Theory of Bitcoin: The global spreadsheet, Information Theory, and law

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“Bitcoin is not only a solution to digital cash, but maybe the only solution.” Proving or disproving this statement is the mission for Ryan X. Charles of Money Button in the “Theory of Bitcoin” video series with Dr. Craig S. Wright. Now in its second series, the pair is moving into some of Bitcoin’s finer points, working episode by episode towards figuring out exactly what Bitcoin is, and what it can do. The latest episode looks again at Information Theory, particularly with regard to Bitcoin and the law.

Educate yourself

Dr. Wright already has a pretty good idea of what Bitcoin is, and Charles is the student. But whether the above statement is true or not, as Charles says, he’s creating a trove of educational material that’s essential for anyone who wants to build something on Bitcoin.

Or at least, if you don’t want it and educate yourself, you run the risk of spending years building a business that won’t work—or is destined to be shut down by regulators. The digital asset business graveyard, inside and outside the Bitcoin world, is full of such people. Don’t be one of them.

“Legal hermaneutics” is the expression Dr. Wright uses in this episode to explain different people’s interpretation of blockchain, or in many cases, misinterpretation.

Diagrams and metaphors for Bitcoin

Charles is still working on a diagram that definitively explains what Bitcoin is, and how it works. It’s not an easy task, but he’s making progress. In the meantime, we have a series of current-day metaphors that go some way to understanding.

One of these is the safety deposit box. You can think of Bitcoin as a secure locked box at a bank. Anyone can drop an envelope into the box, but only you can take them out. These envelopes are Bitcoin’s UTXOs (unspent transaction outputs), and you should be able to leave them there for as long as you like, hundreds of years if necessary, and still use (“spend”) them. As well as having a million of these boxes if you want, you can also program the box to perform certain functions on the box to automate what it does with the envelopes, even far into the future.

This also helps explain how Bitcoin is infrastructure, and is not intended to be a legal system (code is not law). Just as bank deposit boxes work due to a series of human created and enforced rules, so too is Bitcoin.

Deposit boxes are subject to laws, and with a warrant the authorities may search them or even seize assets from them. It’s the same with Bitcoin. It doesn’t need to be in the process of investigating a crime, either. The authorities may also look at your assets in the case of a court order, investigation, business or bankruptcy proceedings.

The enforcers in this structure are the transaction processors (aka “nodes” or “miners”). Those processors can’t hide, can’t remain anonymous, and are also subject to law if they wish to keep operating. As Dr. Wright points out, the Financial Action Task Force (on Money Laundering), known as FATF or “fat eff”, covers 42 countries. It’s hard to escape their reach, and hard to try if you want to be an operation of any significance.

Dr. Wright again issues a warning to those who sniff at those rules, or think they’re exempt: a reckoning is coming. Charles was surprised this week to hear of the “DeFi” concept, which he’d only just come across. Both think the idea is a bad one if participants think they’re not subject to the same rules as everyone else. Law is part of Bitcoin’s security structure, it secures ownership and allows the various components of Bitcoin’s ecosystem to operate.

Charles asks why, if a legal reckoning is coming to the digital asset industry, it hasn’t happened yet. Dr. Wright says the number of people working in law enforcement to investigate “white collar crimes” is surprisingly low. Right now they have bigger fish to fry, but the digital asset industry will be in for a shock when it grows large enough to grab their attention.

Following that theme, there’s another reiteration that computers don’t have agency. Dr. Wright dislikes the term “smart contract.”

“Even automated EDI processing is not a smart contract,” he says. “A contract is a meeting of minds, and computers don’t have minds.”

The contract, both agree, is result of a negotiated settlement. For example, the agreement to use EDI, rather than the EDI system itself. For the record, “EDI” is Electronic Data Interchange—a business concept that refers to exchanging official information like orders and invoices electronically, rather than on paper.

Information is important

The conversation also touches on Information Theory, something Charles thinks supplies the mathematical link to what Bitcoin is. The Information Theory sections of this episode are more accessible to the layman than those in the last (either that, or the last one explained them so well that viewers are able to follow it a little easier).

Wright and Charles discuss how incorrect or incomplete information “fans out” to produce radically different results. Charles mentions Hayek’s book “The Fatal Conceit”, which describes the classic flaw in socialism: it’s impossible to have all the information you need to centrally plan an economy, no matter how much you think you do have it.

In a similar vein, is it possible to “lose” or “delete” information? The common understanding is that information can change forms, but cannot be destroyed. Dr. Wright describes how changing information can affect companies: people leave, groups break up, removing valuable informational inputs. The outputs from previous information remain, the inputs have been changed. Different outcomes will result.

The “Theory of Bitcoin” series will continue with a new two-hour episode every week. The “Bit” portion of the series covers technology, while the “Coin” segments cover finance and economics. But there’s considerable mashup between the two in these conversations, and a lot of side-tracking into classical education and the lessons of history in the process. It’s all relevant and it’s all important. Only by educating yourself, at least by watching these episodes, can you have the understanding of Bitcoin you’ll need to benefit from it.

To watch previous episodes of the Theory of Bitcoin, check the Theory of Bitcoin YouTube playlist here.