In the first episode of a 10-part special of the “Theory of Bitcoin” series featuring a line-by-line explanation of the Bitcoin white paper, the author himself and Bitcoin creator, nChain Chief Scientist Dr. Craig S. Wright and engineering head of tokenization entity smart wallet at the Bayesian Group and Money Button founder Ryan X. Charles discuss what “trusted third parties” are and how they are not an economic system compared to Bitcoin.
“When we’re talking about no trusted third party, it’s not your normal everyday trusted third party. We’re talking about fiduciaries. A trusted third party is a defined legal term. So, we are talking about financial intermediaries, no fiduciaries here. So, nobody holds your money. It’s like cash, but they verify it. And when I hand you money, miners can’t intercept that. They can process it… but they don’t sign it. They don’t validate that it’s correct and then alter something and then stamp it… I hand you [money], and you get cash,” Dr. Wright explains.
It is clear from what Dr. Wright said that Bitcoin miners cannot be considered trusted third parties or fiduciaries as they do not hold your money for you. They only process transactions and help secure the network by validating and timestamping Bitcoin transactions. They cannot intercept or take away your cash because it is never in their possession.
“Miners can change the rules, but it’s public. So, you can’t change the protocol, but you can interact with things. You can ban different addresses or reassign addresses and do things. There are always different actions that can be taken. But if they do this and the system doesn’t agree, then there’s a complete audit record of all of these exchanges,” Dr. Wright clarifies.
And it is this complete audit record of all activities that all Bitcoin miners have that provides security to the network. When payment intermediaries like PayPal and WeChat are hacked and all data is deleted, then it would spell catastrophe for businesses and users on the network. This is because these fiduciaries are centralized, meaning they have a central administration that governs the entire system. And when this central system is attacked, then all data will be lost. And this is not economical at all.
Because Bitcoin has a decentralized and distributed system wherein all nodes operated by miners have copies of the data on the blockchain, then even if one miner gets bankrupt, it will not affect the system at all.
“If Monaco, who’s a big miner and owns 40% of the market, goes bankrupt, no one cares. 60% of the market go, ‘Our profitability is skyrocketing! Yippee!’ And they invest more money, because they’re getting more money back. It’s economic. That’s what I keep saying, It’s an economic system, primarily,” Dr. Wright further explains.
Bitcoin miners are in constant competition with each other in order to earn more in transaction fees and block rewards. And each miner is independent of each other, each with their own master copy of the data stored on the blockchain. Hence, if one suddenly closes down shop, it will not affect the other miners at all. It is a completely economic system.
Why Bitcoin Is An Economic System – Author: Makkie Maclang