Bitcoin from First Principles

The internet allows any two individuals to transfer data without permission from any central authority. Bitcoin does the same for value.

There is a very small chance that the greatest wealth transfer in human history will occur via Bitcoin.

Intro to Blockchain

The internet gave us programmable, digital abundance. Blockchains give us programmable, digital scarcity --> a better representation of the real world.

We might have just created something larger than ourselves. Similar to how we first invented markets, when you first invent something that big, it's hard for anyone to figure out what it is and how it works. Everyone is collectively trying to figure out how to describe it and what its properties are.

In the land of blockchains, developers are legislators, miners are executors, and users are judges.

A public blockchain is a governance network for distributed resources. It ensures resources are provided and people can consume those resources. Somebody has to keep tracking of who's providing the resources, who’s doing the work, and who's consuming the resources. This essentially creates a ledger entry of credits and debits, and that automatically creates a currency.

The technical advantages of cryptocurrencies are bootstrap mechanisms for mass-belief. Once enough people believe in a currency, it's real.

One of the things that people don't realise about crypto is even if there's a small percentage of people in the world who really believe in it, and can use it as a store of value, it has value.

Bitcoin

Most people are only familiar with bitcoin the electronic currency, but more important is Bitcoin, with a capital B, the underlying protocol. It encapsulates four fundamental technologies:

  1. Digital Signatures - these allow one party to securely verify a transaction with another and cannot be forged.

  2. Peer-to-Peer networks - like BitTorrent or TCP/IP - difficult to take down and not central trust authority is required.

  3. Proof-of-Work - prevents the double spend problem. A central authority is no longer required to distinguish between valid and invalid transactions. This creates an incentive for miners, who run powerful computers in the network, to validate transactions and secure them from future tampering. The miners are paid by "discovering" new coins, and anyone with computational resources can anonymously and democratically become a miner.

  4. Distributed Ledger - there is a history of each and every transaction into every wallet. This "Blockchain" means that anyone can validate that a given transaction was performed.

The technical features above lead to a new definition of "value":

  1. Bitcoins are scarce (Central authorities can't inflate them)

  2. Durable (they don't degrade)

  3. Portable (ability to transmit and carry electronically)

  4. Divisible (into trillionths)

  5. Verifiable (through everyone's blockchain - source of truth)

  6. Easy to store (paper or electronic)

  7. Fungible (each bitcoin is created equal)

  8. Tamper-proof (cryptographically impossible)

The internet allows any two individuals to transfer data without permission from any central authority. Bitcoin does the same for value.