[52] A. Narayanan, et. al., op. cit.
[53] Y.N. Harari, op. cit. p.30
[54] Ibid., p.32
[55] Y.N. Harari, op. cit. p.197