Originally published on The Voyage newsletter on January 11, 2022.
The first Bitcoin transaction happened in January 2009 and everything we knew and believed about money changed forever.
The technology was invented by an anonymous figure we know only by the name of Satoshi Nakamoto. An individual or possibly a collective that has yet to be identified.
Bitcoin was the first successful internet code-based currency network to garner world-wide adoption. The rules were all pre-written and launched as an open source project, giving the code-base away to the public.
The Blockchain is Born
The most important innovation of Bitcoin was the introduction of blockchain technology to the world.
The blockchain is, as the name implies, a chain of blocks that live on the internet. Each block holds transaction data. What’s most unique about the blockchain is that it doesn’t live on a central server anywhere. It is distributed amongst numerous users through a peer-to-peer (P2P) network. It’s stored and run on their computers.
As a matter of fact, you can go to the bitcoin.org website and download the blockchain right here.
When you hear people talk about Bitcoin being decentralized, this is what they mean. There is not a single point of failure. Every computer or node running the blockchain would have to go down to take Bitcoin offline. Currently, that’s over 15,000 nodes, not likely to happen.
Blockchains fall under a larger category of technology known as distributed ledgers. Essentially, the blockchain is a public and open ledger that anyone can access and see who has what in their accounts.
There are other reasons, that the blockchain is referred to as decentralized beyond the P2P distribution.
The blockchain is designed to allow anyone to make a transaction without requiring approval by a central authority and instead it’s executed through a code-based protocols. These protocols are called consensus mechanisms. For Bitcoin that consensus mechanism is known as Proof-of-Work (PoW).
PoW is a system that requires computers to solve complex math problems to secure and add transaction blocks to the blockchain. If you’ve heard the term Bitcoin miner, this is where they come in. Bitcoin miners are nodes using significant computing power to solve these math problems and secure the next block onto the node.
That looks like a multitude of nodes competing to “mine” the next block and receive the reward in bitcoins for their effort. Today, the computers that win-out are often multiple nodes rigged together sharing their computing power and using the high-end hardware to do it. Hence, the common concern that Bitcoin is using massive amounts of energy.
Another genius element of bitcoin is that the protocol caps the number of bitcoin in existence at 21 million.
After every 210,000 blocks are mined, the number of bitcoin rewarded to miners is cut in half. This feature is known as halving, the last of which happened in May 2020. Eventually, no new bitcoins will be mined.
This contributes to the scarcity of bitcoin and partially why it’s valued so high. But more than that, it establishes trust. The protocol tells what’s to come and that won’t change. As others have innovated on the blockchain since the conception of bitcoin, they have all varied the circulation supply. Some decided on a hard-cap and some didn’t.
Public and Private Keys
The last significant innovation of bitcoin was the introduction of a new digital identity.
In Web 1.0 our identity was usually a random handle or username that differentiated site-to-site. In Web 2.0 that became our email address and in some cases, our phone numbers. In Web 3.0 our identity is our public key, first introduced on the Bitcoin network.
The public key is a long string of digits that anyone can use to see our account activity. The public key is paired with a private key, think about this as your ATM PIN, but a much longer string of numbers and letters. Your private key is necessary to complete any transaction on the blockchain. You don’t want to share your private key with anyone, because as soon as you do, they have access to everything.
As you can imagine, keys introduce a high level of complexity and challenge because they are easily lost or forgotten. You can read countless stories of all the lost bitcoin because people lost their keys.
Eventually, wallets were invented as a more user friendly way to manage keys and view account details. Calling these applications wallets is a bit deceptive since they don’t actually store anything, but instead provide visibility to your account on the blockchain.
Introducing an Open, Trusted, Decentralized, Permission-less Protocol
While all of these features essentially created an internet currency, they also set the foundation of a new internet that is often referred to as Web3. It introduced an open, trusted, decentralized, permission-less protocol that can be adopted to many uses beyond currency.
In the next essay, I’ll get into the Ethereum network and how it innovated on the blockchain technology and created new primitives which are the building blocks of Web3.