Education Blog Series: Bitcoin, Ethereum, and Blockchain (Part 0: A deeper dive into Bitcoin)
Lately, I find myself, more than ever, being asked similar questions from friends, relatives, and even those with experience in tech. Questions like “What is bitcoin?”, “What is ethereum?” and “What is a blockchain?”. In the hopes of bringing some much needed clarity to these questions, I thought it made sense for me to first take a look back and give some historical overview regarding the history of bitcoin as the first blockchain, what properties the inventor focused on, the limitations of the bitcoin blockchain, and the evolution of the blockchain universe in the wake of bitcoin. For the sake of making these important topics more user-friendly to those maybe not as familiar with them, I will be e writing multi-part blog series over the next few weeks in order to give some real insights into each topic. To start, I’d like to focus this first post in this series on bitcoin.
Bitcoin is, by definition of the author, a “peer to peer, electronic cash system.” You may be asking, “But Nick, what does that mean?”. Bare with me, I will break it down piece by piece. Any time you are exchanging assets directly with another person, it is deemed peer to peer (P2P). If you are paying for goods in cash, whether it’s via the trading of baseball cards, buying a hotdog from a street vendor, or girl scout cookies at your front door, these interactions require no intermediary or third party to facilitate the transaction. However, people don’t always like to carry cash. Instead they are more comfortable storing money with a bank your trusted third party, or intermediary.
Rather than paying for goods with cash at the register, you can swipe your bank card, and the bank moves the money electronically from your account to the merchant’s account, in a sense, ‘electronic cash’. The bank makes sure you can’t spend more than you have, or spend the same dollar twice, which is called a double spend. Weather it’s a credit company, online poker room, even the gold in a video game, what remains constant is these trusted parties maintain a record of accounts, or ledger, for every member of their system.
Banks keep little cash on hand these days. It’s all numbers in a computer. Long gone are the days of bank heists seen in the movies where robbers are dashing to getaway vehicles with burlap sacks branded with large dollar signs on the sides. The biggest heists now are digital, hacks in the computer systems of these entities. If those systems are hacked the record can be altered. While you may notice tens or hundreds of millions of dollars appear or disappear, the only way to know the damage for sure is to audit the books and compare it against the assets owned or what was originally started with.
Bitcoin’s ledger is secured by something called proof of work, which I will come back to in more detail soon down the road. These ledgers and account records ,maintained by the banks and credit companies, are private. You can’t randomly walk into a bank and say, “I would like to audit your books now, thank you.” You also wouldn’t want just anyone to know exactly how much cash is in your account, or what you spend and where you spend it. That’s private information.
The Bitcoin ledger, on the other hand, is public, which means every person who participates in the network has a copy of it. A public ledger would have to be anonymous, but verifiable in order to be trustworthy. Bitcoin makes this possible using cryptography. Below is what a transaction looks like in the Bitcoin network. Please don’t get intimidated or confused by the seemingly random mess of letters and numbers. No worries, we’re going to get to that, and take this journey together slowly. Stay with me, now.
There is not much information to be gained from this transaction, but those strings of numbers and letters represent the transaction receipt, time and date, input, output, the amount sent, and the amount left over. The input must always equal the combined outputs, which is why you can’t create transactions from thin air.
A transaction is sent using a special key, aptly called a private key, that has to be kept safe, secret, and never be shared or else you lose sole access to your value and someone can steal it from you. Just the same as if you handed out the combination to your safe. You use the private key to make a transaction and the public key to receive a transaction. The public key can be shared and can never be used to figure out the private key. That’s part of the magic of cryptography.
These transactions are then broadcasted to every member of the network to be included in the ledger. The ledger is updated incrementally in chunks, or blocks, each with a reference to the last; forming a chain. The term blockchain was never used in the bitcoin white paper, this ‘chain of blocks’ was the closest mention. Interesting, no?
How is a block created? Do you remember the proof of work I mentioned earlier? Proof of work was first used in the 90’s by a project named Hashcash to try and combat spam email. If someone wanted their email to be trusted, they solved a cryptographic puzzle using their computer based on the unique content of the email and sent the solution along with the email. The solution to the puzzle was difficult to find, but easy to verify, allowing recipients to easily filter out invalid emails. Given that spam relies on cheap mass-distribution, this system provided a mechanism for making spam uneconomical.
Proof of work, colloquially referred to as ‘mining’, serves multiple purposes in the bitcoin blockchain. By doing this work and creating a valid new block, bitcoin is generated by the protocol and given to the creator of the block, permitting growth and providing incentive to participate. You can imagine it as a lottery, and the prize goes to the winner, the one out of the many looking for the winning ticket. Again, resources are expended in the process, and changing a transaction in this record would require redoing ALL of the work from that time in history. This is an irrational choice given doing so would destroy the premise of the system and render the gain immediately worthless and obsolete. This occurs approximately every 8 minutes, and the system adjusts the difficulty of the puzzle to target that timing.
This global, peer to peer transaction network enables you to transfer value to anyone in the world in just 8 minutes! All of the copies of the records are being updated globally in unison. Purchasing goods over the internet becomes more secure as well, removing the concerns of storing personal financial information on every website a purchase was made from. Bitcoin was released in 2009, and the first item bought using it was a pizza, in 2010, for 10,000 Bitcoin.That equates over $50 Million USD at the current exchange rate. Best pizza ever? I sure hope so.
At the end of the day, Bitcoin was designed for value transfer, and experiments to clone and modify the protocol sparked an explosion of technology and a vast ecosystem of blockchain projects. In the next part of this short series, we will cover the evolution of the blockchain universe after bitcoin was released into the wild.
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