INTRODUCTION
The internet came into existence to serve as the infrastructure that allowed the sharing of files between prominent research institutions. Today, the scope goes beyond a few computers and connects the entire world. Web 2.0, the next evolution of the internet, gave us technologies such as social media. Further innovation has brought us to the early stages of Web3. The backbone of Web3 is blockchain technology. Much of the information needed to understand blockchain technology can be found in the Bitcoin white paper.
DIGITAL CASH
After reading the Bitcoin Whitepaper written by Satoshi Nakamoto, we learn that Bitcoin is an extension of Hashcash. Further research teaches us Hashcash is a “proof of work” algorithm: the foundation of Bitcoin. Hashing is a cryptographic method in which data is converted into a digital string (hash). Satoshi’s vision was to create a payment system that did not rely on a middleman. Bitcoin was meant to be a payment system that relied on cryptography rather than trust. By design, a total of 21 million bitcoin will ever exist. This creates a deflationary ecosystem which theoretically should inflate price due to scarcity.
TRUST
The whitepaper explains how a trustless system can be achieved. While one my envision some sort of digital image signifying a coin, the bitcoin ‘blockchain’ is simply a chain of digital signatures. No central authority is needed to verify possession of bitcoin. When creating a bitcoin “wallet”, a series of words are created. These words are turned into a hash string, and this hash string becomes the way in which an owner of bitcoin interacts with the system. In the system, participants use their hash strings as digital signatures (keys) which are used to transfer the coin. Further, the system solves the problem of “double spending” without the needs of a centralized “middle man”. The solution is the use of a “time stamp server” that requires a network to compete through a “proof of work” model.
PROOF OF WORK
When a new transaction occurs, it is broadcast to all the nodes that compose the network. A node can be a single computer or a group of computers. Each node places all of the transactions into a block. Using cryptography, the nodes compete to create a “proof of work” in the form of a hash. The first node to successfully solve an equation signifies the current block. This solution is broadcast the to all other nodes. The nodes then ensure all transactions are valid, eliminating the threat of “double spending”. From here, the nodes move onto the next block, and the process is continued. The new block will build on top of the hash created by the previous block, and this is how the chain grows into a blockchain.
MINING REWARDS
When a new block is confirmed in the form of a hash, the winning node is rewarded in bitcoin. This process is called “mining”. As mentioned, only 21 million bitcoin will ever exist. All bitcoin are estimated to be “mined” by the year 2140. Every 210,00 blocks mined, the bitcoin ecosystem goes through a “halving“. The halving event signifies mining rewards being cut in half. As of 2020, the mining reward is 6.25 bitcoin. The next halving should occur sometime in 2024. This process of rewarding nodes will continue until all bitcoin is in circulation. When all of the fixed supply has reached circulation, nodes will then be rewarded in transaction fees. No central authority releases coins. The rewards are automatically released to miners through the code that defines the bitcoin blockchain.
NETWORK ATTACK
Satoshi explains that a bad actor could compromise the system through control of a majority of nodes. Performing a “51 % attack“, this bad actor would destroy the system if they chose not to play by the rules. Satoshi argues it would be more beneficial for the attacker to play by the rules and gain all the new coins rather than destroy the system. A bad actor would certainly follow Satoshi’s logic if they had an interest in bitcoin. However, an entity looking to destroy bitcoin would not follow logic. At it’s current state, gaining 51% of bitcoin’s computing power is easier said than done.
BLOCKCHAIN
The system Satoshi envisioned was one in which the public could view every transaction. This raises questions regarding privacy. Bank transactions, for the most part, are private. The information is limited to the bank and the parties involved in the transaction. Bitcoin is not private as the blockchain is meant to keep a record of every transaction. The bitcoin system is a public ledger that anyone can access. However, the keys associated with a transaction cannot immediately be associated with an owner.
While Bitcoin doesn’t offer privacy, it can offer temporary anonymity. This anonymity is limited to how extensively someone is willing to search. One of the arguments used to create bitcoin FUD is the idea that it is only used by criminals to hide their transactions. Anyone with an understanding of blockchain sees the absurdity of the argument as the entire purpose of a blockchain is to create a transparent, public ledger.
CONCLUSION
Hashcash was invented in 1997 to serve as a layer of security. Building on the idea of Hashcash, Bitcoin was created as an alternative to the modern fiat system. Using the internet as its foundation, the network of computers that compose the bitcoin network is hard at work to achieve the ideals of the bitcoin whitepaper. It’s hard to say if Satoshi’s vision has truly been realized. In order for society to accept bitcoin for day-to-day transactions, the current level of price volatility needs to be tamed. Institutional investors are entering the cryptocurrency game if not already dominating the space. With the implementation of leverage and futures contracts, the tools of manipulation are all in place to keep Bitcoin within the system it was designed to transcend.