Bitcoin, for the Neo-Medici age of global commerce

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For those not versed in modern western history, the Medici era marked the expansion of commerce and the rise of the merchant class as the ruling class of power, alongside the clergy and royalty.

It was made possible by the free ruling largely autonomous city states and Duchies of Florence, Tuscany, Milan, Venice, and the Papal States. It was a time of expansive trade, with the discovery of the new world and the renaissance movement spurring fresh new scientific thought, philosophies, discovery, and the age of Romanticism. And it was made possible by the most significant invention in human society since the use of tally sticks to keep records… the invention of banking.

The idea that value can be safeguarded, lent, and borrowed without actually moving tonnes of goods, grain, or coins around the world was revolutionary. With the banking came the invention of credit, and the ability for debts to be passed on from one to another, endorsed and guaranteed by middlemen.

Hallelujah! Modern society was born. This invention brought about a new age of accelerated growth and prosperity for the world. (Well, unless you happened to be an indigenous agricultural-based society living off the land…in a yet undiscovered continent.)

What does this have to do with Bitcoin?

Well, glad you asked. Bitcoin was created as a digital CASH system. But I think Satoshi Nakamoto chose the wrong word. His unfortunate choice of the word “cash” inevitably leads to the misunderstanding (some innocent, some deliberate) that his invention was meant to replace money, namely, government scrip itself, as the money for the world. I have to admit I was initially misled to believe this as well because by the time I entered Bitcoin around 2012, Satoshi had already left, and I had only the words of the self-proclaimed expert who took over the project to guide me.

SPOILER ALERT: It was never meant to replace fiat currencies or government scrip. Anyone who knows the capability of BSV understands this intrinsically.

But then, what word should Satoshi have used instead of ‘cash’? Ledger? Distributed record system?—No.

In my humble opinion, the Bitcoin white paper should have had the title,

“Bitcoin, a Peer-to-Peer Electronic Cheque System”

What? Cheques¹?

Yes. Though I can understand how if he actually called it that, it would have been ignored by pretty much everyone who initially took an interest in Bitcoin in the first place, and it might not have taken off at all. But why cheques? If you understand how Bitcoin works, you will know it is much more analogous to how cheques work. More specifically, bills of exchange. If this term is new to you, I suggest you go wiki up on it now so that you have a vague idea of what they are. They aren’t used much anymore in modern times, but their closest cousin that you do know (at least if you live in North America) is the common personal cheque.

What is a cheque? Well, it is a debt instrument. Anyone can write one, and it puts the writer in debt to whoever holds the cheque. I can write out a cheque for $100 to you, naming you as the creditor, and I sign as the debtor. Now you can go to a bank and cash (convert) that cheque, which will instruct that bank to draw on my bank the requisite funds and deposit it to yours. This is how it is used in modern times, but when bills of exchange were invented (or popularized) was in the Medici times. They were called bills of exchange, and they did not have the recipient designated; namely, they were bearer personal/corporate debt instruments. The ‘accounts’ were backed with assets or deliveries of goods on ships bound to arrive at times in the future. So, you couldn’t really cash the bill until the goods had arrived.

Sometimes, it may just be an instruction for a merchant bank to change ownership of an amount of goods that were far away in another country. Given the lack of near-instantaneous communications², to facilitate trade at ports, banks and holders of bills started to trade and transact using the bills themselves as money. So instead of cashing the bill (taking delivery), it was often good enough to just endorse the bill and pass it onto someone else. In this way, the bill acted as a bearer, negotiable instrument. The value at every changing of hands was not only the future delivery of goods that it represented, but also the credit worthiness of everyone who had previously endorsed the bill. This was because you could demand debt repayment from any of the previous bill holders. All previous holders who endorsed the bill were still on the hook to repay the debt and receive the goods from whoever presented the bill. So, the actual history of a bill mattered, and the more it was validated and endorsed, the more valuable it became.

Suppose this is starting to sound familiar, congrats! You are among the Bitcoin intelligentsia. Just like bills of exchange, blockchain transactions get more valuable the longer history they have. Transactions are more secure the more block confirmations that have been mined on top of them etc. The whole notion of a chain implies that the historical path is the record itself… not a derived state, like a balance.

But that isn’t the point I wanted to make. The point is that the Bitcoin transactional model is exactly a mirror of this. Bitcoin does not have any notion of accounts. It is not (transactionally speaking) a ledger! It is a system of cheque validation, aggregation, and endorsement.

Exactly as the Medici’s did with bills of exchange. Except that now we have something called computer networks which make the mechanics a distributed one, the model is the same. This is the critical key to Bitcoin’s scalability potential. It can scale to global levels of transactions because there is no shared state of all transactions happening at any given time but only the state of all currently spendable coins. That’s important because that is something that does NOT grow monotonically ever larger, is dependant only on the amount of transactional activity, and can be synchronized globally, reliably, at the rate of once every 10min or so³. And when I say coins, I mean coins.

Individual digital tokens.

This is radically different from the design of Ethereum or other blockchains, which employ a more traditional account-based model. That model is nothing more than the existing accounting model where there are static accounts and transactions events that make debit or credit changes to them.

This is important because an account-based system cannot work on global processing scale because of the amount of state that they have to carry around and synchronize. This state increases over time, and keeping it all synchronized becomes exceedingly harder without some sort of system for consensus and Sybil defense.

Of course, Ethereum designers made this choice partly because they didn’t understand that the coin (UTXO) model of Bitcoin was the key scaling design feature that made operating at planetary scale possible, and also because they required the account-based model in order to create their smart contracting system. Bitcoin smart contracts operate in a way unfamiliar to most of today’s programmers who are not familiar with what they would call esoteric details of state machines and stack-based computers. A skill and art remaining only with the electrical and computer engineers of a bygone era. If you are invested in Ethereum because you believe in its ability to become a world computer, well, I implore you to re-evaluate your portfolio.

Probably a topic for a future article.

Bitcoin, on the other hand, using the coin-based model, can support an entire thriving economy where people constantly trade and endorse bills of exchange back and forth between each other (not involving any miner or public node) and only ‘cash in’ the cheque when it suits them. Sometimes perhaps even years later.

This is the hidden power of Bitcoin that nobody knew about⁴. If anyone can pass a signed cheque to anyone else, then as long as the bidirectional interaction remains amicable, the cheques can remain outstanding forever.

Cheques on Bitcoin do not have an expiration date.

Or do they?

Well, by design, they didn’t. But then the BTC core devs, in a display of egregious arrogance, went about changing the protocol, redefining the meaning of some of the OP_CODES in bitcoin, and repurposing others. They justified their work by examining the blockchain (historical records) and seeing that nobody had used the codes in the past and, judging by that analysis, determined that it was safe to change the protocol behavior without breaking anyone’s node that happened not to accept the new patch.

But in this, they made a fatal mistake. One brought upon by their own arrogance.

They only considered the historical blockchain (the record of settled trades) to determine if anyone had used a certain feature of Bitcoin.

They didn’t stop to think if anyone was presently using the feature. It is as if a foolish government redesigned the U.S. money system, mandated a move to a digital dollar, transactable only via Apple Wallet/Google Wallet, and abolished paper cash, and determined compatibility by looking only at people’s bank accounts, but didn’t bother to check or consider all the outstanding paper bills. They didn’t understand that Bitcoin is a bearer instrument! (Cash, cheques, and some bonds). All the old circulating bills in public would be made invalid by their changes to the monetary system. All ATM machines, cash registers, cash counting machines, etc. were recalled and demolished, and they didn’t once consider that the outstanding bills in circulation would be made un-exchangeable by any protocol change. 

Maybe they knew it but didn’t care because to them, this just opened up the opportunity to build (and sell) a solution to the problem that they caused, called Lightning Network, and it was just short 18 months⁵ away. They were myopic in their focus, and this is how they broke the protocol.

As you see, the secret to Bitcoin, now BSV’s, scaling architecture is that at scale, most of the daily commerce of transactional exchange and validation is done between just two parties, the parties of any transaction, and NOT the whole world (ahem… Ethereum? ROFL). This is what Satoshi meant by SPV (Simple Payment Verification)⁶. You only need the transaction and some small bits of data⁷ from the network to validate a payment yourself. You don’t need to publish it to the blockchain.

So this is why a protocol set in stone is paramount to this functioning. Most of the active transactions and economic activity should be done OFF the blockchain, in the form of these personal cheques or bills of exchange, being written, accepted, and passed on by parties between each other and settled only when it was required. Just like the Medici’s did—and they ran a global banking system for the entire known world at the time…

/Jerry Chan

Wall Street Technologist

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NOTES:

[1] And I’m not referring to the shock of using the British spelling of the word.

[2] Thank you, Mr. Marconi, another Italian, for that one.

[3] To be pedantic, actually, it is synchronized globally in less than 4 seconds, but the 10min block time ensures that any conflicts are resolved.

[4] Well, Craig Wright did. For he was the one who opened my eyes to this

[5] Lighting has been ‘just 18m’ away since 2016. It is a long-standing running joke. Please pass it on. BTC-ers love it.

[6] Bitcoin Whitepaper Section 8

[7] All you need to validate a transaction for yourself is the UXTO, the transaction that created it, and a Merkle proof linking it to a block. With just these pieces, you can validate that the UTXO is a real coin. Now, if you don’t keep a live UTXO set yourself, you need to additionally check with a miner or someone who does, to ensure that it has not already been spent. That is it. If the payer subsequently tries to double spend this cheque they just gave you, then you can take them to court for writing a bounced cheque. See why Bitcoin depends on the law to work?