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February 3 - February 4, 2018
Bitcoin with an uppercase B refers to the software that facilitates the transfer and custody of bitcoin the currency, which starts with a lowercase b. • Bitcoin equals software. • bitcoin equals currency.
Decentralizing a currency, without a top-down authority, requires coordinated global acceptance of a shared means of payment and store of value.
Bitcoin is a similarly shared representation of value, except it has no physical manifestation and no top-down authority to protect it. Despite these hurdles, the elegance of the mathematics that allow it to function has also allowed it to grow and store billions in value.
Bitcoin’s blockchain is a distributed, cryptographic, and immutable database that uses proof-of-work to keep the ecosystem in sync. Technobabble? Sure. But impenetrable technobabble? No.
More recently, cryptography has evolved to include applications like proving the ownership of information to a broader set of actors—such as public key cryptography—which is a large part of how cryptography is used within Bitcoin.
Transactions are not added one at a time, but instead in “blocks” that are “chained” together, hence the term blockchain.
The Code Book: The Science of Secrecy from Ancient Egypt to Quantum Cryptography by Simon Singh.
The computers—or miners as they’re called—use PoW to compete with one another to get the privilege to add blocks of transactions to Bitcoin’s blockchain, which is how transactions are confirmed. Each time miners add a block, they get paid in bitcoin for doing so, which is why they choose to compete in the first place.
The solution to this cryptographic puzzle involves combining four variables: the time, a summary of the proposed transactions, the identity of the previous block, and a variable called the nonce.
The nonce is a random number that when combined with the other three variables via what is called a cryptographic hash function results in an output that fits a difficult criteria. The difficulty of meeting this criteria is defined by a parameter that is adjusted dynamically so that one miner finds a solution to this mathematical puzzle roughly every 10 minutes.
Miners are economically rewarded for creating a new block with a transaction that grants them newly minted bitcoin, called a coinbase transaction, as well as fees for each transaction.
Remember, a blockchain is created by a distributed system of computers that uses cryptography and a consensus process to keep the members of the community in sync. A blockchain is useless in isolation; one might as well use a centralized database. The community of computers building a blockchain can either be public or private, commonly referred to as permissionless or permissioned.
But to Bitcoiners it had always been “bitcoin and blockchain.” The asset, bitcoin, was what incentivized an ecosystem of players—miners, developers, companies, and users—to secure and build upon Bitcoin’s blockchain, delivering means of exchange and store of value services to the world.
Pivotal to the current conversation, private blockchains don’t need native assets. Since access to the network is tightly controlled—largely maintaining security through exclusivity—the role of computers supporting the blockchain is different.15
A private blockchain is typically used to expedite and make existing processes more efficient, thereby rewarding the entities that have crafted the software and maintain the computers. In other words, the value creation is in the cost savings, and the entities that own the computers enjoy these savings.
Over time, miner compensation will shift from the issuance of new bitcoin to transaction fees, and if global adoption is great enough, then transaction fees will be sufficient to sustain miners.
