bitcoin

What Is A Bitcoin And Why It Matters In Business

Bitcoin was the first digitalized and decentralized cryptocurrency, released as open-source software in 2009. It uses an underlying technology called Blockchain, which works as a digital, distributed ledger that can be used as a mechanism for disintermediating trust in transactions. Blockchain Technology, underlying Bitcoin, is enabling new business models to emerge.

Who is Satoshi Nakamoto?

Back in 2008, when Satoshi Nakamoto sent the first email to Hal Finney, his identity was private.

He was trying to explain how to get Bitcoin up and running.

That is the first email ever between Satoshi Nakatomo and Bitcoin first user, Hal Finney:

Normally I would keep the symbols in, but they increased the size of the EXE from 6.5MB to 50MB so I just couldn’t justify not stripping them. I guess I made the wrong decision, at least for this early version. I’m kind of surprised there was a crash, I’ve tested heavily and haven’t had an outright exception for a while. Come to think of it, there isn’t even an exception print at the end of debug.log. I’ve been testing on XP SP2, maybe SP3 is something.

I’ve attached bitcoin.exe with symbols. (gcc symbols for gdb, if you’re using MSVC I can send you an MSVC build with symbols)

Thanks for your help!

The communication among the people part of the Bitcoin community was private, and many didn’t meet in person for a few years.

Yet none ever met Satoshi Nakamoto.

In fact, on April 23rd, 2011, he left anyone baffled with this short message:

I’ve moved on to other things. It’s in good hands with Gavin and everyone.

As of today, we don’t know exactly who is Satoshi Nakamoto and whether he is a person or a group of people. 

Did you know Satoshi Nakamoto was nominated for the Nobel Price in economics in 2015?

Satoshi Nakamoto might be the first fictional character to go close to winning the Nobel Memorial Prize in Economic Sciences. 

The Prize was proposed by Bhagwan Chowdhry, as explained in this tweet:

Bitcoin is decentralized; what does it all mean?

That means that no controls nor guarantees for the system.

In a traditional financial order, a central authority, like a bank or a government, are necessary to make the system work.

Instead, the central authority isn’t needed with a Blockchain-based system, like Bitcoin, because the whole system relies on a technology called Blockchain.

In short, that is a distributed ledger made of millions of computers, each of which ensures that the ledger’s transactions are approved in blocks (that is why Block-chain).

In fact, for each block of operations, a lottery gets to run among a set of machines that have to solve math problems to approve those transactions.

This mechanism is at the core of Bitcoin’s underlying philosophy, proof of work.

proof-of-work
A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In Proof of Work, miners compete to complete transactions on the network by commuting hard mathematical problems (i.e., hashes functions), and as a result, they get rewarded in coins.

Once the computers in the chain approve the transactions, the blocks get recorded in the Blockchain forever.

To pass a block of transactions, the majority of principles apply. If 50% + 1 of computers approve a transaction while the remaining do not, the majority wins.

At that stage, the only way to change a Blockchain protocol drastically, or the set of underlying rules that make it up, will be through a hard fork

Those computers taking part in achieving consensus are called miners, and as rewards for helping the Blockchain Protocol to achieve consensus, they get Bitcoins. 

What is the Blockchain foundation?

That is a function called SHA256.

What is SHA256?

SHA256 is a particular type of algorithm, a Cryptographic Hash Algorithm.

In short, you input the value and the algorithm spits out a 256-bit code, which can’t be reversed.

Therefore, you cannot get the initial input. In this way, none knows who this code belongs.

That is how privacy is ensured.

For instance, let’s say I input into SHA256 “Gennaro,” and I get back the following code:

5b77b0b0984e51447faac5ab0dd46491501d73a8e985d12f2a7159ef3bddd854

The code cannot be decrypted back to find out my name. In short, it works only in one-way!

Is Bitcoin redistributing wealth?

As anything that starts with a visionary attempt to change the world might become just another way to create a cluster of wealth, that might be true for Bitcoin.

Over the years, Bitcoin’s primary philosophy, proof of work, also brought to the centralization of the network.

This is true, especially on the mining side.

As proof of work assigns Bitcoins, based on the ability of mining pools to solve harder and harder problems, those mining pools that, over the years, invested in computing equipment also monopolized the network.

As of 2020, five mining entities (AntPool, BTC.com, BTC.top, F2 Pool, and ViaBTC), all based in China, controlled 49.9% of all computing power on the network

The current protocol used by Bitcoin also raises concerns about energy consumption. 

What is the Market Cap of Bitcoin?

As of September 2022, the Market Cap for Bitcoin is over $360 billion.

The price of Bitcoin is quite volatile; and it’s today treated as a speculative asset, tied to easy liquidity. 

When too much liquidity is available (due to low-interest rates from the Federal Reserve) this liquidity moves to very speculative assets, like Bitcoin. 

How much can a Bitcoin be Worth?

Wences Casares, CEO of bitcoin wallet Xapo and member of PayPal’s board of directors, was one of the first Silicon Valley investors to believe in the potential of Bitcoin.

As reported in the book Digital Gold, Bitcoin could be worth as much as a half million dollars.

This computation was based on a simple assumption. Given all the value of gold in the world at around 7 trillion dollars in 2020 (in 2022 Gold stands at over 10 trillion dollars). Like gold needed to be mined, so Bitcoin does.

To create new Bitcoins, computers dedicated to mining must solve for complex math calculations.

The more the mining gets closer to the limit of Bitcoin that can be mined (set at 21 million), the harder it gets to mine new Bitcoins.

Until the problems computers are required to solve to mine, blocks will become unsolvable, thus making the supply of Bitcoin reach its highest limit.

What is going to happen next?

In theory, the limit should be kept to guarantee Bitcoin value stays stable. In practice, that limit might be changed as well.

Money back in the 60s was supposed to be tied to the reserve of gold.

On August 15, 1971, President Nixon announced the end of the so-called Gold Standard.

The US currency, the dollar, was finally free to be printed without needing a correspondent reserve of gold.

The Federal Reserve and the US government became the guarantors of the system.

Could the same happen to Bitcoin?  

Who controls the mining of Bitcoins?

Mining requires complex math calculations that can only be handled by machines.

The more the mining gets closer to the limit of 21 million Bitcoins available on the market, the more it gets hard for those devices to mine new Bitcoins.

That means that those machines now need to be more and more efficient in solving calculations. It also means that they need way more electricity to be run properly.

Not surprisingly China controls the mining of Bitcoins.

The energy consumption, the centralization of the network over time, and the security problems that come with it, also brought to the evolution of Ethereum’s proof of stake consensus.

How long it takes before a new block of Bitcoins is solved?

There is a time limit for each block of coins to be solved, which is ten minutes. Why?

As reported on a bitcoin.stackexchange.com discussion:

Ten minutes was specifically chosen by Satoshi as a tradeoff between first confirmation time and the amount of work wasted due to chain splits. After a block is mined, it takes time for other miners to find out about it, and until then they are actually competing against the new block instead of adding to it. If someone mines another new block based on the old block chain, the network can only accept one of the two, and all the work that went into the other block gets wasted. For example, if it takes miners 1 minute on average to learn about new blocks, and new blocks come every 10 minutes, then the overall network is wasting about 10% of its work. Lengthening the time between blocks reduces this waste.

As a thought experiment, what if the Bitcoin network grew to include Mars? From the farthest points in their orbits, it takes about 20 minutes for a signal to travel from Earth to Mars. With only 10 minutes between new blocks, miners on Mars would always be 2 blocks behind the miners on Earth. It would be almost impossible for them to contribute to the block chain. If we wanted collaborate with those kinds of delays, we would need at least a few hours between new blocks.

In short, to make the Blockchain efficient, ten minutes seemed to be the right time to allow all the machines in a blockchain to align without wasting too much work.

Is the blockchain allowing the emergence of innovative business models?

blockchain-business-models
The emergence of the Blockchain has also favored the development of new business models. It is essential to understand the implication of these new business models from a different standpoint. According to Joel Monegro, from USV (a venture capital firm) the blockchain implies value creation in its protocols. Where the web has allowed the value to be captured at the applications layer (take Facebook, Twitter, Google, and many others). In a Blockchain Economy, this value might be captured by the protocols at the base of the blockchain, where the apps built on top of it will have a fraction of the value.

Blockchain is not a unique protocol. There are many out there.

What protocol will turn out to be the most successful we don’t know yet.

However, looking at the current landscape, it is clear that the blockchain is allowing new business models to spring up.

To understand Bitcoin and the Blockchain, you need to understand the key principles from its White Paper and the new economic drivers of a Blockchain-based economy system:

blockchain-economics
According to Joel Monegro, a former analyst at USV (a venture capital firm) the blockchain implies value creation in its protocols. Where the web has allowed the value to be captured at the applications layer (take Facebook, Twitter, Google, and many others). In a Blockchain Economy, this value might be captured by the protocols at the base of the blockchain (for instance Bitcoin and Ethereum). However, according to blockchain investor Paivinen due to ease of forking, incentives to compete and improved interoperability and interchangeability also in a blockchain-based economy, protocols might get thinner. Although the marginal value of scale might be lower compared to a web-based economy, where massive scale created an economic advantage. The success of the Blockchain will depend on its commercial viability!

A glance at Bitcoin’s key principles

Bitcoin has been built upon a technology called Blockchain.

This technology allows decentralizing transactions or interactions among parties without needing a middleman and without necessarily relying on trust but on math and probability.

Since then, new blockchain protocols have been in use and have been proven effective in offering alternative business models.

For instance, the Steem Blockchain allows online publishers to monetize their content. In this article, I want to show you a few key takeaways from Bitcoin White Paper by Satoshi Nakamoto.

Cut off the middleman

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.

One critical aspect of the blockchain thought by Satoshi Nakamoto is cutting off the middleman.

The proof-of-work as a central concept

The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.

What makes the whole blockchain system thick is the proof of work.

To deter service abuse, the protocol requires a computer to perform computational work.

Business with less data

Merchants must be wary of their customers, hassling them for more information than they would otherwise need.

A certain percentage of fraud is accepted as unavoidable.

Today businesses like Facebook and Google have built a fortune thanks to their users’ data.

However, this business model is asymmetric and lacks transparency. Instead, with the blockchain, a transaction can occur with a little information.

Trust the cryptographer

system based on cryptographic proof instead of trust,

Another compelling aspect of the blockchain is the fact that it relies on math and probability rather than human trust. This is true to a certain extent.

As the network grows, the more effective it should become.

The collective is good

The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.

Another assumption of the blockchain connected to the previous one is that for it to work, honest nodes have to control more CPU power than attacker nodes.

We will see why this is the case – from the probabilistic standpoint – when the blockchain reaches a critical mass.

The fragility of centralization

The problem with this solution is that the fate of the entire money system depends on the company running the mint, with every transaction having to go through them, just like a bank.

Centralization works, but it’s quite fragile and creates many side effects.

For instance, if we think about governments and banks, substantial transaction fees, fraud, and corruptions are some of those.

Also, an asymmetric system, where one authority has power over a large number of people by controlling their data.

The blockchain avoids just that.

Of course, as the blockchain is based on a private key that, if stolen or lost, cannot be replaced or generated again, third parties that secure private keys have become the norm.

This makes Bitcoin less decentralized than it seems.

How does the blockchain transaction process work?

1) New transactions are broadcast to all nodes.

2) Each node collects new transactions into a block.

3) Each node works on finding a difficult proof-of-work for its block.

4) When a node finds a proof of work, it broadcasts the block to all nodes.

5) Nodes accept the block only if all transactions in it are valid and not already spent.

6) Nodes express their acceptance of the block by working on creating the next block in the chain, using the hash of the accepted block as the previous hash.

Majority rules

Nodes always consider the longest chain to be the correct one and will keep working on extending it

The blockchain process for approving transactions is based on the fact that the longest chain is assumed to be the correct one.

So if a shorter chain finishes first, the longest chain will still win over the shortest.

Privacy is in the master key

The traditional banking model achieves a level of privacy by limiting access to information to the parties involved and the trusted third party. The necessity to announce all transactions publicly precludes this method, but privacy can still be maintained by breaking the flow of information in another place: by keeping public keys anonymous.

As the private key is anonymous, so the privacy of the person that holds is kept so. This is a central principle of the blockchain.

Honest nodes win (in the long-run)

We consider the scenario of an attacker trying to generate an alternate chain faster than the honest chain. Even if this is accomplished, it does not throw the system open to arbitrary changes, such as creating value out of thin air or taking money that never belonged to the attacker. Nodes are not going to accept an invalid transaction as payment, and honest nodes will never accept a block containing them. An attacker can only try to change one of his own transactions to take back money he recently spent.

and it continues:

Given our assumption that p > q, the probability drops exponentially as the number of blocks the attacker has to catch up with increases. With the odds against him, if he doesn’t make a lucky lunge forward early on, his chances become vanishingly small as he falls further behind.

There is a probabilistic reason why honest nodes win against attackers, making the blockchain thick.

Related Blockchain Business Frameworks

Web3

web3
Web3 describes a version of the internet where data will be interconnected in a decentralized way. Web3 is an umbrella that comprises various fields like semantic web, AR/VR, AI at scale, blockchain technologies, and decentralization. The core idea of Web3 moves along the lines of enabling decentralized ownership on the web.

Blockchain Protocol

blockchain-protocol
A blockchain protocol is a set of underlying rules that define how a blockchain will work. Based on the underlying rules of the protocol it’s possible to build a business ecosystem. Usually, protocol’s rules comprise everything from how tokens can be issued, how value is created, and how interactions happen on top of the protocol.

Hard Fork

hard-fork
In software engineering, a fork consists of a “split” of a project, as developers take the source code to start independently developing on it. Software protocols (the set of rules underlying the software) usually fork as a group decision-making process. All developers have to agree on the new course and direction of the software protocol. A fork can be “soft” when an alteration to the software protocol keeps it backward compatible or “hard” where a divergence of the new chain is permanent. Forks are critical to the development and evolution of Blockchain protocols.

Merkle Tree

merkle-tree
A Merkle tree is a data structure encoding blockchain data more efficiently and securely. The Merkle tree is one of the foundational components of a Blockchain protocol.

Nothing-at-stake

nothing-at-stake-problem
The nothing-at-stake problem argues that validators on a blockchain with a financial incentive to mine on each fork are disruptive to consensus. Potentially, this makes the system more vulnerable to attack. This is a key problem that makes possible underlying blockchain protocols, based on core mechanisms like a proof-of-stake consensus, a key consensus system, that together the proof-of-work make up key protocols like Bitcoin and Ethereum.

51% Attack

51%-attack
A 51% Attack is an attack on the blockchain network by an entity or organization. The primary goal of such an attack is the exclusion or modification of blockchain transactions. A 51% attack is carried out by a miner or group of miners endeavoring to control more than half of a network’s mining power, hash rate, or computing power. For this reason, it is sometimes called a majority attack. This can corrupt a blockchain protocol that malicious attackers would take over.

Proof of Work

proof-of-work
A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In a Proof of Work, miners compete to complete transactions on the network, by commuting hard mathematical problems (i.e. hashes functions) and as a result they get rewarded in coins.

Application Binary Interface

application-binary-interface
An Application Binary Interface (ABI) is the interface between two binary program modules that work together. An ABI is a contract between pieces of binary code defining the mechanisms by which functions are invoked and how parameters are passed between the caller and callee. ABIs have become critical in the development of applications leveraging smart contracts, on Blockchain protocols like Ethereum.

Proof of Stake

proof-of-stake
A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like the Ethereum’s Casper protocol). Proof of Stake has the advantage of security, reduced risk of centralization, and energy efficiency.

Proof of Work vs. Proof of Stake

proof-of-work-vs-proof-of-stake

Proof of Activity

proof-of-activity
Proof-of-Activity (PoA) is a blockchain consensus algorithm that facilitates genuine transactions and consensus amongst miners. That is a consensus algorithm combining proof-of-work and proof-of-stake. This consensus algorithm is designed to prevent attacks on the underlying Blockchain.

Blockchain Economics

blockchain-economics
According to Joel Monegro, a former analyst at USV (a venture capital firm) the blockchain implies value creation in its protocols. Where the web has allowed the value to be captured at the applications layer (take Facebook, Twitter, Google, and many others). In a Blockchain Economy, this value might be captured by the protocols at the base of the blockchain (for instance Bitcoin and Ethereum).

Blockchain Business Model Framework

blockchain-business-models
A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.

Sharding

sharding
Blockchain companies use sharding to partition databases and increase scalability, allowing them to process more transactions per second. Sharding is a key mechanism underneath the Ethereum Blockchain and one of its critical components. Indeed, sharding enables Blockchain protocols to overcome the Scalability Trilemma (as a Blockchain grows, it stays scalable, secure, and decentralized).

DAO

decentralized-autonomous-organization
A decentralized autonomous organization (DAO) operates autonomously on blockchain protocol under rules governed by smart contracts. DAO is among the most important innovations that Blockchain has brought to the business world, which can create “super entities” or large entities that do not have a central authority but are instead managed in a decentralized manner.

Smart Contracts

smart-contracts
Smart contracts are protocols designed to facilitate, verify, or enforce digital contracts without the need for a credible third party. These contracts work on an “if/when-then” principle and have some similarities to modern escrow services but without a third party involved in guaranteeing the transaction. Instead, it uses blockchain technology to verify the information and increase trust between the transaction participants.

Non-Fungible Tokens

non-fungible-tokens
Non-fungible tokens (NFTs) are cryptographic tokens that represent something unique. Non-fungible assets are those that are not mutually interchangeable. Non-fungible tokens contain identifying information that makes them unique. Unlike Bitcoin – which has a supply of 21 million identical coins – they cannot be exchanged like for like.

Decentralized Finance

decentralized-finance-defi
Decentralized finance (DeFi) refers to an ecosystem of financial products that do not rely on traditional financial intermediaries such as banks and exchanges. Central to the success of decentralized finance is smart contracts, which are deployed on Ethereum (contracts that two parties can deploy without an intermediary). DeFi also gave rise to dApps (decentralized apps), giving developers the ability to build applications on top of the Ethereum blockchain.

History of Bitcoin

history-of-bitcoin
The history of Bitcoin starts before the 2008 White Paper by Satoshi Nakamoto. In 1989 first and 1991, David Chaum created DigiCash, and various cryptographers tried to solve the “double spending” problem. By 1998 Nick Szabo began working on a decentralized digital currency called “bit gold.” By 2008 the Bitcoin White Paper got published. And from there, by 2014, the Blockchain 2.0 (beyond the money use case) sprouted out.

Altcoins

altcoin
An altcoin is a general term describing any cryptocurrency other than Bitcoin. Indeed, as Bitcoin started to evolve since its inception, back in 2009, many other cryptocurrencies sprouted due to philosophical differences with the Bitcoin protocol but also to cover wider use cases that the Bitcoin protocol could enable.

Ethereum

ethereum-blockchain
Ethereum was launched in 2015 with its cryptocurrency, Ether, as an open-source, blockchain-based, decentralized platform software. Smart contracts are enabled, and Distributed Applications (dApps) get built without downtime or third-party disturbance. It also helps developers build and publish applications as it is also a programming language running on a blockchain.

Ethereum Flywheel

blockchain-flywheel
An imaginary flywheel of the development of a crypto ecosystem, and more, in particular, the Ethereum ecosystem. As developers join in and the community strengthens, more use cases are built, which attract more and more users. As users grow exponentially, businesses become interested in the underlying ecosystem, thus investing more in it. These resources are invested back in the protocol to make it more scalable, thus reducing gas fees for developers and users, facilitating the adoption of the whole business platform.

Solana

solana-blockchain
Solana is a blockchain network with a focus on high performance and rapid transactions. To boost speed, it employs a one-of-a-kind approach to transaction sequencing. Users can use SOL, the network’s native cryptocurrency, to cover transaction costs and engage with smart contracts.

Polkadot

polkadot-token
In essence, Polkadot is a cryptocurrency project created as an effort to transform and power a decentralized internet, Web 3.0, in the future. Polkadot is a decentralized platform, which makes it interoperable with other blockchains.

Filecoin

filecoin
Launched in October 2020, Filecoin protocol is based on a “useful work” consensus, where the miners are rewarded as they perform useful work for the network (provide storage and retrieve data). Filecoin (⨎) is an open-source, public cryptocurrency and digital payment system. Built on the InterPlanetary File System.

Brave

bat-token
BAT or Basic Attention Token is a utility token aiming to provide privacy-based web tools for advertisers and users to monetize attention on the web in a decentralized way via Blockchain-based technologies. Therefore, the BAT ecosystem moves around a browser (Brave), a privacy-based search engine (Brave Search), and a utility token (BAT). Users can opt-in to advertising, thus making money based on their attention to ads as they browse the web.

Decentralized Exchange

decentralized-exchange-platforms
Uniswap is a renowned decentralized crypto exchange created in 2018 and based on the Ethereum blockchain, to provide liquidity to the system. As a cryptocurrency exchange technology that operates on a decentralized basis. The Uniswap protocol inherited its namesake from the business that created it — Uniswap. Through smart contracts, the Uniswap protocol automates transactions between cryptocurrency tokens on the Ethereum blockchain.

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