A New Peaceful Transition of Power

Last month’s Insight contained “A New Separation of Powers” in which I wrote about how Bitcoin’s methods of defending itself against corruption differ with those of governments of democratic republics, particularly the United States. It explained how the US relies on a different and much more traditional form of separating powers to make corruption more difficult than Bitcoin does.

While preventing corruption is very important, another crucial political process is the transition of power when individuals or parties must actually relinquish power and hand it over to successors.

In this article, we’ll compare power transitions in governments with those in Bitcoin, and even explore the idea of which powers currently residing in the hands of government might themselves be transitioning to Bitcoin.

Swan Private Insight Update #20

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Power Transitions in Government

We take it for granted nowadays, but transitions of power were not always historically peaceful. In fact, it seems that it was much more common that they did not come about peacefully, nor that they were accepted peacefully when they did come about.

Today, of course, in the west, we hold elections at regular intervals, and their results can lead to the transition of some seat of political power from one person to another. (Some seats of power, like becoming a supreme court justice, are made by appointment and last for life.)

When someone new is elected or appointed to take office, we expect their predecessor to stand aside and peacefully accept that change. We expect clarity and fairness in the election or appointment process. We expect the bureaucracy that supports the functions of government to abide by and enforce the process, regardless of what outcome the individuals involved personally prefer.

However, this process is far from perfect. Today, we see signs of controversy around the process, with many people questioning the legitimacy and fairness of elections, and others questioning whether those questioners represent a threat to democracy. Even politicians, who depend greatly on the peaceful transition of powers, have themselves cast doubts on both the integrity of some elections or declared that some block of voters are a danger to democracy.

All of these developments are concerning, and remind us we should not be taking for granted the peaceful transition of power. Without a non-violent means of transitioning power we would be left with only two alternatives — either no transition of power, or transition only by violent means. Neither is desirable, or even tolerable, really.

It is not within the scope of this article to discuss how democracy can or should be fixed. Rather, I intend to use this space to discuss what power transitions exist within Bitcoin, and how they are peacefully effected without elections and without anyone having to voluntarily agree to secede that power to anyone else.

What Power Exists In Bitcoin? How Is It Transitioned?

“Hold on a second, ” you might interject. “I thought nobody was in charge of Bitcoin!”

Well, if by “in charge” one means “gets to make up new rules, ” then that is correct (and was the subject of last month’s article).

But although Bitcoin’s rules don’t change except for under exceptional circumstances, Bitcoin’s ledger — also known as the blockchain or the timechain — does change: It gets a new block of data added once every ten minutes on average.

Who has the power to add that next block? Why can’t someone contest that power and add a different block?

Since each block contains a mining reward — a payment in Bitcoin to the person who got to add it to the ledger — shouldn’t we expect there to be disputes about who gets to do it?

Mining: A Peaceful Contest

Democratic elections are contests — arguably “popularity” contests. The most popular contestant wins the election. After elections, there’s work for the winner to do, so they are given some time to do the work — usually around four years. Then they must run again in a new contest.

By contrast, in Bitcoin, those who want to write to the ledger and get paid for it must do all the work beforehand. This is what is known as “mining” in Bitcoin. Like democratic elections, there can only be one winner for each block. But mining is not a popularity contest. It is a contest that combines doing real-world work, with perhaps a little bit of luck (in the short term).

The contest goes like this: (I’ll elaborate on the points after listing them, so don’t despair if I use a word you don’t fully understand.)

1. First, all contestants (miners) accept the latest state of the ledger.

2. Next, they assemble a block of legitimate transactions that have not yet been added to the ledger, including also one special transaction paying themselves the legitimate rewards of adding the block to the ledger (known as the Coinbase transaction).

3. Then, they begin guessing, as fast as they can, various values which, when included in the description of the block, might result in the “hash” of that block satisfying the required value as set out by the protocol. Doing all this guessing is the work in Bitcoin’s “Proof-of-Work” mining.

4. Finally, when a miner doing all this work finds a valid result, they share it immediately with the network, and everyone in the network can easily verify for themselves whether or not the solution is valid. This is the proof that that miner did the work and got lucky enough to beat out everyone else competing in the contest.

That final step is the conclusion of the contest — the winner’s block is added to the ledger, by everyone, and a brand new contest begins again from the first step.

Let’s consider some aspects of this contest:

1. Nobody is in charge.

2. There is no ceremony on transitioning power.

3. There is no advantage to the “incumbent” who got to add the most recent block.

4. There is no promise to be kept, or broken, by the winner.

5. The work is done.

6. For one, brief instant, the winner had the power to add the next block to the ledger.

7. Then, they were once again on the exact same footing as everyone else, having to do exactly the same work as anyone else for their chance to win the next round of the competition.

8. And it was all perfectly peaceful.

Does This Contest Work in Practice?

Proof of Work works.

What the last fourteen years of history have shown us, over 770,000 times, is that Bitcoin’s transition of adding data to the chain of its history from one entity to another occurs:

• peacefully,

• with complete agreement of all system participants,

• at the intervals built into it from its inception

• and issuing the rewards that were described at its inception

Edge Cases Are Also Resolved Peacefully

To work this flawlessly, Bitcoin does have to address edge cases where there might be ambiguity, or where someone might try to cheat. Here’s how it peacefully resolves all of these issues.

Chain-splits and “Orphaned” Blocks

Occasionally, and as fully expected in the scope of the rules of the contest, two miners find a valid block of the same block height (which is what the latest block’s number is called) at roughly the same time. When this happens, there is a temporarily disputed matter as to which of those two blocks should be the one everyone accepts. If this disagreement went unresolved and different miners kept on building on both of these blocks, we would end up not with a single chain, but with a split in the chain. If that happened, which would be the one we call true, and which would be the one we reject?

Bitcoin peacefully settles this dispute in the same way it settles the contest in the first place. It does so by waiting until a next new block is found that builds on one of those two blocks. Of the two disputed blocks, the one that was used to build the longer chain is the winner, and all the miners move to work on that version of the chain, discarding the block that belongs to the now shorter chain.

This type of event could be considered comparable to a tie in a democratic election. How do these get resolved in democracy? It’s not always clear. Recounts are attempted in some cases. Sometimes special appointees or other bodies of power cast the tie-breaking votes. Sometimes it’s not so straightforward.

But in Bitcoin it’s simple. Just wait about ten minutes until someone finds another block and the dispute is peacefully settled.

What Prevents Cheating?

We hear accusations of cheating in politics all the time. But we never hear of them in Bitcoin. Why not?

The reason is that the contest is set up in such a way that choosing any strategy but the honest one is always a losing one. Recall, when I listed the four steps in the contest above, I didn’t say they were the rules of the contest. I said that they were how the contest “goes.” The reason it goes that way is because it is the rational way for every participant to act in the contest, not because someone forces them to act that way.

Let’s look at a few of the most common temptations people think might exist to try to compete differently, and why they’re not pursued by the miners: those entities who are pursuing the power to write Bitcoin’s history and receive the rewards of newly issued Bitcoins and fees paid to use the system.

Why, for example, obey the first rule of the contest that says you must accept the latest state of the ledger? The reason is actually quite simple.

If a miner ignores the latest block discovered by other miners, they’re going to have to do much more work than everyone else to find a block that anyone else considers valid. They’re going to have to discover two blocks before everyone else discovers one. As a result, they’d be doing work that they’re much less likely to ever get paid for than if they accept the latest block discovered by other miners.

Here’s a simple example to illustrate this: say the blockchain’s latest height is at 750,000 blocks, and a miner disregards the latest block found and tries to find it again. Meanwhile, every other miner is working on finding block 750,001. That first miner is running in a race that’s already been won to discover block 750,000. As soon as any one of the rest of the miners find block 750,001 they will all move on to working on block 750,002. Nobody is interested in hearing about a revision way back in block 750,000, because it would invalidate the now accepted block 750,001 and 750,002. So that miner who ignored block 750,000 would need to do all the work to find all three blocks in the time it took everyone else in the network to find only two.

(Satoshi Nakamoto modeled the difficulty of doing this in the Bitcoin whitepaper back in October 2008. That modeling is the most challenging part of the whitepaper to understand. I wrote an article titled Satoshi’s White Paper, The Hard Part Explained trying to make it easier to understand.)

The second and third points of the contest cannot be cheated. Nobody can pass off any invalid transactions or any block that cannot prove the necessary work threshold has been met. The unchangeable and uncheatable laws of math prevent this. Every node in the Bitcoin network enforces these requirements by executing the code, so it all falls under the “executive and judicial” enforcement branches of Bitcoin discussed in last month’s piece.

However, the fourth point, which states that as soon as a miner finds a valid block they broadcast it, is entirely up to the miner. Why shouldn’t a miner hold on to their newly discovered block which nobody else knows about yet? Doesn’t this give them an advantage over all the other miners still working on what is a lower block height?

Well, if a miner keeps their newly discovered block a secret they take a big risk of someone else discovering a block at the same height, and broadcasting that to everyone else. If that happens, everyone else would then begin using that other block to build the next block on top of. Thus, trying to keep a new block a secret so as to get a head-start on building the next one turns out to be a risky and losing strategy. It amounts to not claiming an earned reward and instead risking not ever being able to claim it!

The only way to play successfully in this contest is to play by the strategy outlined earlier. These aren’t rules enforced by a referee, a court, or a police force. They’re just the only logical way to play the game. Nobody is in charge of Bitcoin, so nobody forces anyone to play by the rules. It’s just that the forces of nature punish anyone who plays differently.

A Bigger Question

Will Power Transition from Central Banks to Bitcoin?

Central banks, especially the Federal Reserve Bank of the United States, are among the most powerful entities in the world. They can create money and raise or lower interest rates simply by decree.

This indirectly gives them the power to raise and lower employment rates, inflation rates, economic activity, and other factors fundamental to our day-to-day lives. Their actions are unpredictable, by design. Within central banks, it is individual human beings who reach these decisions. These individuals are appointed to their roles, not elected. The seniormost position at the Federal Reserve, Chairman of the Board, is a position that is guaranteed for a four-year term and the Chair cannot be fired from the position! Many of us would like to see such great power transition elsewhere, or through some better process at the very least.

By contrast, Bitcoin has no chairman or any group of people who can alter its policies. This fact alone is one major reason we see Bitcoin being taken so seriously by so many entities, including central bankers, politicians, ordinary citizens, and freedom advocates. Many people see the powers granted to central banks as being far too great. Those in power want to reassure others that they can be trusted with this much power.

So, does Bitcoin represent a transition of power away from Central Banks? Will it be a peaceful transition? These are perhaps some of the most intriguing questions of our time.

Bitcoin is a technology that is voluntarily adopted by those who choose to use it. It is inherently peaceful in that sense. Were everyone to choose Bitcoin, it would peacefully become the world’s money, and it would continue to operate peacefully according to the rules of Proof-of-Work described above.

Will this happen though? How long will it take? Who might stand in its way — especially in a non-peaceful manner?

One of the very first objections that often gets raised about Bitcoin when people hear about it being separate from the government is that “The government will stop it.” But one of the most uncanny things about Bitcoin seems to be that governments can not stop it. Bitcoin is spread out all over the world — outside the grasp of any single government. Moreover, governments turn out not to be very effective at stopping things anyways. They can ban things, but as we all know, that doesn’t mean everyone complies.

Governments have not always had the powers that they now have through central banking. Will the invention of Bitcoin (or its discovery if you prefer) require that they eventually surrender that power back again, peacefully?

There is good reason to be optimistic not only about the transition of monetary policy power away from unpredictable central entities to reliable, predictable, and fair Bitcoin but also of this happening peacefully.

To a large degree, Bitcoin has already been normalized as something that is acceptable to own and use. It is already on a peaceful march of being seen as various things, including an alternative to gold, an insurance policy against currency debasement, a substitute for international payments and remittances, and more.

Just as the Internet digitized and disrupted many industries, transforming them in both predictable and unpredictable ways, regardless of whether those industries embraced the Internet or fought against it, Bitcoin appears to be poised to do the same to the structure of the “money industry.”

Newspapers used to own the printing presses which gave them a monopoly on timely, written news content. The Internet eliminated that monopoly and turned those presses into expensive, slow, liabilities. Consumers chose to get their news (and create their own) more quickly, cheaply, and from diversified sources as the Internet grew and digital information replaced information printed on paper. As adoption of Bitcoin grows, similar reasons become clearer as to why people would choose Bitcoin over the present-day dominant alternatives.

As previously mentioned, the main concern voiced about Bitcoin’s ultimate success is that, unlike the Internet, governments will shut it down. But Bitcoin is built to not be able to be shut down by governments (or anything else for that matter). With that option eliminated, it removes the possibility of any protracted “war” on Bitcoin. Once accepted, Bitcoin relieves governments of the impossible task of centrally planning the economy through monetary policy. This would usher in a new age of governing responsibilities, constrained by the fair and honest economic realities that sound money is meant to reflect. And this dramatic shift can all happen perfectly peacefully.