“Bitcoin is digital money, but it is so much more than that. Saying that it is digital money is like saying the internet is a fancy telephone. It’s like saying that the internet is all about e-mail. Money is just the first application.” ~Andreas Antonopoulos,
Bitcoin (BTC) is not only groundbreaking technology, it is a new form of virtual currency that does not rely on banks or government to give it value. Bitcoin is completely decentralized and fully peer-to-peer, meaning that no one person owns Bitcoin, much like no one owns the Internet. Bitcoin allows anyone to send money from one person to another without going through a financial institution because of its underlying technology, the blockchain.
The internet enabled us to send information and communicate with anyone on the planet, essentially for free. Bitcoin allows us to securely send money directly to anyone on the planet, in any particular location for a minimal fee or no fee at all (currently less than $0.80 using a SegWit enabled address) This is done outside the reach of government, without a financial intermediary. This has never been done before.
What is Bitcoin considered?
Bitcoin the technology (capital B) or the underlying blockchain technology enables bitcoin (the token or cryptocurrency, lowercase b) to be perceived in many different ways.
- A virtual currency (cryptocurrency)
- A store of value
- A commodity
- A digital asset
- A global payment network (think SWIFT or Visa)
As you dive down the Bitcoin rabbit hole, you will uncover the many definitions that “industry experts” in various disciplines describe it differently.
Two main problems needed to be solved in order to create a version of electronic cash.
- Prevent double-spending
- Create economic consensus on the network
The Double-spend problem
Implementing a fully digital currency has taken the better part of 30 years to get where we are today, thanks to developments in advanced forms of mathematics, public key cryptography, and the advent of the blockchain by Satoshi Nakamoto in 2009. The issue with any digital asset (think pictures, files, etc.) is that when they are sent to another person, a copy is made and then sent via e-mail, social network, messaging platform, etc. The most obvious issue with a digital currency is how to we prevent someone from simply copying and pasting their bitcoins or sending the same coins to two different parties, aka the double-spend problem.
Physical money such as United States dollars, Euros, or other fiat currency cannot be double spent due to their inherent properties. I cannot give the same dollar to more than one person without ripping the bill in half, rendering it completely useless. Satoshi Nakamoto outlined how the double-spend problem was solved in the now famous Bitcoin Whitepaper.
“We started with the usual framework of coins made from digital signatures, which provides a strong control of ownership, but is incomplete without a way to prevent double-spending. To solve this, we proposed a peer-to-peer network using proof-of-work to record a public history of transactions that quickly becomes computationally impractical for an attacker to change if honest nodes control a majority of CPU power.” ~Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System
Bitcoin solves this problem by time stamping and recording transactions into an ongoing chain that contains a record of all previous transactions that have happened on the network. As time goes on and more users join the network, the longer the chain becomes. The length of a chain can help individuals determine what perceived value the network has. The longest chain undoubtedly has the most support because users choose to store their value on that particular chain.
Creating Economic Consensus on the network – Cryptoeconomics
Another problem that Bitcoin and the blockchain solves is the Byzantine Generals Problem. In order to solve this, economic incentives are built directly into the Bitcoin protocol, enabling trust among the network without having to actually trust anyone on the network.
Economic incentives are a key driver to the adoption and security of the Bitcoin network, aka cryptoeconomics. Bitcoin miners use special computers (ASICs) that are validating transactions on the network by competing against other computers on the network to win the next block reward (currently 12.5 Bitcoins for winning the block). Every 10 minutes, miners on the network are competing in a computational race to compile all of the recent transactions that took place and validate the next block in the chain (that the entire network then updates their record of that block on the end of the chain) and are thus rewarded with newly created Bitcoins.
Miners on the network are inherently trustworthy due to the mathematical rules written into the underlying Bitcoin code. In order for an untrustworthy participant to hack the network or create new bitcoins for themselves they would need to perform a 51% attack on the network. In order to do this, the malicious actors must control 51% of the computing power on the network and then subsequently rewrite the entire blockchain.
It has been argued that since such a hack would require a significant amount of computing power it would be both extremely difficult and expensive to perform such a task. In order to get around this expensive and difficult hack, it would actually be much easier to simply create your own version of the Bitcoin blockchain, e.g. Bitcoin Cash. We will not discuss the recent Bitcoin Cash fork in this blog post, but you must understand that anyone or any group can decide to hard fork the network and create their own version of the Bitcoin blockchain with a different set of parameters, e.g. 8mb block size.
What is Bitcoin
It will take time to fully grasp what Bitcoin is and how it works, although its underlying principles that create trust among its users and the network will seem so obvious to us in the years to come. Following people like Andreas Antonopoulos or Bitcoin core developers can help to shed light about what is on the horizon for Bitcoin. Bitcoin can be different things to different people, depending upon the problem the user is trying to solve. As an example, the international remittance industry is ripe for disruption because of the minimal fees (currently < $1) to send money across the globe when compared to the astronomically high fees (20% +) charged by the likes of Western Union.
The end of Bitcoin has been a common topic among many of the Wall Street elite and has been predicted time and time again. Despite these unfavorable predictions, Bitcoin has proven itself to be extremely resilient over time. We encourage you to do your own research and start using Bitcoin so that you can have a deeper understanding what it is and how it works.
Photo Credit: Atlas | Data: Coindesk, Quartz