What Exactly is Bitcoin?
Let’s Read the Whitepaper Together
Though cryptocurrencies have shocked the media and reached the masses, most are still unable to explain what they are. But, that’s for good reason. Not enough people have read the whitepaper, and many who have face the trouble of having to explain an extremely complex technology to others who may not have as technical of a background as the interpreter.
If you’re wondering, Bitcoin was introduced as a technology when the creator, with pseudonym Satoshi Nakamoto, released this whitepaper. This is the paper that we’re going to read together. Although I recommend you try reading it in its entirety in the future, I’ll be quoting pieces of the paper throughout this article so you don’t have to leave too often. While I won’t cover each part of the paper and I won’t go in full depth about each topic, I hope that you can leave this article with some of your questions about Bitcoin thoughtfully answered.
Without further ado, let’s get started!
What is Bitcoin in one sentence?
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.
Taken from the abstract of the paper, this is saying that Bitcoin is a substitute for traditional money (dollars and whatnot) that can be sent from person A to person B without a bank or government mediating the transaction.
The idea that Bitcoin is decentralized comes from this statement. Our current methods of making transactions require our money to go through our banks, the Fed, or a government institution before it ends up where we want it. Bitcoin escapes that practice by allowing coins to go straight from one place to another without it traveling through a third party. Because coins can be sent without passing through a cental location/party, Bitcoin is decentralized.
How does a coin transfer from one party to the next without interference?
We define an electronic coin as a chain of digital signatures.
This is where it starts getting pretty technical. No worries, though; I’ll try to simplify it the best I can. Here we can see that Bitcoin is not a physical coin, its existence is defined as a chain of digital signatures.
Just like each person has their own unique physical signature, everyone that can hold Bitcoin has a digital signature that is unique to them. So, in the same way that you may sign a piece of paper to confirm that it’s yours or verify that you’ve read it, digital signing is having a computer do some math to ensure that you authenticate some process, transaction, or data.
Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership.
A Bitcoin transaction is pretty unique. Since it can happen between two parties on opposite sides of the Earth via the Internet, the transaction can’t be a physical exchange like we have in our current monetary systems. And, it’s decentralized, so we can’t rely on a third party to manage the transaction as with PayPal. Bitcoin approaches this by doing a lot of math.
For person A to transfer a coin to person B, person A signs the hash, or unique ID, of the last Bitcoin transaction to occur and the public key, of person B. This process defines a transaction.
Why don’t the transactions get mixed up?
…we propose begins with a timestamp server. A timestamp server works by taking a hash of a block of items to be timestamped and widely publishing the hash, such as in a newspaper or Usenet post [2–5]. The timestamp proves that the data must have existed at the time, obviously, in order to get into the hash. Each timestamp includes the previous timestamp in its hash, forming a chain, with each additional timestamp reinforcing the ones before it.
To make things simpler, Bitcoin groups transactions processed within a similar time frame into a block. These blocks are then stored in a sequence known as the blockchain. So that the blockchain effectively keeps transactions in chronological order, the chain hashes the block, a timestamp, and the previous hash in the chain. This allows the system to leverage mathematics to ensure the integrity of the chain. As more blocks are added, hashed and timestamped, the chain becomes more trustable and resistant to attack.
What’s stopping an attacker from making their own long chain and then replacing the official chain with their version to steal money?
Without a central party, it’s hard to prevent theft. However, Bitcoin does this by establishing a proof-of-work system. This is a way for the system to make sure that every block added to the chain is authentic. It also ensures that the person who created the block (known as a miner) put in the necessary amount of time and electricity to create it.
Because the specifics of this feature are hard to simplify, below is a screenshot of this section from the whitepaper.
On what computers does the Bitcoin network run?
Because the network is high-velocity, most of the major parts (known as nodes) in the Bitcoin network are high performance supercomputers and dedicated servers that have enough processing power to manage all of the transactions.
You can read the whitepaper to get a better idea of how these computers work together.
Why would a miner want to spend time and electricity on creating blocks from transactions?
By convention, the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block. …The incentive can also be funded with transaction fees. If the output value of a transaction is less than its input value, the difference is a transaction fee that is added to the incentive value of the block containing the transaction.
Each time a miner creates a new block, the miner is rewarded a new coin. This coin has value and can be spent in future transactions. In addition, a miner is also given a portion of each transaction as a reward for processing the transaction in many cases. Thus, a miner invests in his or her time and electricity with the return of monetary incentives as new coins each time a block is mined or a transaction is processed.
How is all of this still anonymous when so much information is shared?
The traditional banking model achieves a level of privacy by limiting access to information to the parties involved and the trusted third party. The necessity to announce all transactions publicly precludes this method, but privacy can still be maintained by breaking the flow of information in another place: by keeping public keys anonymous.
With Bitcoin, identifying information like an individual’s public key is made widely available. But, Bitcoin retrieves a lot of its value from anonymous transactions. So how does this work? The system assumes that public keys are not associated with individuals. But, this isn’t always the case. When you go to buy a pizza from the store with Bitcoin, someone is now able to associate the transaction public key with you. How do we prevent that? Many wallets generate new public-private key pairs after each transaction so it’s hard to associate a single public key on the blockchain with an individual.
What are some cool things about Bitcoin?
- You can mine new blocks by hand! No computer involved.
- You can see a live feed of every block on the chain.
- You can open new wallets for free.
- You can make your own cryptocurrency! (JavaScript)
That’s it! If you have any questions, feel free to leave a comment or give me a shout on social media! Thanks for reading!
