The basics of Bitcoin
Most people have heard the term Bitcoin being mentioned frequently in the media, from clueless news anchors calling it “drug- money” to perplexed politicians advocating banning it to irascible central banks irresponsibly attempting to outlaw it. In short, Bitcoin is arguably one of the most widely misunderstood innovations to emerge in the new millennium. So what is Bitcoin? This complex question shall be answered in two parts. The first is a simplified overview and the second a slightly more in-depth outlook, albeit merely an outlook.
Bitcoin is a protocol, a system of rules defining pre-approved conduct and procedures to be followed in any given situation. However, before proceeding onwards, we need to understand what money is, given it’s connection to Bitcoin. Money is the actualization of a protocol governing the communication of financial transactions. That’s all money is – nothing more, nothing less. Bitcoin and money are both protocols. If we accept that, then that implies that ‘Bitcoin = money’.
However Bitcoin is not only money. Bitcoin is a protocol for much more than merely financial communications. It’s a framework encompassing several modules that may be harnessed for different purposes. Money, or more aptly currency, is merely one of the many possible applications; and this is the hyper-inflated aspect of Bitcoin that has garnered a lot of attention from the media primarily because the modular units in this framework (dubbed satoshis) are neither issued by central banks nor governed by the whims and fancies of politicians or their loving sponsors. Instead, it’s generated and distributed by an algorithm and governed by the incorruptible laws of mathematics.
Looking closer, an outlook: The Blockchain
Bitcoin is an open-source encrypted triple-entry public ledger that exists on a distributed consensus network that facilitates P2P financial transactions. This public ledger is called the ‘Blockchain’.
Essentially, Bitcoin is a breakthrough in info-comm technology and praxeological economics. This advent in time has birthed what is known as the Blockchain along with ‘proof-of-work’ concepts, which have finally come together to solve the Byzantine Generals’ Problem, also known as the double spend issue in computer science; a common issue with decentralized digital currencies, prior to Bitcoin.
To fully understand Bitcoin, six diverse aspects pertaining to it have to be covered individually:
Open Source Design
Cryptography (Encryption)
Triple Entry Public Ledger
Distributed Consensus Networks
P2P Operations
Financial Transactions
Open source design
In production and development of software systems, open source as a development model promotes universal access via free license to a products’ design or blueprint, and universal redistribution of that design or blueprint. This includes subsequent improvements to it by anyone via patches or forks.
An open-source code enables a self-enhancing diversity of production models, communication pathways and interactive communities that constantly contribute and evolve.
To put that in perspective, there are two basic models for development, using operating systems as an example:
Proprietary or Closed source examples are Microsofts’ Windows or Apples’ Macintosh systems. No source code is available for public audit and users have to trust there is no back door in the code. Forks or patches have to come from a select community with inside access to source code. This system is a non-transparent system by design and trust is required.
Open source examples are Linux or OpenBSD, with thousands of distributions within – such as Ubuntu, CentOS, Debian, Fedora, BTr3 and Kali, to name a few. Source code is publicly available for anyone to fork or patch. Independent audits are possible by anyone in the community. This system is fully transparent by design and trust is not required.
This implies that Bitcoin as an open source system, by design, is inherently completely transparent; it is very different from contemporary monetary systems which are highly opaque. Everyone has access in an open system. In contrast, only a privileged few have access in closed systems. The superiority of open-source trust-less systems by design, in terms of integrity of the system, are pretty apparent.
Cryptography (Encryption)
Cryptography or encryption is the process of encoding messages or information in such a way that only authorised parties can decipher it. There are several cryptographic technologies encompassing the essence of Bitcoin.
Both ‘blockchaining’ and the hashcash cost-function use SHA-256 as the underlying cryptographic hash function. Additionally, on top of that, Bitcoin uses public key cryptography – where each “coin” is associated with its current owner’s public ECDSA key; and AES-256-CBC is used to encrypt the private keys that are held in a digital wallet. Bitcoin, as such, encompasses a framework of encryption technologies, translating to security by diversity.
In essence, the protocol consists of the same encryption technologies that governments and the military use to hide their secrets. Is it secure? Yes it is, very.
Triple entry public ledger
A ledger is a principal book or a digital representation for recording and totaling monetary transactions into accounts, with a beginning balance and ending balance for each account. It is a permanent summary of all amounts entered into it, listing individual transactions by date/time and other properties. It’s a time-stamped entry into a book or file that denotes a financial transaction which has existed in some point in time.
Modern accounting is based on a double entry system – to put it simply, double entry bookkeeping allows for the maintaining of records that reflect what one owns and owes and also what one has earned and spent over any given period of time. The setbacks of double entry bookkeeping becomes apparent when entities are expected to reveal their records to an independent third part. The independent public auditor, whose role was (and is) to serve as an independent guarantor of financial information is the trusted third party in this equation. However, with the Blockchain, the trusted third party is no longer required.
Triple entry bookkeeping is an upgrade from the inferior double entry system in which all entries involving transacting parties are simultaneously cryptographically secured and published for the world to witness. This is where the Blockchain shines – rather than these entries be entered separately into independent sets of books, they occur in the form of a transfer between two blocks on the Blockchain, creating an interlocking chain of mutually exclusive & incorruptible records. Since these entries are stored on distributed networks and cryptographically secured, manipulation, falsification or destruction of said records is practically impossible.
Distributed consensus network
In networking there are three types of network architecture:
Centralised Networks
De-centralised Networks
Distributed Networks
Centralised is when there is a single “Boss” node presiding over the “Worker” nodes on a network.The weakness of this design is simple: take the boss node out and the network fails (i.e. internal company networks).
Decentralised is when there are a few “Boss” nodes presiding over the other “Worker” nodes. This design is harder to disrupt, as attacking one “Boss” node does not necessarily mean the network fails. However, attack all the “Boss” nodes simultaneously and it probably will. It is superior to a centralised network but the flaws are still obvious (i.e. The Internet).
Distributed networks are a little different – they are “Distributed” when the computer programs and the data to be worked on are spread out over multiple computers. Usually, this is implemented throughout a network. There is neither a “Boss” nor a “Worker” node. There is no critical point of failure. Every node added is an exponential increase of strength to the network. Any node attacked and rendered useless does not necessarily mean the network is destabilised. This model, by design, is more resilient to external attacks and has been proven to resist direct take-down attempts via censorship – even by the State (i.e. BitTorrent).
So a distributed consensus network is simply a distributed network, with no apparent vulnerabilities or single failure point, being used to solicit consensus from voluntary participants. A potential application for this type of model is voting, at least for those that believe in the concept of Statism.
P2P
Peer-to-peer (P2P) refers to systems that work like organised collectives by allowing each individual to interact directly with others. In the case of Bitcoin, the network is structured so that each user broadcasts the transactions of other users without a central authority (i.e. banks or financial institutes) acting in fiduciary capacity as a “trusted” third party. It essentially means a person may send transactions directly to another person without interference, censorship or blockade.
Financial transactions
Financial transactions are communications taking place between a “Buyer” and a “Seller” in order to exchange asset(s) for payment to represent a transfer in value. It usually involves a change in the status of the finances of the entities involved.
In Conclusion
So what is Bitcoin? Simple, it’s an open-source encrypted triple-entry public ledger that exists on a distributed consensus network that facilitates P2P financial transactions. I sincerely hope this statement makes a little more sense now.
Clarke’s Laws are apt descriptors for the future potential of Bitcoin. Clarke’s 2nd Law states: “The only way of discovering the limits of the possible is to venture a little way past them into the impossible” & Clarke’s 3rd law states that, “Any sufficiently advanced technology is in-distinguishable from magic”.
Bitcoin, in many ways, brings changes that seem almost magical. With the magic happening right before our eyes and the coming of the inevitable, all we can do is to sit back, relax and let ourselves be entertained!