Bitcoin is a peer to peer electronic payment system where you can send and receive payments anywhere in the world in minutes. It’s a monetary system designed to store value, provide a method of payment, and a ledger of accounts run by decentralized software that offers security (to not be hacked by bad guys), fungibility (ability to exchange other goods and services thru payment), scarcity (only 21 million of them ever), immutability (transactions cannot be modified afterwards), censorship resistance (your bank can’t tell you how to spend your bitcoin) as well as a slew of other benefits. It also allows you to be your own bank.
Satoshi Nakamoto
Bitcoin is the blend of many different technologies created by different people over many years and decades including cryptography, hashing, blockchain, proof of work mining, and many people attempted to create a digital cash. But the problem of the double-spend could not be overcome without having a trusted third party verify the transactions. You could counterfeit the money of previous implementations of digital cash and double-spend the same money, and had to rely on an intermediary to manage this and secure the digital currency.
Enter Satoshi Nakamoto. Satoshi Nakamoto is believed to be a pseudonym of an individual or small core group of programmers that wanted to find a solution of the double-spend problem without using a 3rd party intermediary. A trustless, sound method of payment. Satoshi did this through the distributed peer-to-peer network through proof of work by the miners (expending energy, time and resources to add groupings of transactions (called a block) to the ledger on a regular basis, every ten minutes) and verification of that work by the nodes (a simple way to verify the block through hashing). Satoshi published his whitepaper on Bitcoin in 2009, started mining in 2010, others joined the network of miners, and then it simply grew as more people became interested in the technology and its potential. Satoshi also published his whitepaper as opensource software, meaning that anyone can read the code and see its properties. This is how we know that 21 million is the maximum Bitcoin that can ever be produced, not counterfeited, and cannot be changed without consensus by all the nodes.
An interesting note, Satoshi left Bitcoin development in 2011, a case of burnout, and his personally mined Bitcoin (approx 1 million bitcoin of the 21 million ever to be available) has never moved since he left. He up and disappeared like the wind. It is mysterious. It is interesting. It causes conspiracy theories to crop up from time to time. My belief is that it is much simpler explanation why we have not heard from him in 13 years. It’s possible he died. Others known in the maillist that he worked have passed, including Hal Finney. He clearly had been a coder for a long time – his work speaks with an air of experience. Its plausible he was an older programmer, and he just died. Nothing more, nothing less. But we owe a lot to him and his work for creating a monetary experiment that is changing the world.
The Bitcoin Blockchain
You’ve probably heard the term ‘blockchain’. New Bitcoin transactions are placed into blocks of transactions every ten minutes on average by Bitcoin miners. These miners compete with each other to create a block of transactions, and the winners block is then added to the chain of previous blocks of transactions – hence blockchain. The winning miner also is rewarded for their effort with Bitcoin (currently 3.25 Bitcoin awarded per block – this reward gets cut in half every four years creating more scarcity). This blockchain has the history of every block of transactions since the very first block was created. Each new block confirms the previous blocks transactions by verifying and basically making the previous block immutable (or unable to be recalled, charged back, changed, or manipulated). This is the process by which confirmations occur, a new block adds a confirmation to the previous block(s). This process is also known as proof of work – it is an energy intensive process to create the blocks and secure the Bitcoin network – and the results are a proof of work that went into to accomplish this.
In addition to these computers, there are Bitcoin nodes that validate the transactions created by the miners. This validation by a majority of nodes is called Consensus. This consensus validation ensures that the network is secure and that no false or counterfeit transactions are allowed. These nodes also allow you (or anyone else) to connect to the Bitcoin network and interact, and create and verify transactions on your own (this is self-sovereignty, being able to run a banking network on your own without any intermediary or 3rd party interference).
Why is Bitcoin important?
History of money shows it has a tendency to be manipulated and controlled by those in power. The people not in power have to accept and absorb these monetary manipulations. This manipulation can be through inflation, confiscation, censorship, lack of banking options, and even the loss of financial privacy through corporate data sharing of your personal information. Bitcoin is a way to counteract that manipulation. Bitcoin has the properties of money. These properties include Scarcity, Durability, Acceptability, Portability, Divisibility, Fungibility, and Immutability. These concepts are beyond the scope of this writing. Please read Eric Yakes The 7th Property for a detailed analysis on Bitcoin’s monetary properties.
A Note about 21 Million Bitcoin
Bitcoin has a total supply cap of 21 million Bitcoin, ever, basically etched in stone (in computer code), and controlled by majority consensus. The vast network of nodes protect and enforce the code. It cannot realistically be changed, meaning that the number of Bitcoin can never be inflated (thereby decreasing everyone else’s Bitcoin value in the process). Try not to get hung up on 21 Million Bitcoin. While it may be a personal goal of yours to accumulate a whole Bitcoin, there are sub-units of Bitcoin called ‘sats’, short for Satoshis. Think of pennies to a dollar, as sats to a Bitcoin, but instead of 100 pennies, there are 100,000,000 sats per Bitcoin. You can buy fractions of a Bitcoin and receive this in sats. As Bitcoin goes up in value, buying sats will be a more economical way of doing so, and then you can save your sats and build a savings over time (this is known as dollar cost averaging). Thinking you must buy 1 whole Bitcoin is daunting for most people. Buy sats when you can afford it. A term called ‘unit bias’ occurs when people avoid Bitcoin altogether – thinking they can only buy a whole Bitcoin. We have a Bitcoin conversion tool to help you learn the conversion between dollars, Bitcoin and sats.
Bitcoin Layers: On-Chain & Off-Chain
Bitcoin has layers. These layers are currently on-chain Layer 1, and off-chain Layer 2. The On-Chain layer is the process of mining and spending Bitcoin transactions every ten minutes. The confirmation process is vital to the security and immutability of the Bitcoin network. The average ten minute window was created to allow all computers around the world to be part of the mining and confirmation process due to network lag. It takes this amount of time on average for computers to share consensus, and start the process where a transaction can never be altered once posted and confirmed. Ten minutes for final settlement. If you think that is too slow for final settlement, I ask you if you can get final settlement of a credit card transaction in ten minutes? The short answer is no. Credit cards can be charged back for a minimum of 90 days, sometimes even 120 days later. This is one example of the power of Bitcoin On-Chain. This layer also charges fees based on the priority assigned to the transaction. The miners take in these fees for processing transactions to the Bitcoin blockchain. If you want to confirm a transaction fast, you might pay a higher fee. If you want a free transaction (or low cost), you might be willing to wait a couple days for your transaction to be added to a block. It just depends on how fast you want or need final settlement.
However, ten minutes is too long to wait to pay for a cup of coffee. Enter Off-Chain Layer 2 Bitcoin. An instant payment method was envisioned even in the very first discussions of the Bitcoin protocol by Satoshi Nakamoto. But it took many developers many years to put together a plan to implement a Layer 2 solution. This was realized with the Bitcoin soft fork, SegWit, and the Lightning Network was born in 2017. The Lightning Network is a Layer 2 protocol that has several implementations including LND, C-Lightning, and Eclair. Liquid is a Layer 2 protocol also and incorporates Bitcoin payments, stablecoins, security tokens, and other technologies. These Layer 2 protocols allow wallets to be created that transmits Bitcoin on Layer 2 in near instant speed. Many wallets are available that interact with the different protocols as well as between On-Chain and Off-Chain. As Bitcoin becomes ubiquitous, you will see both layers being available at the cash register or point of sale. Large dollar purchases might be paid in Bitcoin, and smaller purchases, say $1000 or less might be paid instantly via a Lightning payment. This layer inherently has lower costs to transmit value. Where On-Chain may see $0.30 or even $40 in some instances to send a transaction, Off-Chain fees are typically measured in sats (fractions of a penny currently). Both layers have their benefits in both time and cost.
For more information, check out the following posts:
How To Get Started as an Individual
How To Get Started as a Business
Our Recommended Reading List
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