Hello Bitcoin!!!

Part I: The Story of Money

“All money is the matter of belief “-Adam Smith

Money is medium of exchange, a unit of account and a store of value. It is durable, portable, divisible and fungible. Currency is similar to money except the fact that it is not a store of value. US dollar has lost 95% of its purchasing power since 1913. It shows that it is not very good store of value. Only gold and silver have maintained their purchasing power. Thus, they are considered as optimum form of money. Moreover, gold and silver are found in limited quantity in nature and can’t be simple printed.

Fiat currencies are the currencies that are dictated by government or private companies. There is no intrinsic value and they are backed by nothing. To be clear, they are created out of thin air. Basically, it is just a worthless paper that is used as medium of exchange. All fiat currencies that were there in history, all went to zero. Every single one of them went to zero. No fiat currency has ever survived.

Around 17000 years ago, there was no sign of money. Humans used to live in small tribes and their only objective was survival. They exchanged goods like meat and weapons among each other for convenience. This exchange of goods is known as barter system. With increase in population and cooperation among people, it was difficult to trade using barter system as there must be a double coincidence of wants. Two parties can have barter exchange only if their possessions actually suit each other’s needs.

Then later, the concept of commodity money was introduced. People monetized everything that was rare and everyone agreed on this. Commodities like cow, peacock feathers, knife, salt, alcohol were used as money. Each commodity seemed to have its own distinct value. But, things like animals and alcohol deteriorate over time. And, it was difficult to know what was the true value of one’s possessions. So, now people wanted something that had a certain value and would take long time to expire.

Then around 5000 years ago, Egyptians started using gold and silver as their form of currency. Following this, kings of each empire starting minting metal coins of their names. Sooner metals coins were widely adopted across the globe as trade was much easier.

Slowly, the banks were established who could issue banknotes. The paper that could be redeemed for an equal amount of gold from government. Basically, it was a paper bill that claims that you own equivalent amount of gold. Talking about the US dollar, it was backed by gold. But, in 1979, the order was issued and US currency was no longer pegged to gold. Never again, anyone could legally demand US government gold for in exchange of US dollar. Federal Reserve System is a private corporation which holds power for printing US dollar. They can simply print more and more and dilute currency supply. Now, the whole world economy was backed by faith. “Trust”

Then, there comes Bitcoin- a trustless alternative.

Part II: History of Bitcoin

An anonymous individual, Satoshi Nakamoto published a white paper detailing a design of “peer-to-peer electronic cash system” in October of 2008. At that time, the world was going through a financial crisis caused by the irresponsibility of the institutions that controlled our financial system. He proposed a global financial infrastructure based on cryptographic proof instead of trust.

I’ve developed a new open-source P2P e-cash system called Bitcoin. It’s completely decentralized, with no central server or trusted parties, because everything is based on crypto proof instead of trust. Give it a try, or take a look at the screenshots and design paper. — Satoshi Nakamoto

The first Bitcoin block ever mined was by Satoshi himself on the 3rd of January ,2009 and it is known as Genesis block. What is mining a block? We will talk about that shortly. The first notable retail transaction involving goods or service occurred on May 22, 2010 when a programmer offered to pay 10,000 BTC for two pizzas. The price of two pizzas was estimated to be around $25 at the time of purchase. After that, people slowly started to accept bitcoin as a form of payment.

Part III: The Bitcoin Blockchain

BLOCKCHAIN

In simple terms, blockchain is way of storing data. Of course, there are many ways of storing data which includes traditional ledger using paper and pen as well as use of excel sheets where data are structured in form of tables. In case of blockchain, data is stored in chunks called blocks. Data is stored in distributed and decentralized ledger and is immutable. The blocks are organized in chronological order and are chained by cryptography.

What is block?

For simplicity, let’s consider a block in a blockchain contains two things:

a) Transactions — the transactions recorded in the block

b) Block Header — It is composed of several fields

For simplicity, Block Header is composed of:

a) Nonce — a randomly generated 32-bit number

b) Hash of previous block

c) Target Hash

Hashing means to convert arbitrary amount of input data to gibberish output data called hash by applying mathematical functions. Example:

Input: Ram

Output: 6795D462DE738ED46BD0323B951651735A327007

Demo: https://andersbrownworth.com/blockchain/hash

Source: https://www.ig.com/en/trading-strategies/what-is-blockchain-technology--200710

One interesting fact about Block-hash is that it is generated. For now, consider the block hash is produced on the basis of transactions in the block and hash of previous block. Altering transactions or previous hash will change the block hash.

Consider, someone tries to change the transactions of BLOCK 2. Then the new hash produced will be different from “8Y5C9”. Then the previous hash for BLOCK 3 must be updated and new hash should be generated for BLOCK 3. This process should be continued till the current block. In short, to tamper any block, all blocks after that must be changed. This property provides security and immutable feature to blockchain.

Demo: https://andersbrownworth.com/blockchain/blockchain

Decentralized: All transactions are verified by several nodes (participants of network) before storing in a block. The authority to verify transactions is held by all nodes. It is different from institutions like bank where the validation and verification of transaction is a centralized process.

Distributed: The history of transactions is stored in every node. But, altering the transaction details on the given node will not alter transaction history of the whole network. The stored transactions are synchronized and validated automatically around the distributed nodes.

Demo: https://andersbrownworth.com/blockchain/distributed

Mining and Consensus

Mining is the process of adding new bitcoin to the circulation supply as well as validating and adding new block to the global ledger. Mining means to solve a difficult mathematical problem based on a cryptographic hash algorithm. The first one to solve the problem will get an opportunity to add new block. The competition to solve the problem (Proof-of-Work algorithm) to earn reward and the right to record transactions on the blockchain is the basis for bitcoin’s security model. The hash function SHA-256 is the function used in bitcoin’s mining process.

In the simplest terms, mining is the process of hashing the block header repeatedly, changing one parameter (nonce), until the resulting hash matches or is below the target hash. The interesting thing is that the only way to produce a correct hash result is to try again and again, changing the value of nonce until the desired hash result appears by chance.

Let’s take an example. You ask 10 of your friends to guess a number between 1 and 10,000 that you have thought and written somewhere. Your friends don’t have to guess the exact number, they have to be the first person to guess a number less than or equal to your number.

If you are thinking of the number 13 and a friend comes up with 999, s/he lose. If someone guesses 7, s/he wins. Then it is announced to other friends that someone has come up with a correct number, then other friends will simply verify that the guess number is below the target number of not. It is clear that it is hard to find a solution but is very easy to verify that the solution is correct. The bitcoin mining problem is same problem described above except with 64 digits hexadecimal numbers and thousands of computing systems.

Bitcoin Money Supply

Bitcoins are “minted” during the creation of each block at a fixed and diminishing rate. Every 210,000 blocks or approximately every four years the currency issuance rate is decreased by 50%. Initially, the issuance rate was 50 new bitcoin per block. Finally, after 13.44 million blocks, in approximately 2140, all 21 million bitcoins will be issued. This means that total supply of bitcoin is limited to 21 million. Unlike a fiat currency, which can be printed in infinite numbers by a central bank, bitcoin can never be inflated by printing. This is the reason why people compare bitcoin with gold and silver. Initially, people used bitcoin as a medium of exchange only but now they use it as a store of value. Bitcoin as a store of value. Then, can we say Bitcoin as money rather than currency or cryptocurrency? If answer is yes, then take a moment to realize that Satoshi Nakamoto created money with help of technology.

Citations:

1) GoldSilver (w/ Mike Maloney). (2013, February 27). Money vs Currency — Hidden Secrets Of Money Episode 1 — Mike Maloney [Video]. YouTube. https://www.youtube.com/watch?v=DyV0OfU3-FU&t=423s

2) Antonopoulos, A. (2017). Mastering Bitcoin: Programming the Open Blockchain. ‎O’Reilly Media.

3) (n.d.). Bitcoin Mining. Investopedia. https://www.investopedia.com/terms/b/bitcoin-mining.asp