What is Bitcoin?
Bitcoin

What is Bitcoin?

Understanding the key concepts and technologies that form the basis of the evolution of a global monetary system.

Gary Woodfine

Gary Woodfine

12 May 2024

On the 31 October 2008, an individual or a group of individuals, making use of a pseudonym of Satoshi Nakamoto published a link on a cryptography mailing list to a paper titled Bitcoin: A Peer-to-Peer Electronic Cash System. The paper detailed methods of using a peer-to-peer network to generate what the paper described as an electronic payment system based on cryptographic proof instead of trust.

Bitcoin is a decentralized digital currency, also known as a cryptocurrency, that enables direct, peer-to-peer transactions without the need for intermediaries like banks or financial institutions.

The white-paper was an evolutionary piece in that it tied together a number of concepts and previous attempts to create anonymous and decentralized digital currency . However, many of the previous attempts were unsuccessful to because they could not solve the problem of preventing double spending in a completely trustless or permissionless environment. Bitcoin provided a solution to this problem by introducing the Bitcoin Blockchain.

Bitcoin also provided a solution to the SMR Problem introduced in 1978 by Leslie Lamport and formalized in 1980 by Fred Schneider. The State Machine Replication (SMR) problem is concerned with ensuring that a distributed system remains consistent and fault-tolerant despite failures and network issues.

The State Machine Replication problem is concerned with ensuring that a distributed system remains consistent and fault-tolerant despite failures and network issues.

Bitcoin solves the problem by allowing the replication of blocks at all correct nodes and ensuring consistency via its Proof Of Work (PoW) mechanism. Here, the agreement is reached between nodes (or replicas) repeatedly to append new blocks to the blockchain.

Electronic Money

Electronic money, also known as e-money, refers to a digital representation of value that can be stored, transmitted, and used for financial transactions electronically. It is a form of currency that exists only in digital form and is not physical, like coins or banknotes. E-money is typically stored in electronic wallets or digital purses and can be used to make payments, transfers, and other financial transactions online, over the phone, or through other electronic means.

The concept of electronic cash (e-cash), or digital currency, is not new. Since the 1980s, e-cash protocols have existed that are based on a model proposed by David Chaum. The important lesson learned from these efforts were that in order to create an effective digital monetary system there were two fundamental components that needed to be met.

Accountability

Accountability is the concept that ensures that cash is spendable only once and by its rightful owner. This is typically known as the Double-spending problem, which arises when the same money is spent twice. As it is quite easy to make copies of digital data, this becomes a big issue in digital currencies as you can make many copies of the same digital cash.

Anonymity

Protecting users privacy is of key consideration of digital money.

One of the advantages of physical cash, it is almost impossible to trace back spending to the individual who actually paid the money, which provides adequate privacy should the consumer choose to hide their identity

One of the shortcomings of the digital world, especially one with the advent of Google and other Web 2.0 companies like Facebook, Instagram, TikTok and other surveillance capital era companies is that providing such a level of privacy is difficult due to inherent personalization, tracing, and logging mechanisms not only in the platforms but also in the digital payment systems such as credit card payments. Governments and financial institutions argue that this is a required feature for ensuring the security and safety of the financial network, whilst attempting to ignore and obfuscate the complete breach of privacy.

Bitcoin provides a solution to these problems via distributed consensus in a trustless network, using public key cryptography with a Proof of Work (PoW) mechanism to provide a secure and decentralized method of minting digital currency.

The key innovation is the idea of an ordered list of blocks composed of transactions that is cryptographically secured by the PoW mechanism to prevent double-spending in a trustless environment.

Just like the technical aspects of Bitcoin draw on many influences, so does the rest of Bitcoin. The answers to the yet seemingly simple question "What is Bitcoin?", could just as well come from a myriad of disciplines such as Law, Economics, finance, civil society, history and many more. The reality is you could create a pretty comprehensive study curriculum around Bitcoin and still have more material yet to study.

When I first got into Bitcoin, obviously as a software engineer I was drawn to the computer science aspect and the code. However, as I started digging deeper I was drawn to the other disciplines to discover they were just as equally interesting and compelling. Over past several years I spent more time studying and learning these other subjects, because in my opinion the only way to truly understand the Bitcoin and the problems it solves you truly need to understand the problems, books like the Bitcoin Standard served as a great introduction and reference point for further study.

Bitcoin Architecture

As mentioned previously Bitcoin is built on decades of research. Various ideas and techniques from cryptography and distributed computing such as;

  • Merkle trees
  • Hash functions
  • Digital signatures

Bitcoin also drew on many other ideas and influences to lay the groundwork, such as;

  • BitGold
  • b-money
  • hashcash

Taking learnings from these previous attempts Bitcoin was able to provide and develop solutions to several historically difficult problems related to electronic cash and distributed systems such as:

  • The Byzantine Generals problem
  • Sybil attacks
  • The double-spending problem
Gary Woodfine
Gary Woodfine

Back-end software engineer

Experienced software developer, specialising in API Development, API Design API Strategy and Web Application Development. Helping companies thrive in the API economy by offering a range of consultancy services, training and mentoring.

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