Bitcoin 101 (cryptocurrency basics)

Super WIP. Might just be a bullet-point list while I formulate thoughts and make time to write more extensively.

Full disclosure: this post is about Bitcoin. A lot of what I am saying about Bitcoin may be viewed as advocacy. As such, I’d also like to disclose that I have Bitcoin. I also don’t have an economics degree, specialty in cryptography, or anything else like that. Not really trying to sell you anything; mostly just explore my thoughts and maybe educate some friends.

Starting simple.

Let’s talk Bitcoin. More generally, let’s talk about “cryptocurrency” with a focus on Bitcoin.

Cryptocurrency: a digital asset with cryptographic techniques employed to verification of transactions, regulate the generation of the money, etc.

The “WHY” of cryptocurrency

Before talking too much about what Bitcoin is, let’s talk a bit about the why of cryptocurrencies: why even bother? Why use crazy, new tech versus age-old cash?

Banking for the under-banked

  • Billions of people are under-banked. If Gallup us to be believed, only about 62% of the world’s adult population (roughly 2.7 billion people) have an account at a formal financial institution. The thing is… while 62% doesn’t seem too awful, that’s roughly 1.63 billion people who aren’t included in the global financial system [system? market? …?].
  • Beyond that, a lot of people who have an account simply have very limited access to the account – no banks nearby, inconvenient hours, etc.
  • With Bitcoin (digital money in general), you just need connectivity (and a bit of arithmatic to actually manage the money). If you’re thinking “connectivity is hard to come by”, look no further than how wide-spread cell phones are. Even in the poorest, seemingly most disconnected places, you’ll often find an old Nokia phone shared by an entire village [TODO citation of some kind or something…].
  • Digital currencies are already being used heavily in unexpected places – check out M-Pesa, a Kenyan-based mobile phone-based money transfer system with huge popularity.
  • Even if a bank might have been available, some people don’t have enough wealth (or aren’t in good enough standing) for the banks to be interested in giving them account. There are arbitrary restrictions as to who can use Bitcoin.

More secure than credit cards*

*may need better wording

  • When you use a credit card online, you’re giving away all its secrets. With Bitcoin, it’s the opposite: value is simply transferred with no possibility of “reversing” the payment (other than to manually send it back).
  • As mentioned, there are no chargebacks with Bitcoin. Bitcoin (and cryptocurrency in general) places a lot of responsibility on the users.
  • Note: Bitcoin doesn’t replace credit or other forms of digital money. There’s still use for parties like credit card companies to be middlemen in this whole thing, but they’re a lot more like escrow companies in this model.

As private as the user wants

  • Since there’s no gatekeeper or required information to create a new ‘account’ for Bitcoin, and no name associated with an ‘account’, it starts off with a lot of anonymity.
  • While all transactions can be traced in Bitcoin’s public ledger, obfuscation and added anonymity isn’t difficult to achieve.
  • Don’t mistake “can be anonymous” with “is completely anonymous”. Like with any metadata, get the right data and one can accurately be unmasked.

“It’s harder to track made in bitcoin than it is to, say, Visa payments or something. But it’s a lot easier than it is with cash. And because you have this unbroken record of where is moved, generally speaking, combine that with other policing and you can actually stop crime much easier than you can with cash […]” - Alex Tapscott in his talk at Google.

No trusted third party needed

  • Because of Bitcoins network design, no trusted third party is needed to transfer value between two individuals. That is to say: no need for a PayPal, VenMo, or any other company. One person simply makes a transaction and the Bitcoin network fulfills it – everyone is equal.
  • This means that businesses like PayPal won’t cut off funding from business owners, as they’ve been one to do (many, many times) in the past.
  • In an even grander sense: it also means that there’s no real barrier for international value transfers. Imagine being able to donate directly to someone across the globe - how something like microfinancing might completely change the way of life in some places in the world. And suddenly it’s possible, because there’s no third party needed.

(TODO: add more “why” of cryptocurrency to list above?)

What is Bitcoin?

In brief:

Bitcoin is a cryptocurrency and payment system. Bitcoin is a network of computers which maintains a ledger (think: a spreadsheet that keeps track of which accounts have how much money). The ledger’s primary purpose is to track which accounts have how much bitcoin.

  • While Bitcoin isn’t the first digital money or even the first cryptocurrency, it is the first decentralized digital cryptocurrency.
  • No person or organization owns or controls Bitcoin.
  • Any computer which joins the Bitcoin network is treated as an equal.
  • Any user in Bitcoin’s network is able to create new accounts (with which to store bitcoin in).
  • Any user in Bitcoin’s network can send or receive transactions.
  • In other words: the Bitcoin network has a flat hierarchy.
  • Because of the lack of central authority, the network operates on rules and network consensus. These rules are very important to maintaining a fair balance of power on the Bitcoin network.
  • Because the network is decentralized, it becomes more and more difficult for any single entity to control the network as more computers join the network. This is because both the data and work of Bitcoin’s network is decentralized and distributed, and all the computers in the Bitcoin network work to collectively maintain the integrity of the network.
  • Every user in Bitcoin’s network has access to the entirety of the public ledger – giving every user a copy of every transaction ever performed on Bitcoin’s network. This complete transparency of data is what gives Bitcoin a lot of value: the decentralization and transparency prevents the history of all transactions from being changed.
  • Bitcoin’s transparent ledger, combined with modern cryptography, helps enforce the Bitcoin network’s integrity. This means that nobody can “hack” Bitcoin (in theory). For example: there’s no way “hack” bitcoin to give your accounts more bitcoins, nor could bitcoin’s history of transactions themselves be “hacked”, etc.
  • Bitcoin transactions (i.e. the sending of bitcoin between accounts) also provides a way to include misc data, so a user can include other information in the ledger as well. Since the ledger is unable to be changed (“immutable”), being able to put data into the network also becomes very valuable (because that data cannot be changed and has a verifiable copy on every computer in Bitcoin’s network).
  • Bitcoin are produced through a process “mining” (explored this more in-depth later). Any user can be involved in the mining process to earn Bitcoin, though the people that become involved, the harder it becomes to profitably mine for bitcoin (i.e. it might cost more in electricty to mine bitcoin than it would cost to simply purchase bitcoin from someone who already has it).

If Bitcoin is money, what is its value?

The value that Bitcoin offers is the value of the integrity of its data. The value Bitcoin has is the value people give it – Bitcoin, like most things, is worth whatever people are willing to pay for it. That being said there are costs associated with sending and verifying bitcoin transactions, generating new bitcoin, and generally maintaining the bitcoin network (think: real world costs like electricty, computers, and time) which help drive a base value for Bitcoin.

Another aspect to consider is simple supply and demand: only 21 million Bitcoin will ever exist (be produced). Assuming Bitcoin’s popularity goes up, its supply becomes increasingly more constrained. This means Bitcoin is deflationary (in theory).

TO BE CONTINUED














  • Instead of just “what/how”, cover the “why” of cryptocurrency
    • Enables banking for billions of under-banked people
    • No inflation; deflationary
    • No chargebacks
    • More secure than credit cards (this point probably needs better wording)
    • As private as the user wants it to be
    • No trusted third party needed for a value transfer between two parties
    • Opens the door for a wave of decentralization (because doing value transfers without a third party wasn’t viable before)
    • Low transfer rates (less than $1 for just about any amount)
  • Bitcoin
    • Bitcoin (network/protocol/technology/community) vs bitcoin (currency/unit)
    • Who is Bitcoin? Someone obviously must make it. (open source software, Bitcoin core, spinoff projects)
  • Blockchain
  • Consensus rules
  • Full nodes
  • Transaction chain
  • Wallets
    • HD wallets
    • Hardware wallets
    • Multisignature wallets
  • Obtaining bitcoin
  • “Getting rich on bitcoin”
    • What probably draws most people to Bitcoin
    • Personally, I’m more interested in bitcoin’s applications more than its speculative investment value
    • This isn’t investment advice
    • Getting rich is a possibility, but pretty speculative
    • “Investing in education instead of speculation” by Andreas Antonopoulos
    • ETF (Winklevoss ETF)
    • 75% of bitcoin have already been mined (fixed supply; deflationary)
    • Economic crises may drive value into bitcoin
  • Related concepts:
  • Related political concepts:
    • Cashless societies (potentially authoritarian)
    • Very libertarian
  • Future of bitcoin
    • Lightning Networks
      • “instant” transactions
      • effectively makes transaction fees zero
      • Lightning networks could be used to stream money. i.e. get paid by the minute.
      • related: Rootstock, TumbleBit, etc?
  • Unorganized thoughts:
    • Internet of things
    • Normal skepticism
      • [FALSE/MYTH] “Bitcoin was hacked” – keep hearing this (anecdotally).

Related reading/watching:


misc scratch

Why full nodes?

Participate in the Bitcoin, Litecoin, or Ethereum network. Full nodes, SPV wallets, cold storage, offline transaction signing.

Bitcoin SPV wallet - “Simplfied Payment Verification” - wallet which connects to full nodes

A Bitcoin implementation that does not verify everything, but instead relies on either connecting to a trusted node, or puts its faith in high difficulty as a proxy for proof of validity. http://en.bitcoin.it/wiki/Scalability#Simplified_payment_verification http://en.bitcoin.it/wiki/Thin_Client_Security#Simplified_Payment_Verification_.28SPV.29 http://www.raspnode.com/ http://www.coindesk.com/bitcoin-nodes-need/ https://en.bitcoin.it/wiki/Clearing_Up_Misconceptions_About_Full_Nodes https://bitcoin.org/en/full-node https://www.reddit.com/r/Bitcoin/comments/5owd6h/run_a_node_now_its_easy_simple_and_cheap/dcmkfmf/ https://www.reddit.com/r/Bitcoin/comments/5ovpty/200000_readers_vs_5200_nodes/

51% attacks

You have to keep up the 51 percent indefinitely in order to disrupt the chain. (via https://www.reddit.com/r/Bitcoin/comments/5n4520/a_new_proofofwork_mechanism_that_can_shield/dc8ldxe/)

Bitcoin innovations

There are really three core innovations that underlie Bitcoin: peer-to-peer networking, blockchains, and consensus mechanisms. Of these, peer-to-peer networking is generally nothing new, and blockchains are merely novel ways of storing and validating data. source

the genius of using well-known technology

The thing is that Bitcoin is an amalgamation of many ideas that have been kicking around for a long, long time. I read about electronic cash somewhat similar to Bitcoin as early as the 1980’s in a copy of Byte magazine (at least the transaction business and many of the record keeping ideas to avoid double spending). Other ideas like cryptographic proof of use date back to HashCash and several cryptographic ideas that have also been kicking around for much longer. The genius that Satoshi had was to put all of these ideas into a coherent whole in a new and interesting way that became Bitcoin. via https://www.reddit.com/r/Bitcoin/comments/5l66a7/satoshis_lesson/dbtpwwg/

Segwit

What is a “witness”?

What a “witness”?

https://www.reddit.com/r/Bitcoin/comments/5pzgxy/i_hear_the_term_witness_thrown_around_a_lot_in/

https://en.wikipedia.org/wiki/Witness_(mathematics)

Blockchain non-monetary uses

Stats

Bitcoin addresses