Bitcoin is the most popular cryptocurrency by market capital and many people think of it when they hear the term “cryptocurrency”. This is due to its market dominance and age. However, the details of the coin are often lost in the shuffle. Many people think of Bitcoin simply as “internet currency,” which is fine for the general public. However, Bitcoin is about something much more important. It’s important to understand what Bitcoin is.
A Short Prehistory
Bitcoin was the first cryptocurrency to become mainstream. However, it wasn’t the first cryptocurrency. Let’s first define what this word actually means. Cryptocurrency’s “crypto” has the same root as “cryptic” or “cryptography”. It means secret or coded.
A series of computer signatures coded together give each cryptocurrency a unique identity. It is helpful to think of them like serial numbers on U.S. dollars bills. We’ll discuss the details of this process later.
There were many internet currencies and credit before Bitcoin. We won’t get into too many details, but Nick Szabo’s bit of gold is worth mentioning. In 1998, Szabo wrote that digital currencies could be greatly improved by incorporating cryptographic signatures. This would make each coin unique, and prevent thefts, double-spending, and copying.
Nick Szabo’s Profile
Szabo also developed the idea for a smart contract. A smart contract is a digital agreement between two parties that can only be executed using the code. The analog version, a vending machine, is probably familiar to you. The vending machine has all the information it needs to make a deal between you, the vending machine stockist, and its cogs. The vending machine will automatically give you the candy bar or bag with chips that you choose if you enter the correct amount of change. Smart contracts work in the same way.
Satoshi Nakamoto
You might be surprised to learn that Bitcoin’s creator is not known. Even that is a little misleading. Satoshi Nakamoto, an entity claiming to be Satoshi Nakamoto, published a paper in 2008 that introduced the basics of Bitcoin. It was granted an internet domain and Nakamoto began producing Bitcoins shortly thereafter.
Who is Satoshi Nakamoto
It is not clear who or what Nakamoto is as the creator of Bitcoin has not made his-, hers-, or himself public. Szabo is one of the suspects in Nakamoto’s identity. However, it is equally possible that Nakamoto was either a group of people or a corporate entity.
It is important to remember that Bitcoin was built on prior work in cryptography and digital currencies, but it combines them in a novel and ultimately useful manner.
Proof-of-Work Mining
How new Bitcoins are created is one of the key factors in understanding Bitcoin and its value. This is known as proof-of work mining and is done by computers.
Bitcoin Mining
Each Bitcoin (and many other cryptocurrency types) has a unique digital signature. This signature is created by computers solving complex mathematical problems. These Bitcoins are highly valuable because they represent significant computer work, time and electricity spent on large math problems. A block is a series of bitcoins that are created when a computer solves a problem. Bitcoins cannot be created simply by pressing “copy, paste” repeatedly.
The math problems were relatively simple to solve in the early days Bitcoin. They could be solved on any standard computer. These computers are called application-specific integrated circuits (or ASICs). These problems get more difficult over time, so Bitcoin is generated primarily by extremely powerful computers designed for the task. This simply means they were created with the sole purpose of solving Bitcoin’s unique math problems. They are costly – they can cost thousands of dollars each – and consume a lot electricity and produce a lot heat.
Bitcoin is Big. Bitcoin is a huge deal because it does not rely upon a trusted third party like traditional fiat currencies. The U.S. dollar bill is nothing more than paper and cloth. It has no real value. Its value is derived from the U.S. government’s promise to it that it is worth whatever it is printed on.
Fiat currency
It is difficult to spend any money without involving a third party, usually a bank or payment processor. This ensures that transactions are valid and keeps money in reserve. It also allows for it to be stored securely.
This system was broken by Bitcoin. It allowed people to exchange money with no intermediary. A Bitcoin was only one Bitcoin in its purest form. It was worth exactly one Bitcoin regardless of whether it was spent in Japan or the U.S. It didn’t require approval from a bank or government.
This brings up another important aspect of Bitcoin. Bitcoin is a decentralized blockchain. This means that every transaction made in Bitcoin is recorded in a long string. It is also distributed, meaning it is stored on many computers and servers belonging to different Bitcoin users. This basically means that it is difficult to shut down the Bitcoin network. This string is transparent, verifiable, and open to all. Because Bitcoin is spread over many computers, it would not be destroyed if a bank fails or a government bans it.
Another thing is that Bitcoin is anonymous. This is different from private. Bitcoin transactions can be viewed on the blockchain. However, it is difficult to tie a specific Bitcoin owner to a transaction.
This led directly to the Silk Road black market, which was one of the most important uses for Bitcoin.
Silk Road: Boom and Bust
Silk Road was an online marketplace that sold illegal drugs, guns, and other items. federal authorities. Despite being in operation, Bitcoin was the preferred currency due to its untraceable nature. U.S. eventually shut it down. Every Bitcoin carries a secret code that makes it difficult to trace its owner. It is difficult to stop Bitcoin flowing completely because the Bitcoin network is decentralized.
Although the Silk Road is no longer in existence, it was a successful early use case for digital currency. It proved that Bitcoin could be used beyond the traditional borders of banks and governments. It also held its value well, despite the unsavory company it kept.
The Future of Bitcoin
This is a brief introduction of Bitcoin. We’ve covered its history, how new Bitcoins are created and its first major use case. The Bitcoin story is still unfolding and it’s a rich one. These are the basics of Bitcoin. Now you can follow along.