- It's Subjective
- It's Software
- It's a Platform
- It's an Idea
- It's Sound Money
- It's a Payment System
- It's a Database
- It's a Consensus Network
Bitcoin is difficult to define because it's not just one thing. There are layers to Bitcoin and that's what makes it so captivating. Bitcoin is whatever characteristics resonate with you most. For example, some characteristics that may resonate are the digital money, store of value, censorship resistant or programability aspects. We'll discuss all the different layers that help define Bitcoin throughout this page.
Bitcoin is a software program that you can download and run to connect to the Bitcoin network. This program is Bitcoin and it defines the rules of the network. For example, there will never be more than 21,000,000 bitcoin in existence.
Each user that runs the software online downloads the entire transaction history of Bitcoin. One of the most important aspects of using the software is that it validates all transactions, ensuring you are in fact receiving the bitcoin that you think you are. Using this software is the equivalent of having your own self-soverign bank.
Bitcoin is a platform for which apps, tools, protocols and networks are built upon. Technically speaking, Bitcoin is a protocol just as TCP/IP is of the internet.
Similarly to the internet, Bitcoin has spurred a torrent of innovation from all walks of life around the globe for the past decade and will continue to for the next. Like a blank canvas, tens of thousands of artists around the world painted and continue to paint their visions for a better future.
Bitcoin is an idea that using technology we can improve things like money by removing the need for trusted third parties. This idea originated from the Cypherpunks where many have tried to create systems like Bitcoin but would eventually fail.
Bitcoin itself was created from the ashes of the 2008 financial crisis with the creator embedding the message: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks." into the Bitcoin blockchain. Perhaps a hint to why Bitcoin is needed.
In essence, Bitcoin brings control over money back to the individual by removing the need for trusted third parties. People are no longer forced to trust the words of a central entity that they have what they claim to, that they'll never freeze your funds or that they aren't printing more money. We are no longer bound by the strict and decaying rules of legacy systems. The bitcoin that you hold is 100% verifiably yours using software anyone can run.
Bitcoin is sound money because it has:
- a predictable supply issuance schedule that cannot be maliciously altered
- a fixed supply that cannot not be changed by a central entity
- a system and value that has less correlation with traditional financial markets
- value that cannot be endlessly printed or devalued into oblivion
- value that is shielded from inflation, negative interest rates and other future human interventions
- value that is easily verifiable and auditable
- value that is resistant to confiscation
- value that is extremely portable, divisible, durable and non-counterfeitable
- payments that are censorship-resistant and irreversible
- a network that can function independent of trusted third parties
Bitcoin is growing into the soundest money on the planet and if you think about it, it may be the only truely sound money there is.
Bitcoin is a payment system because value can be easily transferred from Alice to Bob.
BUT, the Bitcoin protocol is better suited for the settlement of transactions, particularly higher valued transactions and this will become more evident in the coming decade. This is because a blockchain is not designed for global instant coffee payments. It's designed for a limited but very special usecase: digital immutability. Infinite Coffee payments don't need to be permanently recorded forever, that would be a waste of limited resources.
Bitcoin will have global, instant coffee payments but it will be facilitated by technologies built on top of Bitcoin such as Lightning. In fact, technologies built on Bitcoin take payments to the next level by enabling micro transactions that cost fractions of a cent and at a near limitless rate - not just for people but for machines too.
If we take our understanding to the next level, Bitcoin is actually a network to record ownership and money/payments were just the first obvious applications.
Bitcoin uses a special database called a blockchain to permanently record each transaction done on the Bitcoin network. The records express the past and current statuses of which bitcoin addresses own which bitcoin.
The database is special because everyone can see, audit, download and connect to it but no one can alter the records to trick the network. The database is designed for a very limited but highly valued usecase: digital immutability.
For central entities like a company, decisions are ultimiately approved by a leader. But how would a decision be made for a global network that has no leaders?
Bitcoin uses consensus to form an agreement on the current status of the network. Ultimately, consensus is achieved on the network through users running the Bitcoin software which in and of itself are the rules of the Bitcoin network.
Let's say that a group of miners, exchanges and developers wanted to change the consensus code of Bitcoin to have a limit of 100 million bitcoin instead of 21 million.
Developers would need to make the change and release the new bitcoin software. Fortunately, this is the easy part. The hard part is convincing all the users of Bitcoin to come to a consensus on adopting the new change and that's a whole other beast.
Achieving consensus in Bitcoin is an organic, genius and beautiful thing. Yet the process can be full of debate, arguing, gridlock and constant explaining that can go on for months or years. There is game theory involved too. But this is a feature, not a flaw. This is by design so that no bad actor(s) can waltz in and change Bitcoin's consensus code willy-nilly and that only well tested code gets adopted.
If consensus cannot be achieved, no change is adopted and the network continues as normal. A minority or majority (whether for legitimate or ill-intentioned reasons) have the freedom to "fork off" and create their new version of Bitcoin. Forking is a non-event now because it had occurred hundreds of times by scammers. Genearlly speaking, if the network comes to consensus, a high percentage of users download and install the updated Bitcoin software.
Two methods have been used to change consensus code thus far:
Soft fork: this software update is backwards compatible with all previous versions of the bitcoin software that are connected to the Bitcoin network. If users don't update to the new software, they can still use Bitcoin, they just won't directly benefit from the improvement(s) of whatever the new software offered. A softfork involves miner participation to push it through.
Hard fork: this software update isn't backwards compatible with previous versions of the bitcoin software. If a user doesn't update by a specific trigger time, they are using a different network than those who installed the altered Bitcoin software. Users will have coins on both networks.
- Trust Minimized
- Open Source
- Fixed Supply
- Dumb Network
Bitcoin is decentralized meaning the network has no central point of control.
Ultimately, this means Bitcoin is controlled by all of us - the individuals. It can't be controlled or shutdown by any group like a government because tens of thousands of users run the Bitcoin software all over the globe.
Only something drastic like turning off the electricity for the entire planet would temporarily distrupt Bitcoin! Not even shutting down the internet could shutdown the network because technologies such as satellites, mesh networks and radios are used to run Bitcoin. Bitcoin is not bound to just the internet.
The decentralization of the network is measured by the number of users running the Bitcoin software and to a lesser extent, by those that are mining. Collectively, how evenly all the Bitcoin nodes and miners are spread around the world plays a role in the decentralization too.
Bitcoin is a trust minimized network meaning trusted third parties are not required for certain usecases like money to function.
The problems with trusted third parties are that:
We trust them to hold all our confidential data (such as e-mail, phone number, full name, home address, credit card info, bank info, etc.), so they naturally become a huge attraction for hackers. Examples in history taught us that it is near impossible for central entities to protect this data.
We put so much trust in entities like central banks that some gained incredible power over the people and have been proven to abuse their power because humans are subject to corruption, emotions, bad decisions, self-interests, etc.
With Bitcoin, the value that you or anyone else holds is 100% publicly verifiable. You own your bitcoin in the purest sense that can exist. In this space we go by the motto, "Don't trust. Verify".
Bitcoin's code is open source meaning anyone can freely view, audit, modify or redistribute it. This means that the project is open to everyone for collaboration which is great for bug checking and innovation.
As a result, anyone can copy+paste Bitcoin's code to create their own altcoin. A developer can also work to improve Bitcoin and potentially have the changes implemented.
Bitcoin is a protocol and it doesn't know what a border is. This means any person or machine can connect to the network at any location.
Once connected to the Bitcoin network, the global network is in your grasp and you can transact with anyone, anytime at any place.
In addition, being borderless means the pace at which innovation is built dramatically increases because it's not dependent or dictated by just one group, company or even country. It's a global community and a global project.
Bitcoin is permissionless meaning no person or machine has to ask permission to connect to the network. You can open your global bank account right now - all you have to do is download a Bitcoin wallet. You don't have to wait until a certain age, fill out paper work or visit your local bank. Even machines can have their own bank now, which unlocks some great future usecases. As we all know, machines cannot have a bank account using our current banking system.
No permission is required from a government, bank, authority, regulatory body or company. It doesn't matter how old you are, where you live, who your leaders are, if you have legal documents, what gender, what religion or what color you are - Bitcoin is a protocol and it does not care.
In addition, permissionless also means that anyone can build on Bitcoin which greatly increases the pace of innovation. You can wake up one morning and think to yourself "Hmm, I want to build something on Bitcoin.." and just start building something, by yourself, in your bedroom.
Bitcoin's blockchain is digital data, yet it's immutable meaning once the digital data is recorded, it can never be changed. This is an extremely important characteristic of Bitcoin and has some very special usecases for things like money.
On a technical level, this immutability is achieved through Bitcoin's decentralized network and an algorithm called proof-of-work. This combination eliminates the ability of someone altering "the past". Immutability is not a native feature of a blockchain, in fact, Bitcoin is the only truely immutable blockchain.
Bitcoin utilizes a peer to peer broadcast network to propogate data (such as data for a new transaction made by a wallet) between Bitcoin nodes on the network, where miners, for example, can eventually submit the transaction in the form of a transaction block to be recorded into the blockchain indefinitely.
Bitcoin is clone-proof both in that a bitcoin token cannot be duplicated out of thin air causing an increase in supply and that the network effects of Bitcoin cannot be cloned. Bitcoin's code can be cloned a million times to create different altcoins because it is open source but you can't magically copy and paste Bitcoin's security, value, organic growth, collective mining power, etc.
However, a bitcoin can theoretically be double spent meaning that someone can spend the same bitcoin more than once but transaction confirmations eliminate these attacks. This is why Bitcoin's layer 1 protocol, by itself, is better seen as a settlement layer than a payment layer.
Bitcoin is neutral because it doesn't belong to anyone and does not play favoritism towards any person, group, company or country. Everyone is on an equal playing field because it's just a protocol that exists and does it's function.
Bitcoin uses a public ledger called the blockchain. A blockchain is a list of every transaction ever made on the Bitcoin network. It expresses the current and past statuses of which bitcoin addresses hold which bitcoin. Everyone can see and track each individual transaction real-time. This is why Bitcoin is not anonymous but pseudonymous. Transactions are not identified by name but by bitcoin address.
In this regard, the Bitcoin blockchain offers an un-matched level of transparency that didn't exist before. In addition, the blockchain allows Bitcoin to be used for other applications beyond ownership of money.
The software that defines Bitcoin is just code meaning it can change and adopt new features from altcoins if they have been tested thoroughly over a period of time. But to our knowledge, this has never occurred because all the innovation is already being built and tested for Bitcoin by the best developers. Altcoins have yet to offer anything worth implementing, just broken experiments or scams. However, all altcoins have taken from Bitcoin's innovation(s).
Think about it:
Are the tens of millions of people (and future billions of people) going to throw away all their money and investments every time someone shouts they have somethnig better? Is the entire network going to throw away all the organic growth, infrastructure and restart to square one? Of course not. That would be an endless cycle of disruption and destruction occurring on a monthly basis.
Bitcoin is anti-fragile because instead of weakening in times of chaos and disorder, it gains strength. For example, when there is economic trouble caused by corruption, Bitcoin adoption accelerates. Or when an entity tries to co-opt Bitcoin, the communities grow stronger, new innovations are created to protect the network and game theory kicks in.
The system is battle tested because everything but the kitchen sink has been thrown at it and it doesn't die. In fact, the attacks made the technology, network and communities stronger each time. Mainstream media declared Bitcoin dead over 350 times already and guess what? It's still here and thriving.
Everyone from presidents, governments, bank CEOs, central banks, politicians, mainstream media to your Uncle Bob have bashed Bitcoin. Detractors desperately search for negative talking-points that will stick but fail because you can't argue against facts. Interestingly, many who started off as detractors of Bitcoin eventually progressed to embracing it. Almost everyone in Bitcoin, started off as a skeptic.
Bitcoin has been through:
- Bans, restrictions and threats in many countries
- Attacks from governments, banks and politicians
- Constant bashing from established economists, bankers, mainstream media, etc.
- Attacks from a conglomerate of large bitcoin companies, miners and has-beens
- Protocol, game theory and hacker attacks
- Scaling hurdles
- Hard forks
- An endless wave of "the next Bitcoin" altcoins and their bag holders
- Multiple +85% multi-year bear market corrections
- the collapse of Mt.Gox which was the largest and only relevant exchange for Bitcoin at the time
- Multiple high-profile exchange hacks including an 850,000 bitcoin hack (Mt.Gox)
- Early code bug hiccups
During Bitcoin's entire existence it has had to fend off attacks from outside the space, from within the Bitcoin space and from the Crypto / Blockchain space in general. But it's still here, thriving and as important as ever.
As Ghandi's famous quote goes, "First they ignore you, then they laugh at you, then they fight you, then you win".
Bitcoin has a fixed supply of less than 21,000,000 bitcoin that will ever exist. Bitcoin is slowly added to circulation until the year ~2140. This is hard-coded into the DNA of Bitcoin and cannot be changed by any central entity.
The system is designed so that everyone knows:
- how often new Bitcoin are added to circulation (every ~10 minutes)
- how many Bitcoin are created every ~10 minutes (6.25 btc for years 2120 to 2124)
- when the issuance rate will be halved, a.k.a the quantatative hardening / halving event (every 210,000 blocks or every ~4 years)
- when new Bitcoin stop getting issued (year ~2140)
Bitcoin is a dumb network meaning the core function is simple and devices that connect to the network are smart. The Bitcoin network doesn't care about how you are transacting, using which device, to whom or to where - it just does it. This means innovation doesn't require risky, disruptive changes at the core protocol level. Innovation is pushed to outside the core protocol such as on end-user devices and other protocols. This is a good thing. Think of how a small bug in updating the core protocol would affect everyone on the entire network. This translates to a stable, secure and reliable core protocol - which is of utmost importance for a protocol handling massive amounts of value.
A dumb network is more robust than a complex protocol and accelerates the pace of innovation by putting it in the hands of any user and not just one company or group.
The internet (TCP/IP) is an example of a dumb network. It transfers data from A to B and it does not know or care what that data is or what the end device is. Additional protocols and networks work together to make the internet experience smooth and scalable.
Historically, the greatest innovation came from the bottom-up meaning outside the already established banks, Fortune 500 companies, etc. The greatest innovation comes from the bottom simply because that's where it has the greatest need. It's also where individuals have the most creativity, motivation and passion, uncontrolled by bosses, agendas or regulations.
Simply put, a system that is highly regulated, permissioned, closed source, has a singular vision dictated by the company and a walled garden environment simply cannot compete with an open, global and permissionless system designed to help, not profit from people. This is why bottom-up innovation beats out top-down.
In addition, the power structure in Bitcoin is reminiscent of bottom-up because the people are given the power and ultimately, the people are the ones who control Bitcoin.
A bitcoin is divisible up to the eighth decimal place. 0.00000001 btc is the smallest amount you can own and it's called a "satoshi". 1 bitcoin = 100, 000, 000 satoshi.
As of May 2020, over 87.5% of the 21,000,000 bitcoin have been issued. There is less than 12.5% left to issue.
A bitcoin cannot be deleted but access to them can be lost permanently.
Bitcoin is not anonymous, it's pseudonymous.
The idea of a Bitcoin-like system actually existed long before Bitcoin was created. In fact, there were quite a few attempts at creating a similar system from a group called the Cypherpunks. Some attempts that would fail include DigiCash, eGold, B-Money, HashCash and BitGold. Now we have Bitcoin which is by far the most successful and as more time passes, it can be more confidently viewed as the one that made it.
The Bitcoin whitepaper was published on Halloween day, October 31, 2008 by Satoshi Nakamoto on the cryptography mailing list at metzdowd.com. Intentional or not, the Bitcoin whitepaper was released to the world from the ashes of the 2008 financial crisis with the creator embedding the message: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks." into the Bitcoin blockchain.
The first block a.k.a. "the genesis block", was mined on January 03, 2009.
On January 12, 2009 - Satoshi sent 10 bitcoin to Hal Finney which is the first bitcoin transaction in history. On may 22, 2010 - the first publicized bitcoin purchase for something physical made its mark in history when Laszlo Hanyecz paid Jercos 10,000 bitcoin to purchase and deliver 2 Papa John's pizzas to his house. At Bitcoin's 2017 peak, these pizzas cost just under $200,000,000 USD.
From 2009-2012, Bitcoin was completely unknown to most - only to be accepted for payment by a handful of visionaries. Starting from 2013, Bitcoin slowly gained traction and legitimacy as more visionaries and entrepreneurs discovered Bitcoin's advantages and it's huge potential. Now, the world cannot go 1 day without talking about Bitcoin.
Bitcoin was created by an unknown person or group that went by the pseudonym of Satoshi Nakamoto on bitcointalk.org and on other forms of communication.
2011 was the last time Satoshi publicly communicated with anyone but before he disappeared he encouraged the former "lead" Bitcoin Core developer Gavin Andresen to continue working on Bitcoin. But now there is no leader due to the radical decentralization that the network went through since then.
Satoshi Nakamoto most likely disappeared due to the dangers of creating such a system that would ultimately succeed. It isn't known but some people have speculated that the creator passed away because Satoshi's known bitcoin addresses have never sent any bitcoin anywhere - meaning the bitcoin never moved, even once. Others believe that Satoshi may be alive but cannot spend his known bitcoin holdings without exposing his identity. It's also plausible that access to the bitcoin have been lost permanently.
P.S: No one knows who Satoshi is. Quite frankly, the identity has no significance and he/she/they no longer have influence on the Bitcoin protocol. Bitcoin has evolved far beyond Satoshi and that's a good thing. Bitcoin has no leaders.
In the first few years of existence, a handful of non-technical users mistakenly pitched Bitcoin as an instant and virtually free payment system. It had this persona because not many people used Bitcoin during this early period.
In reality it was just a cute sounding sales pitch. Limitations, trade-offs and use-cases of the "blockchain technology" were not well defined or tested yet because it was so new to many people. A blockchain is ineffecient and cannot scale for instant global coffee payments. It has a limited but very special use-case: digital immutability. Because of how a blockchain works, global coffee payments on a blockchain would naturally centralize the network and if the network becomes centralized it no longer has the digital immutability characteristic.
Coffee payments don't need to be permanently recorded because and that would be a waste of limited resources. Most can also agree that a centralized system soley for fast and cheap payments isn't new or special.
The Bitcoin network consumes minuscule resources in comparison to the traditional financial system. Think of all the accumulated energy and physical resources that bank branches, financial offices, entire skyscrapers, building heating/cooling/lighting, commuting, armored transportation, bank vaults, millions of ATMS, thousands of large central servers, tens of thousands of computers, fiat printing factories, tens of billions of paper/plastic bills and tens of billions of metal coins consume in every country around the planet.
Moving on to gold: Gold mining destroys the natural habitat of mountains, hillsides, waterways and even distrupts communities to find mere ounces of gold. Gold also requires physical storage, high physical security, mining machinery, gold factories and armored physical transportation.
Bitcoin mining does not dig into our planet and a bitcoin is digital so it doesn't require physical storage areas, physical security, physical transportation or a physical representation such as coins or bills. Most of the infrastructure that Bitcoin uses already exists such as the internet, computers and phones. The only additional infrastructure are the miners and over 70% of the energy consumed by Bitcoin miners come from; renewable resources, surplus energy that would otherwise be wasted and byproducts such as natural gas flares. In fact, Bitcoin miners are now being used to reduce or eliminate natural gas flares that would otherwise be released into the air.
The electricity consumed by the Bitcoin network provides global network security, immutability and a global sound money native to the internet. Bitcoin will become more energy efficient as mining technology advances and will play a larger factor in pushing for more green advancements in the energy field.
- Bitcoin Doesn't Waste Electricity (Article)
- The Last Word on Bitcoin’s Energy Consumption (Article)
- Study: Over 74% of Bitcoin Mining is Powered by Renewable Energy (Article)
- POW is Efficient (Article)
- Bitcoin doesn't have an energy problem. It's an energy solution (Twitter)
- Op Ed: Bitcoin’s Energy Consumption Is Neither Frivolous Nor Excessive (Article)
- SLP12 – Bitcoin Mining and Energy, with Hass McCook (Podcast)
- Bitcoin mining is efficient (Twitter)
- Effects of Gold Mining on the Environment (Article)
- Bitcoin mining and oil/ gas producers (Tweet)
Think of Bitcoin's blockchain as a global ledger or database. The ledger has record of every single Bitcoin transaction which expresses the past and current statuses of which bitcoin addresses own which bitcoin.
Bitcoin has what we call a a public blockchain. It's public because anyone can read, audit and connect to it without permission. Copies of the ledger are distributed all over the planet by users that run the Bitcoin software.
Bitcoin's blockchain is special because it achieves what a blockchain was specifically designed for: digital immutability. Something that no other blockchain achieved because digital immutability is not native to a blockchain. It can only be achieved with a decentalized network and an algorithm called proof-of-work. Digital immutability has very important implications on how we see and use digital data for certain things like money and brings about many other desired side-effects.
The Key To A Useful Blockchain - Decentralization
All blockchains by design are inherently slower, less efficient, more expensive and a less scaleable database than existing database structures like MySQL. This is because a blockchain is designed for digital immutability and not fast / cheap payments. For a blockchain to scale for even a decent amount of transaction volume, it must destroy it's decentralized nature as a consequence of how blockchains work. Once the decentralization is compromised, what do you have? An ineffecient, non-innovative paypal-like system that isn't new or special.
Bitcoin uses a process referred to as "mining" to process transactions. This is an over-simplified term because the process is much more complex.
Without getting technical, the important thing to understand about miners is that they don't validate transactions - transactions are actually deemed valid by users running Bitcoin full nodes. Instead, miners are adding already valid transactions into a transaction block to be recorded into the blockchain. This means miners build the blockchain by adding transaction blocks on to it which in effect, increases the security of all recorded transactions by adding something called transaction confirmations to them.
Miners add a block to the blockchain by competeing to be the first in solving a work-intensive mathematical puzzle using special hardware. If a miner wins the race, they get to add their block to the blockchain and receive the block reward as payment. Miners can also collectively work to solve the puzzle by forming a mining pool. In this case, the block reward is divided between miners based on their hash rate contributed. The block reward (or more specifically the block subsidy) is how new bitcoin are issued into circulation.
Mining is a technically complex process and also involves an algorithm called Proof-of-Work. We'll leave it at this.
At the beginning, anyone could mine with a device that had a CPU, such as a laptop or desktop. Mining eventually progressed to video cards, then FPGAs. Now, minig is only profitable with specialized hardware called an ASIC.