₿itcoin

Bitcoin’s scarcity stems from its immaculate conception, longest-established history, and extreme decentralization.

Bitcoin’s discovery enabled financial self-sovereignty, allowing the global storage and transfer of value in an uncensorable manner. It is the first nonviolently securable property in history, since its ownership is enforced through the possession of a small piece of data.

Bitcoin’s strongest reputation has attracted the best cryptographers to review and secure its code.

“Gifted people tend to want to work with other top people and work on something that matters, that they believe in. Motivation matters. Protocol design and coding is partly an artistic, aesthetic endeavour; people do their best work on a mission: uncensorable global internet money.” — Adam Back.

Alternative “cryptocurrencies” compromise security for temporary gains in some functionality. They resemble Bitcoin much like a doll resembles a baby. They lack the predominant source of value that distinguishes Bitcoin from fiat money: the minimization of governance.

“If the designers of your blockchain talk about ‘saving the planet’, ‘increasing throughput’, ‘compliance’, ‘governance’, ‘democracy’, or any other topic more than they both talk and actually care about securing your financial property, run! do not walk away from that chain.” — Nick Szabo.

The minimization of financial governance

Bitcoin technology enables to decentralize the control over a monetary system, minimizing financial governance. Bitcoin operates based on rules without rulers. Questioning “who controls Bitcoin?” is akin to asking “who controls a language?”.

In Bitcoin, consensus emerges when different computers simultaneously run the same protocol. By maximizing the role of the consensus protocol, social consensus is ruthlessly minimized. The core design of Bitcoin is immutable, and only security-improving innovations are gradually included.

“The nature of Bitcoin is such that once version 0.1 was released, the core design was set in stone for the rest of its lifetime.” — Satoshi Nakamoto.

“We must handle Bitcoin software with the respect we handle nuclear reactor software.” — Hugo Nguyen.

“If you are frustrated by how slow Bitcoin moves, let me tell you, Bitcoin moves too fast.” — Andrew Poelstra.

Security updates

1. Research & Proposal: New ideas are tested, improved, and shared for review.
2. Consensus: If most developers and users agree, the update moves forward.
3. Open Source Deployment: The code is public so anyone can check it.
4. Enforcement: Each node chooses whether to install the update.

Forks:

• Soft Fork: Tightens rules, does not require full network upgrade.
• Hard Fork: Loosens rules, requires all nodes to upgrade. Used only in extreme cases.

In case of a catastrophic failure, principle-based developers may migrate the rules to new technology — the “nuclear option.”

“If SHA-256 became completely broken, I think we could come to some agreement… and continue from there.” — Satoshi Nakamoto.

The network

A Bitcoin implementation is software that turns a computer into a node. The main implementation is Bitcoin Core. Nodes verify transactions and uphold the network.

Transactions

A Bitcoin transaction is a digitally signed message transferring monetary units.

• Private Key: Random 256-bit number.
• Public Key: Derived from the Private Key via one-way function.
• Digital Signature: Proves the transaction was authorized by the key owner.
• Addresses: Encoded public keys.
• Wallets: Generate and store keys and addresses.

Nodes keep:

• Mempool: Pending transactions.
• Blockchain: Confirmed transactions.
• UTXO Set: List of spendable balances.

Proof of Work

In case of conflicting transactions, order matters. But since nodes receive transactions at different times, double-spends can occur.

Proof of Work (PoW) solves this by using energy to probabilistically assign authority:

• Works like a decentralized lottery using energy as tickets.
• Prevents central authority.

Competing consensus systems (non-PoW) require trust and governance.

Blocks

A block includes:

• Verified transactions.
• A block header with important data:
  1. Previous block hash
  2. Merkle Tree root (all transaction hashes)
  3. Nonce and hash target
  4. Timestamp

Blocks are chained. The chain with most cumulative work wins. Confirmations increase with block depth.

Block rewards:

• Transaction fees
• Subsidy (new bitcoins via coinbase transaction) Halves every 210,000 blocks, capping total supply at 21 million BTC.

Hash Functions: SHA256 produces a fixed-size hash from input data. Even tiny changes alter the hash completely.

Nonce and Hash Target

To mine a block, miners find a nonce so the resulting hash is below a target. It proves computational effort.

Hash target adjusts every 2016 blocks (~2 weeks) to keep 10-minute block intervals.

This makes Bitcoin’s monetary inflation predictable.

The process of mining

Bitcoin uses electricity to replace human intermediaries.

“When we can secure a financial network by computer science rather than by accountants, regulators, police… we go from manual to automated security.” — Nick Szabo.

Bitcoin’s breakthrough is that it automatically enforces

Bitcoin’s breakthrough is that it automatically enforces property rights in a monetary system.