The following is an excerpt from my upcoming book, The Great Blockchain Book. Get notified when the book is released by joining the Entrepreneur Hideout mailing list!
Unless you have been living in an igloo at the center of the Arctic without an Internet connection you have likely over the past 10 years heard of something called Bitcoin. You may not know what it is or how it works but you have certainly heard of it. And based on the stories of incredible fortune (literally!) experienced by long-time holders of Bitcoin, you’re probably curious to learn more.
Bitcoin is Born
Back on October 31, 2008, while all hell was breaking loose in the midst of the Great Recession, a whitepaper titled, “Bitcoin: A Peer-to-Peer Electronic Cash System,” was hitting the virtual streets of the Internet by way of the Metzdowd.com cryptography email list. The whitepaper was authored by Satoshi Nakamoto – likely a pseudonym for the person or persons responsible for authoring the whitepaper.
Nakamoto’s whitepaper provided the framework for the creation of a decentralized peer-to-peer monetary system (Bitcoin) that was built upon earlier failed cryptocurrency attempts. The whitepaper described the use of an elegant public ledger system (Blockchain) combined with cryptographic techniques, that when implemented would create the trust needed to ensure Bitcoin’s success as a digital currency.
Bitcoin represents the first commercially viable and widely accepted cryptocurrency. While Bitcoin is not the first cryptocurrency, it is the first to successfully solve certain fundamental issues, such as double-spending, that contributed to the distrust and failure of previous digital currencies.
Prior attempts date back as far as 1983, when David Chaum developed his concept paper on ecash. Twelve years later, Chaum implemented his concept through the launch of Digicash in 1995. The 90s also saw the launch of Wei Dai’s B-Money (1998) and Nick Szabo’s Bit Gold (1998). These were just a few of the cryptocurrency launches that provided the lessons learned that led to the birth of Bitcoin.
What is Decentralized Currency?
Nakamoto created Bitcoin as a decentralized currency. This means that no single government or entity controls Bitcoin. Instead, the cryptocurrency exists thanks to the large international network of computers that process Bitcoin transactions (miners).
Unlike traditional “fiat” currencies, such as the U.S. Dollar, Bitcoin has no “master.” No entity governs or controls Bitcoin. There is no Bitcoin equivalent to the Federal Reserve. The digital currency’s only master is the Bitcoin software comprised of pre-programmed rules.
The term decentralized refers to how the database of transactions, or “decentralized ledger,” resides with each computer (node) on the Bitcoin network and not at one specific location. Like the Internet, if a node goes down or goes offline, a complete copy of the decentralized ledger can be accessed via another node. This feature keeps the Bitcoin network operating – even if nodes within the network fail. If a specific path needed to obtain and process data is eliminated, the Bitcoin network just reroutes the transaction to another node. This process ensures that the network is always up and running.
With a decentralized currency there is no ability for an entity to step in and place controls on Bitcoin like can be done with fiat currencies. Computers throughout the world that comprise the Bitcoin network, process, record and validate Bitcoin transactions using cryptographic and other techniques that ensure that transactions are proper and can be relied upon.
Blockchain and the Public Ledger
A term that is impossible to escape these days is “blockchain.” Like the term Bitcoin, blockchain is all over the news. The term blockchain has taken on celebrity status in most industries. What’s interesting is that while the term is everywhere, most people have no idea what it means. Clearly, blockchain is important. But why?
are credited with giving birth to the idea of the blockchain. In 1991, the two men released their whitepaper on creating a cryptographically secured chain of blocks. In 2008, Nakamoto released his Bitcoin whitepaper that considered their work. Bitcoin was the first commercially recognized product that incorporated the use of a blockchain.
Blockchain is a technology that securely stores information using strong encryption techniques. Financial transactions can be stored using blockchain. So can medical records, property records or any other information that is stored in a database.
Blockchain is the technology that Bitcoin uses to store transactions securely. Contrary to popular belief, blockchain is not Bitcoin but Bitcoin is blockchain. While Bitcoin is blockchain’s most significant implementation, blockchain can be used for much more than cryptocurrency. In fact, many argue that it is blockchain – not Bitcoin – is the greater innovation.
The easiest way to visualize a blockchain is to think of an actual chain. Approximately every 10 minutes a new link comprised of encrypted transaction data is created by Bitcoin’s decentralized network of computers. After completing a validation process, the new link is added to the end of the chain. As time passes the blockchain gets longer and longer. Instead of being called links, the segments added to the end of the blockchain are called “blocks.”
A computer on the blockchain network is called “node.” Each node automatically receives a copy of the blockchain. The blockchain uses what is referred to as Distributed Ledger Technology (“DLT”). Today, DLT is primarily used to verify digial currency transactions. DLT, however, can be used to digitize, code and insert practically any document into the blockchain. Doing so creates an indelible record that cannot be changed; furthermore, the record’s authenticity can be verified by the entire community using the blockchain instead of a single centralized authority.
Kill the Messenger
Bitcoin was designed to facilitate online payments without the use of a third party, such as a bank. Elimination of the middleman provides for faster transaction settlement. It also makes transactions cheaper as the elimination of the middleman also eliminates the middleman’s commissions and/or fees.
In the U.S. it generally costs $35 to $50 to send an international wire transfer from a bank. Further, it can take up to a couple days for the funds to arrive in the recipient’s bank account. Even less costly remittance services such as Western Union can cost a consumer $10 to $15. Depending on the amount of money being remitted, the fees can represent a significant percentage of the transaction.
An international remittance via Bitcoin costs a nominal amount and can be credited to a recipient’s Bitcoin account in minutes – not days. Once credited the recipient can transact with the Bitcoin directly, withdraw the Bitcoin in local currency using a Bitcoin ATM or convert the Bitcoin to local currency and transfer to a local bank account.
Mine, Mine, Mine, Mine
The Bitcoin model was designed to generate new Bitcoins over time as transactions are conducted. The process is called “mining.” In order for Bitcoin transactions to be validated and entered in the public Bitcoin record (blockchain), the transactions undergo a series of computations that are performed by computers (nodes) around the world.
The computers that perform the intensive computations are called “miners.” Miners are rewarded in Bitcoins for successfully validating (mining) a set of Bitcoin transactions. By taking part in the mining process, miners create new Bitcoins to add to the general circulation while facilitating the transactions that make Bitcoin a viable cryptocurrency.
Since Bitcoin is not issued by a government such as the United States Federal Reserve, it is not subject to the currency controls placed on fiat currencies such as the U.S. Dollar. Further, since it is a digital, or virtual currency, it can be used to settle cross-border transactions more easily than traditional fiat currencies.
Up until Nakamoto proposed the Bitcoin model there did not exist in the universe of digital currencies a manner to reliably prevent a party from remitting two or more digital payments using the same digital currency balance (double-spending). Double-spending is a problem unique to digital currencies because digital information can be reproduced with minimal effort. Physical currencies do not have this issue because they cannot be easily replicated, and the parties involved in a transaction can immediately verify the legitimacy of the physical currency.
With digital currency, there is a risk that the holder could make a copy of the digital token and send it to a merchant or another party while retaining the original. This was a concern initially with Bitcoin since it is a decentralized currency with no central agency to verify that Bitcoin used has not been previously used. However, Bitcoin has a mechanism based on transaction logs to verify the authenticity of each transaction and prevent double-counting.
Bitcoin requires that all transactions, without exception, be included in a shared public transaction log known as a “blockchain.” This mechanism ensures that the party spending the bitcoins really owns them, and also prevents double-counting and other fraud. The block chain of verified transactions is built up over time as more and more transactions are added to it.
Bitcoin transactions take some time to verify because the process involves intensive number-crunching and complex algorithms that take up a great deal of computing power. It is, therefore, exceedingly difficult to duplicate or falsify the block chain because of the immense amount of computing power that would be required to do so.
Hackers have tried to get around the Bitcoin verification system but their attempts have been met with only limited success. In fact, most Bitcoin thefts so far have not involved double-counting, but rather have been due to users storing bitcoins without adequate safety measures.
Without a solution to the double-spending challenge, digital currency in general, and Bitcoin in particular, could not achieve widespread adoption and acceptance as recipients of digital currency payments would always be subject to fraudulent duplicate transactions. Bitcoin solved digital currency’s double-spending challenge and eliminated a major obstacle to broad acceptance and trust in the Bitcoin currency model.
The Genesis Block
Genesis Block is a term used when working with blockchains. The Genesis Block is the first block of a blockchain. If you think of a blockchain as a chain composed of a bunch of connected links, the genesis block is the first link before any other links are connected to it. Bitcoin numbered the Genesis Block as block 0 (zero).
According to Investopedia, “The Genesis Block is the backbone of the entire bitcoin system and the origin of Bitcoin itself. If every transaction with Bitcoin were like a fork in the road, then all those roads would eventually lead back to the Genesis Block.”
In January 2009, Satoshi Nakamoto released the first Bitcoin software that launched the Bitcoin network. Nakamoto mined the Bitcoin genesis block (block 0) on January 3, 2009.
“The Genesis Block is the backbone of the entire bitcoin system and the origin of Bitcoin itself. If every transaction with Bitcoin were like a fork in the road, then all those roads would eventually lead back to the Genesis Block.”
The Bitcoin Organization
Bitcoin.org was set up by Nakamoto. Nakamoto’s involvement with Bitcoin, including working with Bitcoin software developers, continued until mid-2010. Towards the end of Nakamoto’s involvement, control of the Bitcoin source code and network alert key was transferred to U.S. Bitcoin developer Gavin Andresen.
Nakamoto also transferred several related domains to various prominent members of the Bitcoin community. These transfers were meaningful because up to that point Nakamoto made all modifications to the Bitcoin source code. Once all this was done Nakamoto faded into the background.
Satoshi Nakamoto: The Man Without a Face
No one has ever met Nakamoto face-to-face and according to The Economist‘s November 2, 2015 article by L.S., “Except for a few messages, most of which are believed to be hoaxes, he has not been heard from since [April 2011].”
It’s very possible that Satoshi Nakamoto is a pseudonym for the person or persons responsible for developing Bitcoin and the whitepaper. In fact, based on the complexity and thoroughness of the Bitcoin model, which uses blockchain at its core to record transactions, it is very possible that Bitcoin was a team effort and not that of a single person.
While there exists no reliable information regarding the true identity or identities of Satoshi Nakamoto, there is no shortage of theories.
One theory suggests that the creator of Bitcoin was Hal Finney. Finney was the first person to receive a bitcoin transaction. If Finney was the creator we’ll never be able to confirm as Finney passed away in 2014 from ALS.
Another interesting theory is that Satoshi Nakamoto is comprised of four Asian technology companies. According to this theory, the name Satoshi Nakamoto came from the letters within the company names of Samsung, Toshiba, Nakamichi, and Motorola (Sa-Toshi Naka-Moto).
The Economist romanticizes Nakamoto’s disappearance. “Speculation about Mr. Nakamoto’s identity is likely to continue,” writes The Economist’s L.S. “Much like other evergreens such as who really killed JFK or whether Elvis is still alive.” Or what the true meaning is behind Kurt Cobain’s blissed-out smiley face graphic. It’s a mystery that may never be solved.
Seven Big Ones
Currently, there are approximately 980,000 bitcoins that sit in digital wallets and that were once controlled by Satoshi Nakamoto. According to research, only around 500 Bitcoins were used by Satoshi Nakamoto. The rest sit in Bitcoin’s blockchain unused. As of May 25, 2018, Nakamoto’s stake represented roughly $7 billion!
With billions of dollars at stake, it seems that if Satoshi Nakamoto were still alive he, she or they would have claimed their share. But given the lack of activity, my bet is that Satoshi Nakamoto is resting among the flowers. I mean, who can resist $7 billion dollars? Right?