- Defining Bitcoin
- Uses of Bitcoin
- The Parts of Bitcoin
- The Token
- “Dumb” Protocol
Beyond just money
Bitcoin is a faster, cheaper, more secure and an all-round better payment system than our current one but that is not what it is fundamentally. In fact, money was just the first application of Bitcoin.
Fundamentally, Bitcoin is a low level protocol just like TCP/IP is to the internet and just how the internet has websites and protocols built upon it – Bitcoin has applications and protocols built on-top of it to seamlessly connect the world.
Functionally, Bitcoin uses a public blockchain/ ledger to record and transfer tamper-proof ownership of digital data – and this is all done without the use of a third party. The data can represent money, assets, voting rights or anything else that makes sense to digitize in a more efficient, faster, transparent and decentralized manner that is cheaper, tamper and clone proof and permanent.
Bitcoin may very well be the greatest technological advancement since the internet – some argue even more so. Like the internet, the transformative power of Bitcoin is to transcend the transfer of value just as the internet did to the transfer of information. Bitcoin is what we call a public blockchain that is used to seamlessly connect the world financially, at the foremost – although it can serve alternative use-cases not restricted to finances. Think of the public blockchain (Bitcoin) as the internet and private blockchains as intranets – a highly regulated, permissioned, restrictive, walled garden benefiting mostly only those that are inside.
Bitcoin has three broad and distinct functions:
A currency / store of value / exchange of value: using the bitcoin token for buying and selling, micropayments, speculation, store of value, hedging, cross-border payments, etc.
A financial rail: using the bitcoin token to transfer some value around the world by attaching an asset or something of value to a bitcoin token.
A ledger: A copy of Bitcoin’s entire ledger is distributed worldwide on computers running the Bitcoin Core client software. It is the most secure ledger / blockchain – equating to a censorship resistant and immutable global public ledger. Bitcoin’s ledger is truly the only trustworthy ledger in the world because of its proof-of-work, decentralization and network size resulting in immutability with no central points of failure. This blockchain can be used for time-stamping, proofs, identity schemes, etc. – the use-cases are truly endless.
At a basic level, we can understand how Bitcoin works by breaking it down into 4 separate gears that spin together to make the system work.
bitcoin the token: The native token of the protocol used to carry and transfer some sort of value. It is also used as part of an incentive system for miners to secure the blockchain.
Bitcoin the protocol: The programming code that sets the rules for Bitcoin. Example: No more than 21, 000, 000 bitcoin can ever exist.
the public blockchain: The most widely used and secured blockchain equating to the censorship resistant, immutable global public ledger that is used to record ownership of digital data.
the network: This is the global network of all the participants in the Bitcoin ecosystem – in particular the miners and full bitcoin core nodes.
Learn How it Works
Metaphorically, think of the bitcoin token as the metal: copper. Copper is mined, it is speculated in, it has value, it is traded on exchanges but it has very important utility on top of this. Just how copper is used to transfer electricity and data such as packets, voice messages, etc. – the bitcoin token relates to copper in that it carries “something” as well. In the case of the bitcoin token, it carries value (and even data).
The bitcoin token is a crucial part of the system that has multiple functions:
Currency/ store of value: This is used for store of value, speculation, buying and selling, salaries, etc.
Financial rail: Used by companies to transfer some sort of value by attaching some real-world valuable to a token such as stocks, real-estate, etc. Tokens can also be used to attach data to it such as proof of ownership, or proof of identity, etc.
Security/ Incentive for miners: The value that the tokens hold are part of an incentive mechanism that gives miners an incentive to keep mining thus securing the network from attacks. It makes it more lucrative for attackers to direct their resources to mining instead of attacking. This is accomplished through the block reward and transaction fees.
Bitcoin is considered a dumb network meaning it is not highly complex in nature. The protocol serves as a stable, simple, secure and reliable base on which more complicated applications can be built on top of it. The protocol doesn’t care what you are transacting, what device, who you are or where you are located. Generally, a dumb network is more robust and all-around better than a complex smart protocol. The internet was a dumb network – it transfers data from A to B and it doesn’t know or care what that data is or what the end device is. To add innovation to a dumb network, like the internet, all you had to do was add it from the edge – in other words outside the protocol level and that could be done without permission. No change is needed to be made at the protocol/system level.
In a smart network if you want to increase the positive experience, that must be done at the protocol/system level instead of pushing the innovation to the edge of the network such as the end devices. Smart networks have to be upgraded from the inside-out meaning innovation comes from the inside by a central actor and that means innovation is slow and changes are only applied when everyone in the network direly requires it.
History has shown that the greatest innovation comes from the bottom-up the majority of time – in other words outside the established fortune 500 billion dollar companies. Bitcoin is organic bottom-up open-source innovation like many technologies including TCP/IP.
But why does the greatest innovation come from the bottom-up and why does it have a history of such a successful track record?
These three characteristics summarize why:
Open-source: Bitcoin is open-source technology meaning the software’s programming code is public and freely available to re-distribute and modify by ANYONE in the world.
Global/ Borderless: Bitcoin has no geographical boundaries as to who can participate in the Bitcoin ecosystem.
Permissionless: There are absolutely no restrictions as to who can participate in the Bitcoin ecosystem. The protocol does not care where you live, what your religion is, how old you are, how much wealth you have, etc. You don’t need any permission to participate – just like the internet.
These characteristics summarize why bottom-up innovation almost always beats out top-down. A system that is highly regulated, permissioned, closed-source, walled gardened cannot compete with a open, global and permissionless system.
There is a divide in the ecosystem that can be described as THE public blockchain versus private blockchain(s). Metaphorically, you can think of THE public blockchain as THE internet and the private blockchains as the intranets. THE public blockchain is global, permissionless, borderless, decentralized, immutable, ownerless and connects the world – similar to the internet.
The private blockchains are equivalent to the intranets that companies built to send e-mail to others within their own office or building. But those intranets could not communicate outside their intranet and were cut off from the rest of the world – this was not transformative to the world. In other words, private blockchain (the intranet equivalent) does not and will not transform the world.
When building a private blockchain – some questions need to be asked:
1. What does the blockchain bring to the table that is different than using a database technology that already exist?
2. Does the blockchain do this task more efficiently than current database technologies that exist already?
- Not centralized
- Public ledger
- More facts
Bitcoin is decentralized meaning it is not controlled by a single entity. In fact, it is controlled by all of us – the users that run the Bitcoin client software and those participating in Bitcoin mining. This means Bitcoin cannot be turned off if a company closes or if it gets banned. Something drastic would have to occur to temporarily disrupt Bitcoin such as turning off the internet or electricity for EVERYONE in the world!
Bitcoin nodes around dispersed all around the globe creating a mesh network. A large number of nodes can go down and the network will remain running with no down time, delays or performance degradation. Each node in the network has many paths to and from it – creating a robust, censorship resistant and 24/7 network.
Bitcoin is open-source allowing anyone to not only view and audit the programming code that makes-up Bitcoin but developers can alter the coding to improve the functionality of Bitcoin and potentially have the changes officially implemented into Bitcoin. Additionally, anyone can copy the code and create their own Bitcoin clone to experiment without consequence.
Like the internet, Bitcoin is global and borderless, meaning anyone at any location can participate and use the network regardless of where you are located. You can connect with the world through the Bitcoin network no matter where you are. This dramatically increases the speed at which innovation progresses by enabling the world to build on Bitcoin versus one company.
Bitcoin is permissionless meaning anyone at any location can participate and use the network without requiring permission from any government, authority, regulatory body or company. It doesn’t matter how old you are, where you live, who your leaders are, what gender, what religon or what color you are – Bitcoin is a protocol, it does not care.
In addition, machines can now hold and use money. As we all know, machines cannot have a bank account using our current banking system.
The permissionless state of Bitcoin increases the rate of innovation at unmatched levels.
Bitcoin’s blockchain uses something called proof-of-work. Proof-of-work eliminates the ability to reverse what has already occurred and prevents an individual or group from corrupting or trying to re-write history. Proof-of-work helps to create an ecosystem where an attacker has to spend greater resources (mining hash power/ money) to successfully (and only temporarily) attack the network than it would get in return. As a result, an attacker would get a more positive reward by directing those resources towards securing the network. Bitcoin’s immutable attribute is enabled by proof-of-work but the proof-of-work is only effective with a large network of miners behind it and that is what Bitcoin has gained by being released to the world first.
Bitcoin is a consensus system that enables the “users” on the Bitcoin network to approve or reject proposed changes in the Bitcoin coding and functionality. In Bitcoin, there are many different users that all have important needs and roles: everyday users, holders, traders, miners, full nodes, exchanges, merchants, financial institutions, wallet providers and developers. Forks require consensus from a very large portion of the entire community (not just the miners) to be successful.
Bitcoin is peer-to-peer which enables any user or machine to directly send “something” via the bitcoin tokens to another user without a middle-man, the need for any permission or restrictions.
Bitcoin solved an outstanding problem in the computer science world called the “Byzantine Generals” or “double-spend” problem.
The tokens (bitcoin) cannot be counterfeited because there is no actual bitcoin to duplicate – instead there is just a public ledger called the blockchain that has a list of transactions in the order that they have occurred. Because of this – something called a double spend is theoretically possible but it is improbable and highly unprofitable because you require the majority of hashing power over all the miners around the world combined. The hashing power of the network is thousands of times faster than the top 500 super computers combined for SHA-256 hashing. There are also other safeguards against a double spend attack such as accepting the payment only after a certain number of network confirmations.
Bitcoin uses a public ledger called the blockchain. The blockchain is a list of every transaction ever made in the Bitcoin network and everyone can see and track each individual transaction real-time. The blockchain offers an un-matched level of transparency that was never available before. In addition, the blockchain allows Bitcoin to be used for other applications beyond transfer of value.
The functionality and rules that make up Bitcoin is just code. Thus, Bitcoin can adopt brilliant features or improvements from new discoveries or competitors if users come to a consensus by downloading the new version of Bitcoin Core. Are we just going to start at square one again and throw away all of our time and money each time someone comes up with a new improvement or feature?
Bitcoin views alt-coins as experiments and takes a very slow and safe approach to making changes at the protocol level.
1. There will only be 21,000,000 bitcoin generated.
2. A bitcoin is divisible up to the eighth decimal place: 0.00000001 is the smallest amount of bitcoin you can own. 1 bitcoin can be broken down to 100, 000, 000 individual satoshi.
3. New bitcoin are created at a predictable rate, in fact we know how many bitcoin are generated every 10 minutes and that the last bitcoin will be mined in the year 2140.
4. A bitcoin cannot be deleted but access to them can be lost permanently.
You can transfer money to anyone such as your loved ones – across the world, at any time, on any day, at any location, instantaneously, without a third party such as a bank, without any restrictions for fractions of a cent regardless of the amount sent.
Tens of thousands of merchants accept Bitcoin including household names such as Microsoft, Dell, WordPress, NewEgg and Dish Network. Eventually, the plan is that every online merchant will accept Bitcoin. Even physical stores accept Bitcoin but at a much slower pace than the online world.
Support your favorite cause by sending them any amount of bitcoin at your convenience. They’ll receive the full amount without a third party taking a cut in your donation.
Show your token of appreciation to your favorite content providers such as artists, YouTubers or article authors by sending them a small amount of bitcoin. You can send them 5 cents, a dollar, it does not matter.
Store bitcoin safely in a secure environment such as cold storage and create a hot wallet for day-to-day spending.
Speculate on the price of Bitcoin by making trades on exchanges or by holding bitcoin long term.
Many more things to come as Bitcoin develops! As adoption grows and innovation continues – you will be able to do much more.
Complete control over your money. Cheaper, faster, and more convenient. Eliminates credit card and ID fraud and the need to trust a 3rd party.
No fraudulent charge backs. Payment processor fees eliminated or reduced significantly, therefore increasing profits.
Neutral and universal currency used in any country without conversion. Exchange rates will be non-existant.
True transparency through proof of ownership (finances, assets, etc.) via the public ledger.
Minuscule resources are required to keep Bitcoin running compared to traditional systems such as fiat or gold. Bitcoin becomes more energy efficient as mining technology evolves. Bitcoin mining also does not dig into our planet and requires no physical transportation. Perhaps we will have solar powered bitcoin miners in the not so distant future..
This new booming industry will create new career opportunities- to support the infrastructure.