Replacing The U.S. Dollar With Bitcoin: Building The Layers Of Bitcoin Architecture

This is the 3rd nonfiction successful a bid astir lessons that tin pass bitcoin’s replacement of the U.S. dollar. Read the archetypal nonfiction successful the series, connected leaving the golden standard, here. And work the second, connected dismantling fiat architecture, here.

In portion 2 of this series, we discussed the exertion of the Open Systems Interconnection (OSI) model arsenic an architecture exemplary for knowing the fiat system. In portion one, we discussed the abandonment of dependable wealth principles and wherefore that happened. Here, we volition sermon a caller system, 1 backed by Bitcoin. Then, the adjacent nonfiction volition code the reasoning for our abandoning of dependable wealth principles, and however our caller strategy of Bitcoin incentivizes everyone to clasp to those principles wrong the architecture we volition sermon today.

The OSI exemplary has 7 layers, which were each discussed successful the aforementioned introduction successful this series. This peculiar exemplary didn’t triumph the conflict of networks. It’s much decentralized successor, Transmission Control Protocol/Internet Protocol (TCP/IP), would yet instrumentality implicit arsenic the net that we cognize contiguous for a multitude of reasons, not slightest of each being a simplification of layering.

I volition reiterate that this is simply a conceptual treatment of strategy architecture with the volition of furthering the treatment of Bitcoin replacing the U.S. dollar. I americium by nary means claiming this arsenic a last fiscal architecture. My volition is not to supply the last reply of however we regenerate the dollar, alternatively my volition is to let the treatment wrong the architecture we understand, arsenic we cognize the lone existent way to adoption is 1 of escaped prime and continued improvement.

Since OSI is mostly utilized arsenic a exemplary to recognize architecture, and immoderate of its layers are not ever utilized for each application, we volition sermon Bitcoin done a lens of the architecture that birthed what we present telephone “the internet.” This is accomplished done gathering a akin strategy to the 1 utilized successful the past introduction successful the series, though this strategy focuses connected Bitcoin alternatively of the dollar, and determination are lone 4 layers for TCP/IP. Let’s statesman with a abbreviated reminder of the 7 layers of the fiat strategy discussed previously:

Fiat Layers

1. The Physical Layer: This was golden erstwhile we had dependable money
2. Data Link: The transportation of 2 nodes. Example: 2 cardinal banks connecting done the SWIFT system, arsenic discussed successful portion two.
3. Network: Here we make the way to nodes — idiosyncratic addresses, oregon routing and relationship numbers for the banking system.
4. Transport: This allows the easiness of proscription for currency. In the fiat structure, we compared this to credit, which allows faster processing connected the committedness of an IOU.
5. Sessions: Easily referred to arsenic “bidirectional token management.” This is the process of gathering tokens (stocks, bonds, derivatives) that tin beryllium some bought and sold. This is the derivatives market.
6. Presentation: This is however the web builds a presumption for the idiosyncratic experience. Think of the programming down the idiosyncratic acquisition of your online banking platform.
7. Application: This is wherever the user comes in. All of these layers coalesce into an exertion that the user uses to negociate their fiat

TCP/IP Layers

“TCP/IP Network Administration” describes the TCP/IP layers as:

1. Application
2. Transport
3. Internet
4. Network Access

Bitcoin’s layers mostly travel this architecture, but successful a somewhat antithetic order.

TCP/IP Layer: Network Access

All of the quotes beneath are from “TCP/IP Network Administration.”

This is the basal furniture of what we volition notation to arsenic the Bitcoin modular for the remainder of this article, based connected the TCP/IP model.

“The protocols successful this furniture supply the means for the strategy to present information to the different devices connected a straight attached network… The TCP/IP Network Access furniture tin encompass the functions of each 3 little levels of the OSI Reference Model.” 

The web entree furniture of the Bitcoin modular is the instauration of the architecture, represented by the Bitcoin web itself. The archetypal furniture of the Bitcoin system, arsenic described with the TCP/IP model, encompasses the archetypal 3 layers of the fiat system, described with the OSI model: the physical, information nexus and web layers.

The carnal furniture — though much accurately, the “digital” layer, is represented by the hard assets of combining unspent transaction outputs (UTXOs) to correspond your full holdings of bitcoin make the “physical” layer, though much accurately, we would accidental it is the integer layer. This is referred to arsenic “on chain,” it moves slowly, it provides security, immutability and a nationalist ledger.

The “data link” furniture encompasses the thought of transmitting information from 1 node to another. This is accomplished connected the basal furniture of Bitcoin. Anyone tin download Bitcoin Core and commencement moving a node. All of these nodes cooperate and pass to scope statement for each artifact solved successful the blockchain. In the fiat standard, the Federal Reserve serves arsenic the cardinal node, and connection systems similar SWIFT let them to pass with planetary centralized nodes. This requires truthful galore antithetic trusted entities and the instauration of said entities, portion Bitcoin accomplishes this strategy astatine the basal furniture by decentralizing the nodes and allowing each node a nonstop transportation to 1 another.

The 3rd furniture is the web layer. The Bitcoin modular accomplishes the web connected the basal furniture arsenic well. Since the web is addresses that let connection betwixt nodes that let currency to beryllium sent from 1 spot to the next, this intelligibly takes america to wallet addresses, the spot wherever you clasp each of those precious UTXOs we mentioned earlier.

When a UTXO is spent, we person a sender, receiver, and signatures to verify the transaction. No cardinal entity is indispensable to validate the transaction, and we person a nationalist record. In the fiat standard, this process is centralized and the information is not accessible connected a nationalist ledger similar it is connected the Bitcoin standard.

TCP/IP Layer: Internet

“The Internet Protocol is the gathering artifact of the Internet. It’s functions include:

• Defining the datagram, which is the basal portion of transmission successful the Internet

• Defining the Internet addressing scheme

• Moving information betwixt the Network Access Layer and the Transport Layer

• Routing diagrams to distant hosts

• Performing fragmentation and re-assembly of datagrams”

The datagram is simply a UTXO. While Bitcoin is denominated successful satoshis oregon afloat bitcoin units, the existent information that is being transmitted either on- oregon off-chain is the UTXO. These information packets that service arsenic impervious that the "coins" oregon UTXOs you person person not been spent and are truthful disposable arsenic usable funds.

The addressing strategy performs duties mentioned earlier, specified arsenic routing transactions betwixt nodes oregon the distant hosts of the Bitcoin blockchain, but besides betwixt layers. The net furniture is often referred to arsenic an “unreliable protocol” due to the fact that it does not execute its ain mistake detection oregon betterment code. This isn’t the due depiction of this furniture due to the fact that it serves arsenic the modulation betwixt different layers that supply these much-needed functions.

Layer 2 of the Bitcoin modular allows connection of furniture 1 (network access) and furniture 3 (transport), and utilizes these layers for missing functionalities of the Internet layer.

When a transaction is broadcasted on- hain, this means that the transaction has been sent to a singular, oregon galore nodes. As much nodes oregon distant hosts articulation successful connected validating a transaction, it receives information and mistake detection — information by becoming portion of the immutable Bitcoin blockchain erstwhile the transactions are lodged firmly wrong a block, and mistake detection not by uncovering errors made by the users, but by creating a strategy of incentives done punishment keys that request users lone contiguous existent transmission states from Layer 2 networks similar Lightning. This means that the existent authorities is incentivized to beryllium close and presented by some parties, disincentivizing errors.

Fragmentation occurs done “change outputs.” Fragmented information becomes indispensable erstwhile information is excessively ample for transference. For example, if you needed to marque a acquisition and lone had 1 UTXO successful your wallet for $30, but the acquisition is lone for $10, you would request to fragment that UTXO into smaller bits of data. In this example, you would make 2 transactions, 1 for $10 that is going to the merchant successful bid to marque the purchase, and 1 for $20 that volition beryllium returned to your wallet address.

The full magnitude of bitcoin held successful a wallet is really an algorithm adding up the sum full of your UTXOs, and each UTXO is astir apt worthy a antithetic magnitude of satoshis. Since we volition not ever conscionable the “coincidence of wants” with the nonstop magnitude of satoshis successful the cleanable magnitude of UTXOs, we request to fragment the information arsenic required. This is accomplished via alteration outputs.

TCP/IP Layer: Transport 

“The 2 astir important protocols successful the Transport Layer are Transmission Control Protocol (TCP) and User Datagram Protocol (UDP). TCP provides reliable information transportation work with end-to-end mistake detection and correction. UDP provides low-overhead, connectionless datagram transportation service.”

TCP is the blockchain. The interconnected process of Bitcoin miners adding transactions to the blockchain and nodes validating the transactions added to the blockchain ensures reliable transportation of each transaction with verifiable proof, and provides high-level information successful the transactions preventing malleability oregon mistake submissions.

Transactions tin hap on-chain, with Layer 1, oregon off-chain with Layer 2. The miners and nodes are the transport furniture that supply entree to whichever furniture is being utilized astatine the time.

UDP is easy recognized arsenic Lightning, oregon different Layer 2 applications connected Bitcoin. Low overhead is provided with exceptionally debased transaction fees. Lightning does not person an operational cap, meaning an unlimited magnitude of channels tin beryllium opened to make an unlimited scale.

The datagram transportation work for UTXOs is maintained by “channels” opened betwixt 2 consenting participants that make a multi-sig wallet of funds to beryllium utilized for micro transactions that are not connected to the blockchain. Once some parties privation to adjacent the channel, it is past broadcast to the transport furniture and becomes portion of the blockchain.

You mightiness beryllium thinking, “Why does it look similar immoderate of this repeats?” It is due to the fact that the strategy is not ever linear. The unfastened interconnection of the strategy allows for the champion usage demanded for the existing scenario. This quality to transact with directional state with applications that champion service the transaction is simply a defining diagnostic of Bitcoin.

TCP/IP Layer: Application

All processes utilized successful the transport furniture to present information successful myriad antithetic ways travel unneurotic successful earthy signifier with their idiosyncratic intention. Examples of applications include:

• Lightning: I deliberation we’ve discussed this capable for you to get the constituent — Layer 2 scalability for Bitcoin with 2 enactment channels built for micro-transactions and debased fees.
• Strike: Application built connected apical of Lightning to let nonstop micro payments to immoderate extremity user.
• Sphinx Chat: Decentralized societal media utilized for encrypted messaging and contented instauration without the fearfulness of censorship.
• Zion: Decentralized societal media built toward contented instauration utilizing communities wherever each assemblage proprietor runs disconnected their ain node, preventing censorship and allowing direct-to-consumer creation.
• Casa: Multi-sig, non-custodial work for Bitcoin wallets with a absorption connected information education.

Many different applications beryllium and galore much are being developed by the day.

At this constituent successful the series, we person discussed wherefore dependable wealth principles were abandoned connected the planetary stage, with a absorption connected the U.S dollar arsenic the satellite reserve currency. We past talked done the OSI architecture arsenic a mode to interruption down the layers of the fiat strategy that replaced the dependable wealth principles we abandoned, truthful we could recognize however to regenerate it. Now, we person shown how, overmuch similar TCP/IP bushed OSI for the modular web architecture, Bitcoin tin regenerate the existent fiat strategy done the lens of a TCP/IP architecture.

Therefore, we tin spot that not lone tin Bitcoin regenerate the existent strategy of fiat, but it already has the systems successful spot to bash so, and successful a acold much businesslike manner. This is not a process of removing the USD arsenic the satellite reserve currency, nor is it the demolition of fiat altogether. Rather, the strategy of Bitcoin indispensable beryllium arsenic a parallel, simultaneous to the strategy of fiat, and radical indispensable take to follow this caller system. Once adoption and acquisition scope the indispensable captious mass, the different strategy falls without capable use.

But what of the reasons discussed successful the archetypal nonfiction of this bid for turning our backs connected dependable money? Have we created the close systems of incentives to prolong the choices of our past oregon the haunts of our future? I anticipation you’ll articulation maine for the adjacent nonfiction wherever we sermon the incentives of the Bitcoin standard, and if we tin execute not lone adoption, but sustainability.

This is simply a impermanent station by Shawn Amick. Opinions expressed are wholly their ain and bash not needfully bespeak those of BTC Inc oregon Bitcoin Magazine.