In this article we are going to explore why the emergence of Bitcoin is inevitable once a public decentralized immutable ledger has been invented. For that purpose, we have to understand first that the Bitcoin system is composed by two main entities, a ledger and a monetary unit:
- The ledger, commonly known as blockchain, is not only a data structure but also a set of very specific rules which ensure a high degree of immutability (please see update below about immutability). The term blockchain only makes sense when attached to its consensus rules which together ensemble that high degree of immutability. Without consensus rules it is not blockchain but just a database.
- The monetary unit is just a finite set of intangible elements, similar to an alphabet or the months of the year.
In the Bitcoin system these two elements rely on each other in order to exist, because the monetary units are the incentive to encourage the market to mantain the security of the ledger.
Because the monetary units are intangible, the need for a ledger is imperative in order to track and exercise ownership. For the sake of illustration let’s assume that instead of the 21 million units we use the 26 letters of the English alphabet. How can I claim ownership of the element “c”? And if I transfer it, how can others be sure that I don´t double spend it? The only way is to have a ledger that tracks all ownership and all transactions. This is a property ledger.
The conclusion from the above is that an intangible monetary unit cannot exist without a ledger. This conclusion has the negative effect, in terms of monetary theory, that the fungibility of the monetary units is lost as units are always attached to a ledger entry or owner identifier, which enables tracking and blacklisting. Therefore, to achieve full fungibility additional technology is needed.
Before “legal” or illegal fractional reserve practices, the ledgers maintained by gold custodians were property ledgers. The same way that if I park my car in a public parking lot and the parking manager maintains a ledger of cars and clients, that ledger would be a property ledger. That is, the parking lot does not make any use of my car and it does not owe me the car, the car is always mine.
The difference between gold custodians and the Bitcoin blockchain is that for the former the ownership is managed by centralized trusted parties while for the latter the ownership is managed by the users. Hence the critical importance of Bitcoin full nodes that can be easily run by any user. If for whatever reason full nodes cannot be easily be run by any user, Bitcoin will be co-opted like Gold was. On the opposite, as full nodes are easier to run, the more resilient Bitcoin will be.
We cannot claim that it is impossible to invent a ledger with the same degree of immutability without a monetary incentive (i.e. reward for the miners), no matter how inconceivable it might seem as of today’s technology, the prudent thing to do is to leave that possibility open, at least theoretically.
However, a very interesting conclusion is that if a highly immutable ledger without a monetary unit is invented and considering that the implementation of an intangible set of elements is trivial, it is inevitable that the free market will immediately try to implement a monetary unit in that ledger.
Currently, Bitcoin is the ledger with a higher degree of immutability.
Update: I have realized that all the references I made in this article about ledger immutability are not correct. The Bitcoin ledger is immutable by definition (at least until time travel is invented). New alternative ledgers can be created, yes, but it is up to the market to choose which ledger to use and the option of not switching to a new ledger will always be possible.
- Carlos Bondone, he influenced on my idea that an intangible set of monetary units cannot exist without a ledger (of course, the errors on that idea are only mine).
- Keith Weiner, as he challenged me to think about the Aristotelean essence of Bitcoin.
- Joseph Skewes, he made me realize that my references to immutability in this post were not correct, although he does not agree with my view.