Bitcoin and the Problem of Byzantine Generals

Another interesting brain game is the Problem of Byzantine Generals.

The problem is the following. We have two armies attacking a fortress. Each army is weak. Taking an action alone is a certain defeat. If the allies attack together on the other hand they can carry out the siege with success.

The issue is that the allies are separated and the defenders can capture and corrupt messages. If the message is lost, one party attacks without the other and they get defeated.

The problem appears in computer science as well. Bitcoin tries to solve the same problem by seeking for strong enough proofs by voting among miners to sign transactions.

The right solution is way more simple as usual. The allies can advance as long as they can without enemy engagement. Then, instead of sending scouts, they can use the enemy to send their message. The defenders won’t attack each party, since the allies would notice the restructuring. This is a sign of weakness on the other side and they would take the leverage right on. Defenders won’t imitate, since they need to get reinforcement from the other side, too. Thus the allies need to attack randomly. If the defenders start restructuring on the other side, the allies on the other side start attacking as well causing the certain victory.

It is like pressing the brake on your car. You do not send a sound wave over the fluid, you press the fluid and the pressure triggers the break on the other side.

Similarly, let’s assume a distributed transaction system. Two parties have bread and butter and they are starving, so they exchange and record the transaction locally. Both would dry or get sour by the next day anyways. If one has extra bread left, they can walk to the nearby village and sell it at the local price or exchange it there in a similar way. The only problem that may occur is if one party does not have enough goods for the transaction. You are either a beggar in this case or somebody owes you. If you are the only beggar, you need to move to another village. If there are more beggars you agree. Some start producing bread others start producing butter. If you did not have the butter ready, you would have signed a check.

You may trade the leftover. You may not trust checks from other villages, so you will devalue them. The system teaches to fulfil essential trusted demand with local supply.

If there is excess, you may trade. Excess is not important locally. it teaches to fulfil demand with sustained imports, so that checks from the known recurring sources are trusted. Random demand and supply is untrusted, so it will likely be cheap. Trade is not war, so the military solution above does not apply. However, the standard solution noticing recurrence does and it is valid. Bandits occasionally appearing with random checks are rarely trusted. Bandits regularly showing up will show the need of more law enforcement.

This is my issue with Bitcoin. If you use it, you are not better off with just writing checks. If you rely on folks to sign it for you by mining, you spend lot’s of energy ruining the environment that could be used somewhere else. Even if you rely on renewable energy that energy could have been used for scientific climate research instead. Financial institutions are way greener thus more affordable in the long run. Anybody can launch a new cryptocurrency, since it is just software. The demand can be split this way causing a long term fall in it’s price of fixed assets. Gold cannot be made.

Cryptocurrencies may still be useful for three things. One is taxing, where the miners slowly take over the assets. The other is statistics, where the tax collector can get useful information about the market. The third option is using it to measure and assess the state of the cyber security space. It is good for the organizers, not for the participants. It is a casino. Think about it. It collects excess money and it may fill it back to the economy later acting like a reserve bank or trade partner stabilizing prices. However, only all the cryptocurrencies may have this role and the issue can be solved way more transparently by regular reserve banks.

Cryptocurrencies are still useful but for different purposes and for different entities than it was invented for.