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What is Bitcoin?

Posted 2/25/20 by Yan Pritzker

Bitcoin is a peer to peer electronic cash, a new form of digital money that can be trans­ferred between people or computers without any trusted inter­me­diary (such as a bank) and whose issuance is not under the control of any single party. 

Think of a paper dollar or metal coin. When you give that money to another person, they don’t need to know who you are. They just need to trust that the cash they get from you is not a forgery. Typically people do this with physical money using only their eyes and fingers or using special­ized testing equip­ment for more signif­i­cant amounts.

The majority of payments in our digital society are made over the Internet using a middleman service: a credit card company like Visa, a digital payment provider such as PayPal or Apple Pay, or an online platform like WeChat in China.

The movement toward digital payments brings with it the reliance on a central actor that has to approve and verify every payment. The nature of money has changed from a physical object you can carry, transfer, and authen­ti­cate yourself to digital bits that have to be stored and verified by a third party that controls their transfer. 

As we give up our cash for conve­nient digital payments, we also create a system where we give extra­or­di­nary powers to those who would seek to oppress us. Digital payment platforms have become the basis of dystopian author­i­tarian methods of control, such as those used by the Chinese govern­ment to monitor dissi­dents and prevent citizens whose behavior they don’t like from purchasing goods and services.

Bitcoin offers an alter­na­tive to centrally controlled digital money with a system that gives us back the person to person nature of cash, but in a digital form. Bitcoin is a digital asset that is issued and trans­ferred over a network of inter­con­nected computers that each indepen­dently verifies that everyone else is playing by the rules.

Where Did Bitcoin Originate?

Bitcoin was invented by a person or group known by the pseudonym of Satoshi Nakamoto around 2008. No one knows Satoshi’s identity, and as far as we know, they’ve disap­peared and haven’t been heard from for years.

On Feb 11, 2009, Satoshi wrote about an early version of Bitcoin on an online forum for cypher­punks, people who work on cryptog­raphy technology and are concerned with individual privacy and freedom. Though this isn’t the first official release announce­ment of Bitcoin, it does contain a good summary of Satoshi’s motiva­tions.

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. […]

The root problem with conven­tional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat curren­cies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electron­i­cally, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micro­pay­ments impos­sible.

A gener­a­tion ago, multi-user time-sharing computer systems had a similar problem. Before strong encryp­tion, users had to rely on password protec­tion to secure their files […]

Then strong encryp­tion became avail­able to the masses, and trust was no longer required. Data could be secured in a way that was physi­cally impos­sible for others to access, no matter for what reason, no matter how good the excuse, no matter what.

It’s time we had the same thing for money. With e‑currency based on crypto­graphic proof, without the need to trust a third party middleman, money can be secure and trans­ac­tions effort­less. […]

Bitcoin’s solution is to use a peer-to-peer network to check for double-spending. In a nutshell, the network works like a distrib­uted timestamp server, stamping the first trans­ac­tion to spend a coin. It takes advan­tage of the nature of infor­ma­tion being easy to spread but hard to stifle. For details on how it works, see the design paper at http://www.bitcoin.org/bitcoin.pdf

Satoshi Nakamoto

What Problems Does Bitcoin Solve?

Let’s break down some of Satoshi’s post to glean his motiva­tions. 

I’ve devel­oped a new open source P2P e‑cash system

P2P stands for peer to peer and indicates a system where one person can interact with another without anyone in the middle, as equal peers. You may recall P2P file-sharing technolo­gies like Napster, Kazaa, and BitTor­rent, which first enabled people to share music and movies without an inter­me­diary. Satoshi designed Bitcoin to allow people to exchange e‑cash, electronic cash, without going through an inter­me­diary in much the same way.

The software is open source, which means that anyone can see how it works and contribute to it. We don’t need to believe anything Satoshi wrote in his post about how the software works. We can look at the code and verify how it works for ourselves. Further­more, we can evolve the function­ality of the system by changing the code.

It’s completely decen­tral­ized, with no central server or trusted parties…

Satoshi mentions that the system is decen­tral­ized to distin­guish it from systems that do have central control. Prior attempts to create digital cash such as DigiCash by David Chaum were backed by a central server, a computer, or a set of computers that was respon­sible for issuance and payment verifi­ca­tion under the control of one corpo­ra­tion.  

Such centrally controlled private money schemes were doomed to failure; people can’t rely on money that can disap­pear when the company goes out of business, gets hacked, suffers a server crash, or is shut down by the govern­ment.

Bitcoin is maintained by a network of individ­uals and compa­nies all over the world. To shut Bitcoin down would require shutting down tens to hundreds of thousands of computers around the world, many in undis­closed locations. It would be a hopeless game of wack-a-mole as any attack of this nature would simply encourage the creation of new Bitcoin nodes, or computers on the network.

…every­thing is based on crypto proof instead of trust

The Internet, and indeed most modern computer systems, are built on cryptog­raphy, a method of obscuring infor­ma­tion so that only the recip­ient of the infor­ma­tion can decode it. How does Bitcoin get rid of the require­ment of trust? Instead of trusting someone that says “I am Alice” or “I have $10 in my account,” we can use crypto­graphic math to state the same facts in a way that is very easy to verify by the recip­ient of the proof but impos­sible to forge. Bitcoin uses crypto­graphic math throughout its design to allow partic­i­pants to check the behavior of everyone else without trusting any central party.

We have to trust [the banks] with our privacy, trust them not to let identity thieves drain our accounts

Unlike using your bank account, digital payment system, or credit card, Bitcoin allows two parties to transact without giving up any person­ally identi­fying infor­ma­tion. Central­ized repos­i­to­ries of consumer data stored at banks, credit card compa­nies, payment proces­sors, and govern­ments are giant honey­pots for hackers. As if to prove Satoshi’s point, Equifax was massively compro­mised in 2017, leaking the identi­ties and finan­cial data of more than 140 million people to hackers. 

Bitcoin decou­ples finan­cial trans­ac­tions from real-world identi­ties. After all, when we give physical cash to someone, they don’t need to know who we are, nor do we need to worry that after our exchange, they can use some infor­ma­tion we gave them to steal more of our money. Why shouldn’t we expect the same, or better, from digital money?

The central bank must be trusted not to debase the currency, but the history of fiat curren­cies is full of breaches of that trust.

Fiat, which is Latin for “let it be done,” refers to govern­ment and central-bank issued currency, which is decreed as legal tender by the govern­ment. Histor­i­cally, money emerged from things that were hard to produce, easy to verify, and easy to trans­port, such as seashells, glass beads, silver, and gold. 

Any time something was used as money, there was a tempta­tion to create more of it. If someone came along with superior technology for quickly creating lots of something, that thing lost value. European settlers were able to strip the African conti­nent of its wealth by trading easy to produce glass beads for hard to produce human slaves. The same happened to the Native Ameri­cans when the colonists discov­ered the ability to quickly produce wampum shells, which were consid­ered previ­ously scarce by the natives. 

Over time and throughout the world, people realized that only gold was scarce enough to act as money without fear that someone else could create lots more of it. We slowly shifted from a world economy that used gold as money to one where banks issued paper certifi­cates as claims on that gold. Nixon ended the inter­na­tional convert­ibility of the US dollar to gold in 1971 with a tempo­rary order that quickly became perma­nent.

The end of the gold standard allowed govern­ments and central banks full permis­sion to increase the money supply at will, diluting the value of each note in circu­la­tion, known as debase­ment. Although govern­ment-issued, redeemable for nothing, pure fiat currency is the money we all know and use daily, it’s a relatively new exper­i­ment in the scope of world history.

We must trust our govern­ments not to abuse their printing press, but we don’t need to look far for examples of breaches of that trust. In autocratic and centrally planned regimes where the govern­ment has its finger directly on the money machine, such as Venezuela, the currency has become nearly worth­less. The Venezuelan Bolivar went from 2 Bolivar to the US dollar in 2009 to 250,000 Bolivar to the US dollar in 2019. 

Satoshi wanted to offer an alter­na­tive to fiat currency whose supply is always expanding unpre­dictably. To prevent debase­ment, Satoshi designed a system of money where the supply was fixed and issued at a predictable and unchange­able rate. There will only ever be 21 million bitcoins. However, each bitcoin can be divided into 100 million units now called satoshis, producing a final total of 2.1 quadrillion satoshis in circu­la­tion around the year 2140.

Before Bitcoin, it was not possible to prevent a digital asset from being infinitely repro­duced. It is cheap and easy to copy a digital book, an audio file, or video and send it to your friend. The only excep­tions to this are digital assets controlled by middlemen. For example, when you rent a movie from iTunes, you can watch it on your device only because iTunes controls the delivery of the movie and can stop it after your rental period. 

Similarly, your bank controls your digital money. It is the bank’s job to keep a record of how much money you have. If you transfer it to someone else, they autho­rize or deny such a transfer.

Bitcoin is the first digital system that enforces scarcity without any middlemen and is the first asset known to humanity whose unchange­able supply and schedule of issuance is known entirely in advance. Not even precious metals like gold have this property since we can always mine more and more gold if it is profitable to do so. Imagine discov­ering an asteroid containing ten times as much gold as we have on earth. What would happen to the price of gold given such abundant supply? Bitcoin is immune to such discov­eries and supply manip­u­la­tions. It is simply impos­sible to produce more of it.

Data could be secured in a way that was physi­cally impos­sible for others to access, no matter for what reason, no matter how good the excuse, no matter what. […] It’s time we had the same thing for money

Our current methods of securing money, such as putting it in a bank, rely on trusting someone else to do the job. Trusting such an inter­me­diary not only requires confi­dence that they won’t do something malicious or foolish, but also that the govern­ment won’t seize or freeze your funds by exerting pressure on this middleman. 

However, it has we have seen time and time again that govern­ments can and do shut down access to money when they feel threat­ened. It might sound silly to someone living in the United States, or another highly regulated economy, to contem­plate waking up with your money gone, but it happens all the time. I’ve had my funds frozen by PayPal simply because I hadn’t used my account in months. It took me over a week to get restored access to “my” money. I’m lucky to live in the United States, where at least I could hope to seek some legal relief if PayPal froze my funds, and where I have basic trust that my govern­ment and bank won’t steal my money.

Much worse things have happened, and are currently happening, in countries with less freedom.  Banks shut down during currency collapses in Greece. Banks in Cyprus used bail-ins to confis­cate funds from their customer. The govern­ment declared certain banknotes worth­less in India. 

The former USSR, where I grew up, had a govern­ment-controlled economy leading to massive short­ages of goods. It was illegal to own foreign curren­cies such as the US dollar. When we wanted to leave, my family was allowed to exchange only a limited amount of money per person to US dollars under an official exchange rate that was vastly divorced from the true free market rate. Effec­tively, the govern­ment stripped us of what little wealth we had by keeping an iron grip on the economy and the movement of capital.

Autocratic countries tend to imple­ment strict economic controls, preventing people from withdrawing their money from banks, carrying it out of the country, or exchanging it for not-yet-worth­less curren­cies like the US dollar on the free market. This allows the govern­ment free reign to imple­ment insane economic exper­i­ments such as the socialist system of the USSR. 

Bitcoin does not rely on trust in a third party to secure your money. Instead, Bitcoin makes your coins impos­sible for others to access without a unique key that only you hold, no matter for what reason, no matter how good the excuse, no matter what. By holding Bitcoin, you hold the keys to your own finan­cial freedom. Bitcoin separates money and state

Bitcoin’s solution is to use a peer-to-peer network to check for double-spending […] like a distrib­uted timestamp server, stamping the first trans­ac­tion to spend a coin

network refers to the idea that a bunch of computers are connected and can send messages to each other. The word distrib­uted means that there is not a central party in control, but rather that all the partic­i­pants coordi­nate to make the network successful.

In a system without central control, it’s essen­tial to know that nobody is cheating. The idea of double-spending refers to the ability to spend the same money twice. Physical money leaves your hand when you spend it. Digital trans­ac­tions, however, can be copied just like music or movies. When you send money through a bank, they make sure that you can’t move the same money twice. In a system without central control, we need a way to prevent this kind of double-spending, which is effec­tively the same as forging money.

Satoshi is describing that the partic­i­pants of the Bitcoin network work together to timestamp (put in order) trans­ac­tions so that we know what came first. There­fore we can reject any future attempts to spend the same money. 

Satoshi tackled several inter­esting technical problems to address the issues of privacy, debase­ment, and central control in current monetary systems. In the end, he created a peer to peer network that anyone could join without revealing their identity or having to trust any other partic­i­pant.

How has Bitcoin evolved over the last decade?

When Bitcoin launched, only a handful of people used it and ran the Bitcoin software on their computers to power the Bitcoin network. Most people at the time thought it was a joke, or that the system would reveal serious design flaws that would make it unwork­able.

Over time, more people joined the network, using their computers to add security to the network. People started exchanging Bitcoins for goods and services, giving it real-world value. Currency exchanges emerged that swapped Bitcoin for almost every tradi­tional fiat currency in the world. 

Ten years after its inven­tion, Bitcoin is used by millions of people with tens to hundreds of thousands of nodes running the free Bitcoin software, which is devel­oped by hundreds of volun­teers and compa­nies world­wide. The Bitcoin network has grown to secure more than a hundred billion dollars worth of value. 

Computers that partic­i­pate in securing the Bitcoin network are known as miners. They operate indus­trial opera­tions across the world, investing millions of dollars into special­ized mining hardware that only does one thing: ensure that Bitcoin is the most secure network on the planet. 

Miners expend electricity to make Bitcoin trans­ac­tions secure against modifi­ca­tion. Because miners compete with each other for scarce number of bitcoins produced per day, they must always find the cheapest energy sources on the planet to stay profitable. Miners operate in places ranging from hydro­elec­tric dams in the far reaches of China to wind farms in Texas, to Canadian oilfields that produce gas that would other­wise be vented or flared into the atmos­phere. 

Although Bitcoin is highly publi­cized and debated in the media, we estimate that only a few million people in the world have started saving Bitcoin regularly. For many people, especially those who have never lived under oppres­sive regimes, this inven­tion of a new form of digital money outside the control of govern­ment can be very challenging to under­stand and appre­ciate. That’s why we’re here. We want to help you under­stand Bitcoin and own your future!


Featured photo by Marko Ahtisaari, cropped.

This blog offers thoughts and opinions on Bitcoin from the Swan Bitcoin team and friends. Swan Bitcoin is the easiest way to buy Bitcoin using your bank account automatically every week, month, or paycheck, starting with as little as $10. Sign up or learn more here.

Yan Pritzker

Yan Pritzker is the co-founder and CTO of Swan Bitcoin, the best place to buy Bitcoin with easy recurring purchases straight from your bank account. Yan is also the author of Inventing Bitcoin, a quick guide to why Bitcoin was invented and how it works.[

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