Bitcoin

I am late to the Bitcoin party. But after finally understanding what it is and how it works, I have to admit this invention by Satoshi Nakamoto is on par with the invention of the World Wide Web by Sir Tim Berners-Lee.

Bitcoin is a splendid triumph of mathematics and especially public cryptography, applied to one particular problem of digital currency. It is a completely out-of-the-box solution that could never be created by established players like banks or governments. What is even more important, the idea of blockchain can be extended to other domains. This has already become an area of interest for VCs.

My blog will by no means be able to tell the whole story. For those who want to dig deeper, I strongly recommend the book Mastering Bitcoin: Unlocking Digital Cryptocurrencies by Andreas M. Antonopoulos. Below are some important highlights from the book, telling the story.

Satoshi Nakamoto’s main invention is the decentralized mechanism for emergent consensus. Emergent, because consensus is not achieved explicitly — there is no election or fixed moment when consensus occurs. Instead, consensus is an emergent artifact of the asynchronous interaction of thousands of independent nodes, all following simple rules.

The main bitcoin network, running the bitcoin P2P protocol, consists of between 7,000 and 10,000 listening nodes running various versions of the bitcoin reference client (Bitcoin Core) and a few hundred nodes running various other implementations of the bitcoin P2P protocol.

The network nodes interconnect in a mesh network with a “flat” topology. There is no server, no centralized service, and no hierarchy within the network. Nodes in a peer-to-peer network both provide and consume services at the same time with reciprocity acting as the incentive for participation.

Decentralization of control is a core design principle and that can only be achieved and maintained by a flat, decentralized P2P consensus network.

The competition to solve the proof-of-work algorithm to earn reward and the right to record transactions on the blockchain is the basis for bitcoin’s security model.

Mining is the main process of the decentralized clearinghouse, by which transactions are validated and cleared. Mining secures the bitcoin system and enables the emergence of network-wide consensus without a central authority.

Bitcoin transaction validation is not based on a static pattern, but instead is achieved through the execution of a scripting language. This language allows for a nearly infinite variety of conditions to be expressed. This is how bitcoin gets the power of “programmable money.”

Because [each] transaction is signed and contains no confidential information, private keys, or credentials, it can be publicly broadcast using any underlying network transport that is convenient. Unlike credit card transactions, for example, which contain sensitive information and can only be transmitted on encrypted networks, a bitcoin transaction can be sent over any network.