Foundation of Bitcoin

Written by Krisztian L.

May 9, 2020

Bitcoin is thought to be a really complicated story while it is in fact a lot easier. In short, for understanding the basics, it is a new technology combining a few previous inventions that are used almost every single day. 

We can think of it as a payment system as it allows transferring money in a simpler way than through banks or credit cards. It is also usually referred as “digital gold” or “Gold 2.0”, but it comes without the difficulties of having and using gold as payment. For last, it has special traits like the Internet; as it is decentralized no one controls it and it is accessible for everyone.[1]

Bitcoin was invented by Satoshi Nakamoto with the publication of “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008. He introduced the system as “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.”[2] 

He created the Bitcoin code in a way that it is available to anybody (open source) without secrets and since then the system was further developed.[3] Satoshi’s key innovation was the „Proof-Of-Work” algorithm, a distributed computation system which creates a decentralized network. It was also a solution for double-spending which was the digital currencies’ weakness.[4]

Before Bitcoin, commerce on the Internet relied on financial institutions – the trusted third parties – to process electronic payments. Using online payments the payment uncertainties cannot be avoided without a mediator which increases transaction costs. The transactions are reversible with which the trust spreads and the merchants have to wary their customers. However with the use of Bitcoin, sellers are protected from fraud with non-reversible transactions. According to Nakamoto that is why an electronic payment system was needed that is based on cryptographic proof instead of trust. The network creates timestamps and generates proof of the chronological order of transactions. It is also forming a record which cannot be changed. This is a secure system as long as the majority of CPU powers are controlled by groups of non-attackers.[5]

Bitcoin was started in 2009 and the distributed computation processing capacity increased exponentially and now exceeds the power of the world’s top super-computers. This provides the security and resilience of the bitcoin network.[6]

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Bitcoin can be seen as the basis of a digital monetary system and a computing innovation. In the bitcoin network bitcoins (units or fractions of a Bitcoin) are used to store and transmit value between parties using the bitcoin protocol which is mainly the Internet. The technology is easily accessible as the protocol can be run on different computing devices like smartphones. Compared to traditional currencies like fiat money, everything can be done with bitcoins from selling or buying goods to transferring money with a more secure system. Also, they can be exchanged to fiat money on specific sites. Bitcoins, like other cryptocurrencies are totally virtual and are stored in digital wallets from where transactions can be made. Users have their own keys to unlock their wallet, so the control is completely in their hands. The bitcoin network is an entirely decentralized peer-to-peer system, so no one controls it.

In sum, Bitcoin “[…] is the perfect form of money for the Internet because it is fast, secure, and borderless”.[7]

The real person behind Bitcoin still remains unknown but goes with the Satoshi Nakamoto alias. In 2011 he withdrew himself from the public and volunteers got the responsibility of further developing the code and network. He left behind a ground-breaking invention that is completely based only on mathematical principles without the control of anybody, including him.

Bitcoin can be seen as the basis of a digital monetary system and a computing innovation. In the bitcoin network bitcoins (units or fractions of a Bitcoin) are used to store and transmit value between parties using the bitcoin protocol which is mainly the Internet. The technology is easily accessible as the protocol can be run on different computing devices like smartphones. Compared to traditional currencies like fiat money, everything can be done with bitcoins from selling or buying goods to transferring money with a more secure system. Also, they can be exchanged to fiat money on specific sites. Bitcoins, like other cryptocurrencies are totally virtual and are stored in digital wallets from where transactions can be made. Users have their own keys to unlock their wallet, so the control is completely in their hands. The bitcoin network is an entirely decentralized peer-to-peer system, so no one controls it.

In sum, Bitcoin “[…] is the perfect form of money for the Internet because it is fast, secure, and borderless”.[7]

The real person behind Bitcoin still remains unknown but goes with the Satoshi Nakamoto alias. In 2011 he withdrew himself from the public and volunteers got the responsibility of further developing the code and network. He left behind a ground-breaking invention that is completely based only on mathematical principles without the control of anybody, including him.

Reference

[1] What is Bitcoin, Learning Portal of Luno, https://www.luno.com/learn/en/article/what-is-bitcoin

[2][5] Nakamoto, S.: Bitcoin: A Peer-to-Peer Electronic Cash System, 2008, https://bitcoin.org/bitcoin.pdf 

[3] Where did Bitcoin come from?, Learning Portal of Luno, https://www.luno.com/learn/en/article/where-did-bitcoin-come-from 

[4][6][7] Antonopoulos, A. M.: Mastering Bitcoin, Unlocking digital crypto-currencies, Early Release, O’Reilly Media Inc., Sebastopol, California, 2010

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