Is the Bitcoin Paradigm moving from virtual to real?

The LexTech Institute, in collaboration with the Cercle du Coin and the Master in Innovation of the University of Neuchâtel (Switzerland), organized on June 24, 2022 a conference devoted to “The Bitcoin Paradigm”. This conference gives us the opportunity to discuss in this blog post the representation of the Bitcoin world and to show how the development of new protocols that run on top of the Bitcoin blockchain allows for the improvement of privacy on the Internet.

From transactions conducted on-chain…

The Bitcoin blockchain has been established to enable peer-to-peer transactions that do not rely on a trusted third party. It is based on a decentralized technology, which allows the transfer of values to be performed in a secure manner without the involvement of financial intermediaries. This computer network hosts a crypto-currency (bitcoin, BTC) that can be traded upon it. The security of the system is guaranteed by the maintenance provided by thousands of nodes scattered around the world that share the transaction register in a distributed manner. In addition, some users perform mining, a process of verifying transactions by solving complex algorithms. The most recent transactions are assembled into blocks that are cryptographically secured and added to the blockchain. Each block is time-stamped, which can prove that the data recorded in the block existed at a specific date and time.

Due to its decentralized nature, Bitcoin is censorship-resistant, meaning that any transaction that is registered in a block is valid according to the rules of the network and thus no single entity can prevent, modify or cancel a transaction. Bitcoin is also a fully transparent system, every single user being able to verify any transaction executed on the network. Everyone is thus “controlling” the blockchain by being able to verify that any transaction is compliant with the rule of the network. This allows users to exchange bitcoins even if they do not trust each other. This capacity is illustrated by the expression “Don’t trust, verify” (see P. De Filippi/M. Mannan/W. Reijers, Blockchain as a confidence machine: The problem of trust and challenges of governance, Technology in Society 62 (2020), 101284).

The technology behind Bitcoin has been adopted and developed on other platforms, including the Ethereum blockchain. Like Bitcoin, Ethereum allows the exchange of its native crypto-currency (ether, ETH). But this platform has an additional feature that offers more flexibility by allowing a layer of software to manage and automate transactions. These types of transactions are called smart contracts. The software automatically executes the transaction as soon as the predefined conditions are met. The use of a smart contract makes it possible, for example, to automatically transfer a certain amount of ether from one wallet to another at a predefined date or when a specific event has occurred. Ethereum has enabled the development of tokens, non-fungible tokens (NFTs), decentralized applications (DApps), and decentralized autonomous organizations (DAOs), which are used for different purposes but mainly for decentralized finance (DeFi).

…to transactions conducted off-chain…

Bitcoin is considered by its aficionados to be intrinsically more secure than other blockchains, such as Ethereum, due to its true decentralization and its reliance on the proof of work (PoW) consensus mechanism. But Bitcoin, like its competitors, is facing a scalability problem and struggles to support increasing load of transactions. As the number of transactions increases, the speed of execution decreases, because the number of transactions that can be performed per second remains the same. One way to solve this fundamental problem is to create additional layers, on top of the base blockchain, allowing the execution of transactions without directly using the base blockchain. For example, the use of a layer such as the Lightning Network enables Bitcoin to scale off-chain. By opening a payment channel between two users, this network allows a series of bitcoin transactions to be made without the need to mine each transaction. Only the transactions for opening and closing the channel are recorded on Bitcoin, while intermediate transactions are only recorded on the Lightning Network.

The RGB Protocol is one of those new applications which can be implemented directly on top of Bitcoin, as a second layer, or on top of the Lightning Network, as a third layer. The transactions performed with RGB happen off-chain and are not immediately recorded on Bitcoin. This avoids placing the computational burden on all the nodes that support Bitcoin, which allows for a significant increase in transaction volume. RGB has the added advantage of allowing the creation of smart contracts and thus brings applications such as DAOs and NFTs into the Bitcoin environment. The implementation of this protocol will facilitate the development of bitcoin finance (BiFi).

… for building a true privacy-preserving Internet

The most interesting innovation brought by the RGB Protocol is the improvement of privacy on the Internet. This protocol is private by default, which means that only the parties who participate in a transaction have the information about the transaction and have the means to validate it. For example, only the parties to a transfer of crypto-assets have the information about the transfer taking place and have the means to validate the information and value that is being transferred. This is made possible by the fact that RGB keeps the smart contract code and data off-chain. By doing that, it allows each user to regain control over their own data, thus offering more privacy than Bitcoin. It should also be noted that RGB is a digital rights management (DRM) system which allows a rights owner to exert control over data by himself. With RGB, each asset is held by its owner who is the only one to have the power of disposal over it. For example, RGB gives the power of verifying the rights attached to an NFT (e.g., the right to use or sell a piece of art) to its creator.

The developers of RGB remain true to the basic ideology of Bitcoin as a decentralized system and stay in line with the Bitcoin paradigm. When we mention the Bitcoin paradigm, we inevitably think of the Cypherpunks who try to acquire privacy on the Internet by using cryptography. “We the Cypherpunks are dedicated to building anonymous systems. We are defending our privacy with cryptography, with anonymous mail forwarding systems, with digital signatures, and with electronic money.” (Eric Hughes, A Cypherpunk Manifesto, 1993). Bitcoin has its roots in the Cypherpunk movement, allowing its users to regain monetary sovereignty. “Privacy is necessary for an open society in the electronic age. Privacy is not secrecy. A private matter is something one doesn’t want the whole world to know, but a secret matter is something one doesn’t want anybody to know. Privacy is the power to selectively reveal oneself to the world.” (ibid.). However, we can see today that there is a progressive loss of the original identity of the blockchain ecosystem, as a result of states and central authorities taking over control. The return of centralization would lead to a paradigm shift for blockchains in general and for Bitcoin in particular.

In this context of “recentralization”, the development of applications that run on top of the Bitcoin blockchain is not only an important technological progress, but also a natural development of a technology that is only at the beginning of its evolution. Projects such as the RGB Protocol make it possible to re-emphasize the values defended by the Cypherpunks. They also fit perfectly into the development of Web 3.0, which is characterized by decentralization and the redistribution of power from centralized platforms into the hands of users. Web 3.0 should indeed see the rise of a more privacy-preserving Internet.

The features of the RGB Protocol is further discussed in the blog post “On the way to Bitcoin Citadels via the RGB Protocol”.

Proposition de citation : Guillaume Florence, Is the Bitcoin Paradigm moving from virtual to real?, Blog du LexTech Institute, 31.08.2022