Bitcoin and the Byzantine Generals’ Problem



“Before the Bitcoin protocol was invented, most computer scientists thought a system like Bitcoin was impossible because of a famous problem in computer science called the Byzantine Generals’ Problem.

The problem, in a nutshell, is how to coordinate among distributed nodes to come up with a consensus that is resistant to attackers who are trying to undermine that consensus. A significant component of the solution is the proof-of-work algorithm, which is the main purpose of so-called Bitcoin miners.

The mainstream press has completely ignored the importance of this computer science breakthrough. When The NY Times writes about mining, it either ridicules it:

‘Bitcoin is digitally “mined” by computers running an algorithm. (If you just rolled your eyes, you’re not alone.)’

Or calls it wasteful:

‘One thing I haven’t seen emphasized, however, is the extent to which the whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression—a retrogression that Adam Smith would have scorned.’

How much does the existing banking/payment infrastructure cost? One reasonable measure is the fees charged. Standard online payment fees are 2.5 percent, not including the added costs [of] fraud (chargebacks plus transactions blocked out of fear of fraud). Bitcoin payment fees are close to zero, and fraud is impossible since Bitcoin is a bearer instrument.

The NY Times has now written hundreds of articles about Bitcoin, but the phrase ‘Byzantine Generals’ Problem’ (or any discussion of Bitcoin’s scientific significance) has yet to occur in any of the articles.”

In regards to this excerpt from Chris Dixon’s blog post, it is good to see someone is mentioning the fundamental impact that Bitcoin has brought about. All the other discussions are certainly valid, but this one is why we are even talking about Bitcoin today.

One point, though, on the full cost of the banking infrastructure: it is in fact way more than those payment fees, which are strictly for credit-based payments. The fact that little innovation has occurred in the space accounts for the fact that 1) that infrastructure is not more expensive and 2) in a cyclical paralysis no investment is made other than to keep the creaking system afloat to accommodate Fedwire and CHIPS for domestic payments changes or SWIFT and SEPA requirements for international payments. The whole thing is a monster, and if Bitcoin can work around all of that, it could disrupt that entire infrastructure.

This article was originally published on Strong Opinions, a blog by Birch Ventures for the NYC tech startup community.

Image credit: CC by BTC Keychain

About the author: Mark Birch

Mark is an early stage technology investor and entrepreneur based in NYC. Through Birch Ventures, he works with a portfolio of early stage B2B SaaS technology startups providing both capital and guidance in the areas of marketing, sales, strategic planning and funding.

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