The Powerful Hold The Chain Definition Has On The Bitcoin Community

In Electronic Coins Craig Warmke outlines his dissatisfaction with the chain definition of bitcoin. Defining what he thinks a bitcoin is by addressing some of the ambiguities in the original bitcoin whitepaper.

In the bitcoin whitepaper, Satoshi says: “We define an electronic coin as a chain of digital signatures.”Like a series of physical signatures on a check, an electronic coin’s chain of digital signatures represents a transaction history. So, in the whitepaper, Satoshi identifies an electronic coin with its encoded transaction history.

Many have since replaced the reference to electronic coins in Satoshi’s definition and defined each bitcoin as a chain of digital signatures. We’ll call this the Chain Definition. In effect, the Chain Definition identifies each bitcoin with its encoded transaction history… However, the Chain Definition fails, and, despite appearances, Satoshi likely never endorsed it.

Throughout these lessons Bitcoin with a capital B refers to Bitcoin’s blockchain or distributed ledger. bitcoin with a lowercase b refers to units of bitcoin currency.

1.        Individual bitcoins do not Exist.

An analogy may help. Suppose you deposit $1 from your friend and $1 from your sibling in your previously empty savings account. Asking which bitcoin in A4 came from A1 and which came from A2 is like asking which of the two dollars came from your friend and which came from your sibling. The question falsely presupposes that digital dollars carry this information on the bank’s ledger. Similarly,

the Chain Definition falsely presupposes that there are individual bitcoins that carry individuating features on the bitcoin ledger.Just as there is no fact of the matter about the source of any individual digital dollar in your account,there is no fact of the matter about the source of any individual bitcoin in A4. In both cases, we have quantities without individuals.

Lesson Learned – Bitcoin balances reflect the quantity of unspent bitcoin controlled by individual private key holders.

There is nothing distinguishing these unspent bitcoins from each other. Similar to how there is nothing distinguishing a dollar bill from another dollar bill.

2. The Ability to Mix bitcoins Reinforces Their Fungibility

Mixing is important not only because it falsifies the Chain Definition. It also enhances bitcoin’s  fungibility. The features that distinguish quantities of bitcoin from each other pre-mixing get smeared across the quantities of bitcoin post-mixing. Now, in the Stages above, mixing occurs over a series of transactions. But it also frequently occurs within single transactions. The CoinJoin method developed by Gregory Maxwell [2013] has been advertised as enhancing privacy because it blurs the

connection between users and their addresses. In such a transaction, multiple users combine amounts of unspent bitcoin and split them into chunks having the same amount back to themselves across

new addresses. According to Maxwell, this blurring between user and address “is what makes Coin-Join possible.” CoinJoin enhances privacy precisely because it enhances fungibility by smearing the sources of transaction inputs across all the mixed outputs.

Lesson Learned – The ability to mix quantities of bitcoin’s with each other and then transfer them to new wallets contradicts the premise of the chain definition. That individual bitcoins can be tied to their transaction history.

Instead showing how units of bitcoins are similar to the dollars in your wallet. Changing hands frequently over time without an accounting of who controlled them when.

3. The Records Needed to Support the Chain Definition are not Stored on Bitcoin’s blockchain.

The Chain Definition fails because it falsely presupposes that the bitcoin ledger marks bitcoins as individuals. But without individual bitcoins, we don’t have entire transaction histories either. What could a bitcoin’s entire transaction history be except for the path that a specific bitcoin takes through a series of transactions? In general, a history of an individual piggy-backs ontologically on that individual. No individual, no history. So if there are no individual bitcoins, there are no entire transaction histories either. Consequently, the Chain Definition faces double jeopardy. The Chain Definition falsely presupposes that the bitcoin ledger marks bitcoins as individuals and also identifies bitcoins with transaction histories that fail to exist precisely because the ledger does not mark bitcoins as individuals…

a system that tracks the identities of individual units faces a trade-off between scalability and divisibility. Satoshi avoided this trade-off altogether by adopting a ledger of the kind described by Wei Dai [1998] that tracks primitive quantities instead of individual units with identities. So the Chain Definition ultimately obscures one of Satoshi’s smarter engineering decisions.

Lesson Learned – The transaction details needed to support the concept of individual bitcoins are not available on the Bitcoin blockchain.

This was an intentional design choice by Satoshi to enhance Bitcoin’s scalability while not compromising bitcoins divisibility.

4. Electronic Coins are unspent bitcoins not unspent transaction outputs

Like pouring a cup’s contents into another without spilling, early bitcoin users could often transfer a UTXO’s entire unspent quantity without spending any of it in a transaction fee. Feeless transactions occur rarely now, so a UTXO’s unspent quantity is now typically a flash in the pan. Even so, each UTXO represents an unspent quantity which has at least vacuously persisted through a chain of at least one digital signature. So, with some success, we can model a UTXO’s particular quantity of unspent bitcoin with the chain of digital signatures that has preserved that quantity back to the transaction in which it resulted by combining smaller quantities, by splitting a bigger quantity, or by serving as a mining reward. Consequently, charitably interpreting Satoshi leads us to the conclusion that the electronic coins in Satoshi’s definition are probably best understood as unspent quantities of bitcoin—not the UTXOs which contingently and often temporarily signify them.

Lesson Learned – Intuitively, early on in Bitcoin’s history the chain definition accurately described the state of affairs because most transactions did not require fees so UTXOs (unspent transaction outputs) equaled unspent quantities of bitcoin. After bitcoins were transferred between parties.

5. The Importance of Distinguishing Between Unspent bitcoins and UTXOs

the Chain Definition has begun to spread like an interdisciplinary wildfire. Like many wildfires, the Definition’s influence has been both destructive but understandable.

Lesson Learned – Bitcoin is a complex inter-disciplinary system. Properly defining what bitcoins are is a critical first step to understanding it.

Original notes for these lessons can be found here

Author Bio

Steven Miller Is a CFA® Charterholder and writer focused on providing people with insight on surviving and thriving in a volatile world and the founder of Crypto Jungle, a site devoted to helping people hack through the weeds to find the Crypto gems.
He's published three books. Most recently The World After Covid 19: Coexisting with the Novel Coronavirus.
His musings can be found at stevenlmiller.me. Subscribe to The Pompatus Times for updates.
The CFA designation is globally recognized and attests to a charterholder’s success in a rigorous and comprehensive study program in the field of investment management and research analysis.
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