Bitcoin has always been at the forefront of cryptocurrencies. Since 2008, when it was first presented by — the until today unidentified — Satoshi Nakamoto (it is not clear yet whether Satoshi Nakamoto is one person or a group of people), noise always surrounded this famous digital asset. On the one hand, Bitcoin became very popular since it is a decentralized digital currency that can be sent from user to user (peer-to-peer) directly without intermediaries (financial institutions or administrators). On the other hand, the fact that Bitcoin’s ownership was anonymous (at least during the beginning) paved the way for its misuse on the dark web and its vilification. With this in mind, we will dive deeper into the core of Bitcoin and try to analyze the technical aspects of Bitcoin in an attempt to understand what it is.
What is Bitcoin ? (A very simple explanation)
Firstly, let us define what is Bitcoin in simple terms. For those users that have absolutely no idea about coding (computer programming) and the technicalities of digital products in general, this is the simplest way to define Bitcoin. (You can also view the video below as suggested by bitcoin.org to get a general idea about Bitcoin). Simply put, Bitcoin is a representation of a group of information (data). The data represented by Bitcoin are online financial transactions. These data are recorded in chronological order and categorised in small chunks called blocks that altogether form a sequence or else chain (the blockchain). Many blocks constitute larger groups represented by a digital coin that is called Bitcoin.
What is Bitcoin and why was it created? (according to Satoshi Nakamoto’s paper)
Satoshi Nakamoto created Bitcoin to solve the problem of double-spending in online transactions. In his original paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” Nakamoto suggested electronic peer-to-peer cash to avoid double-spending by eliminating financial institutions as intermediaries. According to Satoshi Nakamoto, financial institutions are using the Trust-Based Model in online transactions. Nakamoto postulates that the Trust-based model the following flaws.
Firstly, increased transaction fees due to the involvement of intermediary parties.
Secondly, loss due to inability to address the problem of “non-reversible payments for non-reversible services”.
And finally, loss tolerance up to an amount due to inevitable fraud.
According to Satoshi Nakamoto, such flaws do not exist in transactions that use cash. Therefore, he outlines the need for an electronic payments ecosystem that would resemble the physical (cash) ecosystem. His proposal is a payment system based on cryptographic proof instead of trust that would allow any two parties to transact with each other, directly without the need of a third party. Moreover, sellers would be protected from fraud by transactions that would be computationally impractical to reverse, while buyers would be protected by “routine escrow mechanisms” that could be implemented accordingly. Furthermore, Nakamoto provides technical details with respect to the implementation of a peer-to-peer timestamp server that would generate computational proof of the chronological order of transactions and outlines that the system would be secure as long as “honest nodes” collectively own more CPU power than “attacker nodes.”
Some thoughts about Bitcoin
Bitcoin is a very well structured idea that could solve a problem. All of the crazy headlines that colour Bitcoin with dark shades or bright light have nothing to do with its true nature. Bitcoin’s representation as the coin of the villains is far from true as every transaction on the chain contains detailed information given during the transaction. Therefore, if a transaction takes place on a specific platform (i.e. an e-shop), will this platform provide information about the user? As an example, one of the darkest uses of Bitcoin happened on the Silk Road marketplace, a completely anonymous Darknet black market website for buying or selling illegal products or services.
Concerning Bitcoin’s value, it is irrelevant to the original purpose of Bitcoin. There was always uncertainty concerning Bitcoin’s value. Several factors made this digital asset’s price volatile. Firstly, several cases of past Bitcoin’s misuse resulted in negative press announcements and led to a phobia of adoption in the early years. However, since the structure of Bitcoin ensures that every piece of past, present and future data was, is, and will always be available, this phobia is not present anymore. Secondly, financial markets transformed Bitcoin into a product for sale. As a result, a non-stop price rally led the price of Bitcoin to around 40,000.00 USD as of today.
Moreover, this massive Bitcoin adoption led to the creation of numerous other cryptocurrencies and similar products. In other words, the genesis of Bitcoin resulted in the creation of a new economic ecosystem, a crypto ecosystem. After Bitcoin was created, several other cryptocurrencies emerged such as Ethereum, Litecoin, Tether, Dogecoin, and others. Additionally, various relevant products entered the crypto ecosystem. Some of them are Stablecoins, Tokens, Social Money, Smart Contracts, Yield Aggregators, NFTs and collectibles, and plenty more. Not to mention the numerous cryptocurrency exchanges that entered the crypto space. According to Coinmarketcap, some of the top cryptocurrency exchanges ranked by volume are Binance, Huobi Global, Coinbase, Kraken, Bitfinex, and others. Furthermore, the Blockchain which is practically a Nakamoto invention is considered a highly efficient way of storing information as all records are “linked together using cryptography”. This is why there are numerous applications of the blockchain apart from cryptocurrencies such as smart contracts, financial services, video games, energy trading, supply chain, anti-counterfeiting, healthcare, domain names, music distribution, the insurance industry, IoT and others.
Bitcoin and the technology around it changed the past, shape the present and will affect the future of finance and technology. Will the effects of this technology be positive or negative? Is this technology good or bad? The answer to these questions is that the technology itself is neither good nor bad. Technology is merely a tool. The matter is who uses this technology and for which purpose.