Burgeoning new technologies always seem to stump us. One can easily imagine with every ground-breaking technology (internal combustion engine, gunpowder, incandescent lights) there is always some confusion about it. I think looking back on these technologies we have a bias of knowing more about it now than people did then. We forget until there is a new ground-breaking technology, that those people 100 or 1,000 years ago had the same feelings we do now. We feel made vulnerable by new technologies. We feel left behind a bit. Possibly the most common truth of new technologies is also the most overlooked when looking back. It is that people did not yet know all of the uses of that invention. Bitcoin is no different. Here, we will now try to remove some of the shroud around Bitcoin, without getting too deep into the world of coding and computer science.
Bitcoin was first announced in a paper by its inventor Satoshi Nakamoto in October of 2008. The original paper can still be found at https://Bitcoin.org/Bitcoin.pdf. In January of the following year, Nakamoto released the Bitcoin open source software, meaning it was free to use by anyone and not held by copyright laws. The idea of a cryptocurrency has been around since the late nineties, however like many novel ideas it took some time for the technology to catch up to the idea. The specific identity of Satoshi Nakamoto is unknown. He has said he is a Japanese man living in Japan. However, several cryptographers have analyzed his code and language patterns and think it more likely that he lives in Europe or America, and even doubt his Japanese origin. The official Bitcoin website deals with his anonymity by saying his actual identity is “probably as relevant today as the identity of the person who invented paper.” True too, as there is no owner or controller of Bitcoin owing to its open source nature.
As mentioned above, the idea of a cryptocurrency has been around since 1998. It was originally credited to Wei Dai, a computer engineer who is cited as the inventor on at least 2 Microsoft patents. He created the cryptocurrency b-money in 1998, but it failed to stand the test of time. He was however, heavily relied upon when Nakamoto was creating Bitcoin. A cryptocurrency is basically defined as a digital medium of exchange that is secured using cryptography (a fancy way of saying secure online transactions, the word is taken from Greek meaning “secret writing”.) The allure of a cryptocurrency is that it is decentralized and untraceable. This is to say, there is no nation or financial institution controlling it. Bitcoin is run opensource so any programmer can review and write into it. Also, the fact that it is untraceable lets the users make transactions that they do not want tied to them, or purchase illicit goods. The abstract from Nakamoto’s paper from 2008 spells out the intent of Bitcoin as well as his motivation behind it. Here is an excerpt:
-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. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network.
One of the biggest pieces of history in the saga of Bitcoin is the “Silk Road”. The Silk Road was a black-market website operated as a Tor hidden service. Tor (The Onion Router) is a free software that users can use to browse the internet anonymously. It browses a side of the internet frequently known as the dark web and renders users anonymous by relaying web traffic through several thousand other systems to mask the users IP. Silk road was launched in 2011 and within months became the go-to place for underground, online, transactions. It was a huge market place for illict drugs, fake drivers licenses, child porn, and even the occasional assassination. Between its launch and subsequent closure by the FBI in 2013, there were over a million transactions completed on the silk road. This added up to 9,519,664 Bitcoins traded on the site and the commissions from the sales generating 614,305 Bitcoins ($172 billion and $11 billion by today’s value of Bitcoin.)
One of the beauties of Bitcoin is in the approval and security of transactions. Rather than a vendor contacting a bank to ensure the requisite funds are in the account, the users have a heavily encrypted communication between their two respective wallets (wallet is the name given to the account in which the Bitcoins are held.) The picture below from the Bitcoin website shows the general concept of how this encryption works.
Caution: Technical jargon. When a transaction occurs, it is included in a block chain. Embedded in the block chain is a chronological order of transactions as well as a signature on each transaction which guarantees the authenticity of the account. Basically, when you submit a Bitcoin transaction it is bounced through a bunch of other computers to hide your identity, but holds a signature to show that it is truly the account it was supposed to be. All of this encryption and transference of data requires a massive amount of computing. This processing power is achieved by using a distributed consensus system. Which in layman’s terms means it is crowd sourced. This crowd sourcing is what gives the Bitcoin system all of its anonymity and secrecy. It means that no one user has too much access. The crowd sourced processing is, also, how new Bitcoins are generated.
Caution: Maths incoming. As a reward system for lending your processing power to Bitcoin transactions, you originally received 50 Bitcoins for every block chain you unlocked (a process coined “mining”.) The reward for unlocking a block halves every 210,000 blocks unloakced, which equates to roughly a 4-year timespan. As of 2017, there are just under 17 million Bitcoins in circulation. The maximum number of Bitcoins allowed by the code is 21 million. The number of Bitcoins mined per year will drop every four years by virtue of the reward system. Simply put, every 4 years the reward is halved, so the number of Bitcoins added to circulation is halved. Various estimates for when all 21 million Bitcoins will be in circulation converge somewhere around the year 2120. The power it takes to unlock a single block chain is also variable, but a rough estimate is somewhere around 2,000,000,000 attempts.
Since the ability to mine Bitcoins is fairly straightforward, many have jumped on the train to set up computers for mining Bitcoins. In the early days of Bitcoin, it was fairly easy to do with limited processing power. However, as the number of transactions went up, and the reward went down, it has become increasingly difficult to monetize mining operations. Today, a fully self-sufficient mining rig would cost around $15,000. However, many miners take a more budget oriented route and join massive mining pools. The idea being that hundreds of people will lend their processing to the pool, which will divide up the proceeds in proportion to your contribution. At the time of writing this, a budget computer to join a mining pool could be built/purchased for about $300 which would generate about a dollar a day. However, as with most heavy computing systems, they generate a lot of heat. A raspberry pi (a sort of DIY computer that can be set up to do anything you program it to do) set up to do Bitcoin mining can easily overheat and melt itself down if not properly cooled. This brings into the equation a consideration for power consuption. It is a very tight economic balance between the money generated by Bitcoin mining and the money spent powering the necessary computing and cooling systems.
Bitcoins, whether they be mined or purchased to use in transactions, are held in wallets. These wallets are secured with advanced cryptography and are supposed to be above reproach. However, as with any unsinkable ship, hackers have broken into many Bitcoin wallets. Hackers have stolen millions of dollars’ worth of Bitcoins. Since Bitcoins are decentralized and not backed up by any security, if stolen they are lost for good. There is no law enforcement or insurance at play like with a credit card or bank account that is hacked. If your Bitcoin wallet is hacked and compromised, those Bitcoins are lost for good. It is very similar to someone stealing cash from you. There is no real way to prove the Bitcoin “Joe Blow” is using is the Bitcoin that was stolen from your wallet.
SO! Bitcoin represents the first online, decentralized, “crypto” currency to be available to the masses. Since its inception, it has been viewed with skepticism and scorn. In its brief 8-year history it has steadily worked its way into more and more legitimate markets. It is heavily traded by Wall Street traders, much like any other commodity. Today, many online vendors accept Bitcoins. everybody from OKCupid to Dominoes have set up the ability for its users to pay using Bitcoins. While nothing is certain in technology, especially not after only existing for only 8 years, Bitcoin seems like it will be here for the long haul. Many are saying Bitcoin, and what it represents, will be the future of money. A form of payment that is not linked to any particular nation or organization. A money that does not draw its value from any real basis and is not influenced by political regimes. Or, maybe it is just the next tech bubble that will exist as long as the hype is up around it and will be looked back on in ten years as a failed experiment. No one can say for now. It is natural, when there is a new technology that is out of the ordinary, to wonder about it. It is normal to view it with a little skepticism. It is only through our curiosity that we discover these things, and through that same curiosity that we must demystify them once they are presented to us. If like me, you have found yourself wondering about Bitcoin and the future of cryptocurrency you can feel at home. Many have and many will. We started this saying “what the %@#$ is a Bitcoin”, And Now You Know.