Papers associated with Bitcoin and related topics in law: Part X

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This article was first published on Dr. Craig Wright’s blog, and we republished with permission from the author. Read Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8, and Part 9.

The concept of a ‘rollback’ attack is referenced when it comes to blockchain solutions and attacks or changes to the system. In addition, the concept of decentralization is touted as a solution to “censorship resistance” and promoted with the agenda that no information on the blockchain may be removed or altered—even with interactions from governments. Yet, the notion of censorship resistance as a component of Bitcoin was introduced by individuals who did not build the system or maintain it and had agendas different from those noted in the original release of the Bitcoin white paper (Wright, 2008).

Hassanein et al. (2022, p. 99) define a public blockchain as one where anyone can:

• Join/leave the network at any moment in time.
• Read data in the blockchain.
• Write data to the blockchain.
• Create new blocks and publish them to the network.
• Add new blocks to the blockchain.

Yet, it is important to note that the Bitcoin white paper defined any network based on economic conditions and did not describe a system in which all individuals could add blocks. Rather, the description posited by Hassanein et al. (2022) reflects the cryptocurrency system Karma (Chow, 2007) and related attempts at a digital cash application before Bitcoin. The authors also note that data immutability requires that a “Blockchain rollback is almost impossible” (Hassanein et al., 2022, p. 102).

Politou et al. (2021, p. 1977) take a similar approach, noting that “blockchains are in principle immutable as it is nearly impossible to delete, update or rollback transactions once they are included in a blockchain,” going on to say “that immutability is an emergent, and not intrinsic, property of a blockchain data structure, and therefore an agent or set of agents with a sufficient amount of computing power can modify it, stating that a blockchain is by default immutable is incorrect and misleading.”

The Bitcoin white paper (Wright, 2008, p. 4) explicitly says that spent transactions and thus no longer important transaction information can be discarded with a specific reference to prior transactions: “spent transactions before it can be discarded to save disk space.” Consequently, while an index marker will always exist within the blockchain, the immutability of information is based upon the storage of information by parties who have the incentive to remove excess data. Therefore, such forms of analysis (Politou et al., 2021) that are directed toward explaining immutability and ignoring the primary micropayment capability of Bitcoin may be argued to cherry-pick information and take it out of context.

In a pre-release working paper, Nabilou (2022, p. 8) discusses “an erroneous upgrade to the Bitcoin protocol and its rollback via coordination between developers and miners,” demonstrating how even Bitcoin has been ‘rolled back’ and thus may not be considered immutable under all conditions. The author argues it to be “an apparent violation of the Nakamoto consensus,” while failing to note that the Bitcoin white paper does not specifically refer to blind adherence to rules, but rather says that “[a]ny needed rules and incentives can be enforced with this consensus mechanism” (Wright, 2008, p. 8).

Each author in the section builds upon arguments describing Bitcoin that have been developed after the launch of the Bitcoin white paper and that, in many instances, stand in opposition to the conditional purpose and description laid out in the reference work. For example, the argument that an “issue originates from the famous 51% attack” (Nabilou, 2022, p. 7) contradicts the description of governance documented in the Bitcoin white paper. Here, the information sources fail to check or integrate the original concept and base themselves upon comments by actors within the industry seeking to claim a position that allows them to maintain profitability outside anti-money laundering (AML) and tax rules.

The argument that nodes will follow the longest chain runs contrary to the statement in the Bitcoin white paper noting that nodes (or, rather, node operators) will only accept valid blocks, “expressing their acceptance of valid blocks by working on extending them and rejecting invalid blocks by refusing to work on” (Wright, 2008, p. 8) blocks created by an attacker or that have built upon a previously rejected chain. As a result, each of the authors references concepts of immutability in a way that was not included in the Bitcoin white paper and which fails to understand or comprehend the integration of micropayment systems or that Bitcoin was designed for such a purpose.

Annotated Bibliography

Hassanein, A. A., El-Tazi, N., & Mohy, N. N. (2022). Blockchain, Smart Contracts, and Decentralized Applications: An Introduction. In B. S. Rawal, G. Manogaran, & M. Poongodi (Eds.), Implementing and Leveraging Blockchain Programming (pp. 97–114). Springer Nature. https://doi.org/10.1007/978-981-16-3412-3_6

In a chapter referencing blockchain technologies, Hassanein et al. (2022, p. 97) contended that “[t]he core driving idea for designing the architecture of a blockchain platform is to guarantee that no single business party can append, modify or delete any record residing within the ledger without going through the necessary consensus from other business parties within the network.” Yet, no such claim is made within the Bitcoin white paper (Wright, 2008). In referencing immutability, the authors try to change the primary purpose of the blockchain from an efficient micropayment solution and system, that is noted to provide ownership and honest access to funds, into one of allowing transfers that cannot be altered or changed for any reason.

The authors argue that blockchain technology is unrelated to Bitcoin and that disruption based upon alternative distributed ledger technologies (DLTs) will evolve without the fundamental economic foundations of Bitcoin. Most importantly, rather than discussing the fundamental micropayment capability of Bitcoin or any related blockchain, the authors have created a series of definitions of nodes engaged in consensus activity of the blockchain network outside the original concept. The term node is defined within the Bitcoin white paper (Wright, 2008, p. 3), yet is transformed to represent any “machine in a Blockchain network” (2022, p. 102).

Importantly, the authors reference ‘smart contracts’ as a system that is both fraud-resistant and immutable and tamper-proof. By referring to a system as one that was completely outside of the ability to be changed or accessed by courts or law enforcement, such a system would invite fraud and not lead to fraud reduction. The paper also includes the concept that rules within a Bitcoin network can change without the interaction of human agency, which presupposes some form of consensus outside of the consensus system. Unfortunately, the authors fail to investigate any of the claims and assume that the original sources of information were accurate.

Politou, E., Casino, F., Alepis, E., & Patsakis, C. (2021). Blockchain Mutability: Challenges and Proposed Solutions. IEEE Transactions on Emerging Topics in Computing, 9(4), 1972–1986. https://doi.org/10.1109/TETC.2019.2949510.

Politou et al. (2021, p. 1977) note that “[i]mmutability, or irreversibility, is claimed to be a fundamental blockchain property that stems from the fact that transactions cannot be edited or deleted once they are successfully verified and recorded into the blockchain”. Yet, the immutability of blockchain systems does not reference the section in the Bitcoin white paper on pruning and the recovery of data. While the authors are correct in noting that there are individuals and researchers arguing both for and against the concept of immutability, it was never referenced as a key feature of Bitcoin.

In explaining such concepts, Politou et al. (2021, p. 1978) reference the right to be forgotten (or, right to erasure) and the European GDPR data protection laws, arguing that compliance with “the GDPR only through the use of hash values and public key cryptography cannot be guaranteed.” Yet, such an argument is based upon the need to incorporate encryption or “off chain” storage solutions that link to pruning for compatibility, which are argued not to exist within Bitcoin and other blockchain networks, despite their inclusion within the Bitcoin white paper (Wright, 2008).

The authors continue to discuss the removal of immutability, noting that the creation of a “Blockchain whose content can be edited or deleted” (Politou et al., 2021, p. 1980) introduces negative features that remove the decentralized trust in transactions. Throughout the discussion, no reference is made to the original purpose of Bitcoin: providing a micropayment solution for the internet. The authors also seek to define blockchain characteristics and the notion of ‘cryptocurrencies.’ Politou et al. (2021) incorrectly argue that the goals of cryptocurrencies and Bitcoin are the same. The authors contend that the purpose of Bitcoin was immutability, and at no point discuss micropayments.

Nabilou, H. (2022). Probabilistic Settlement Finality in Proof-of-Work Blockchains: Legal Considerations. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4022676
Nabilou (2022) contends that a combination of the final block subsidy in the year 2140 and other conditions will lead to the economic decline of Bitcoin. In this, they build upon the various arguments of immutability, and while the author notes that many proponents of the technology argue that immutability is a feature, the same individuals promoting “blockchains often confuse operational finality with legal finality” (Nabilou, 2022, p. 33). Yet, the author has not fully explored the concept of immutability and fails to note that the claims on immutability are based on systems reliant on encryption, while Bitcoin is not encrypted.

Consequently, the arguments on operational versus legal finality miss an opportunity to detail how the integration of controls in a blockchain network can be constructed to allow the reversal of transactions outside of the need to ‘roll back’ blockchain transactions. The author documents multiple uses for distributed ledger technologies, while not detailing the foundational aspects of ledgers, including traditional double-entry bookkeeping systems. In these, a level of immutability is maintained using a set of books that must match and be written using paper and ink.

While the discussion on operational finality versus legal finality is warranted, and opens up communications between scholars as to the nature of finality on any ledger, including a blockchain, the argument needs to extend to traditional accounting practices, which has not been touched upon within the paper. Similarly, while governance issues in blockchain networks and the potential risk associated with changes have been noted, the author presumes a form of decentralization in Bitcoin that other authors, including Walch (2019), have already demonstrated to be disingenuous. Hence, the author fails to address the foundations of ledger technology by focusing on the technical aspects of Bitcoin and ignoring the traditional definitions of ledgers.

References
Chow, S. S. M. (2007). Running on Karma – P2P Reputation and Currency Systems. In F. Bao, S. Ling, T. Okamoto, H. Wang, & C. Xing (Eds.), Cryptology and Network Security (pp. 146–158). Springer. https://doi.org/10.1007/978-3-540-76969-9_10
Hassanein, A. A., El-Tazi, N., & Mohy, N. N. (2022). Blockchain, Smart Contracts, and Decentralized Applications: An Introduction. In B. S. Rawal, G. Manogaran, & M. Poongodi (Eds.), Implementing and Leveraging Blockchain Programming (pp. 97–114). Springer Nature. https://doi.org/10.1007/978-981-16-3412-3_6
Nabilou, H. (2022). Probabilistic Settlement Finality in Proof-of-Work Blockchains: Legal Considerations. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4022676
Politou, E., Casino, F., Alepis, E., & Patsakis, C. (2021). Blockchain Mutability: Challenges and Proposed Solutions. IEEE Transactions on Emerging Topics in Computing, 9(4), 1972–1986. https://doi.org/10.1109/TETC.2019.2949510
Walch, A. (2019). Deconstructing ‘Decentralization’: Exploring the Core Claim of Crypto Systems (SSRN Scholarly Paper No. 3326244). https://papers.ssrn.com/abstract=3326244
Wright, C. S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3440802

This article was lightly edited for clarity purposes.

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