The Nakamoto Blockchain

Kristofer J Carlson, MS, CISSP

Systems Analyst
CASK LLC

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 Bitcoin vs Blockchain

Contents
THE NAKAMOTO BLOCKCHAIN.....................................................................................I
CONTENTS.......................................................................................................................II
FIGURES...........................................................................................................................II
EPIGRAPH........................................................................................................................1
ABSTRACT.......................................................................................................................1
1. THE NAKAMOTO BLOCKCHAIN..............................................................................1
2. PROBLEMS WITH THE NAKAMOTO BLOCKCHAIN..............................................3
2.1 THE NAKAMOTO BLOCKCHAIN IS NOT A LEDGER...................................4
2.2 THE NAKAMOTO BLOCKCHAIN IS NOT INHERENTLY SECURE..............5
2.3 THE NAKAMOTO BLOCKCHAIN IS NOT IMMUTABLE................................7
2.4 THE NAKAMOTO BLOCKCHAIN IS NOT A PROTOCOL.............................8
2.5 THE NAKAMOTO BLOCKCHAIN IS NOT ROBUST......................................9
2.6 THE NAKAMOTO BLOCKCHAIN IS NOT A DATABASE............................10
2.6.1 ACID..............................................................................................................10
2.6.2 BASE.............................................................................................................11
2.6.3 NAKAMOTO BLOCKCHAIN CANNOT BE QUERIED..................................12
2.6.4 THE NAKAMOTO BLOCKCHAIN IS A BAD TRANSACTION LOG.............12
2.7 THE NAKAMOTO BLOCKCHAIN SCALING PROBLEM.............................13
3. CONCLUSION..........................................................................................................15
BIBLIOGRAPHY...............................................................................................................1

Figures
No table of figures entries found.

ii
Epigraph
Projects to develop and incorporate blockchain haven’t altered the business landscape
as previously predicted. [1]

Abstract
In books, magazine articles, and YouTube videos, the concept of the blockchain and its
first implementation, Bitcoin, are often confused. It seems that as the price of Bitcoin
climbs, interest in blockchain increases. Much of the popular material about blockchain
serves more as part of the hype machine than a reasoned discussion of the pros and
cons. In general, the history of blockchain begins with the pseudonymous publication of
Satoshi Nakamoto’s initial paper outlining the Bitcoin use case and it’s technical
framework. This paper is intended to describe Nakamoto’s blockchain, describe the
problems inherent in the Bitcoin implementation (as well as other leading crypto-
currencies), and provide a reality check for the blockchain hype machine.

1. The Nakamoto Blockchain

In 2008, an anonymous person (or persons) using the pseudonym Satoshi Nakamoto
released a paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System.” The key
innovation was a chain of cryptographically linked blocks, now known as blockchain. 1
The promise of blockchain technologies is the ability to engage in anonymous economic
transactions without involving corporations or governments. This require trust that the
individual has the money, that the money can be securely exchanged, that the
transaction settlement will be quick and inexpensive, and that the exchange is final.
Pundits argue blockchain’s potential to improve cashflow, reduce transaction cost, and
reduce or eliminate chargebacks due to fraud, all without third party involvement.
However, the frameworks they propose are themselves a new type of third party, one
where the risks are solely borne by the user. To a libertarian or an anarchist, this may
seem like a good thing. For the rest of us their may be some doubt.
Nakamoto buried his innovation within his implementation, known to the world as
Bitcoin. The resulting excitement linked the underlying theoretical concept with the
Bitcoin implementation. For example, the definition of the blockchain used by Brett
Benefield, Scott Herford, and Kyle Thomas includes transaction data, something
required for cryptocurrency transactions.
Each one of these blocks can have multiple pieces of information in it such as
transaction information or asset data as an example. When a new block is added, it is

1
Interestingly, the term “blockchain” does not appear in Satoshi Nakamoto’s paper, which instead spoke
of a “chain of blocks.” Sometime in 2008, “block chain” began to appear as a compound noun with a
space; today we connect the terms into a single noun.

1
 Bitcoin vs Blockchain

added to the end of the chain of blocks and then a new hash value is computed. This
relatively simple feature ensures that once the blockchain is large enough it is
computationally secure preventing a malicious party from modifying any previous blocks
[emphasis added]. [2]
The hype machine has sold many books and raised certain people’s speaking fees, but
has obscured the underlying technology. 2 Trevor I Kiviat, writing for the Duke Law
Journal, describes the problem:
Authors almost exclusively focus on bitcoin as a currency system. For example, authors
have weighed the costs and benefits of transacting with virtual currencies, considered
the sustainability of virtual currencies, and contemplated the application of existing
regulatory schemes to virtual currency. Missing from the dialogue is a deeper
perspective on the technology.
Books like “Blockchain Revolution” contain chapter after chapter of potential use cases,
but provide little actionable detail. [3] In truth, real world use of blockchain is limited. The
C-Suite is skeptical, with 39% of executives saying blockchain is overhyped, and with
only 8% engaged in short-term planning or active experimentation. [1] Part of the
problem is that there is more than one type of blockchain, but most authors fail to draw
the proper distinctions.3 What all blockchains provide is data integrity, but vary in the
manner in which they provide it. Most implementations follow the example set by
Satoshi Nakamoto and embeds both data and metadata in the block. In what I term the
Nakamoto Blockchain, the data consists of transactions denominated in Bitcoin,
although current implementations of Bitcoin allow for smart contracts in addition to
transactions.4
In general, Nakamoto blockchain technology is incorrectly defined and poorly
implemented. The Nakamoto blockchain also has technical limitations, making it a poor
fit for many of the proposed use cases. The Nakamoto blockchain is open
(unencrypted), decentralized (on a peer-to-peer network architecture), anonymous
(users identities are hidden), with data integrity maintained by a time-stamped,
cryptographically secured hash, and uses Proof of Work (PoW) validation for Byzantine
Fault Tolerance. Most Nakamoto blockchains follow this model, but with the following
variations: some may be encrypted instead of unencrypted; permissioned instead of

2
I have read a number of books that purport to explain blockchain, but are in fact thinly veiled promotions
for crypto-currencies (and, in particular, Bitcoin), all of which feels like a come-on a network marketing
scam or a Ponzi-like scheme.
3
Estonia was experimenting with blockchain in 2007, before the Bitcoin paper was published. Their
blockchain implementation contains tags identifying external data and the hash of that data file, thus
ensuring the integrity of the file. The block, however, does not contain the data itself, this avoiding many
of the pitfalls of the Nakamoto blockchain. [37]
4
In legal terms, a smart contract is an agreement whose execution is automated. [39]

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 Bitcoin vs Blockchain

anonymous; distributed rather than decentralized. Some provide different methods of

providing Byzantine Fault Tolerance.
Blockchain 1.0 is represented by Bitcoin and related cryptocurrencies. Blockchain 2.0 is
represented by Ethereum, and adds smart contracts. Blockchain 3.0 is comprised of a
variety of approaches intended to overcome the technical limitations of the Nakamoto
blockchain. [4] The one thing shared by all Nakamoto blockchains is the block
encapsulates the data. The terms ledger, distributed ledger, transaction, and smart
contract are specific to the Nakamoto blockchain, especially in relation to
cryptocurrencies, and are keys to determining whether the author is describing the
Nakamoto blockchain.5

2. Problems with the Nakamoto Blockchain

The definitions of blockchain in widespread use are incorrect. In most cases, they
confuse specific implementations and use cases with the underlying technology. For
example, Saeed Elnaj defines blockchain as follows: 6 “Blockchain is a digitized,
distributed and secure ledger that guarantees immutable transactions and solves the
trust problem when two parties exchange value.” [5] This definition, while relatively
common, is misleading as it conflates cryptocurrencies and blockchain.
Valentina Gatteschi (et al.) provides an alternative definition:
A blockchain is a public ledger distributed over a network, recording transactions
(messages sent from one network node to another) executed among network
participants. Before insertion, each transaction is verified by network nodes according
to a majority consensus mechanism. Recorded information cannot be changed/erased
and, at whatever time, the history of each transaction can be recreated. [6]
Let us begin with a discussion of these definitions. The blockchain being described is
not a generic blockchain, but the Nakamoto blockchain. The Nakamoto blockchain, the
basis for cryptocurrencies and smart contracts, is a blockchain where the data is
embedded into the block. There are other types of blockchain (such as Keyless
Signature Infrastructure) which do not do this.
The two definitions use the term “distributed” differently. Saeed Elnaj is describing a
distributed network architecture, while Valentina Gatteschi is simply saying that,
independent of the network architecture, the blockchain is distributed across the
network. While a generic blockchain need not be distributed across a network, the

5
Hyperledger is an open source collaborative effort, hosted by The Linux Foundation, to advance cross-
industry blockchain technologies. [38] The inclusion of the term “ledger” in the name tells you Hyperledger
is based on the Nakamoto blockchain.
6
The definition is no better or worse than most. I use it because it is convenient, not because I have
animus towards Saeed Elnaj.

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 Bitcoin vs Blockchain

distribution improves the computational security of the system. The network architecture
determines the manner in which the blockchain is distributed. Both definitions use the
term “ledger”, a term in widespread use even though it is technically incorrect. Saeed
Elnaj emphasizes the security of the blockchain, something that is demonstratively
false. Both definitions emphasize the immutability of transactions, something that the
Ethereum fork (after the DAO heist) has proven untrue.
2.1 The Nakamoto Blockchain is Not a Ledger
The blockchain is a journal, not a ledger. A journal is a record of detail-level
transactions. At some point, accountants summarize the journal details and post them
to a ledger. [7] A ledger is a permanent summary of the economic transactions recorded
in the supporting journals. [8] This means that implementing blockchain technology to
record individual economic transactions makes it a journal, not a ledger. This distinction
is the difference between bookkeeping and accounting. Bookkeeping is the recording of
financial transactions, while accounting is the keeping, analysis, verification,
summarization, and reporting of financial records. 7 An accurate and immutable
transaction journal could easily form the basis for a ledger, but ledgers are subject to
change in a way that journals are not.
One could argue that since a block contains all the economic transactions that have
occurred since the previous block was created, this constitutes a summary of the
transactions. Because there is no one-to-one correspondence between a transaction
and a block, it might be possible to alter a transaction before it is written to the block.
Only in this sense is it a ledger. However, a ledger is still the result of analysis, not
simply a record of transactions. Thus blockchain is simply a journal, and a poor
implementation of a journal at that.
As proof of this, let us compare the process for determine an account balance in a
traditional accounting system vs a cryptocurrency wallet. If I contact my bank and
request my account balance, the bank looks up my account and replies back with the
summary value of all the transactions, which is stored in their database as my account
balance. If I do the same in a cryptocurrency wallet, the amount in my account is not
immediately returned, but is instead calculated. 8 De Filippi and Wright describe this
process.
To evaluate whether a user has enough bitcoin to execute a transaction, the Bitcoin
protocol searches through all previous transactions, starting from Bitcoin’s first block
(the “genesis block”). If a user has enough bitcoin, the transaction is deemed valid. [9]

7
Bookkeepers record the raw numbers; Accountants interpret the numbers and assign meaning to them.
8
I’m discussing the generic implementation. Their may be wallets that calculate the values and maintain
them, updating them only as new transactions affect the wallet balance.

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 Bitcoin vs Blockchain

Instead of a simple database query, the Bitcoin network searches the Bitcoin blockchain
for all transactions tied to that account, then performs an add and subtract to determine
the balance. The very fact that my account is not represented by a summary value
demonstrates that the blockchain is not a ledger.
2.2 The Nakamoto Blockchain is Not Inherently Secure
Timothy May writes in the Cyphernomicon: “Strong crypto permits unbreakable
encrypion [sic], unforgeable signatures, untraceable electronic messages, and
unlinkable pseudonomous [sic] identities.” [10] It turns out that May’s vision is as faulty
as his spelling.
Blockchain is a concept, not a security protocol. The blockchain only as secure as the
technical framework, the supporting infrastructure, and the length of the blockchain. [11]
As a concept, blockchain can be implemented in a variety of ways, using a variety of
technical frameworks. In their book “Blockchain Revolution”, Don and Alex Tapscott
describe the security features of the Bitcoin network. “Safety measures are embedded
in the network with no single point of failure, and they provide not only confidentiality,
but also authenticity and nonrepudiation to all activity.” [3] This description is false, as
these security features are not inherent to blockchain, nor are they unique to the Bitcoin
network.
The Tapscotts themselves note that the blockchain is public; the confidentiality they
describe is not the confidentiality of the transaction, but the confidentiality of the persons
conducting the transaction. [3] The public nature of the blockchain is what makes it
insecure. While the U.S. government requires a warrant to get your financial history
from the bank, the same is not true of public blockchains. John Bohannon writes:
The majority of Bitcoin users are law-abiding people motivated by privacy concerns or
just curiosity. But Bitcoin’s anonymity is also a powerful tool for financing crime: The
virtual money can keep shady transactions secret. The paradox of cryptocurrency is
that its associated data create a forensic trail that can suddenly make your entire
financial history public information [emphasis added]. [12]
The guarantee of anonymity, and with it confidentiality, turns out to be flawed. In 2014,
Philip and Diana Koshy created their own software that downloaded every packet sent
on the Bitcoin network. Through careful analysis, they were able to link anonymous
digital IDs to the IPs they were using. Since publishing their findings, fake nodes have
turned up in government data centers, indicating the U.S. government is tracking all the
transactions and identifying participants. [12] Here is a hint: if your transaction response
can find you, so can the government.9

9
China, which already controls the world’s largest blockchain mining operations, is now regulating
blockchain technologies with the intent of requiring identified users and inspecting encrypted data. [41]
This is currently aimed at Chinese nationals only.

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 Bitcoin vs Blockchain

The history of cryptocurrencies puts the lie to the hype around their security. Griffin and
Shams describe two of the major heists.
Mt. Gox, a leading exchange that by 2013 was handling approximately 70% of bitcoin
volume, declared bankruptcy due to a mysterious ’hack’ of the exchange which resulted
in approximately $450 million worth of bitcoin missing from investors’ accounts. Good
reasons have been put forward as to why the ’hack’ may have been an inside job. …In
the second biggest hack in Bitcoin history, on August 2, 2016, the Bitfinex exchange
announced that $72 million had been stolen from investor accounts, leading Bitcoin to
plummet 20% in value. [13]
The first Bitcoin heist took place in 2011, as related by Felix Salmon.
A man -- we know him only as “All In Vain” -- went to bed that night with his Windows
computer turned on and connected to the internet. On that computer was a wallet
containing 25,000 electronic coins. When he woke up on Monday morning, the wallet
was still there. But the money was gone. [14]
The “All In Vain” heist demonstrates that blockchain-based applications are not
inherently secure and that blockchain immutability may not be a virtue. Another security
problem arises when blockchains are distributed across a peer to peer network.
Nicholas Weaver writes:
Peer-to-peer systems, and especially those written in unsafe languages such as C and
C++, are particularly vulnerable to worms. A worm that can exploit a P2P node and then
spread to all connected nodes takes approximately the same time to spread worldwide
as a broadcast message in the same network. For cryptocurrencies that minimize the
time required to send transactions, this would enable a worm to spread globally in a
matter of seconds. [15]
No technology is inherently secure. 10 Blockchain is no different.
2.3 The Nakamoto Blockchain is not Immutable
In the 1955 movie “We’re No Angels”, an escaped convict helps a struggling merchant
by adjusting the store’s journal, turning a failing business into (on paper) a prosperous
enterprise. The promise of blockchain is that it makes this type of fraud more difficult.
The reason is the chain created by the cryptographically linked blocks makes it
impossible to alter the data in one block without affecting subsequent blocks. Or, to
quote Matthew O’Brien, “Changing history becomes expensive.” [16] Although the
blockchain is computationally secure, it is still technically possible to alter a single
blockchain; however, if you distribute multiple copies of the blockchain, the potential for
fraud is far more difficult, as you would have to change multiple blockchains at the same

10
Estimates are that quantum computing could break Bitcoin encryption by 2027. [40]

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 Bitcoin vs Blockchain

time. Thus, the promise of immutability is dependent upon the infrastructure and
implementation.
The reality is that the blockchain can change as long as you control a majority of the
nodes. The immutability of the blockchain became a problem when a Distributed
Autonomous Organization (DAO) running on the Ethereum network was hacked.
Nicholas Weaver writes:
The first big smart contract, the DAO or Decentralized Autonomous Organization,
sought to create a democratic mutual fund where investors could invest their Ethereum
[Ether] and then vote on possible investments. Approximately 10% of all Ethereum
ended up in the DAO before someone discovered a reentrancy bug that enabled the
attacker to effectively steal all the Ethereum [Ether]. The only reason this bug and theft
did not result in global losses is that Ethereum developers released a new version of
the system that effectively undid the theft by altering the supposedly immutable
blockchain. [15]
The Ethereum network’s development team decided to reverse the heist by creating a
fork in the blockchain to undo the heist. Most of the members approved of this.
Ultimately, the Ether was returned to the original investors. 11 However, a small number
of users refused to accept the altered blockchain. Today there are two versions of the
Ethereum blockchain, and the Ether in existence at the time of the fork is now part of
both blockchains. [17]
The Ethereum solution to the DAO heist pointed out a flaw in the consensus
mechanism, in that the majority consensus could not prevent the minority from striking
out on their own. To keep that from happening would have required a legal contract,
enforceable by the very third party (government) they seek to keep out of their business.
More troubling, but rarely discussed, is the de facto shutdown of the Bitcoin network in
2013. The Bitcoin developers released a new version of software, and miners running
the previous version rejected the block(s) created by miners running the new version.
This created a network split, which in essence created a double-spend problem – a
person could spend the same Bitcoin (BTC) on both versions of the software.
Vitalik Buterin writes:
Over the next few hours, nearly every major Bitcoin developer and mining pool operator
joined the bitcoin-dev IRC channel. Major mining pools that were using bitcoin 0.8 shut
down, downgraded to 0.7, and switched back on. Merchants were also notified; most
large businesses, including BitcoinStore, BitPay, SatoshiDice and MtGox, shut down
deposits to protect themselves from double spend attacks. [18]

11
Ether is the currency of the Ethereum network.

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 Bitcoin vs Blockchain

And then, of course, there is the case of the 184 billion BTC created out of thin air due
to a floating point error. 12 Someone discovered the floating point bug and, on 15 August,
2010, exploited it. [19] This resulted in a software change and a roll back to last correct
block. [18]
Ultimately, blockchains are not immutable.
2.4 The Nakamoto Blockchain is Not a Protocol
A specification is a document that standardizes a particular technology, produced by a
standards making body. There is a specification that defines the characteristics of a
USB cable, for example. The Hypertext Transfer Protocol (HTTP) is an example of a
protocol, and is a set of rules governing the treatment and formatting of data in
electronic communication. Blockchain technology is neither a specification nor a
protocol. Instead, we have blockchain-based applications riding on communications
protocols. For example, nothing specifies the data structure of a blockchain, whereas
the TCP protocol defines the content and structure of a TCP packet. With blockchain
technology, each application defines its own blockchain data structure.
Despite this, people often discuss the “Bitcoin protocol.” For example, Michael Neilson
wrote a blog post explaining how Bitcoin works, using the term “Bitcoin protocol” 39
times.13 In each case this use is incorrect, and in most cases refers to the full Bitcoin
application, with all its myriad functions, as a protocol.
Bitcoin is an application riding on layer 4 of the Internet model and layer 7 of the OSI
model. As an application, Bitcoin makes use of a wide variety of specifications and
protocols. For example, the cryptographic hash function used by Bitcoin is SHA-256.
SHA-256 is part of the SHA-2 specification designed and patented by the National
Security Agency (NSA), published by the National Institute of Standards and
Technology (NIST), and released with a royalty-free license by the U.S. Government.
[20] [21] Bitcoin Core (a Bitcoin application) makes use of the SHA-2 specification to
securely link blocks. Linking the block data structures is not a function of a
communications protocol.
In their paper titled “Modeling and Verification of the Bitcoin Protocol”, Chaudhary (et
al.) state the following: “The Bitcoin protocol proposed by Nakamoto is described as a
peer-to-peer electronic cash system. The Bitcoin protocol is a decentralized payment
system.” [22] This is misleading, as the pseudonymous paper by Satoshi Nakamoto

12
Computers generally store numbers as integers (no fractional component) or floating-point values (with
a fractional element.) When something is priced at $1.99, the 99 cents is the fractional component.
Computers just add and subtract integers, and it takes some trickery to get them to handle floating point
numbers. In the case above, the trickery was implemented incorrectly, creating a vulnerability that was
exploited.
13
Nothing against Michael Nielson, who merely serves as a convenient foil.

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 Bitcoin vs Blockchain

never uses the term “Bitcoin protocol”, nor does it even use the term protocol (except for
the term’s use in one of the references.) Instead, Nakamoto describes Bitcoin as “an
electronic payment system. [23] A payment system is an application, not a protocol.
One of the things about protocols and specifications is that they aren’t code. Instead,
they describe the behavior of specification conformant code. Applications are written to
conform to the protocol, but the applications are not themselves protocols. Yet
somehow the codebase known as Bitcoin is colloquially and incorrectly labeled as a
protocol. This semantic confusion is a sign of ignorance and lazy thinking.
2.5 The Nakamoto Blockchain is not Robust
While numerous blogs, articles, papers, and books have been written about blockchain,
it is difficult to find anything about the robustness of blockchain technology or
blockchain-based applications. This is a sign that the Nakamoto blockchain may not be
mature enough for the enterprise.
David Alderson and John Doyle define robustness as follows:
A [property] of a [system] is robust if it is [invariant] with respect to a [set of
perturbations].
The use of square brackets emphasizes that formal treatment of robustness requires
the specification of the system, the property, the set of perturbations, and some
measure of invariance (e.g., relative to some norm). Fragility is the opposite of
robustness (i.e., the lack of invariance) and must similarly be specified. The [property]
usually involves some notion of system function and/or purpose and thus depends on
domain-specific aspects of the intended behavior, not simply the structure, of the
system of interest. Thus, without specifying properties and perturbations, to say that a
system as whole is robust or fragile can only mean that the tradeoffs are handled well
or poorly, respectively. [24]
David Alderson defines the bracketed terms in the above definition as follows:
 property e.g., a measure of performance (throughput)
 system e.g., components? boundaries? scope?
 invariance e.g., no change? within 1%? within 5%
 perturbations e.g., component loss? changes in demand? [25]
David Alderson describes the different types of perturbations that a robust system
should be able to deal with:
 Reliability - component failures
 Efficiency - resource scarcity
 Scalability - changes in size and complexity of the system as a whole
 Modularity - structured component rearrangements

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 Bitcoin vs Blockchain

 Evolvability - lineages to possibly large changes over long time scales [25]
Let us examine the most well-known blockchain application, Bitcoin, using the following:
The [percentage of completed transactions] of the [Bitcoin network] is robust if it is
[between 99% and 100%] with respect to [increases in transaction requests]. 14
Using these properties, we can say that the Bitcoin network is not robust. As demand
increases beyond the block limits (greater than a figure between 1,800 to 3,600 per
block, with the upper limit dependent upon implementation of Segmented Witness
(SegWit)), the number of completed transactions falls off. 15 I could have chosen to do
the same for the transaction fees (with the invariance being the average fee ±5%), but
the conclusion would have been the same. (For more information, see “The Nakamoto
Blockchain Scaling Problem”, below.)
2.6 The Nakamoto Blockchain is Not a Database
Patrick McKenzie, using the handle “patio11”, describes blockchain as “the world's
worst database.” [26] Blockchain satisfies only the most basic database definition: a
shared electronic stored collection of raw facts and metadata. To make the blockchain
into a useful database requires adding additional characteristics and adhering to
database properties. Blockchain technologies satisfy neither the ACID nor the BASE
database properties, making them an incoherent mix of centralized and distributed
database characteristics. Blockchain operates more like a transaction log than a
database. Because blockchain operates like a transaction log, you cannot query a
blockchain in the same way you can a modern database.

2.6.1 ACID
The term ACID describes the database properties of Atomicity, Consistency, Isolation,
and Durability, and applies to a centralized database. “A sequence of database
operations that satisfies the ACID properties (and these can be perceived as a single
logical operation on the data) is called a transaction.” [27]
 Atomicity means that the entire transaction either succeeds or fails. Blockchain
technologies are atomic.
 Consistency means the database transaction brings the database from one valid
state to another. Blockchain technologies are consistent.
 Isolation means even when database transactions occur at the same time, they
result in the same state as if they had been executed separately. Blockchain
14
• Property = Completed Transactions
• System = Bitcoin
• Invariance = between 99% and 100% (100% is the Objective)
• Perturbations = increased number of transaction requests
15
Segmented Witness, or SegWit, is a soft fork in the Bitcoion transaction format. SegWit increases the
number of transactions that can be stored within the 1MB block limit.

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 Bitcoin vs Blockchain

technologies are isolated.

 Durability means that one a transaction is committed to the database, it stays
committed. Blockchain technologies are not immutable (as we have already
demonstrated), meaning blockchain technologies are not durable.

2.6.2 BASE
Because distributed databases cannot meet the ACID database properties, another
model had to be created. The term BASE describes the distributed database properties
as Basically Available, Soft State, and Eventual Consistency. Because distributed
databases are geographically separated, and because transactions take time to
propagate across the network, requiring absolute consistency would slow down to the
database to the point that it would be unavailable. BASE, by contrast, emphasizes
availability over consistency.
 Basically Available means the distributed database emphasizes availability over
consistency. Short-term failure is accepted as the price of availability.
 Soft State means “The state of the system could change over time, so even
during times without input there may be changes going on due to ‘eventual
consistency,’ thus the state of the system is always ‘soft.’” [28]
 Eventually Consistent means, “The system will eventually become consistent
once it stops receiving input. The data will propagate as needed sooner or later,
but the system will continue to receive input and is not checking the consistency
of every transaction before it moves onto the next one.” [28]
The Nakamoto blockchain limits availability (speed) in order to maintain consistency,
and are therefore not Basically Available. The Nakamoto blockchain is consistent by
design, and therefore has no soft state. The Nakamoto blockchain is consistent rather
than eventually consistent. Thus, the Nakamoto blockchain does not meet the criteria
for a distributed database.16

2.6.3 Nakamoto Blockchain Cannot be Queried

In practical terms, the blockchain cannot be queried. To return a current value from a
Nakamoto blockchain requires an accounting of the first time that value was created
and an accounting of each time that value was changed. This is not a rapid process,
especially as blocks are regularly added to the blockchain. In addition, there is no query
language for blockchain. If you want an answer to a question that has not been provided
for in your software package, you have to write a program for it. Databases may have
acted like this in the 1950s, but no enterprise database works like this today.
16
One wonders why cryptocurrencies places such a premium on consistency. There are global networks
managing financial transactions on distributed databases, and all emphasizing availability over
consistency. The emphasis on consistency slows down transaction processing and is incredibly
inefficient.

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 Bitcoin vs Blockchain

2.6.4 The Nakamoto Blockchain is a Bad Transaction Log

The basic definitions of a blockchain describe it as either a ledger or a distributed
database containing an immutable record of all transactions. In other words, a
transaction log. Proper Database Management Systems have incorporated transaction
logs for years. In fact, the only database software I know of that does not come with a
transaction log is Microsoft Access, which is one reason why it should never be used for
business.
There is a fundamental difference between the data value stored in a database and the
record of the transactions that resulted in that value. My bank statement provides me
with my account starting balance, a list of my account transactions for the month, and
my ending account balance. But when I go the ATM to get my account balance, the
ATM provides me with a single value, which is stored in the bank’s database. However,
if I want to know the balance of my Bitcoin wallet, the entire transaction log has to be
read from beginning to end to provide the value. The only time this happens with a
database is when the database is being rebuilt after a catastrophic failure. I do not know
how anyone can describe blockchain as a database when it stores transactions, not
values.
Another issue is that the transaction log is an immutable record of everything that
changes the database. The only way to rollback a transaction is to reverse it; both the
original transaction and its reversal are maintained in the transaction log. You can undo
a transaction in blockchain by reversing it, but you can also rollback a blockchain and
recreate it, thereby changing history. Famous examples are the Bitcoin floating point
error and the DAO heist (discussed above). Blockchain technologies are not a
database.
2.7 The Nakamoto Blockchain Scaling Problem
In blockchain technology, transactions are not written to the block immediately. Instead,
they are collected, validated, and written to the next block in an orderly, managed, and
(in the case of public blockchains) slow process. Primavera de Filippi notes: “The
Bitcoin network was slow--it could only reach consensus and validate transactions
roughly every ten minutes--and therefore questions emerged as to how much
information the Bitcoin blockchain could store.” [9] The Bitcoin block size is limited,
which limits the number of transactions per block. Connor Blenkinsop notes:
At a maximum, Bitcoin can handle about three to four transactions per second. But if
crypto was to go mainstream, it would need to process hundreds of thousands of
transactions per second to ensure the economy could keep moving without massive
delays for consumers and businesses. [29]
Other public blockchain networks are faster. For example, the Ethereum blocks are
updated every twelve seconds or so, with a maximum capacity of 15 transactions per

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 Bitcoin vs Blockchain

second. [9] [29] Even so, blockchain in general, and Bitcoin in particular, has a scaling
problem. The scalability problem has to do with the growth of the blockchain itself, the
limit on transaction volume, and the way economic balances are determined.
The Bitcoin blockchain is an approximately 170 GB network database that includes
more than 360 million wallet addresses and billions of transactions. It is common for
each entity to have multiple wallet addresses, and transactions with multiple senders
and recipients are frequent. These features contribute to the Bitcoin blockchain’s
complexity. [13]
As Bitcoin has become more popular, the scalability problem is affecting its usability.
Erik Voorhees takes a broad look at the costs of a Bitcoin transaction, defining it as
“Cost = Fee + Time taken to determine fee + Risk of uncertainty.” As the Bitcoin network
reaches capacity, the fees to process a transaction rise. Since the person making the
transaction is guessing as to what fee will be accepted, it takes time to make a valid
guess. But even when you guess correctly, that is no guarantee your transaction will be
finalized. Vorhees describes the threefold problem:
As blocks approach capacity:
1) Miner fees get more expensive
2) Time/effort to determine fees rises
3) The reliability of transactions falls toward zero (risk of hours-long delay for
first confirmation, even with “good fees”) [30]
Peter Williams, of Deloitte’s Centre for the Edge, estimates that once you factor in all
the hardware, software, and energy involved, it costs $6 per Bitcoin transaction. [31]
That was in 2016, when the user’s cost of a transaction was approximately 83 cents,
meaning it cost the miners $5.17 per transaction. [30] By the end of 2017, user’s
transaction fees had skyrocketed. Timothy Lee writes:
The cost to complete a Bitcoin transaction has skyrocketed in recent days. A week ago,
it cost around $6 on average to get a transaction accepted by the Bitcoin network. The
average fee soared to $26 on Friday and was still almost $20 on Sunday.
The reason is simple: until recently, the Bitcoin network had a hard-coded 1 megabyte
limit on the size of blocks on the blockchain, Bitcoin's shared transaction ledger. With a
typical transaction size of around 500 bytes, the average block had fewer than 2,000
transactions. And with a block being generated once every 10 minutes, that works out
to around 3.3 transactions per second. [32]
There are more transactions than there is room in the block. Bitcoin doesn’t scale.
There are proposed solutions to these problems, but the Bitcoin community has been
slow to embrace them. Timothy Lee points out that an upgrade allows the cryptographic
signature for each transaction to be stored separately. This should have doubled

13
 Bitcoin vs Blockchain

network capacity, but few transactions take advantage of this upgrade. [32] Others have
proposed increasing the block size. However, Peter Evans-Greenwood notes this is not
enough.
Blockchain’s performance is determined by network performance, as it is the network
that limits the number of transactions in a block (block size) and the time between
blocks (dwell time). Networks don’t obey Moore’s law nor will their throughput increase
exponentially. Bitcoin has also reached its current performance limits at around
1/10,000th of VISA’s transaction volume. Reaching VISA’s current volume involves
creating a gigabyte-sized block every minute, which is clearly unattainable. And you still
need to consider that VISA’s volume is a moving target. [33]
Another huge problem is that achieving consensus in a public blockchain is a constraint,
and that alternatives such as the “tree of blocks” or sharding do not improve
performance much, at least not enough to let blockchain scale to VISA-level
performance. [33]
Some think that blockchain is ideal for replacing interbank payment systems. In an
article published on their website, Credit Suisse states: “Interbank payment systems are
ripe for disruption. Interbank payment systems such as SWIFT are old, inflexible, slow,
and increasingly prone to cyberattacks at a time when banks are under tremendous
pressure to cut costs and protect customer data from hackers, which blockchain could
achieve.” [34]
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) network
facilitates economic transactions between financial institutions.
SWIFT is simply a messaging system between banks, operating on up to 24 million
transactions per day. To compare, Bitcoin currently handles around 300,000
transactions through its blockchain, and Ethereum handles around 500,000
transactions. Ripple, the system most touted as a replacement of banking
communication, can handle up to 1,000 transactions per second, or more than three
times the volumes of SWIFT, but that is only when other bottlenecks are excluded. [35]
It should be noted that the SWIFT network has not only increased security, but is
handling increasing traffic volume. “In July 2018, SWIFT recorded an average of 30.5
million FIN messages per day.” [36] Blockchain-based applications such as Ripple are
chasing a moving target. Moreover, the processes and financial instruments used by
SWIFT are well understood, while the technology underpinning blockchain is disruptive
and not well understood. [1]

3. Conclusion
In their book “Blockchain Revolution”, Don and Alex Tapscott provide a myriad of use
cases for which blockchain is the solution. However, what the Tapscotts forget -- like

14
 Bitcoin vs Blockchain

other pundits -- is that the Nakamoto blockchain is a tool, not a solution. One chooses
the appropriate tool for the job at hand; one does not choose a tool and then go looking
for a project to use it on. This is especially true when the pundits cannot properly define
the tool, nor say why that tool is the best fit for the job at hand. Nor have the pundits
determined whether existing technologies can fulfil the user requirements, let alone
whether blockchain technologies provide benefits that outweigh the risks.
Fools rush in, where angels fear to tread.

15
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