Bitcoin is the most efficient blockchain

Bitcoin has received multiple obituaries since its genesis but this time, something’s different. This time, Bitcoin is dead because there’s a better technology that’s been invented. We are told that DAG is a revolutionary technology that is going to upend Bitcoin.

This is also one of the standard criticisms of Bitcoin, the argument that Bitcoin can never be used as money as it is just a technology and hence will be disrupted by a better blockchain that comes along. The cycle of displacement would keep repeating ensuring that no cryptocurrency ever becomes global money. Hence, critics claim that the only way people will use blockchain to transact is if governments implement fiat currency on the blockchain and they authorize it as legal for payments.

Directed Acyclic Graph (DAG) is hailed as a possible competitor to the blockchain, capable of making new cryptocurrencies while overcoming some of the issues inherent to blockchain tech. Some of the cryptocurrencies using this technology are — IOTA and Hashgraph.

In an interview with Bloomberg, Mance Harmon, creator of Hashgraph said-

We can do the same things that blockchain can do. But,we can process far more transactions per second and we are more secure. We achieve the best level of security that one can achieve for this category of technology, and we are the first to do it.

I will list why DAG doesn’t work and the actual network difference in these coins vs Bitcoin. When I mean Bitcoin, I mean Bitcoin how it was intended- without a blocksize i.e Bitcoin Cash.

The myth of decentralization

Many cryptocurrencies claim to be decentralized even though they have elements of authority. In Bitcoin, anyone can become a miner by connecting their hashrate to the system and the verification power given to them is a function of their investment into the system. The system doesn’t distinguish between any miners and hence is completely decentralized.

IOTA has a coordinator which is run by the IOTA foundation and has been described as “training wheels for the juvenile network and has solely the task to set milestones as a Sybil-attack resistance”. The IOTA foundation says it will shut down the coordinator after the network reaches a stage where it can evolve unassisted. I was under the impression that a decentralized network is supposed to be sybil resistant without a central authority. IOTA can claim decentralization after shutting down “the training wheels”. The Tangleblog further continues: Needless to say: the foundation, which is officially registered in Germany as a non-profit organization, under German law, will not exploit it. They would stop their complete venture, which makes zero sense. If we just needed to trust that this non-profit won’t exploit it, I would have been happy continuing to place my trust instead with the current banking system.

Hashgraph published a paper on how it prevents Sybil attacks. Each miner gets a voting stake and the creator of the blockchain can choose amongst multiple approaches to assign this voting stake to all miners : proof of stake, proof of burn, proof of work, permissioned etc. If Hashgraph requires other mechanisms of verification to issue this voting stake, then it has not built a disruptive new mechanism but a permissioned blockchain that requires PoW to issue voting stake in a decentralized manner.

The myth of Free

IOTA promises free transactions and unlimited scalability. Free transactions is one of the features being hailed as a technological marvel compared to Bitcoin where fees is necessary. It should actually be the other way around. The quickest way to spot a fraud is to check for the usage of the word — Free. If someone says ‘Free’, you need to start running in the opposite direction.

Nothing comes free. Everything has a cost. A transaction is ultimately data. Each bitcoin transaction is roughly 500 bytes. And this data has to be verified and stored. These are the two costs associated with a transaction being recorded on the blockchain. If you are not paying for the cost of the transaction, someone else is. And your job would be to find out who is paying and what is their incentive to subsidize your cost of the transaction.

A blockchain can be thought of as a system that does three things very well

  1. Transaction propagation- Your transaction has to be propagated immediately to the global set of miners. All the miners will have to receive your transaction immediately so that your transaction is placed in a block quickly. Attempting to double spend or sybil transactions should be expensive for the attacker making it infeasible.
  2. Inclusion in a Block — The transaction has to be mined or placed in a block and connected to the previous block in the blockchain.
  3. Irreversible- No one should be able to erase your transaction or create an alternate history. It is history that cannot be reversed because it is expensive to reverse.

Bitcoin is a Small World Network

Bitcoin is a small world network with distance d~1.32, one can think of Bitcoin as a system that propagates every transaction that it receives in less than 2 hops. Every transaction on the network on average just has to propagate from the user node to a miner node and it is then immediately distributed to the entire network. This can be visualized as all the miners forming one giant node that other nodes connect to and all it takes for the entire network to receive your transaction is propagation of your transaction through 1 hop.

Small world networks are a recent stream of mathematics developed by Duncan Watts and Steven Strotgatz in 1998. The average node-to-node distance in a small world graph is lesser than random graphs and scale-free networks. This is the reason Bitcoin’s network topology is not comparable to the internet as the internet is a power law network. The comparison of Bitcoin with TCP/IP and Lightning being Layer 2 is misguided at best and fraudulent at worst as Bitcoin’s network structure is quite different from the Internet’s.

Bitcoin is economic

Bitcoin’s security is economic and this is what DAG based blockchains ignore. Proof of work’s security is not the computing power, but the economic investment behind the computing power. Miners compete with each other to solve a hash puzzle and whoever is the first to win gets to mine the block and add it to the blockchain.

The block reward can be spent only after 100 blocks and hence it is in the best interests of miners to include only good transactions so that the network picks up their block and continues to mine over it. A malicious miner who tries to include bad transactions spends electricity and other variable costs to mine the block but will forego the potential block reward as his block will be rejected by the network. In this way, the network is incentivized to be honest and include only good transactions through rational self-interest.

The fees per transaction can be tiny but collectively all the transactions in a block add up to make a huge revenue source that miners will compete for. PoW is not a technological innovation but a rethinking of connecting security to what matters most- economic incentives. The current banking system’s security comes from authority, it is illegal to hack into banks and that dissuades criminals from attempting to hack into banks. If someone can find a security flaw in the system, they can get away with Billions of dollars. This is why breaches are quite common, and many times banking systems have been breached through internal frauds. Bitcoin’s security strips away technology and makes security a function of economics. Anyone wanting to cheat will spend more than he will gain making it unfavorable to attack the system.

If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or using it to generate new coins. He ought to find it more profitable to play by the rules, such rules that favour him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth- Satoshi Nakamoto

Bitcoin is cheap

Bitcoin is not going to make transactions free. What Bitcoin aims to do is make transactions as cheap as possible. The system takes the economic cost of a transaction and distributes it into a competition amongst global miners.

It is in miner’s best interests to include any transaction that costs more than the cost of storage per transaction. Every transaction that pays a fees higher than the cost of storage of the transaction is additional revenue that they want to take. This incenvitizes miners to keep improving their hardware to become more efficient in their endeavor to be more profitable. If any miner is not able to keep up, he is outcompeted by the market.

Miners also focus on increasing efficiency of converting hashing power to security with minimal loss. The factor to measure here is orphaning rate as miners would have spent energy to mine a block but the block doesn’t get rewarded if it gets orphaned. The higher the orphaning rate of a blockchain, energy has been spent by miners but has gone as a waste as it doesn’t secure the network. This affects profitability of miners and hence this increased expense has to be borne by the network and the cost of each transaction increases. Bitcoin has the lowest orphaning rate amongst all blockchains because of its block time.

Bitcoin is efficient

For any blockchain to compete, the blockchain has to be more efficient in any of these parts. Lets compare Bitcoin to other blockchains and see how someone can improve over Bitcoin and if anyone has succeeded.

  1. Efficiency in transaction propagation— Bitcoin is a small world network allowing it to process millions of transactions per second and propagate them to other nodes with minimum network distance. Other network structures have a higher node to node distance allowing the possibility of sybil attacks and double spend attacks due to delay in propagation.
  2. Efficiency of mining- Mining is a competitive zero sum game where miners focus on decreasing cost of computation of hashing. Bitcoin has the lowest orphan rate amongst all blockchains minimizing energy wastage. As long as the transaction fees is greater than the cost of storage, miners will include as many transactions as they can. There cannot be any other blockchain that will have lower fees than Bitcoin because Bitcoin makes the cost of inclusion an economic competition. The more efficient miners are, the more they can compete and increase profitability. Other mechanisms such as Proof of Stake do not incentivize miners to decrease costs as a constant endeavour.
  3. Most proof of work-The blockchain having the most PoW backing it will be the most secure. This is the reason that all PoW blockchains compete to be the most profitable. The blockchain that sees the most usage will see the most profitability and Bitcoin is capable of scaling to billions of transactions. The higher profitability encourages new miners to invest and join the system increasing security and decentralization. The blockchain that has the most PoW will be most expensive to attempt a double spend or rewrite a transaction.

Any competing blockchain can copy Bitcoins code to be as efficient as Bitcoin is but the security and the irreversibility will still be derived from Proof of work. This is not to say new innovations won’t threaten Bitcoin but Bitcoin can absorb these new innovations. If someone develops a better network model or a better hash function, it can be implemented in Bitcoin’s codebase making it ever-combative. The network effect of money will ensure the highest PoW backing Bitcoin and a history that is sacrosanct.

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Sumanth

Sumanth

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