As part of our on-going Tweetstorm Series, we showcase excellent Twitter threads on the most interesting topics in the industry and publish them here on Decentralize.Today
Today we feature Zane Pocock, a Bitcoin entrepreneur and analyst, and his great tweetstorm on the true nature of Bitcoin and why its true value lies in its ability to communicate value through plain human readable text. He is currently working with Knox Custody to promote the ethical and principled financialization of Bitcoin. You can follow him on Twitter @zanepocock and Knox @knoxcustody for more of his deep insights about Bitcoin.
Read and enjoy!xt
Bitcoin is interpreted in many ways, by multiple distinct stakeholders. Regardless, the nature of Bitcoin, inherent to the protocol, remains unaltered—information. The world's most tradable information. Let's dive into it!
As Elizabeth Prefontaine (@eprefon) attests, Bitcoin can not properly be classified as a security for a multitude of reasons including a lack of monetary capital, decentralization, and the precedent already set by regulators. Bitcoin is not a security, but nor is it a commodity. Bitcoin is a distributed communication protocol that relays messages. It is text. @Beautyon_ has made the argument that it is speech protected by the first amendment.
Let's take this logic further.
The unique value proposition of the Bitcoin communication protocol is that these messages can communicate value. How this works is through a mechanism called the "unspent transaction output" (UTXO). There is no such thing as "a bitcoin". There are only UTXOs. UTXOs are the occupants of Bitcoin's information space. UTXOs are *measured* in a unit called "bitcoin", but this is more akin to measuring how space is used on a hard drive than bars of gold in a vault.
UTXOs have accrued market value because the information space they occupy is scarce. The network-wide balance will only ever add up to about 21M bitcoin. This scarcity has created a "digital gold" meme, but this is not the definition of Bitcoin.
Bitcoin is still just text.
Explaining exactly what Bitcoin is can be difficult so mental models emerge. Claiming Bitcoin ought to be regulated as a commodity is a similar logical fallacy to regulating it through the FDA for Brandon Quittem's (@Bquittem) comparisons to a mycelium.
Another analogy is that Bitcoin is "backed by energy". Adding blocks of messages to the distributed information space requires a huge amount of energy to meet the rules set out by the protocol. This process is called proof-of-work (POW) and it has some important features. POW requires that UTXOs must be unspent. This solves the "double-spend" problem in the digital paradigm. Absolute mathematical scarcity now exists for the first time, a discovery that can't be achieved again.
Proof of Work ensures value-transfer messages are buried under each new block of messages: to undo them, an attacker would need to prove the same amount of work to the protocol. POW is a proxy for energy and provides Nic Carter's (@nic__carter) settlement assurances.
POW eliminates trusted third parties by incentivizing competition between miners who agree on and contribute to the shared network state. Changes are made according to strict rules that tens of thousands of independent participants verify for themselves. "Bitcoin is backed by energy" is a useful narrative because energy is so core to Bitcoin's security and viability. Taken to its literal conclusion, this has led some to argue that this energy creates Bitcoin's value and that Bitcoin is therefore a commodity — captured energy.
Bitcoin is neither energy nor gold: if the information space occupied by UTXOs is a commodity, then space rented on Amazon's AWS servers would be also. AWS relies on expending energy and the rented computing resources represent information space in the digital world.
Bitcoin is not a commodity. The Bitcoin communication protocol is powerful in part because it has separated value from commodities. Conner Brown (@_ConnerBrown_) has illustrated that Bitcoin has no intrinsic value as a commodity – but that is a feature, not a bug.
Even as pure information, Bitcoin is not precluded from exhibiting monetary properties. The monetary system used by individual actors doesn't need to be sanctioned as such, it just needs to be useful. Commerce enabled by the Bitcoin value-transfer protocol is commerce. Monetary systems are savings technologies that transfer value in time and space. A tool for the farmer selling his year's output all at once to be able to purchase new shoes six months later. This value transfer role has traditionally fallen to the "most tradable good".
The "most tradable good" has typically been something exhibiting certain beneficial properties such as durability, portability, divisibility, and hardness. Monetary theorists such as Nick Szabo (@NickSzabo4) and Saifadean Ammous (@saifedean) argue that money emerges through stages.
A collectible or commodity first accrues value in the subjective eyes of an increasing number of people. Given enough time, this accrued value gains permanence and successively functions as a store of value then as a medium of exchange. Bitcoin has piqued the interest of human minds such that narratives evolved leading many to collect scarcity in UTXOs. Just as price is an interpretation of value, these narratives are an interpretation of the fundamental nature of Bitcoin: information.
Bitcoin is text, but its properties might allow it to fulfill a monetary role for those demanding scarce information space in the form of UTXOs. Rather than being the world's most tradable good, Bitcoin is the world's most tradable information.
Bitcoin's information space has accrued value, so it can be used as the subject of financial instruments built around it. Credit, insurance, and futures markets are some examples of Trace Mayer's (@TraceMayer) financialization of Bitcoin. This doesn't define Bitcoin as a financial product. The communication protocol also presents opportunities with parallels in financial services, but that doesn't make Bitcoin a financial service. With proof-of-reserves and zero-knowledge-proofs, Bitcoin allows for unique audit solutions without the use of a third party audit.
Because Bitcoin is text, it sits outside of existing financial regulatory groups. That doesn't preclude it from exhibiting monetary characteristics. In fact, it's in part because of all of this that Bitcoin is so valuable. And things that are valuable need to be protected.
Bitcoin private keys are another type of Bitcoin information, and they exercise control over UTXOs. UTXOs are transferred as inputs in messages when they are cryptographically signed by the private key with authority to do so. At the protocol level, the nature of Bitcoin's information space means that private keys function like a digital bearer instrument: there is no inherent difference between possession, control and ownership. This demonstrates the "not your keys, not your coins (UTXOs)" meme.
Unlike UTXOs, Bitcoin private keys are non-scarce. You can write them down, speak them, print them. Thousands can hold the exact same key; if you have Andreas Antonopoluos (@aantonop) book, you share the keys printed in its pages with all those who have access to it.
Since Bitcoin's information space has accrued value, it is in the best interest of those who exercise control over a portion of it to keep the private key out of others' hands. To exercise exclusive control over replicable information requires competence at protecting secrets. This is why KFC didn't patent its 11 secret herbs & spices. Rather, they have a vault at HQ containing the only known certified copy of the recipe. They even have their own multisig scheme, with 2 companies each responsible for supplying half of the ingredients.
Possession of a Bitcoin secret enables the bearer to exercise control over the information space; possession, control and ownership can not be separated. The protocol is necessarily amoral, governed by an uncompromising set of rules.
Such is the burden of holding Bitcoin secrets that exercising control over private key information is more a liability than an asset. Most companies holding Bitcoin keys are required to do so out of necessity but would rather offload that liability as they do not monetize it. Private key storage is like managing a password. When a hard drive is locked by ransomware, most people are likely to pony up the ransom to retrieve access. This information is not really property, but it's valuable to those who previously had possession and control over it.
About The Author
Zane Pocock is a Bitcoin entrepreneur and analyst. He is currently working with Knox Custody to promote the ethical and principled financialization of Bitcoin. You can follow him on Twitter @zanepocock and @Knox. Knox Custody is a company that is working on bringing simplicity to the safekeeping of bitcoins, along with risk pricing and transfer designed for institutional investors with fiduciary obligations. Check out their website for more information.
The original article by the author can be found in the Medium article "The Nature of Bitcoin."