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Bitcoin Blockchain for Distributed Clearing: A Critical Assessment

There has recently been a dramatic increase in interest in the idea of using distributed consensus technology to facilitate the settlement of financial transactions. One strategy that has been advocated attempts to use the Bitcoin blockchain, running meta-protocols on top of that network, so that off-chain assets such as securities and property titles can leverage the same transaction protocol used by the endogenous on-chain cryptocurrency asset. This article explains Bitcoin’s unique flavor of distributed consensus algorithm (hash-based proof-of-work) and how it was motivated by a design goal of censorship-resistant digital cash. It then shows that censorship-resistant consensus has no mechanism for enforcing the correspondence between blockchain reality and legal reality that off-chain assets require. It also suggests that the security of the Bitcoin network itself would be compromised by such an attempt.