TL;DR
The short.. Bitcoin is simply a well-engineered computer program that allows bitcoins to move from one address to another in a secure, and trustless manner.
Learn two things you might not expect.
Hate to sound cliché but we gotta talk about it..
So easy my mom did it.
People need to be rewarded for it
Learn
You won't need to read this part.
Should we even be looking?
The "non-obvious' direction of cbdc's.
Bitcoin is used to describe two things:
Who runs the 'protocol Bitcoin? Bitcoin operates on a network of distributed or “decentralized” computers, connected together through the internet.
It's designed to allow the transfer of economic value between participants.
..and uses a single ledger (a fancy spreadsheet) to act as a permanent accounting system that records all balances of bitcoin in public “wallet addresses.”
Plus the system is append-only,
You can think of it like a sheet of paper or spreadsheet that has a record of 21 million accounts and their balances – new transactions can be added that deduct from one wallet address and add to another, but this paper is unique in that one cannot go back and change any of the values after they are written.
☝ This prevents someone from going into the code and editing their wallet balance to instantly increase their holdings.
This is only possible with cryptography.
..................................................................
In plain english?
- People create transactions >> these trans need to be processed and verified >> by validating nodes, called “miners.”
Miners process and verify peoples transactions.
These transactions are put in batches, called blocks,
The blocks of transactions are then linked together using cryptography.
The linked blocks are called a blockchain.
Bitcoin is one example.
..................................................................
Certain properties of cryptography mean that a very small change to just a single byte or value somewhere in the chain, will change the output of all blocks subsequent to where the change is made, resulting in a highly-detectable event.
Finally miners assure that no such edits are made, by an agreement system called “consensus.”
We actually have a deep dive on consensus mechanisms, including Proof of Work, that was mind boggling at how far they are coming already. It's here.
Together, these unique characteristics result in an uneditable, trustless, and secure ledger, called a blockchain.
We must first verify that Alice has at least 1 bitcoin in her possession.
This requires validating the balance in her wallet address, as well as confirming she is the owner of that address.
To do this, we need an accounting system that contains the values of every single participant’s wallet balances, private keys, and public keys.
What does it mean to be centralized? Banks have accounting systems which are ledgers, however, they are not public or open for public review. We must pay their set fee to use them and are at their mercy in some ways
If they are closed, money cannot be transmitted. If their systems are down, or they decide not to work with you as a customer, money cannot be transmitted.
If your look or past doesn't meet their quota, money cannot be transmitted.
Banks also need to verify you’re who you say you are (KYC) – they use your identification, and a lot of personal details to certify that this is so.
Because of this, banks and financial institutions are said to be “centralized” that is, they are a single entity and a single point of success or failure.
Does decentralized offer something better? Bitcoin manages this by storing a record of this ledger in thousands of different computers, called nodes. This guarantees that the network is always operating, and can be accessed by anyone at any time, provided they have a computer connected to the internet, and the right software.
The network does not need to know who you are, only that you are the rightful owner of a wallet address as evidenced by possession of the private keys.
Therefore, no user information is stored or needed on the network. Transactions can be performed nearly anonymously.
No single entity controls Bitcoin, this is what allows it to be fully “decentralized” and autonomous, governed entirely by a well-written computer program. If one or more nodes fail, there are thousands of others that can continue to maintain and operate the network.
Furthermore, the Bitcoin protocol is open-sourced and freely downloadable by anyone, allowing anyone to become a node or miner.
Instead of using your identification to verify you, it uses a cryptographically-secured system of public and private keys.
Without getting too complicated, it means that possession of a private key, like a password, certifies that you own a wallet address, and the associated bitcoins on that address.
The private key is created at the time the wallet address (called the “public key”) is created, therefore it can only be created by the owner of a particular address.
You can own as many wallet addresses as you please, and can create these using the protocol, in a matter of seconds.
This private key allows you to access the wallet and transact with it – you can send bitcoins to other addresses. To do this, you need the recipients public key or public wallet address.
In this case, the recipient is a completely passive member of the process, they cannot reject a transaction.
Once you have your private key and the recipient's public key, you enter the amount of bitcoin you want to send (can be a fraction of a single coin), and the protocol validates the transaction by comparing your private key to the record on the ledger, along with the associated wallet address’s balance.
Once the details are confirmed, the transaction is posted to the network.
Before Bob can receive the bitcoin Alice sent to him, the transaction must be verified by an entire community of connected computers or “nodes.”
The miners have to agree that it went down.
This is to assure that Alice isn’t trying to send a bitcoin that she already spent, or that she doesn’t own.
Since there are thousands of nodes connected to the network, it is very possible that a few of these nodes are “bad actors” or “byzantine” nodes.
For example, one node may have a false copy of the ledger that shows Alice has 1,000 bitcoins (currently worth $40m+) and therefore can perform this transaction at least that many times.
That node might initially allow Alice to spend money she doesn't actually have.
To prevent these false transactions from happening, other nodes on the network must check the transaction and verify it against a copy of their own ledger.
Surely, one ledger would differ from another in a system where one is honest and another is dishonest.
Therefore, we need a system to check whether the majority of nodes agree or disagree on a transaction.
Who maintains this 'consensus?' This security measure is called consensus, and the process by which this is done is called “mining.” Since all transactions are posted to this shared and distributed network, all miners can review and agree or disagree on a transaction.
Provided the majority, defined as anything over 50%, of the networked miners agree that the transaction is legit, the transaction is “confirmed.”
On Bitcoin’s network, this process aims to take 10 minutes. Said another way, the block confirmation time on Bitcoin’s network is programmatically designed to take 10 minutes.
Mining is the process of performing a computationally expensive calculation to be allowed the right to validate a transaction.
Think of this as a lottery system.
A lottery with a slot machine.
You're at a slot machine right now, free drinks and nacho cheese all night to go along with the bright lights and then protected by the bouncers wearing all matte black suits.
The difference is that every time you pull the slot you are hoping to have the machine that you are using to solve the block. If you were the next to do it today you would get 6.25 bitcoins for it. Someone does every 10 minutes.
But even if you don't hit triple cherries this time, you can still verify transactions and come out profitable. Even without getting the 6.25 bitcoin award.
The fees that the bitcoin users are paying are also going to the miners. These fees are turned around and awarded to the miners who are verify them.
To get a bit technical for minute.. The protocol issues out a very difficult math problem to solve. Whomever solves this problem is awarded bitcoin. Thousands of miners race to calculate the answer to this problem. The first to come up with the answer, is allowed by the protocol to take the contents of the current block with all of the transactions that exist on it, and append it to the block before it, using a cryptographic function.
It also allows the unlocking of new bitcoins from a “coinbase” transaction, which is the miners reward for solving the problem and confirming the current transaction.
Currently the protocol issues precisely 6.25 bitcoins for each math problem solved, and a block added to the blockchain.
The reward is enough to offset the unusually high cost of electricity required to operate mining equipment.
To be sure the system works like a lottery drawing - random and not rigged.
The system needs a way to randomly assign someone to securing a block plus the transactions to the 'ledger' or blockchain. If one miner were allowed to process every transaction, the system would lose its decentralization and that single miner would effectively own the system and the right to process whatever they make up.
This would result in a breakdown of the trustless nature of the protocol.
Here's what Satoshi had to say..
The protocol was designed to intentionally limit block creation to once every 10 minutes.
With the price of bitcoin rising since its creation, this has greatly incentivized the act of mining, vastly increasing the amount of miners on the network.
The protocol needs to always account for this increase in raw computing power, called “hash power” so it has a mechanism to adjust the difficulty of the math problem based on the hash power.
We close this series out with a piece on simplifying consensus.
What if a quantum computer tries to hack the blockchain? There is a rather ingenious mechanism, that even as the hash power increases, the difficulty is increased such that it always takes approximately 10 minutes for a miner to solve the math problem.
The reasons for this are debated, but it is believed that a longer block confirmation time results in a more fraud resistant block, since an exceptional amount of computing energy and time is required.
While reducing the amount of orphaned 'forks' and wasted hash power.
Currently, the amount of power used to process and mine a single block is equivalent to the amount needed to power an average U.S. household for nearly 20 days.
Solving this math problem also serves as a proof that a certain amount of computing work took place. This is called a “proof of work” transaction, sometimes abbreviated as PoW.
Since only one miner (or pooled group of miners) is able to confirm a transaction, that means many other miners have expended significant resources performing mining without receiving any reward at all.
The high cost in doing so disincentives fraud, as fraudulently mined blocks will eventually be rejected.
A quantum computer would be more profitable to just mine bitcoin rather than attempt any fraud. Which would cause an adjustment in the hash rate
As mentioned previously, during each block confirmation, the protocol free’s up a certain amount of bitcoin (currently 6.25 bitcoin per block, or about 900 per day) in what is known as a coinbase transaction.
These bitcoins increase the total supply of bitcoins circulating on the network.
There are currently over 18.4 million bitcoins mined and in circulation. A maximum of 21 million bitcoins can be mined before the protocol ceases to award bitcoins – best estimates are that this will occur sometime in the year 2140.
It is not definitively known who actually created Bitcoin, however we do know that someone or some group going by the pseudonym “Satoshi Nakamoto” created much of the early Bitcoin Core code as well as authored the original Bitcoin whitepaper.
This individual was also very active on a number of forums and was frequently associated with collaborators Gavin Anderson, Hal Finney, and Jeff Garzik.
Some speculate that Satoshi Nakamoto might be one or a combination of the previously mentioned names, while others say that a government organization may potentially be behind the creation of Bitcoin.
At least one individual by the name of Craig Wright, claims to be Satoshi Nakamoto but has yet to provide any conclusive evidence to support his claim, which should be fairly easy to do by simply posting a transaction from the original wallet involved in the mining of the Genesis block, Bitcoin’s first block. He has won a court case in UK regarding this however.
I do not believe Craig Wright is Satoshi.
Perhaps it does not really matter who created Bitcoin, so much as it doesn’t matter who created toilet paper, or who invented TCP/IP, the protocol that powers the internet.
However, consider this, there are an estimated 1.1 million bitcoins that may have been mined by wallet addresses thought to be associated with Nakamoto.
They were mined in the earliest days of Bitcoin’s existence, and have, since that time, remained dormant.
At today’s market price, that would be nearly $44b in unspent bitcoin.
Many speculate that the private keys that provide access to this wallet have been lost forever. If these funds are one day moved to an exchange and sold, the price of bitcoin would likely instantly collapse.
Fiat money or simply fiat, is a term that is widely used in the cryptocurrency industry.
Fiat money is government issued currency that is typically not backed by a reserve of gold or other precious metal.
Nearly all currencies issued by governments around the world are considered fiat, including the U.S. Dollar.
Also the British Pound, Euro, and Chinese Yuan.
Fiat money is what most people are familiar with and is used to
Are there any important differences between fiat and crypto? Fiat’s differ from cryptocurrency in that they are controlled by fiscal and economic policies at the government level. For example, governments using the fiscal and monetary policy I just mentioned to maintain economies.
Governments can choose to “print” more fiat to increase its supply and stimulate economic development, OR reduce its supply to curb inflation.
Fiat currency is designed to be stable in price, so it can be a reliable store of value and method of payment. Fiat currencies may be issued in bank notes, coins and electronically.
What is unique about crypto? Cryptocurrencies, on the other hand, are generally decentralized and not controlled by a single entity. For example, the supply of bitcoin cannot be expanded or contracted based on economic policy or performance of the currency, nor is it regulated by an entity.
Their price is largely dictated by supply and demand, unless specifically designed to be pegged to an underlying asset or global currency (stablecoins).
They are exclusively issued electronically.
Fiat money is subject to the stability of the governments that issue them. This can be a good thing if a government is relatively well run, but can be disastrous in cases where corruption and economic sanctions disrupt their value.
Not all economies are equal, therefore, not all costs of living are equal.
Case in point, the Venezuelan Bolivar dropped in value so much that in one year the cost of a cup of coffee rose from 450 Bolivar to 30,000 Bolivar. The Venezuelan government does not allow banks to support any other currency, and yet an underground market for U.S. dollars has grown so rapidly that Bloomberg reports that workers are sending their relatives with stacks of cash on flights from Caracas to Miami just to deposit the cash into a U.S. bank account.
With cryptocurrency, such measures are not needed as transfers of value can occur nearly instantly, with relative anonymity and safe from the purview of world governments.
They can operate without banks, and only require some sort of wallet software and an internet connection.
Some cryptocurrencies can even power blockchain based platforms, earn interest, or pay dividends back to their holders. Or even be legal tender for a person.
In summary, Bitcoin is, put simply, a well-engineered computer program that allows bitcoins to move from one address to another in a secure, and trustless manner.
It happens to be speculated on, by many people across the world, on a diverse range of exchanges, offering different types of trading techniques, by the masses. This deepens the natural volatility inherent in totally new, tradable items.
The psychology of accepting new, dominant stuff can be challenging sometimes.
Bitcoin is the technological marvel of its space, blockchain, and as the brightest developers continue to build user friendly apps with bitcoin services native to the user, the network will continue to grow by usage.
Think outside of areas where Visa and Mastercard are dominant and into areas where they are unknown, but the internet is also present. In these areas is where bitcoin is proving one use case.
There are many use cases coming with user friendliness, check out a few in the next of the Bitcoin series, here.
Much Respect,
Michael #4111
P.s.. I was expecting to find out Bitcoin was another get rich quick bull$4!t scam, but instead, I am happy with what I found.
Next Article: Is Bitcoin Really Healthy?
You'll understand the crypto-verse, get weekly deep dives & frameworks, PLUS network with our private little group.