Inventing Bitcoin: The Technology Behind The First Truly Scarce and Decentralized Money Explained

by Yan Pritzker

We slowly shifted from a world economy that used gold as money to one where paper certificates were issued as a claim on that gold. Eventually, the paper was entirely separated from any physical backing by Nixon, who ended the international convertibility of the US dollar to gold in 1971. The end of the gold standard allowed governments and central banks full permission to increase the money supply at will, diluting the value of each note in circulation, known as debasement

There will only ever be 21 million bitcoins, though each bitcoin can be divided into 100 million units now called satoshis, producing a final total of 2.1 quadrillion satoshis in circulation around the year 2140.

It is simply impossible to produce more of it, and we’ll explain why in later chapters.

Bitcoin separates money and state

In his paper, Satoshi cited several important attempts at implementing similar systems including Wei Dai’s b-money, and Adam Back’s Hashcash. The invention of Bitcoin stood on the shoulders of giants, but no one prior had put all the right pieces together, creating the first system for issuing and transferring a truly scarce digital money without central control. Satoshi tackled a number of interesting technical problems in order to address the issues of privacy, debasement, and central control in current monetary systems:

Satoshi mined the very first genesis block ever mined to generate the first bitcoins ever produced. The code is open source, meaning that anyone could take a look at how it works and validate that nothing fishy is going on under the hood. But even Satoshi had to run billions of computations and play the Proof of Work lottery in order to mine the first block. He couldn’t produce a forgery by faking the expenditure of the electricity required, even though he was the creator of the system.

Eventually, around the year 2140, the Block Reward will go away entirely, and miners will be incentivized only by fees paid by those performing the transactions.

Over the last few years, the price has climbed very quickly, as has the total hash rate. The higher the hash rate, the harder it is to attack the network because in order to control what gets written to even just the next block, you’d need to have as much energy and hardware under your control as more than half of the entire network. Today, the energy expended by the network of Bitcoin miners is estimated as equivalent to that of a medium sized country.

Even if Henry connects to dozens of out of date or malicious nodes, and one correct node, his Bitcoin software will know the one correct copy because it will contain the greatest amount of Proof of Work and consist of valid transactions all the way back to the genesis block.

Although the non-finality of transactions may seem disconcerting at first, it’s important to keep in mind that credit card transactions can typically be reversed 120 days after they are made. On the other hand, Bitcoin transactions are nearly irreversible only a few blocks in.

Bitcoin best practices actually call for generating a new address with a new private key for every transaction you make. So instead of having one bank account, you might have thousands or even millions of Bitcoin accounts, one for every transaction you’ve ever received.