Bitcoin

Since the emergence of the internet, privacy has become the frontline of development among members of the cypherpunk community.1 As the initial cypherpunk movements took shape, the goal of creating censorship-resistant communication in cyberspace became paramount.

Alongside this development, liberation technologies gained prominence, allowing end-users to access encryption tools that could shield their communications data from prying eyes and unauthorized access. Thanks to the global adoption of the internet and the subsequent evolution of technologies built upon it, everyone now has the ability to encrypt their communications and protect themselves from oppressive governments and mass surveillance.

The establishment of a cyber currency has been at the forefront of this ideology, aiming to create an independent form of digital cash that operates free from centralized government control. However, prior to 2008, there were no viable, decentralized solutions that could serve as a censorship-resistant monetary system necessary for individual empowerment.

As the internet expanded globally and became an integral part of our daily lives in just 28 years, it has facilitated the decentralization of control and governance, accelerating the worldwide dissemination of technology. This has ushered in an era where revolutionary technologies can bring about transformative changes at an unprecedented pace. Cybercash represents one such technology that aims to address the centralized control and issuance of currencies — the main issue contributing to repeated breaches of trust — by separating money and state.

The concept of an independent monetary tool functioning without government control was initially difficult to imagine, given the nature and entrenched role of fiat currencies in society. The perceived stability and widespread usage of government-issued fiat currencies also acted as a barrier against any attempt at disassociating fiat currencies from the process of value establishment. Previous attempts at creating independent monetary tools, such as HashCash or BitGold, were unable to effectively address double-spending issues and lacked the technological sophistication required for proper operation.

This all changed in 2008, when a cascade of events led to the emergence of belief in a monetary system that could exist beyond the manipulation of governments. A monetary system that can serve as a viable alternative to fiat currencies, storing value through programmed scarcity and creating a non-inflationary environment. A digital form of money that can function as a unit of account and medium of exchange, supported by a complex social defensive organization, its core value proposition, and its fundamental beliefs. As explained in the book The Sovereign Individual, the creation of such cybercash has the potential to trigger a range of revolutionary effects that could change the world by liberating individuals from the tyranny of authoritarian governments.

We will now examine Bitcoin, assessing its relevance and its potential to address our trust problem.

“Bitcoin: A Peer-to-Peer Electronic Cash System”

In 2009, an individual or group operating under the pseudonym Satoshi Nakamoto introduced a new software called Bitcoin. Nakamoto described Bitcoin as an open-source, decentralized digital currency—a peer-to-peer electronic cash system designed to replace traditional fiat currencies. Its purpose was to enable users to engage in transactions without the need for a third partys involvement. Bitcoin is also recognized as the pioneering application of blockchain technology.

One of the significant challenges that previous attempts at digital currencies had faced was the double-spend problem2, which involved the risk of spending the same digital coin more than once. Nakamoto successfully addressed this issue by combining technologies with a proven track record and by building upon previous efforts.

The Bitcoin Whitepaper was made available on October 31, 2008, and was distributed via the cypherpunk mailing list by Nakamoto. In that email, Nakamoto outlined his work on a fully peer-to-peer electronic cash system that eliminates the need for a third partys involvement. On January 3, 2009, Nakamoto mined the Genesis Block of Bitcoin, and on January 8 of the same year, version 0.1 of the Bitcoin software was released. Bitcoin’s Genesis Block included a message from Nakamoto that read: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”

In an email shared by Nakamoto, it was explained that the total number of bitcoins generated would be limited to 21 million, and no additional coins would be issued. The email explicitly stated that the bitcoin emission as a reward would be halved every four years until it eventually reached zero rewards per block. Upon the depletion of the block reward, Nakamoto suggested that transaction fees within the Bitcoin network would serve as incentives for securing the network and that they might reach a similar range based on increased free-market competition.

Bitcoin, being a digital currency, can be divided into smaller units called satoshis.3 One bitcoin is equivalent to 100 million satoshis, allowing for precise denominations and transactions. As a result, there will be a total of 2,100,000,000,000,000 Satoshis in existence.

The Bitcoin network can be accessed by interacting with the Bitcoin protocol on the internet. Users can acquire bitcoin through exchanges, or by mining blocks, which involves participating in the process of validating transactions. Of course, individuals can also earn bitcoin by providing goods or services, similar to traditional currencies.

The Bitcoin protocol utilizes public-key cryptography, allowing users to transact and spend their bitcoin. A public key is a wallet address that can receive transactions.

When making transactions from a Bitcoin wallet, we use a public key to generate the transactions directly from addresses. Subsequently, we use our secret key to sign these transactions, ensuring their authenticity. With the adoption of BIP39, Bitcoin wallets now allow users to create human-readable private keys in the form of a 12, 18, or 24-word list, which grants access to their coins on the Bitcoin network. This key acts as the master key, providing complete control over the funds stored in the associated addresses. Additionally, this key generates the extended public key, which governs the generation of addresses for the wallet.

Bitcoin wallets can take various forms. Paper wallets, for instance, can be printed or internally memorized, containing both the public and private keys of a wallet address. Mobile devices can also store keys, enabling users to transact Bitcoin over the internet.

In the context of a Bitcoin wallet, a Quick Response (QR) code can be used to represent the public key of a Bitcoin wallet, displaying the receiving address using the latest bech32 address format. These QR codes can be scanned by mobile wallets to initiate transactions to the specific address.

Once a transaction is signed, it is broadcasted to the nodes within the Bitcoin network, which then propagate it across the network in a matter of seconds. If anyone attempts to manipulate a signed transaction, they would require the master key to make any modifications. In the absence of the private key, it is nearly impossible to modify transactions.4

Nodes store transactions and dynamically package them into blocks based on the transaction fee, keeping them in the mempool. From this pool, miners choose which transactions to include in the following block to be processed, prioritizing the ones with higher fees. Transaction fees often depend on the size of the transaction. Users can manually specify the number of satoshis they wish to include as a transaction fee for miners. However, if the fee is lower than the market average, it may take longer for the transaction to be processed, particularly if the mempool contains numerous pending transactions.

Transactions are processed via the Proof of Work (PoW) algorithm that miners utilize to process and mine Bitcoin blocks. These blocks typically accommodate transactions of up to 1 MB in size, excluding the additional signature data associated with SegWit transactions. However, the inclusion of block headers can considerably increase the size of each Bitcoin block, potentially reaching a maximum of 400,000,000 bytes in theory. The size and fee of a transaction determines which block the miners will include it in next. In this dynamic system, a transaction with a higher fee may supersede a transaction with a lower fee in a given block, resulting in lower fee-bearing transactions being queued in the mempool for later confirmation.

Proof of Work relies on the SHA256 hashing algorithm to generate an irreversible hash. Miners employ electricity to repeatedly hash and guess a correct nonce, which they then append to a block before submitting it to the blockchain. Through this energy-intensive process, miners accomplish the "Proof of Work," enabling them to add a block of transactions to the Bitcoin blockchain.

Once a transaction is committed to the blockchain, it becomes accessible for viewing using block explorer services or through local nodes via a command-line function. These transactions are openly available to anyone on the internet. As Bitcoin operates as a public and transparent monetary system, it becomes effortless to...