Bitcoin, the evolution of ledger systems and its influence on society

By Lizette Louw | 23 September 2021
Bitcoin, the evolution of ledger systems and its influence on society

Keeping a record of transactions, contracts and laws has been commonplace throughout human history. Even so, these records have been subject to destruction, loss and lack of validity. Blockchains like BSV enable the creation, storage and transaction of information without these risks.

At BSV Devcon 2020, Curriculum Specialist for Bitcoin Association Evan Freeman delved into the infrastructure of Bitcoin and how the transactions within it comprise a long, immutable ledger of information while dispelling some of the common misconceptions about ledgers and nodes on BSV.

For those who missed out on Evan’s presentation, this transcript highlights the key points of each section.

Ledger systems through the ages

When we're trying to understand incentives within a technology, we have to understand how we interact with that technology and how that technology changes us through that interaction.

If we look at the history of ledgers, we can see that our ledger systems have adapted in tune with society.

Ancient Mesopotamia: Clay ledgers

Babylonian food disbursement ledger 1800BC

In ancient Mesopotamia, clay tablets were used as administrative ledgers. The tablet above is an example of such a ledger. Inscribed with cuneiform text, it has seven columns recording disbursements of food to various individuals listed in the final column.

Imagine trying to integrate our financial system with a clay tablet ledger system!

Medieval - Renaissance Europe: double-entry ledger system

One of the more significant developments in the advancement of ledgers prior to Bitcoin was the invention of the double-entry ledger. This made it possible to lend money at scale.

In Italy, where the double-entry method was established, people began to lend out money for interest. In time, this led to a tremendous amount of growth as businesses began to flourish. Italy became a prominent economic power that went on to establish global trade routes and lead the Renaissance.

The doubly-entry ledger is a system of bookkeeping in which every entry to an account requires a corresponding and opposite entry to a different account. The double-entry ledger has two equal and corresponding sides known as debit and credit. This is what we've been using for the last 526 years, since Leonardo da Vinci's friend Luca Pacioli invented it in 1494.

Contemporary era: Bitcoin

Bitcoin combines the time-tested integrity of the stone block with the information recording capabilities of a ledger. This is multiplied by the near-instant connectivity of the World Wide Web, resulting in the first global public ledger.

Now we can begin to see that the Bitcoin ledger is significantly more than its chain of blocks. Rather, it's the information ordered by those blocks that make up the ledger.

Bitcoin: an evolved ledger system

As a ledger, Bitcoin is fulfilling the age-old societal need of data keeping in a new, significantly better way. Here’s how it works.

The Bitcoin ledger’s content and structure

Just as stone blocks form the structure of the pyramids, so the chain of blocks form the structure of the Bitcoin ledger. Empty blocks provide nothing for the ledger, it is the transactions within the blocks that shape the ledger. We could also say that it's the validated transactions that are the ledger and the blocks are the structure in which they are ordered and recorded.

In Bitcoin, there is no means of centralised decision-making, so each node must operate individually within the network rules to form a consensus on the ordering of events.

A block allows for this ordering to take place by creating a digital proof using the combination of the previous products, hash and the hash of the new transactions to create a timestamp.

Combining these elements forms a block of data that is subjected to proof-of-work and then built upon by other nodes, creating a chain of timestamped data field blocks that form a single agreed-upon transaction history.

How are blocks formed?

Each timestamp includes the previous timestamp in its hash, forming a chain, with each additional timestamp reinforcing the ones before.

Bitcoin white paper section three, ‘Timestamp Server’

A Bitcoin block consists of an ordered set of transactions. The network considers each transaction to be a separate item or event, and builds the blocks as such. As transactions are received into the network, nodes assemble them in structured database entries called blocks.

Blocks are a timestamp for all the transactions they contain and represent proof of existence for the information within. In order to connect the block to the previous blocks in the chain, a block's header must include the hash of the block upon which it is built. This link forms a single chain of valid blocks leading back to the very first block - the Genesis block.

After the transactions are added into a block template, nodes perform work on a difficulty puzzle that must be solved to form a valid block. The solution proves that the node proposing the block has performed the work necessary for that block to be valid.

Every time a new block is added to the chain, the cumulative proof-of-work built upon all previous blogs is increased. In this way, as time passes, transactions become more secure.

When a node finds a valid block, each transaction is published as a part of that block and through the hash function, it can be provenly shown to have existed at the time the block was found.

Blocks are broadcast across the whole Bitcoin network and are accepted or rejected by the rest of the nodes that are competing to build blocks.

Key takeaway: Bitcoin embodies the principle of coopetition: cooperation between competing parties

The Bitcoin ledger’s immutability

If a node wanted to alter a past transaction, it would have to redo the proof-of-work for that block and all previous blocks, and must then maintain a leading chain reflecting those changes in order to fool other nodes.

This process of attempting to make invalid transactions appear valid is costly, as the attacking node must maintain a majority of the network hash. And even then, the attack is easily reversed as the honest chain overtakes the dishonest chain.

Once this occurs, an attacker's transactions are void and their investment and proof-of-work is lost. Additionally, such attacks are fully visible, making them legally risky for operators of dishonest nodes.

Key takeaway: in Bitcoin, fraud does not pay!

The very nature of proof-of-work is such that the process cannot be faked or mirrored. By mirrored I'm referring to the case of a fork in a proof-of-stake chain, where a node keeps its state coins on both chains. If this was the case with proof-of-work, for every fork we've had, there would be an additional ASIC magically appearing for each of the ones already in existence, which is a ridiculous concept.

This brings me to an important point I want to make about proof-of-work: it ties the virtual to the physical in the sense that there are real resources being used to secure the ledger. The ASICs need to be manufactured, electrical utilities consumed, Internet infrastructure installed and maintained. These operations are an investment that signals a financial commitment to building blocks.

This activity is also impossible to fake. It’s a very respectable business in which nodes become identifiable transaction processors. And so this requirement that a node uses CPU to cycle through combinations of nonce and block header in order to participate in the block building process is a big part of the incentive for nodes to behave honestly.

Key takeaway: Bitcoin incentivises honest work

Who forms the blocks?

The proof-of-work also solves the problem of determining representation in majority decision making. If the majority were based on one-IP-address-one-vote, it could be subverted by anyone able to allocate many IPs. Proof-of-work is essentially one-CPU-one-vote.

Bitcoin white paper, section four, ‘Proof-of-Work’

Bitcoin has a long history of confusion as to who is and isn't a node. It's quite simple: those that don't participate in building blocks are not nodes, but rather peers.

Since nodes are engaged in the competitive business of building blocks, do they require the complete record of all previous transactions in order to be able to build new, valid blocks? The answer is: no.

Once a transaction has been mined into a block, which has then been expanded on by the network, that transaction record is immutable. This means that anyone with a copy of that transaction can prove that it was created before the block timestamp, which is effectively every 10 minutes.

Once a transaction has been made, nodes are free to remove them from their copy of the blockchain. Past transactions are not necessary for the process of creating new blocks and needlessly consume data storage.

Key takeaway: Bitcoin removes the burden of storing the entire ledger to prove the existence of an item within its content

Node data storage requirements

Once the latest transaction in a coin is buried under enough blocks, the spent transactions before it can be discarded to save disk space. To facilitate this without breaking the block's hash, transactions are hashed in a Merkle Tree, with only the root included in the block's hash. Old blocks can then be compacted by stubbing off branches of the tree. The interior hashes do not need to be stored.

Bitcoin white paper, section seven, ‘Reclaiming Disk Space’

For nodes to be able to remove individual transactions that have been placed in a block without affecting the integrity of the block hash, a data structure known as a Merkle tree is used. A Merkle tree enables a node to remove individual transactions from their record of a block and to retain only hashes of these transactions, or even hashes of the branch the transactions were in.

A node can provably show that the Merkle tree root used in the block header is the one using the block hash, even with access to a minority of the total transactions in the block.

Key takeaway: Bitcoin is a dynamic network where nodes can come and go as they please, without affecting the data ledger’s integrity

If nodes don't need to store the transaction data, what do they need to store? The answer is the block header.

From the header, a node can see which block it builds upon, the time the block was discovered, and can validate the proof-of-work done by the node that discovered it. The Merkle tree's contents that include all of the transactions of the block are not a part of the header and are unnecessary to prove the existence of a previously validated block.

Thanks to this data structure, a full record of Bitcoin’s proof-of-work for an entire year takes up 4.2MB of space. (Since blocks are generated every 10 minutes, a block header is approximately 80 bytes. If you multiply that by six, then 24, then 365, you get 4.2MB.)

Key takeaway: Given Bitcoin’s efficiency with data storage, the only boundaries to the BSV ledger are the boundaries of imagination and creativity, as well as our temporary software and hardware limitations.

Bitcoin as a global triple-entry ledger

We've discussed the double-entry ledger system where each debit has to correspond to a credit. When it comes to Bitcoin, we can understand it as a triple-entry ledger, where the third entry is ordered and recorded into an immutable chain of blocks.

This entry serves both as a transaction and a receipt, proving that an event occurred in a way that is vastly more efficient and secure than that of a double-entry ledger, to the point that falsifying or destroying entries is virtually impossible on the Bitcoin ledger.

Key takeaway: Bitcoin allows for the first permanent, objective and globally interoperable triple-entry ledger, open to everyone bounded only by the limits of our minds.

Bitcoin as a robust, global ledger system

If you're familiar with the story of the Library of Alexandria, you'll know of the vast knowledge and history that’s estimated to have been lost with its destruction. Although the world lost countless important writings at Alexandria, it is but a fraction of lost ancient texts.

Since entries on the Bitcoin ledger are in the form of a transaction between wallet addresses in the same distributed public ledger, each transaction is linked together in a system of permanent and objective records. This means we won't lose important things anymore.

As Bitcoin is a system that provides honesty through transparency and incentives, we can increase the capabilities of our applications extensively by integrating with it.

Because the ledger itself is dynamic, users need not be burdened by the data of others. Instead, they can focus on what is needed for themselves. They still benefit from the security, interoperability and provability of a proof-of-work based global public ledger. As a result, digital businesses can offload their burden of security, reducing their infrastructure and operating costs that are often barriers to entry.

Usher in the Renaissance of data

The BSV blockchain is the digital building blocks of a new Renaissance. This future Bitcoin-based economy will be more productive than our modern one because people will know better how to coordinate with each other using the information that is in the ledger.

People will be able to rely on the information that is in the ledger and it will be their virtual connection with everybody and everything.

In essence, the BSV ledger allows for the world to cooperate, and Bitcoin rewards cooperation because cooperation allows for better success at profit-seeking.

Developers and entrepreneurs who want to be successful in Bitcoin have to be profit-seeking. And if you coordinate that profit-seeking with others, you increase the benefit for yourself and every Bitcoiner.

For those of you who want to participate in growing the real Bitcoin network, I urge you to leverage the BSV ledger to build useful applications and services that draw other people to the network.

Bitcoin is needed now more than ever before, and BSV is able to provide the promise of peer-to-peer digital cash and much more.

If you’d like to learn more, check out our latest and upcoming events.


Bitcoin SV DevCon 2021

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