The Financial Crisis and Bitcoin's Origins
In 2007 and 2008, the global financial crisis unfolded—a crisis that had its roots in risky lending from banks, so much so that it led to the collapse of one of the United States' biggest banks at the time. It was perhaps no coincidence, then, that under the shadow of the 2008 financial crisis, a White Paper titled Bitcoin: A Peer-to-Peer Electronic Cash System began to circulate on the cryptography mailing list—a paper written by someone under the pseudonym of Satoshi Nakamoto.
This nine-page manifesto served as a blueprint for what Nakamoto described as a purely peer-to-peer version of electronic cash, which would allow payments to be sent directly from one party to another without going through a financial institution. Nakamoto took the technological innovations of former cypherpunks and put them together into what we now call blockchain technology.
To put it simply, Nakamoto laid out a framework using mathematics, computer science, and cryptography to create a currency that could be used for transactions without needing to trust a central authority. Trust was the problem that Bitcoin was set out to solve.
What Is Bitcoin?
Now, let's pause for a moment. Here is where things can get a little confusing. Whilst we've covered the motivations behind Bitcoin, now we must figure out what exactly it is and how it is decentralized. Understanding blockchain technology is the key to understanding the fanaticism around Bitcoin that we see today.
Bitcoin is not a physical coin; it is, in fact, entirely virtual—a digital currency. Think of Bitcoin as simply transactions on a ledger. For example, let's say Ben pays 2 bitcoins to Jane, and Jane pays 2 bitcoins to Carl. These transactions are recorded on a ledger, and so on and so forth for every transaction that comes after.
Banks work in a similar way, recording the transactions made through a bank account each and every day, using their own system to verify that the transactions made are in fact valid. In other words, a bank can make sure that somebody with only $100 in their account cannot spend any more than that.
Decentralization and the Blockchain
Bitcoin, however, is intended to be decentralized, so how could it possibly verify that the transactions made on its ledger are legitimate—that Ben even has two bitcoins to send to Jane in the first place? This is where we introduce the concept of a peer-to-peer, or distributed, ledger system that Nakamoto outlined in his White Paper.
Instead of a central authority owning the ledger that records all Bitcoin transactions, the ledger is instead distributed amongst all the other computers, or nodes, in the Bitcoin network. Anyone with a computer can join simply by downloading the Bitcoin software.
Now, each time a transaction is made on the ledger, every computer on the network will attempt to verify whether this transaction is legitimate by solving complex algorithms. When a consensus is reached on the network and the transaction is valid, it will be permanently stored on the ledger.
If a single node on the network attempts to validate an incorrect transaction, all the other nodes on the network will reject it. After a certain amount of transactions are made on the ledger, a new ledger is created that contains a type of code—otherwise called a hash—that links back to the previous ledger. This is why we call it a blockchain. Each of these ledgers, or blocks, contains a certain amount of transactions that are then linked to the previous block in the chain.
Privacy and Security
No public identities are used when transacting on the Bitcoin blockchain. Instead, individuals have both a public and a private key, which appear as a string of random numbers and letters. A private key is used to create a digital signature, and a public key is used to verify the signature without revealing the private key.
This process of validating transactions on the blockchain is known as mining. Miners receive a reward of a few bitcoins for every block they successfully mine, incentivizing them to continue adding to the blockchain.
If someone attempts to hack or invalidate a previous block on the blockchain, they would end up invalidating every single block that comes after it, which would be easy to detect and reject by the network. The Bitcoin blockchain allows you to see every single transaction that has ever been made since the very first block, without being able to alter or change the records.
The Genesis Block and Bitcoin’s Future
In other words, it's a decentralized form of currency that doesn't rely on trust between parties for transactions to occur. You can still find the very first block on the Bitcoin blockchain today, mined by the mysterious Satoshi Nakamoto in 2009, showing that Nakamoto was given a total of 50 bitcoins as a reward for mining the first block. This block is commonly referred to as the Genesis Block.
Nakamoto also set the supply limit for bitcoins as 21 million within the software code itself. As of today, there are only 2,000,000 bitcoins left to mine.
Source:
James Jani. (2021, May 10). Bitcoin: The Future, or World’s Greatest Scam? [Video]. YouTube. https://www.youtube.com/watch?v=4ByO8ym-iF8