Theory of Bitcoin: Why you need to understand the network

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What are nodes, and why does it matter? What does “small world network” mean? What effect does the nature of Bitcoin’s network have on its notions of privacy, but also accountability? “Theory of Bitcoin“, the video series of educational discussions between Money Button founder Ryan X. Charles and Dr. Craig Wright continues with this second edition—this time looking at how networks affect the world around us.

The series takes a new look at some of Bitcoin‘s earliest themes, and clarifies some principles that have become misinterpreted over the years. In doing so, it may cause some long-term Bitcoiners to reconsider beliefs they once took as gospel, realizing that other things are more important.

Are there really over 10,000 nodes on the BTC network? No, says Dr. Wright, there were only 32 in 2019. In fact, there have been only 98 nodes since checking block explorers became popular in 2011, and it isn’t even possible to have more than 2,016. To understand this, it’s important to understand what “nodes” are actually doing.

That’s a controversial take for sure, but by now Dr. Wright is well-known for pointing out that some concepts in Bitcoin are not what we thought they were. The two discuss how many “large” networks—including the internet itself—are actually smaller than they seem. Why is it important to understand this? Because it affects accountability for participants, and is based on what they have at stake.

No matter how many individuals and small organizations are using a network, at some point their traffic passes through a hub built and maintained by a large one. Those large organizations have invested much money, time and energy to become large, and are very visible. They are therefore strongly incentivized to play by the rules and obey laws. Whether someone agrees with these laws or not, they’re a reality.

They’re watching, and it’s easy to do

This has implications for Bitcoin, and highlights how some of its early “crypto-anarchist” proponents were misguided. Tax and identity laws for users, and accountability for miners/transaction processors, are an issue that’s only going to get bigger.

Dr. Wright refers to the EU’s “MLD5“, a 2018 directive aimed at fighting money laundering and funding of terrorist activities. Soon, any custodial account holding more than EUR150 in value will be covered by KYC laws—bad news for exchanges who think they’re exempt.

Charles asks about non-custodial accounts, and Wright says even those not covered explicitly by international laws might still prefer to know their users a lot better. This affects many businesses even outside the digital asset/financial world too.

Like it or not, living in a technologically advanced society means people leave digital trails in most daily activities—even when they use so-called “anonymous” blockchain assets. Connections between individuals, and their larger groups, are easy to trace. Living off-grid is near impossible, even for the highly-skilled. And again, that’s just reality.

With the Bitcoin network now looking quite small, Wright notes that it only costs about 50 cents a year to monitor the entire production of BTC (as well as Bitcoin and other assets) globally. Extensive monitoring/tracing is possible, and there are key pressure points. Miners and transaction processors alike will need to ensure they’re acting responsibly if they want to stay in business.

That said, Bitcoin does still offer more privacy (it’s important to understand the difference between “privacy” and “anonymity” here). Dr. Wright explains the importance of using proper SPV, and of keeping smaller UTXO sets, and the two talk about some of the properties Bitcoin wallets need to have, in order to maintain an acceptable degree of privacy while also avoiding compliance hassles. Bitcoin still offers “the best of all worlds”, Charles says.

Mesh, mandala, P2P, and how people got them all wrong

The discussion on Bitcoin’s network structure isn’t all about tracking and legal responsibilities, though. There’s also plenty of information here on individual connections and network resilience, centralization and decentralization (plus where there are elements of both, and what’s desirable), and a reminder of how external forces can suddenly change the entire game unexpectedly.

Understanding the structure of the Bitcoin network, how its nodes and users connect, and the possibilities these factors create will be useful to those looking to build businesses (or empires) of tomorrow. Charles also asks the question “Bitcoin today runs on the internet, but could we someday see a reversal where the Internet runs on Bitcoin?”

Wright and Charles also talk about where P2P fits in, mesh vs. mandala networks, and even the nature of “artificial intelligence” vs. “agency”, and who is responsible for certain actions in a world where machines are starting to make decisions that affect lives and economies.

Machines can’t think, Wright says. Touching on a theme from the first video in this series, he reiterates that “artificial intelligence” is mostly a term used to absolve system creators of responsibility for the actions their code takes.

Misunderstanding these terms has led to BTC’s current technological mess, and understanding them leads back to Bitcoin. Of course, it wouldn’t be a Craig Wright interview without some stones lobbed at popular Bitcoin myths and personalities. Watch the whole video to see who gets a serve this time around.

Conclusion

Bitcoin has existed for over 11 years now. For several years, even responsible users talked positively about anonymity, decentralization, “censorship-resistance” and “fighting the system”—without realizing fully the implications of these, or attempting to achieve them. The result was BTC, which has achieved name recognition without mainstream adoption. Most BTC today is not used as money, but is instead used for speculative trading or sits in cold storage in the hope its price will magically rise someday.

Lack of accountability for BTC block reward miners and large-scale illegal activity surrounding digital assets mean there’s still a large degree of public and institutional distrust. This has stunted BTC’s growth as much as its technological limitations. Misunderstanding Bitcoin’s structure and purpose—whether unintentional or intentional—is largely to blame for this.

With Bitcoin now restored as BSV, it has another chance to prove its true worth as a digital payments system and much more. Charles and Wright’s video series is helping to re-explain what it’s all really about, making it recommended viewing for all in the industry.

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