The Bitcoin Protocol

© Darwin Laganzon

TLDR: This is a bullet pointed high level overview of the Bitcoin Protocol & Consensus.

Bitcoin

• Bitcoin is a pseudonymous, trust-less, decentralized, and immutable network.
• Anyone can join the network with a computer and an internet connection.
• The computer is a node inside this network.
• The node may verify and audit the history of transactions in the network.
• In the case of the Bitcoin network, the minting and distribution of bitcoins is determined through a process called mining.
• Anyone can participate in the mining process by either hosting their own node (computer) in the network (or) joining an existing mining pool.
• The Bitcoin network performs similar functions as a typical bank with a difference — ownership.

And ownership determines outcome.

• There is no single party but rather the entities participating in the network (in any form) that own the network. In other words, if you know the network’s native currency — bitcoin — you have an ownership in the network and therefore, you can be part of determining the outcome of the network, just like a democracy. Whilst, in a bank — ownership lies on those that hold shares of that particular bank, just like a plutocracy and an oligarchy.
• The functions performed by the Bitcoin network include:

1. Manage Accounts and their Identity: This links your personal identity to the information associated to your account — verifying ownership.
2. Manage Records: The network is involved in updating and tracking the balance in your account.
3. Creation & Redemption: The network provides a service to create a transfer of its native currency — bitcoin — and redeem it for the user.

Identity

• Identities associated to an account are determined by keys.
• Keys can be private (only the owner knows it) and public (everyone knows it).
• Private keys generate Public keys and addresses using cryptography to protect the users’ identity.
• The nodes (computers) in the network use private keys to spend bitcoin and public keys to make transactions.
• The total possible addresses make it impossible for two or more users to generate the same addresses.

Transactions

• The Bitcoin network does not have the account balance model that banks have but rather they use an Unspent Transaction Output (or) UTXO model.
• The total amount of bitcoin a user holds is also the total amount of UTXOs.
• UTXOs consist of unique identifiers that make tracking transactions at the network protocol level easy.
• The nodes in the network are responsible for transferring ownership of UTXOs.

Record Keeping

• Recording keeping is carried out using the Blockchain.
• A blockchain consists of an ordered ‘block’ of transactions (IDs) that are linked together representing the prior state(s) (previous block(s)) of the chain. This chain is timestamped and is also called the ledger.
• Nodes involved in mining keep a copy of the entire chain (ledger) of transactions.
• They update their own copy of the entire chain (ledger) on a regular basis based on what they hear from the network whilst broadcasting their version of the chain (ledger) to the entire network. They updates are irreversible.

Consensus

• Consensus is a governance mechanism that the entire Bitcoin network uses to agree upon a single common version of the ledger/blockchain.
• The governance process on the Bitcoin network is performed using Proof of Work.
• Proof of Work is an expensive (computationally) method that ensures a tamper proof consensus process without the aid of a central authority, to maintain the integrity and veracity of the ledger’s transactions history.

A combination of all these four technical properties give it three socioeconomic unique properties.

• Decentralization: every participant in the network owns the same copy of the transactions record.
• Pseudonymous: every participant is represented and use pseudonyms to take part in the network.
• Immutability: every participant is ensured that their history of engagement in the network is not tampered with by malicious actors.

The combination of the three above give the entire network a distinct property of being trust-less.

This means participants do not need to rely on a regulating government authority (or) a hyper-capitalist corporation (or) both to transact/engage in the network while being ensured that their engagement is secure, reliable and faithful.