Many are new to Bitcoin and it’s not easy. We’ve built out a condensed article focused on some frequently asked questions to help ease newcomers into Bitcoin and help existing ones better understand core concepts. We want our investors and partners to be informed and comfortable as we explore this new horizon.
What is Bitcoin?
Bitcoin is a decentralized peer-to-peer digital currency. The first successful implementation of its kind. It is not controlled by any one individual and its “rules” are baked into the code (software). Bitcoin is an internet money that allows anyone to engage in transactions with anyone they choose, anywhere in the world without discrimination or censorship. The key feature that enables this to work is decentralization of control, and what afforded us this ability was a novel implementation of technology and rules; the blockchain.
Why is Bitcoin Important?
There are 4 primary reasons why we believe bitcoin is important.
Censorship Resistant Access & Transactions
Anyone can use bitcoin. No one can prevent you from accessing the network or sending or receiving transactions. People should not be at the mercy of an authority or central body when it comes banking and transacting. Anyone should be able to open a bank account and transaction with whoever they want, anywhere they want. Bitcoin makes this possible.
The control of changes, improvement, and the current state of “balances” is decided by the code run by miners and people all over the world. Engineers and developers can contribute code or suggestions for improvement from wherever they are. Rule about supply and features can’t be arbitrarily chosen by any one person.
Baked in Rules & Economics
The rules of Bitcoin are hardcoded into the software and are very difficult to change. This is a good thing, money isn’t meant to be changed often. In order for new developments or adjustments, consensus of the network is needed. The higher the consensus, generally, the safer the change will be to implement. Sometimes there are network splits, or forks, when there is a meaningful disagreement on the rules.
Market forces and sentiment usually function well in determining the correct chain. This usually defaults to the chain with most hashpower behind it. If users won’t use the chain and developers won’t provide their commitment, a miner would incur significant costs mining on an economically inferior chain.
Bitcoin is a technological improvement over current money. Its sound, ideal money. The issuance (or inflation rate), is set and so is the supply, at 21 million coins. Users know how much dilution will occur over the year and can make a decision based on that data. Money can’t just be printed to solve problems. Bitcoin is faster than conventional money and needs about 6 hours to settle (if being conservative), versus 3-5 days using a traditional bank.
What is a Blockchain?
A blockchain is the core technology (or combinations of technologies), that enable cryptocurrencies, like bitcoin, to function. It is the engine to our bitcoin vehicle, you can have the engine run without a car but can’t have a car run without an engine. In the case of bitcoin, the blockchain orders, and links all the bitcoin transactions sent together. It acts as a timestamping mechanism for economic transactions. A blockchain is similar to an accounting database, except with some unique features.
Bitcoin educator and developer, Jimmy Song explained these features here
“[A blockchain has] specific rules about how to put data into the database. That is, it cannot conflict with some other data that’s already in the database (consistent), it’s append-only (immutable), and the data itself is locked to an owner (ownable), it’s replicable and available. Finally, everyone agrees on what the state of the things in the database is (canonical) without a central party (decentralized).”
It may help to think about this as every transaction you make is updated in a word document that is shared amongst everyone you transact with. Each time you purchase a coffee, for example, the word document updates showing everyone that you now have X amount less in your account and CoffeePlanet has X amount more. If you had insufficient funds, the network would reject that transaction. Now, this arrangement may seem very inefficient, and you’d be right.
Blockchain are most definitely not efficient, they require significant amounts of energy to secure, but they allow for very important functions. Being able to send money anywhere to anyone in a very short time at a low cost is a very valuable function. And while blockchains may not be efficient in themselves they provide great utility in other aspects of our lives, primarily by commoditizing trust. This is achieved through mining.
What is Mining?
Mining is currently the core of what we do. It contributes towards the security and health of the network. “Miners” in Bitcoin use significant computing power to solve a dynamic math puzzle also called “mining”. Whichever miner solves the puzzle first earns a reward in bitcoin. The reward also called the block reward or block subsidy has two primary purposes. The first is to incentivize good behavior and to allow miners to cover their costs (ie. electricity and equipment). Secondly, the block reward is how new bitcoin in minted into the system.
The process of mining also orders and adds transactions into blocks. The miner who solves the current puzzle has its block (full of fresh transactions) appended to the existing blockchain thereby extending the chain and propagating a new block to the network for miners to mine on. Anyone with a computer, a hard drive, and a network connection can mine. The puzzle gets more difficult depending on how much effort (how many computers) are working on it. A miner’s odds of winning the reward is proportionate to the computing power it has relative to the entire network; thus it’s competition based.
Why is Mining Important?
When the role of a central authority is removed from a system such as money, the network must still arrive at consensus. Conventional systems use centralized clearing houses to verify and settle transactions on a daily basis. In a decentralized, trustless system, we need to know that our sent and received bitcoin transactions settled. This is typically very hard because in peer-to-peer networks you can’t (or shouldn’t have to) trust others in the network.
Mining uses Bitcoin’s proof-of-work (PoW) algorithm to solve this. Proof-of-work is a consensus algorithm allowing the network to reach agreement about the current state of accounts about every 10 min. As anyone can contribute to mining, there is no central authority that executively decides the current state.
In Bitcoin, blocks and transactions have rules. Block must not contain invalid transactions and transactions are invalid if they do not have a legitimate origin (printing money) or if they have been previously spent (double-spend). The proof-of-work miners perform to append the latest block to the chain requires they spend significant resources to solve the block puzzle. If they solve the block puzzle and submit the block to the network and it contains an invalid transaction, therefore an invalid block, the block is rejected and the miner loses the opportunity for the block reward as well as the wasted energy on solving the puzzle.
Is Bitcoin Mining Wasteful?
This really depends on how you look at this commonly attributed feature of bitcoin. This isn’t an objective science. A good question to contemplate while thinking this over could be, “What overall value is derived from the function of this power-intensive mining?”
Let’s first view this practically. Mining is intentionally inefficient in order to achieve consensus across an untrusted decentralized network. It adds a cost, currently a very high cost, to attempt to disrupt the network. Mining also secures the historical ledger of transactions helping to make the blockchain’s record immutable. All that energy is currently securing over $140b in value. However, it’s also securing the value of every historical transaction on the blockchain, providing integrity for future commerce.
The existing system of money may seem to be handling all this, and more, in a cheaper more efficient way, but you must remember there are central authorities that control and make decisions on the nature and flow of money. The cost incurred for secure, democratic and decentralized money might seem worth it when you look at all the issues with current money (QE, inflation, bailouts, etc).
Other ways of viewing alternative or substitute products and services. Gold mining, for example, uses a greater amount of energy and resources to extract annually. This isn’t a very good argument, however, because of the overall value of gold extracted far exceeds the cost, especially when compared to bitcoin. The existing banking system uses hundreds of thousands of computers, buildings, ATMs, warehouses, and data centers. Many estimates equate that conventional banking uses ~100 terawatts, while bitcoin uses about 30.
Katrina Kelly-Pitou, a clean-energy researcher, says most opponents are viewing this wrong. “New technologies – such as data centers, computers and before them trains, planes, and automobiles – are often energy-intensive. Over time, all of these have become more efficient, a natural progression of any technology: Saving energy equates to saving costs.”
Many people forget, when it comes to energy, consumption can increase while the impact on the environment remains static. It’s important to look at the source of energy. Miners will always flock towards and invest in the cheapest energy sources available. Currently, miners are seeking hydroelectric sources in Iceland, Canada, and the Pacific Northwest in the US.
Many of the doomsday articles about bitcoin’s energy consumption look at current consumption growth over the past year and project that rate to continue. This is just lazy, disingenuous, reporting. Nothing works that way, profitability will always be the main driver of mining and energy consumption. But reasonable research and reporting don’t sell. And remember bitcoin is just a currency or a payment system, it’s both at the same time.
What are (full) nodes?
(Full) nodes validate transactions on the blockchain and are voluntarily maintained by anyone wants to do so. Often individuals and businesses (merchants accepting bitcoin) often run full nodes to validate their own transactions. A full node broadcasts messages within the protocol. Full nodes add an additional layer of security for these participants within the Bitcoin network. Full nodes differ from simplified payment verification (SPV) nodes by maintaining a copy of the complete ledger of all transactions. SPV nodes are typically wallets on a phone or mobile device. The hold data related to only your transactions and thus don’t have the entire blockchain and are less secure.
Who Created Bitcoin?
The original Bitcoin code was written by Satoshi Nakamoto and released under the MIT open source license. In 2008 Nakamoto outlined the idea behind Bitcoin in the White Paper, which describes how the cryptocurrency would function. Satoshi disappeared in 2010 but left the Bitcoin code in the hands of developers and the community. Bitcoin maintains a large, diverse, and active developer community full of some of the most technically capable engineers with regard to cryptography, networking, and computer science.
Is Bitcoin Anonymous?
Bitcoin is referred to a pseudo-anonymous. You can transact without any personal identifying information attached, and in that way, it is more or less anonymous. However, if you associated you public key (bitcoin wallet address) with a bank, online account, or individual that has or contains personal information about you, it is not anonymous and other transactions you perform[ed] can be linked to you.
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