Bitcoin plan makes no sense at all”

There is no longer a serious organization that does not want ‘something’ with bitcoin, or rather: with the blockchain, the ‘technology behind bitcoin’. Even DNB announced in its annual report last week a project with a DNBcoin , “based on blockchain technology”.

Sorry, DNB, but this makes no sense at all.

What is a bitcoin? and what is its purpose?

What is a bitcoin? Bitcoin is a digital currency. The purpose of bitcoin (the design assignment, the problem to be solved, the raison d’être) is to be able to make reliable digital payments in the absence of a central authority trusted by all parties. The raison d’être of DNB (or at least part of it) is precisely to be that central authority in Dutch payment transactions.

The problem to be solved with digital coins is double spending. You can make perfect copies of everything that is digital quickly and cheaply. There are two solutions to this problem. By far the simplest is a central authority. Simply put: when I make a payment, it is checked in a central register – at DNB, for example. If I have previously issued the coin, the transaction will be refused. If not, the currency changes ownership and the register is updated.

The second solution (the only real existing other solution) is the blockchain as bitcoin uses it. The blockchain is a public register. Anyone can write in it, but transactions cannot be changed afterwards. The register exists in thousands of copies, and an ingenious mechanism ensures that there is always consensus about the state of the register.

Components of this mechanism are principles from cryptography and probability calculation, but also the economy. Thousands of miners are busy solving a crytographic puzzle, and the one who succeeds first is rewarded with a pile of bitcoins. Anyone who wants to falsify the register will have to beat all those thousands of miners and that is statistically impossible (or at least so costly that it makes the entire exercise meaningless).

The second method, the bitcoin blockchain, is accompanied by a lot of waste. All miners, except one, are always working for nothing. So if there is a central authority, the blockchain is always an inferior solution. A central bank that works with a blockchain is like trying to make tofu from steaks.

(Or it may be that DNB is thinking of a blockchain in which everyone can read, but DNB is the only one allowed to write, and which is not updated by miners but by a large computer on Frederiksplein. In that case, blockchain is simply a hip word for database .)

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