Viewpoint | Review of the protections that Bitcoin brings to users

The biggest feature of Bitcoin is decentralization, but it is used as a gimmick by many digital currencies, making this decentralization worship sweep the entire blockchain industry. In this regard, I would like to say that decentralization is only a means to achieve the purpose of anti-censorship. If you want to break some strict rules, then superficial network decentralization is not enough. If you want to subvert the dental industry, then decentralization is obviously not a good solution.

Bitcoin’s fault-tolerant architecture is designed to resist any extreme coercive measures, which enables (or more accurately, reveals) the property of multivariate decentralization. Censorship resistance (i.e., the ability to disseminate information without restriction) is probably Bitcoin’s most important property, but it does not fulfill all of Bitcoin’s promises to its users.

For every Bitcoin user, the period from obtaining Bitcoin to exiting the system is considered a complete usage cycle. So, during this period, what kind of guarantees can the characteristics of the Bitcoin system bring to users? I will give the answer in this article. Among them, although anti-censorship occupies a core position, it cannot fully summarize these guarantees. Please note that the so-called "guarantees" I mentioned are not necessarily 100% fulfilled. After all, things are unpredictable, so I just use them for the sake of use (after reading this article, I have become a fan of the word "guarantee"). In addition, I will also evaluate the importance of Bitcoin to these guarantees. The evaluation framework I propose here is also applicable to other cryptocurrencies, but since Bitcoin is the most well-known currency, this framework is built on Bitcoin.

- Bitcoin's promise to users -

Open Access

Open access actually refers to the “right to freely access Bitcoin”. Bitcoin’s decentralized architecture alone does not guarantee this. For a class of assets to be freely accessible, there needs to be multiple strong and growing “fiat currency portals” competing with each other, and many Bitcoin holders are well aware of this. In this regard, those monopolists are a major threat, and they try to increase regulation and raise the barrier to entry. If the access to assets is monopolized by a few large platforms, they are not only vulnerable to government influence, but also likely to collude to arbitrarily deprive others of the right to access Bitcoin. For example, during the currency crisis, the Venezuelan government banned domestic exchanges such as Coinbase in order to maintain its monopoly on the currency.

Therefore, for developed countries, since cryptocurrencies cannot yet pose a threat to sovereign currencies, large traditional exchanges under government supervision are still a good entry point. However, such exchanges are not suitable for countries with stagnant currencies or severe inflation, for which it is very important to control the channels for obtaining assets. Centralized exchanges must be supplemented by peer-to-peer exchanges such as LocalBitcoins, Hodl Hodl and Paxful - the latter do attract a large number of traders (taking LocalBitcoins as an example, Venezuela's annual trading volume reaches $300 million, Nigeria's annual trading volume reaches $170 million, and Russia's annual trading volume is nearly $1 billion). Wallets such as Opendimes that enable trustless transactions play a key role in this - when you receive an Opendime wallet, you can be sure that the counterparty does not know the private key, which is much less troublesome than waiting for 6 transaction confirmations in an hour.

Finally, the paper voucher system is an important channel. Users can buy small amounts of Bitcoin from street vendors or corner shops. After purchasing the voucher with fiat currency, you will get a receipt with a redemption code, which can then be used for settlement. I have seen local black market dealers (“sarafis” in the local language) on the streets of Tehran and Kabul also accept Bitcoin vouchers - in countries with illiquid national currencies, small-scale entrepreneurial activities can help resist government interference more than large exchanges. Startups such as Fastbitcoins and Azteco are helping to promote the Bitcoin voucher system; I hope more companies will join the ranks.

Peer-to-peer exchanges like Hodl Hodl use an important but little-known technology: Bitcoin’s native multi-signature functionality. A simple, reputable, and widely used implementation of multi-signature has many secondary benefits. In the case of Hodl Hodl, it gives buyers and sellers confidence that they will not be scammed. In a 2/3 multi-signature contract, a transaction can only take place if both the buyer and seller sign; if one party disagrees, the decision is made by an arbitrator. In practice, most transactions are concluded without arbitration—the arbitration mechanism itself has the power to regulate behavior.

In Bitcoin, multi-signature functionality is very popular: there are currently about 1.65 million bitcoins (worth about $6 billion) in known multi-signature wallets. If we roughly extrapolate the ratio of multi-signature to non-multi-signature wallets in unspent p2sh scripts, the number of bitcoins in all multi-signature wallets should be around 3.9 million (worth about $14 billion).

-Source: p2sh.info-

In summary, open access is a core feature of the Bitcoin system - what good is an asset if it is hard to get? Unfortunately, this feature is not given enough attention. It is very important to realize this. Counterintuitively, in countries with less demand for Bitcoin, people have easy access, while in countries with high inflation, the fiat currency on-ramp is not yet fully structured. There is still a lot of work to be done in this regard.

Anti-predation

One of the main motivations for writing this article was to clarify a major misconception: the right of Bitcoin to disseminate without barriers to users is different from the strong static guarantees it promises to users. As mentioned above, censorship can only occur during the dissemination of Bitcoin, so "censorship resistance" cannot be considered a property of Bitcoin in its idle state.

For this reason, I included predation resistance (sometimes called “tamper resistance” or “trial resistance”) in the table above. This term means that users can access Bitcoin in a secure and private manner under duress, social unrest, or displacement.

Hasu and Su Zhu have made a very convincing argument that Bitcoin can be understood as an independent institution that provides users with property rights that are not subject to state and legal jurisdiction. To date, almost all property rights have been granted by the state, law, or local monopolies. However, Bitcoin has created a completely new form of property rights through cryptography (Editor's note: See the hyperlink at the end of the article for the Chinese translation, "Bitcoin and the Promise of Property Rights Independence").

Although I have already introduced it in detail, I still want to say that it is really amazing to be able to fully control your wealth just by memorizing a string of 12 or 16 digits! Although this method is not the most foolproof, it maximizes the portability and confidentiality of wealth.

Multi-signatures also play a role here. New custodians like Casa (disclaimer: not the investment firm Castle Island) use a 3/5 multi-signature mechanism, where 4 private keys are controlled by the user in different locations, and the remaining private key is held by Casa for future use. This makes it much more difficult and expensive to attack Bitcoin holders, while also being convenient and fault-tolerant (seedless recovery is also possible if the hardware wallet is lost). The secure key sharing provided by Bitcoin fundamentally reshapes custody and has spawned a variety of innovative hybrid models that can trade off flexibility and autonomy to varying degrees.

Censorship resistance

This is the most sought after of the Bitcoin guarantees, and I’ll just touch on it here. At its core, Bitcoin enables permissionless transaction broadcasting through a peer-to-peer gossip protocol and mining reward incentives. Anyone can make a transaction, provided that the miners are paid enough to mine. In the case of large transaction volumes, this can lead to transaction delays or increased transaction fees. In addition, a stable network of nodes is also required to achieve transaction broadcasting. If the cost and difficulty of running full nodes increase at the same time, the number of full nodes may decrease, making broadcasting more difficult. Even so, the number of nodes must be significantly reduced to weaken the network performance. Therefore, this risk is not imminent.

It’s easy to destroy Bitcoin’s censorship resistance by shutting down access to the network. While it’s difficult to disrupt Bitcoin’s global infrastructure, even for the most willing countries, a country facing a severe currency crisis—for example, if its currency is not in circulation—might take the extreme step of shutting down the network to temporarily prevent its citizens from accessing Bitcoin. Recently, governments such as Iran, Turkey, and Russia have expressed their willingness to block domestic access to services such as Telegram and Wikipedia. Other countries with strict regulations on the Internet and Bitcoin are also ready to issue bans. It seems that similar policies will not be introduced for Bitcoin.

Proposals to improve censorship resistance at the Bitcoin broadcast layer include Nick Szabo's long-range broadcast proposal and Samourai and Gotenna's joint SMS and multi-hop short-range broadcast proofs of concept. However, these proposals are either in the development stage or in the early stages of deployment. Currently, people in areas with network restrictions are helpless and can only transfer their funds out through hardware wallets or paper wallets. However, network restrictions themselves do not pose a threat to the Bitcoin network in my opinion: regulation of the Bitcoin network is only possible if there is cross-border cooperation between multiple countries (which is difficult to achieve).

If someone is willing to send transactions frequently to perform a DOS attack on the network, it can effectively increase the difficulty for daily users to broadcast transactions. Unless the attacker actively ends the attack or someone pays a higher transaction fee, there is no good countermeasure.

Anti-counterfeiting

This is an important feature of the Bitcoin system, but it is not as well-known as censorship resistance. Anti-counterfeiting means that users can use relevant tools to verify the legitimacy of Bitcoin at a very low cost, ensure that the Bitcoin in their hands will not depreciate due to inflation, and determine whether they have been deceived by the counterparty of the transaction.

If we compare Bitcoin to gold, running a full node is like owning a professional-grade XRF spectrometer that can detect the purity of gold. Verifying the purity of gold requires expensive and complex testing, but verifying the authenticity of Bitcoin is a piece of cake. Running a node only costs a few dollars a year, and the hardware and bandwidth requirements are very low, and the operation is also simple. Although anti-counterfeiting is not difficult to achieve, it must be ensured that the cost of running the node is very low - if the bandwidth, computing power or memory requirements of running a node with full verification capabilities are greatly increased, then the degree of anti-counterfeiting protection will be greatly reduced. At present, Bitcoin is in a steady development stage, and plug-and-play node software has lowered the threshold for running a full node, so this guarantee is temporarily safe. In addition, there are a variety of node management software for individuals and enterprises who do not want to run nodes.

On the other hand, anti-counterfeiting is also reflected in the fact that the block generation is scheduled. The proof-of-work coin issuance mechanism and the difficulty adjustment mechanism are both designed to ensure this. As for the current situation, it is pretty close. Don't be naive to think that Bitcoin really generates one block every 10 minutes on average. The actual number of packed blocks is about 30,000 ahead of the plan. Because the computing power is constantly increasing, and there will be errors in the difficulty adjustment, the block generation speed will exceed the scheduled plan. In addition to this, Bitcoin's PoW mechanism has never been broken, and the hash equation has not been cracked (it is estimated that there is no need to worry too much for a long time in the future). To verify whether the number of blocks is correct, just run the gettxoutsetinfo command in the Bitcoin Core code. It is precisely because of this inherent auditability that Bitcoin and cryptocurrencies derived from Bitcoin can resist rumors such as Bitcoin Private's secret over-issuance.

Currently, Bitcoin is resistant to counterfeiting because its core developers have made accessibility and user sovereignty a priority in system design. Since some Bitcoin companies have provided hardware nodes or node software with entry management, anti-counterfeiting has indeed increased. However, if the Bitcoin blockchain is allowed to grow too fast, it will greatly damage the anti-counterfeiting level for ordinary users.

Free exit

Free exit - the ability to freely sell Bitcoin - is another overlooked aspect of the Bitcoin system. Strictly speaking, this is not a guarantee provided by Bitcoin, but without it, Bitcoin's utility value is greatly reduced. When users want to exchange Bitcoin for fiat currency, they will feel the influence of these chicken-blooded blockchain analysis companies (the heuristics they use can smear innocent users with false information). Since fiat currency exports are most susceptible to regulation and their operating institutions have the need to avoid risks, those who like to blacklist and find tainted UTXO sets will certainly regard them as targets for attack.

There are several countermeasures. One is to shuffle the source of funds through a federated tumbler service like Wasabi wallet. Another is to reverse engineer the heuristics used by blockchain analysis companies and develop a hybrid strategy to keep everyone pegged to a tainted UTXO set (making it difficult for the algorithm to tell) or to use specific types of transactions to avoid detection. Samourai Wallet uses this approach. Another option is to bypass the heavily regulated centralized exchanges and trade through peer-to-peer marketplaces or use Bitcoin instead of fiat currency to exchange goods and services.

Finally, I expect that a batch of bitcoins from the black market or with gray attributes will enter the capital market by selling at a reduced price. This will not have a fatal impact on Bitcoin - these low-priced bitcoins are far from meeting global demand, even if they cannot be traded on Coinbase. The world is so big and there are various regulatory systems. Even if these bitcoins cannot be stored in exchanges regulated by the US government, what does it matter? In the face of hyperinflation, this is not worth mentioning.

This article aims to establish a framework for the user guarantees that Bitcoin provides, showing that censorship resistance is only one of the guarantees. In addition, I want to point out that the Bitcoin system is a joint social and industrial project to provide unregulated financial tools to people all over the world, and software is only a small part of the whole system. Many companies are also working hard to protect users' autonomy and discretion over their private property, developing hardware wallets, merchant services, new types of exchanges, voucher systems, Bitcoin contract architectures, and hybrid custody models. They have made great efforts to realize the guarantees promised by Bitcoin, and they should be praised.

Thanks to Hasu and Matt Odell for their feedback. (This article is from Ethereum enthusiasts EthFans. Reprinting without the author's permission is strictly prohibited. Violators will be prosecuted.)