Bitcoin is a peer-to-peer electronic cash system that uses blockchain technology to record transactions. The blockchain consists of a chain of blocks containing transactions. Miners create new blocks approximately every 10 minutes by solving proof-of-work puzzles. Bitcoin uses economic incentives to secure the network, as attacking the network would be more costly than potential gains. Understanding Bitcoin fully requires knowledge across many disciplines like computer science, economics, and law.
2. Blockchain
The blockchain is the history of all transactions. It is completely public plaintext information that anyone can audit.
The blockchain consists of a chain of blocks. Each block includes all transactions that were created since the last block.
Miners create blocks. If you are not creating blocks then you aren’t a miner. A “node” in the white paper means a miner. It
does not mean SPV nodes. SPV nodes are users.
A new block is created on average once every ten minutes. The true length of time is random but always averages ten
minutes.
The difficulty of mining a block is adjusted automatically to ensure that it always takes approximately ten minutes to
produce a block.
Miners must produce a proof-of-work (PoW) hash in each block which is a hash starting with a small number of zeros to
prove they have spent real-world resources mining the block.
Proof-of-work is an algorithm for the Handicap Principle. The Handicap Principle is a biological idea that species create
costly signals to indicate health, like a peacock’s tail or the horns of an antelope. The proof-of-work hash is the beautiful
tail of the miner.
3. Law
Bitcoin is an evidence system that brings law to the internet.
Bitcoin is not anarchist. Bitcoin is designed to operate in a system of laws.
Bitcoin works because the law works. If you need to, such as when a counterparty commits fraud, you can use the
immutable evidence from the blockchain in court.
Bitcoin does not work in an anarchist system because contracts are not enforceable and anyone can change the rules at
any time. The rules are only set in stone insofar as contracts are enforceable, which requires law.
Bitcoin makes it easier to follow existing regulations in business. For instance, Sarbanes-Oxley requires public companies
to keep immutable accounting records. Bitcoin makes this truly possible for the first time, if utilized properly, by making it
impossible to have two sets of books.
Bitcoin makes it easier for governments to collect taxes, if utilized properly, by making all tax payments transparent.
Bitcoin makes it easier to hold governments accountable, if utilized properly, by making tax collection transparent and
auditable by the people.
4. Computer Science
Bitcoin is Turing Complete, which means it can compute any number. It can do anything that any computer can do.
Each transaction in Bitcoin has multiple inputs and multiple outputs.
An output has a value of satoshis (one satoshi is one hundred millionth of a bitcoin) and a script, sometimes called a
locking script.
An input contains a reference to an earlier output and includes a script that is sometimes called an unlocking script.
To check an input for validity, execute the input script, and then execute the linked output script. If the return value is not
false, then the input is valid.
A transaction is valid if all inputs are valid and if the transaction satisfies other sanity checks such as that they do not
create Bitcoin out of thin air.
There is one case where a transaction can create Bitcoin out of thin air, which is if it is the first transaction in a block.
These are called coinbase transactions and they are where miners get the mining reward.
5. Computer Security
There is no such thing as perfect security. Security is always and everywhere economic. An economically secure system is a system that is more costly to
attack than the gain from attacking it.
Bitcoin is economically secure because it costs more to attack it than the gain from attacking it.
Quantum computers are not a threat to Bitcoin. Firstly, because they are unlikely to be commercially viable any time soon.
And secondly, because quantum computers cannot crack hash functions, public keys can simply be hidden when they are not needed, and can store an
amount of value that is lower than the cost of cracking them when they must be revealed.
Public keys should never be re-used on the blockchain both for privacy and to deter cracking attempts.
Proof-of-work is not a security mechanism.
Proof-of-work is a mechanism to de-anonymize miners. Miners cannot be anonymous because they must use large data centers to be competitive which
always have discoverable locations in the real world through the use of traditional network scanning tools.
Bitcoin is decentralized because it has no central point of failure, not because everybody runs a node.
Users run SPV wallets which track the block headers.
The wide distribution of block headers through the ubiquitous use of SPV is necessary to secure the network because the wide distribution of the block
headers is what enables users to hold miners accountable. Miners cannot commit fraud such as through creating more than 21 million bitcoin not because
everyone runs a node but because everyone has the block headers and can prove if the miners do commit fraud.
6. Economics
Bitcoin is an economic system because the security and functioning of the system uses economic incentives.
The miners are independent businesses that compete to earn more bitcoin for processing transactions. Better miners are
more profitable.
Pre-consensus is incompatible with Bitcoin beacause it creates collaboration between miners which ruins their
independendence and creates a cartel which is a central point of failure.
There are and will always be a small number of large miners and a large number of small miners. This is called the
Pareto distribution or the 80/20 rule.
There is a fixed supply of bitcoin, approximately 21 million, with a variable price. There is no way to fix the price to any
real-world asset without creating a central point of failure, so a fixed supply instead is the only solution.
Bitcoin is decentralized because anybody can run a node, not because everybody does run a node.
7. Networks
The miners form a small world graphic, meaning each miner connects to every other miner.
The users, or SPV nodes, form something like a mesh network, because every user is connect to some subset of other
users directly but not all.
Theoretically, the miners and users form a Mandala network, which has a highly connected central core (the miners) and
a lightly connected outer shell (the users).
In practice, the network structure resembles a Mandala network, but the true network structure is determined by whoever
the miners and users are actually connected to.
8. Identity
Bitcoin is private, but not anonymous. Bitcoin does not require identity for micropayments. But Bitcoin does require
identity for moderate or large payments.
Bitcoin is private because identity information is not included on the blockchain. Best practice is not to re-use addresses
and to not merge outputs. If this best practice is followed, it is very difficult to infer real-world identity from public data. As
the network grows, it becomes even more difficult to infer real-world identity like finding a needle in a haystack that gets
bigger and bigger with time.
Bitcoin does not include a solution to identity. Identity is firewalled from the blockchain and must be provided by a
separate system.
Moderate and large transactions require the exchange of identity information for the security and compliance of the
parties involved.
Bitcoin is not anonymous for anything other than micropayments because fiat gateways always require identity to be
revealed.
9. History
David Chaum published some of the original ideas in the 1980s. DigiCash was David Chaum’s company. Chaum’s work
also goes by the name Chaumian eCash.
There were many peer-to-peer electronic cash systems in the 1990s and 2000s, including Mojo Nation.
Bitcoin is very similar to the 1999 solution by Massias et al. (see reference #2 in the white paper) except where the
network itself distributes the block headers instead of publishing them in a separate newspaper.
Satoshi Nakamoto published the Bitcoin white paper on October 21, 2008.
The Bitcoin network was started with satoshi Nakamoto nodes in January, 2009.
The ticker symbol representing Bitcoin on exchanges is BSV. BTC is not Bitcoin.
10. Future
The most important next step in the future of Bitcoin is the widespread adoption of SPV wallets in the ecosystem for
security and scalability.
Alongside SPV, we must implement an identity system to enable the use of real-world identity where appropriate, such as
large payments and exchanges.
Once these new protocols are developed and adopted, advanced applications can be created such as Internet of Things
(IoT), supply chain, finance, and anything else at the intersection of value and communication.
11. Conclusion
Bitcoin is a peer-to-peer electronic cash system. Bitcoin is extremely interdisciplinary and in order to understand the full
scope of Bitcoin, one must learn many different fields of study. Those fields of study include but are not limited to
computer science, economics, and law. Few people have already mastered all of the background material necessary to
understand Bitcoin, and as such most students of Bitcoin should expect to spend years studying material in order to have
a complete understanding.