How Bitcoin’s networked integrity solves the double-spend problem | RP 95

Business, Media & Technology

1 — How Bitcoin’s networked integrity solves the double-spend problem

In the physical world, if someone hands me a dollar bill, I can be certain that they haven’t spent that money somewhere else.

They couldn’t have.

I can see the bill. Feel it. Smell it.

Cash is cash is cash.

But it’s not that simple online.

How do you know that the byte-sized set of code that someone is paying you hasn’t already been paid to someone else? That they actually had the money in the first place?

This is what’s known as the double-spend problem.

The ye ol’ double spend problem

Money isn’t like other digital artifacts.

If I take a photo on my phone and send it to my friends, that photo lives on my iCloud and on all their phones, too.

But Ii the world of finance, money must only exist in one place at a time. I shouldn’t be able to give a dollar that I already sent to someone else (obviously).

Double-spending is when funds are either spent twice or are spent by someone, other than the owner.

We have three solutions to the double-spend problem:

1. Exchange physical cash

2. Have a trusted third party verify the transaction

3. Use cryptography

Current solution: Trusted third parties

#2 is our present, dominant solution to the double spend problem.

Trusted third parties are financial services, like money transfer services, commercial or national banks, credit card companies, or online payments platform that receive and verify financial transactions. This third party receives the transaction then settles it with the other financial databases.

1. The intermediary receives the request to send funds.

2. They pay the recipient immediately from their store of funds.

3. They put in a transaction to withdraw cash or credit from the sender’s account.

4. Once settlement happens and assuming the sender has enough money in their account, the intermediary receives the funds.

These services charge transaction fees because they take on financial risk between the transaction and settlement. Digital payments platforms want to be compensated for the risk they’re taking on, in case some senders default on their payments.

This process is complex and costly for end users. Data and funds stored in third party servers create multiple points of failure for the entire financial system. Trusting organizations as intermediaries exposes end users to potential data breaches and abuse, as a result of misaligned corporate or political interests.

Networked integrity and Bitcoin were invented to address the issues of using trusted third parties.

Bitcoin relies on a peer-to-peer network of hundreds of thousands of computers (nodes) to clear transactions. Each node possesses an up-to-date copy of every transaction in the network’s history. This way, each node can verify each new transaction’s validity.

Bitcoin has two specific features that run the show: timestamping and proof of work.

Bitcoin solution 1: Timestamping

On the Bitcoin blockchain, the network timestamps the first spend of a currency.

• In the present solution of trusted third parties, settlement happens in days or weeks. On the blockchain, network participants — called miners — collect and sync transactions every 10 minutes.

• In the present solution, if a service’s database gets hacked, then the entire system fails. On the blockchain, there is no single point of failure since the database lives on the computer of every single miner and can be downloaded by anyone.

• In the present solution, if a payments platform covertly decides to sell user information to increase revenue, then the user has to deal with phishing, spam, and worse, identity theft, often without knowing who sold them out or whose system got hacked. On the blockchain, all transactions are fully visible to anyone, making BTC more traceable than cash and other forms of data.

But Satoshi Nakamoto went a step further. They didn’t just want to remove the central banking powers from the process; they also wanted to eliminate conflicting interpretations of events, without relying on human judgment.

This is where consensus mechanisms come in.

Bitcoin solution 2: Proof of work consensus

Timestamping gives us an order of transactions. But how do we know which set of timestamps came first if each node is kinda doing its own thing?

Short answer: The network’s participant nodes agree on the answer.

Long answer…

The central engine of Bitcoin’s blockchain is its proof-of-work (POW) consensus mechanism. This is how nodes decide the correct order of transactions and which block of transactions should be added to the immutable master chain of events.

To vote, nodes need BTC (notation for small b, bitcoin).

To acquire BTC, network participants use powerful hard drives to compete to solve difficult computational problems.

BTC is mined when a node/miner — usually a specially designed processor — successfully solves a hardware-intensive SHA256 cryptographic puzzle. The puzzle is hard to solve but the answer is easy to verify. This verification is done by other nodes in the network.

Once the network corroborates the answer, the miner is awarded BTC.

Every ten minutes, the nodes sync the transactions, compare their chains, and vote on which chain they think is the True Chain.

With BTC, Bitcoin gives voting power to nodes that have contributed computing power to the network, thus: a proof of work consensus mechanism.

Networked integrity: So what?

Once you get it, crypto is about complex solutions to simple problems.

But these are also very valuable problems.

The trillion-dollar value of the double-spend problem is why we have billion-dollar companies like Paypal and Stripe, whose sole purpose is to help us pay each other digitally without double-spending.

Satoshi Nakamoto offered Bitcoin as their own solution to the common issue of double-spending.

Bitcoin removes trusted third parties from the equation to give us our transaction fees and ownership of our data back. It does this by asking us to place our trust in the network instead – networked integrity.

Networked integrity incentivizes all actors in the system to behave with integrity by making it impossible or extremely expensive to not act in good faith.

From a philosophical standpoint, blockchain gives us an algorithmic way to trust one another with our valuables beyond money — even if we have never seen or met the other person.

History & the Arts

2 — How to build awareness, rewrite ingrained beliefs & break out of our societal Matrix: 3 key concepts

If you’ve ever felt…

• The tension to be different and to fit in

• The desire to buy more stuff and to be a minimalist

• The urge to live fast in the city and to retreat to an off-grid cabin away from everyone else

… then you’re caught in the web of beliefs of modern western civilization.

This web — what historian and Sapiens author Yuval Noah Harari calls imagined orders — is one of the foremost building blocks that hold up our society.

Like Neo, we were all born into a societal Matrix of beliefs. And awareness of what has kept us in is the first step towards breaking us out.

I’ve spent hundreds of hours studying the building blocks of modern and ancient civilizations. In this lesson, we’ll explore 3 reasons that have kept us trapped in our societal Matrix… And what we can do to get ourselves out.

Concept 1: Imagined orders shape our deepest desires

Whenever my friends and I talk about money, the following idea never fails to come up:

This inevitably leads to a conversation on what we want to do next as a group:

• Going on a cruise

• Vacationing in Hawaii

• Dancing on table tops in Greece (we’re huge Mamma Mia! fans)

This idea of experiences over stuff isn’t new. It stems from romanticism — an 18th century imagined order that believed achieving our human potential was all about experiencing everything the world had to offer.

Romanticism gave me a deep desire to see the world, learn about different cultures, and understand as many kinds of people as I could.

Since my teenage years, this sweetly seductive intellectual movement has dictated…

• My career decisions (remote work!)

• My friend choices (chosen family I can travel with!)

• And my homebase (Manila→ Toronto! A Canadian passport!).

Imagined orders stick because they speak to our deepest human cravings — and dictate our behaviour.

Concept 2: Imagined orders have tangible, physical manifestations

A couple days ago, I visited a mall in Manila’s Chinatown.

It’s not one of those nice air-conditioned places with shiny floors and name-brand stores.

Nope.

This was one of those chaotic gallerias featuring stalls full of merchandise, walls bursting with cheap stuff, and voices haggling over prices.

It’s what I imagine Amazon would look like if it were a physical place.

From one of those stalls, I bought two baseball caps for 80 pesos or about $2 CAD each. Of course, I posted a photo later to brag about it, with the caption: “Got these for 80 pesos. I love 168 Mall.”

This makes me an avid participant in consumerism — an imagined order from the Industrial Revolution that makes me believe that buying more stuff will make me happier.

The power of consumerism lies in how physical products give consumers a way to express their internal beliefs in the real world — and get validation and social capital for them:

• Factory overruns of Lakers baseball caps ($3) give fans a way to belong to a community of other die-hards.

• Shameless rip-offs of Yeezy slides ($20) give the wearer a certain status amongst other sneakerheads.

• Portable, off-brand karaoke machines complete with duet microphones, ($25) gives titos and titas a way to flaunt their singing skills.

Imagined orders are powerful because they have tangible, IRL equivalents.

Concept 3: Imagined orders are shared by many other people

I wrote part of this lesson on a girls' trip to Miami.

When we were planning, my friends and I sent each other TikToks and IG Reels of Miami must-do's and must-sees. We read Lonely Planet guidebooks, looked up Google reviews, and made reservations at Michelin star restaurants.

To us, Miami is not a place. It is a destination to experience.

Thanks to vloggers, influencers, and the algorithms of TikTok and Instagram, millions of other people feel the same.

This idea of traveling for aesthetic, to experience awe and wonder in our life, drives the sale of products and services (and the success of travel industry as a whole).

In the first concept, we talked about how romanticism espoused that experiences are the way to achieve our human potential.

Next, we talked about how consumerism says that the way to be happy is through buying products and services.

Put those two together and what do you get?

Romantic consumerism a.k.a. the modern travel industry.

Like its predecessors, romantic consumerism is just another imagined order, a result of a confluence of trends dating back to the Industrial Revolution:

• An abundance of cheap products because of more efficient manufacturing and trading practices

• The birth of marketing as a response to the oversupply of products

Romantic consumerism is an imagined order — something we humans made up out of thin air — and yet, it informs our bucket lists and is shared (quite literally on social media!) by millions of people all over the world.

Imagined orders are hard to break out of it because they are agreed upon and adopted by many people — including our family and friends.

So what?

1. We are all in a real-life version of The Matrix — the web of imagined orders of western civilization.

2. We are, therefore, not as original, creative, and unique as we’ve been led to believe.

3. We must accept this in order rewrite our beliefs (and take steps to become truly original).

Accepting the concept of imagined orders opens us up to other ways of thinking and behaving. Hopefully, our open-mindedness will lead us to become curious rather than combative of other people who hold beliefs that run counter to ours.

Accepting that we are mere products of inter-subjective societal beliefs is uncomfortable but crucial to escaping The Matrix.

As for me? My friends and I want to go to Greece next.

The goal is to dance on table tops like in Mamma Mia! — a musical that is based on songs that vilify individualism, youth culture, "life starts at 60", and the idealism of falling in love.

On one hand, we’re “not like other girls”.

But at the same time, we know we kinda are, too.