Collin Rukundo

The Bitcoin Fairness Protocol: A masterclass in trust?

"What is government itself but the greatest of all reflections on human nature? If men were angels, no government would be necessary."

-James Madison, 4th President of the USA

Human beings are complicated. While we are capable of great, big, magical and incredible things, we are also prone to greed, seeking and holding onto power at any cost, stealing and oppression. We are not perfect. So one would be right to assume that perhaps James Madison was advocating for a new framework or technology that would stop the greatest threat to mankind: Human nature.

This is probably why most governments around the world are modelled the same way - three arms of government all checking each other. A complex gridlock of checks and balances that breeds conflicting interests, corruption and a system that relies on trust in human nature. A zero-sum game. The idea of perfection and trust in any system destroys more than it builds because it relies on the assumption that human beings will act rationally and aren’t motivated by self-interest.

So Collin, what does this have to do with Bitcoin?

Created as a response to the global financial crisis that swept the world in 2008, Bitcoin emerged as a “trustless” monetary system and worthy solution to the erosion of trust in traditional institutions like banks. Trustless does not mean devoid of trust. It simply means that trust is not a requirement and you can transact with people you don’t know or trust because the system prevents cheating. In this case, trust is an add-on, or a nice-to-have.

In trust-based systems, people only deal with those they already know through reputation or relationships which breeds a cocktail of vices like favouritism, cronyism and nepotism. Many are left out and only a handful benefit. Rules in trust-based systems are enforced by institutions which grow to be very powerful and deeply corrupt. Furthermore, in a trust-based system, a trusted third party might always be needed to act as an intermediary but this also creates an imbalance of power which breeds corruption and a “too big to fail” dynamic.

The Bitcoin and Lightning Networks are cryptographic systems that use game theory to prevent unfair outcomes through incentives and disincentives. In cryptographic systems, trust is placed in a fairness protocol. The Bitcoin Fairness protocol forges a path to achieve fair outcomes between all participants on the network without the need for trust or a central authority. As long as all participants follow the agreed protocol and stay within the Bitcoin and Lightning Network, the incentive mechanism in the protocol achieves fair outcomes for all without enforcement.

An example of the fairness protocol in action:

Bitcoin mining is the process by which bitcoin transactions are validated on the Bitcoin network and added to the blockchain ledger. Mining also creates new bitcoins and puts them in circulation. The Bitcoin network runs on a Proof of Work consensus algorithm which requires miners to compete to verify transactions and add them in blocks. To ensure that the miners do not cheat without a central authority or trusted intermediary, the Bitcoin network uses a system of incentives and disincentives. To create “proof of work”, miners use expensive resources (electricity) to perform calculations(work) that is embedded as “proof” inside every block. Now if a miner succeeds in producing a valid block fast enough before others, they are rewarded with brand new bitcoin(6.25 BTC at this time). Because miners have to use a lot of electricity before the Bitcoin network considers their block means they have an incentive to correctly validate the transactions in the block. If a miner attempts to cheat, cheats, or makes any mistakes that go against the protocol, their block is rejected and the electricity they used to “prove” it is wasted. There’s nobody forcing miners to do anything. The reward (incentive) and the punishment(disincentive) incentivizes them to do the right thing. The protocol ensures that only valid blocks with Proof of Work are accepted.

Fair outcomes are a natural consequence of the Bitcoin Fairness protocol. This is in stark contrast to traditional systems like banking where you must trust your bank because it controls your money(quite literally by the way). If the bank violates your trust, it is entirely up to you to seek recourse from regulators or courts at an enormous cost of time, money or effort. But as we have seen, these institutions are protected because they work in a system that guarantees their survival.

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