’08 | Bit what? Bitcoin! — Hello world.
You’ve made it. We’re finally at the peak of Mount Blockchain. As you look around you, you look in awe at the long way that you’ve undertaken to get here. All the stories laying behind us have brought you to this point. Let’s take a look around and figure this thing out, once and for all.
Our story today revolves around the very first blockchain that has been created ten years ago — Bitcoin. We will take a look at the emergence of this groundbreaking technology and look under its hood to get an overview of what exactly makes it work. It’s mysterious founder(s) Satoshi Nakamoto will be covered as well.
A somewhat longer article, but it’s worth the extra minutes — I promise. Are you ready?
This article is part nine of our journey. If you’re new here and want to understand what’s going on, just click here.
- 3000 BC | Hiking Up Mount Blockchain
- ’82 | The Birth Of Digital Cash
- ’96 | Oncologist + Gold = Revolution?
- ’97 | Anybody interested in some hash(cash)?
- ’98 | Wei Dai — Who dat?
- ’98 | Make It Rain (Bit) Gold!
- ’03 | It’s Karma
- ’04 | Use me baby, one more time
- ’08 | Bit what? Bitcoin! — Hello world. (This article)
- ’13 | Ethereum — The World Computer
Hello World.
In order to properly understand the importance of Bitcoin and especially its underlying technological foundation, we have to take a step and explore the bigger picture in which this all plays out.
It all started over 5000 years ago.
As our ancestors were starting to live together in ever increasing groups, the creation of centralized systems was inevitable. Only through these centralized entities were we able to synthesize the glue holding our societies together and to efficiently cooperate with each other — trust.
Centralized institutions have played and keep to play an essential role in our world. We trust governments and states as a source of identification (IDs, Driver Licences, Passports, etc..) and banks to ensure that nobody is double spending his money or simply adds some zeros to their accounts.
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”
— Satoshi
All of these services can be provided because of one thing that all these systems have in common.
Ledgers.
Ledgers have played and continue to play an extraordinarily important role in the development of modern societies. Without them, we wouldn’t be where we are today. They are literally the foundation of our civilisation.Throughout the millennials they’ve helped us to deal with trust and complexity, forming a kind of societal memory.
But it turns out that centralized ledgers have also many potentially problematic aspects: they can be manipulated, destroyed or misused.
One of the things that has been under fire by critics for a long time is our current monetary system. There have been countless instances of states deciding to debase a currency, destroying the savings of many hard working people. Another aspect that many people dislike is the enormous amount of intermediaries that sprung up in our financial systems and who all want to take a cut of the money flowing around in between them.
The dream of creating an alternative to this system has been dreamt by many people during the last couple decades — a solution that should be digital, enhance the privacy of its users, immutable to censorship and be trustworthy without any central entity.
Notable visionaries who contributed to that quest and laid the foundation for the following technological revolution include:
And last but not least Hal Finney, a legendary and highly influential cryptographer and privacy advocate who created his Reusable Proof Of Work system in 2004.
All these people and their groundbreaking ideas have paved the way for what was to come in the midst of the financial meltdown of 2008.
In November 2008, a mysterious Satoshi Nakamoto (more on this later) published a whitepaper on a new digital, decentralized currency system — Bitcoin.
What is it that has libertarians, Wall Street professionals and Silicon Valley technologist equally excited throughout the past 10 years?
“Bitcoin is a peer-to-peer version of electronic cash that allows payments to be sent directly from one party to another without going through a financial institution. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.”
– Satoshi Nakamoto
Sounds somewhat confusing and not really too revolutionary? No worries, I promise you that you’ll get it.
What Nakamoto managed to achieve is truly mesmerizing — he (we do not know what gender Satoshi has, but I’ll stick to the male pronoun for the ease of use) single handedly (there could also be more people behind the pseudonym) invented digital scarcity. Which is a pretty big deal.
“When I first heard about Bitcoin, I thought it was impossible. How can you have a purely digital currency? Can’t I just copy your hard drive and have your bitcoins? I didn’t understand how that could be done, and then I looked into it and it was brilliant.”
— Jeff Garzik
But an even bigger deal is that he invented a system which creates trust within people that don’t know each other. And that’s truly revolutionary.
The key characteristics of Bitcoin and therefore the first blockchain were the following:
Redundancy of the data, since it is replicated and stored on many different computers.
The creation of a system without central authority and therefore nobody who could exert individual control over the network.
An irreversibility (immutability) of the ledger and the data it contains, effectively making censorship impossible.
Its a permissionless system, meaning that you need no bank or government in order to participate — its open for everybody to use.
Let’s take a look at how all of this is achieved.
The Tech Behind Blockchain
We will now take a look at the tech powering this groundbreaking invention.
This part will not go too in-depth into the different technologies mentioned — that would be too much for this post. Once the historical series is concluded though, I’ll be starting to write up the technological foundations in longer (well explained) posts. Once done, I’ll link them here. But now let’s understand what’s going on under Bitcoin’s hood.
First and foremost it’s important to know that Bitcoin is completely open source — it is being maintained and developed by programmers all around the world.
Before we get into the different technological components that make up Bitcoin, we’ll take a look at how the system works in general.
Let’s assume you’re new to Bitcoin and want to also try out this cool new technology that has everbody hyped up. In order to get started, you first need a wallet. There are lots of different options, but you decide to go with the one that a good friend of you has proposed to you. Then you go to an online exchange, buy a Bitcoin there and voila, you’re a proud new Bitcoin user.
Halloween is just around the corner and as you walk downtown you pass by this funky costume shop — which is where you see it. The perfect halloween mask for you.
“Pretty dope, I need to have that!” is the only thing you’re thinking right now. So you go ahead and decide to buy it. As you enter the store, you see that they accept Bitcoin. What a coincidence — but hey, it must be a sign. Great opportunity to use this cool new Bitcoin that you just got.
The store owner Bob shows you his smartphone with a QR-code of his wallet (which is simply a long numerical number, but more about that later), you scan it with your own wallet app and off the transaction goes.
What’s happening in between the Bitcoin gets send from your wallet to his is the following:
The transaction becomes part of a block with a lot of other transactions that are happening at the same time. This block eventually gets broadcasted to every part of the network, which then checks if the transaction is valid and approves it accordingly. Once approved, this block then gets added to the other blocks in front of it (over time this forms a beautiful long blockchain) and voila, Bob has gotten his money.
The things going on behind the scenes are way more complex though, but don’t despair, I’ll walk you through it.
First and foremost, Bitcoin is a shared public ledger. As in the prior stories, private key encryption plays a big role here. This works as follows:
We start by taking a random string of numbers (e.g. 3860280357), from now on this will be called our private key) and mathematically derive another string of numbers from it — the resulting new string of numbers is called public key. A very important aspect of this process is, that it’s a so called one way function, which means that it’s very easy to calculate it into one direction (ergo from private key to public key), but not the other way around (aka it’s almost impossible to derive the private key from the public key)! The main take away that you need to remember and understand right now, is that these two keys share an intimate relation and are linked to each other.
One awesome thing that you can do with this is digitally signing something.
The Bitcoins that you own are stored in your wallet, which is your public key. If you want to send someone Bitcoin, you need to sign that transaction using your private key. You’re now your own bank and are solely responsable for not losing your private key (aka your password).
But how do we all agree on who is owning what and has sent what to whom?
Well, let’s welcome the so called miners on the stage.
Satoshi found a groundbreaking and mesmerizing solution to an old problem known as Byzantine Probleme (there will be a full length article about this soon). This problem describes the great challenge to coordinate resources among different participants and to find consensus. The problem is often described as a group of Byzantine generals who all besiege a city. Only if they attack at the same time, they will be able do win the battle — the only problem is that they need to find a way of how to trust each other to attack in a coordinated manner.
Bitcoin managed to achieve Byzantine Fault Tolerance and solved this problem elegantly. It does so by using a marvelous consensus mechanism known as Proof of Work (PoW).
Miners collect all the transactions happening in the system, verify them and then put them into a block. While they do this bookkeeping, they also participate in a cryptographic puzzle and try to find a solution to a difficult task.
This puzzle is based on hashing. It’s used all over the place but for now it’s simply important to understand the basic idea behind it. A hashing algorithm takes an input (this can be literally anything), runs it through some magic mathematical processes and then creates a unique output. In the case of Bitcoin, where it is used in the , it takes the resulting number (which is a hexadecimal number) and converts it again to a “regular” number. This regular number can then be converted to a binary number (0s and 1s).
The participating mines try to find a hash with a value that is underneath a set target. This is super difficult to do for them and they simply have to guess solutions. Once a correct hash has been found by someone, they have won the right to broadcast their block to the whole network. Once confirmed by the others, it’s get accepted and added cryptographically to the chain of blocks before it.
Why all this hassle you might ask yourself?
Well, this guessing is using a lot of computational power. And this computational power needs energy. Energy that you need to pay for. Therefore, by proving that you worked hard to find a solution and were willing to pay for it, you eventually at some point get rewarded big time: the one who finds the correct solution for the puzzle gets a reward (currently 12,5 Bitcoin) plus the transaction fees (that the other people have to pay in order to have their transactions be conducted).
All the blocks that have been linked together are a testament to all the work that went into finding them. If you’d want to change something in a past block, you’d need to redo all the work that has been conducted afterwards!
The computer who run the Bitcoin software (more on this in a future article) always take the chain with the most Proof of Work put into them as the valid one. Thus consensus is reached in a decentralized network. Crazy, right?
Let’s talk about the supply of Bitcoins for a bit.
New bitcoins are minted (produced) every time a miner finds a valid block. In the beginning they were still getting 50 Bitcoin per Block, but this number halves every 210.000 blocks (a block is found on average every ten minutes) and currently miners get 12.5 Bitcoin. This will go down over the years until no new Bitcoins will be produced — this is estimated to happen sometime around the year 2140. At that point, there will be almost 21 million Bitcoin in existence.
All the guessing that the computers do in order to find a right hash is known as hashing rate. Currently Bitcoin has a hashing rate of about 43 million trillion hashes per second. Per second.
By guessing so many possible hashes, the computer use up a lot of energy. How much exactly?
About 72 TWh. That’s about the same as the whole country of Austria.
What makes this all so fascinating and intriguing then? I’ll let Trace Mayer answer this for you:
“Instant transactions, no waiting for checks to clear, no chargebacks (merchants will like this), no account freezes (look out Paypal), no international wire transfer fee, no fees of any kind, no minimum balance, no maximum balance, worldwide access, always open, no waiting for business hours to make transactions, no waiting for an account to be approved before transacting, open an account in a few seconds, as easy as email, no bank account needed, extremely poor people can use it, extremely wealthy people can use it, no printing press, no hyper-inflation, no debt limit votes, no bank bailouts, completely voluntary. This sounds like the best payment system in the world!”
On an interesting side note, Satoshi thought that the big incentive to invest one’s available computing power to lucrative mining might lead to a lovely consequence:
“The Bitcoin network might actually reduce spam by diverting zombie farms to generating bitcoins instead.”
So much for the technical part, you’ve made it!
Evolution
After Bitcoin was released in early 2009, it had a long and rocky way ahead of its wider adoption and fame.
Initially it was a huge problem of figuring out how much a Bitcoin should be worth. The first valuation of a Bitcoin was done by an early user named NewLibertyStandard who came up with a method of determining their value. He used the estimated electricity cost it took him to generate one coin, which put one Bitcoin equal to 0.01$ dollar.
The first use of Bitcoins was on the 22nd of May 2010, when the Hungarian-born software architect Laszlo Hanecz managed to find someone who would buy two pizzas for him in the exchange for the combined price of 10.000 Bitcoins. Ever since then the 22nd of May is celebrated as “Bitcoin Pizza Day”.
Then in 2011 Satoshi suddenly vanishes, having “moved to other things”.
By that time, Bitcoin was already quickly gaining traction. One of the main causes for a wider adoption was an online shop in the infamous dark web — Silk Road. By enabling users to pay for the things offered on the site (mainly drugs, but also all kind of other stuff) in Bitcoin and thus ensuring a more anonymous shopping experience, he put Bitcoin on the map big times.
You can read the whole fascinating story right here.
Ever since then, Bitcoin has been making bigger and bigger waves each year. Apart from where the future will lead Bitcoin to, it has laid the foundation for something much bigger — the blockchain revolution. The underlying technology’s ability to create trust between different people is truly groundbreaking and has sparked a huge wave of innovation. But more on that in future posts.
Before this behemoth of a post is done though, let’s talk about it’s mysterious founder for a little bit.
Satoshi Nakamoto
It’s a mesmerizing fact that 10 years after the creation of Bitcoin, we still have no definite clue who the founder might be.
It could be a guy. (Some think it might just’ve been Hal Finney, while others are convinced it’s Nick Szabo)
It could also be a woman.
Or a group of people.
The beauty is that it doesn’t matter though. Bitcoin is not depended on any single entity and a worldwide group of enthusiastic and passionate developers is continuing to further develop the software underlying it.
It might only matter from a financial point of view — Satoshi currently still owns about 1 million Bitcoins — that amounts to about roughly 6 billion Euro at the moment. To this day, none of these have been touched though. I think that says a lot about the higher and ulterior motives that Satoshi had when he created Bitcoin.
If you read this, you’ve reached the end of the article — thank you very much for the precious minutes that you’ve invested into delving into this post, I thoroughly hope they’ve been worth it.
Yours truly
Till
PS: If you’re looking for helpful and great resources to learn more about blockchain’s paradigm shifting technological potential, check out these awesome resources.
