Bitcoin Anatomy: What is Bitcoin?
This post is part one of a series on Bitcoin anatomy
If you’re still trying to understand bitcoin, start here: If you have money in the bank and you spend it, you can’t go and spend that same money again. That’s because the bank has a record, a list, of who has what money, and it changes that list every time a transaction takes place. Bitcoin takes that list, and the whole record-keeping function, away from the banks and replaces it with a decentralized computer network and a global distributed database, a list of every transaction ever, called the blockchain. The Blockchain is a list of who has what bitcoin that everyone participating in the network can have a copy of so that no one can be cheated in a bitcoin transaction. It’s called the Blockchain because new transactions are added to it in blocks through the storied mining process.
Mining is the process of receiving, bundling, proving the validity of, and adding new transactions — as blocks — to the Blockchain. This process is called mining because bitcoin exists as a metaphor of gold. There is only so much bitcoin just as there is only so much gold on the planet and over time it gets more and more difficult to mine more bitcoin just as it becomes more and more difficult to mine more gold from the Earth. This is in contrast to fractional-reserve based fiat currencies where money is created through the issuance of debt.
You might be wondering what stops someone from making new bitcoin, essentially, counterfeiting. All bitcoin originate from the mining process. Each block which is mined contains within it a special type of transaction which is unique to blocks called the coinbase transaction. All bitcoin originate from coinbase transactions. Coinbase transactions are the only transactions that have an input that does not come from the output of a previous bitcoin transaction. The amount of the coinbase transaction is determined by the total number of blocks that have ever been mined i.e. the ‘height’ of the blockchain. The block reward, from each block’s coinbase transaction is scheduled to halve every 210,000 blocks, thereby ultimately limiting the total amount of bitcoin that will ever be mined to about 21 Million. Each block must refer to a previous valid block, which in turn does the same, going all the way back to the special first block mined by Satoshi himself, which is called the Genesis Block. In this way, the blocks are chained together. Blocks which do not meet these requirements, along with several others, will be rejected by miners checking them against the rules as they are encoded in the version of the open-source bitcoin code they are running.
Each transaction in each block is also checked against a set of rules, among them, that the inputs come from the outputs of a previous, valid transaction in a preceding block(and indirectly that this is the case for each transaction relevant to the one being checked all the way back to an originating coinbase transaction). The ability to transact in the present depends on and is checked against a valid provenance. Your ability to spend your bitcoin is your ability to add to this transaction history. It is controlled by a private cryptographic key that only you(or your computer) should know. This enables you to be your own bank without having to worry about the physical space to store your money.
Bitcoin is really more like a substance, without truly discrete subcomponents, smeared across time and space. The important thing to remember is that a ‘bitcoin’ (or really the power to spend a bitcoin) is really just the ability to append a record to the set records of changes in that list of who has what bitcoin(the Blockchain) much in the way that your bank account balance is just the final entry in the banks’ books given whatever transactions you have committed(or that they have committed on your behalf).
In order for a block to be considered valid, and for the miner to receive the block reward from its coinbase transaction, the miner must have proof that it has done the computationally difficult work to win the cryptographic lottery of sorts that is at the heart of mining. Why can’t a bunch of miners get together and mine blocks that break the rules? They could, but bitcoin’s mining algorithm is designed such that, because of the amount and type of work necessary, if you have the computing power to do the work, it makes more sense (it is more profitable) to participate according the rules and win the block reward than to try to cheat and submit invalid blocks with invalid transactions.
Mining and the Blockchain are incredible innovations that solve really difficult problems: if you created a currency, how would you distribute it fairly? How do you get a bunch of people with different, even conflicting, interests to agree on something? How do you do it without using force, that is, by consent? Satoshi’s solution has inspired millions of people the world over to participate in building the bitcoin network, building the blockchain, and building the bitcoin movement, as well as a lot of epic storytelling. This massive voluntary initiative contrasts with government issued currencies which exist by dictum and function by tacit coercion. You might be tempted to think that mining solves the problem of decentralized consensus and the Blockchain solves the problem of double spending, or that you don’t need bitcoin as a currency underpinning it all, but try decoupling them and imagining a situation that works with only one or the other.
Bitcoin is as much a psychological technology as it is a financial or computer technology. And the miners are the fulcrum on which the system turns. Miners create and operate nodes which are the basic unit of the bitcoin network and they build the Blockchain which is the ultimate record and source of the value that bitcoin embodies. If you heard about bitcoin it is most likely that you heard about, if through a few degrees of proxies, because of a miner. It is these people who bring Satoshi’s blueprint to life.
Over the next several weeks in this series we will explore Bitcoin’s anatomy both as a technology and as a social phenomenon.
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