To the answer to this question most people will say: It's Blockchain, it's a cryptographic technology, it's a cryptocurrency, it's digital money, etc.
All of them are somewhat right, but none of them have hit the nail exactly on the head. So, after realizing the misconceptions that many people have when they talk about Bitcoin, I decided to create this post, with the intention of clarifying it.
Definition of Bitcoin
To begin with, I must indicate that of all the definitions I have read, the one I like the most and the one that comes closest to what Bitcoin is for me, is the one that comes at the beginning of the great book "Mastering Bitcoin" by Andreas Antonopoulos, which is the following:
Bitcoin is a set of concepts and technologies that make up a digital money ecosystem.
Reference of "Mastering Bitcoin" by Andreas Antonopoulo
Having said the above I understand that for newcomers to the "Crypto World", the terminology can be quite confusing and even misleading. Some people refer to Bitcoin when talking about Blockchain technology. While others mention Blockchain when talking about cryptocurrencies in general. However, these concepts are not interchangeable, as they are not analogous. They refer to different but related concepts. Therefore, it is important to understand the differences between them. Let's define the basic concepts of Blockchain technology, Cryptocurrencies and Bitcoin.
Blockchain:
Blockchain is a digital, distributed and decentralized ledger of records. In simple terms, Blockchain is like an electronic version of the typical paper ledger. Where all transactions occurring within your network are recorded.
Specifically, a Blockchain is a linear chain of multiple blocks connected and secured by cryptographic proofs, used to validate transactions. Which are achieved after solving complex mathematical algorithms.
Decentralized concept.
The concept "Distributed" is due to the fact that blockchains can only be updated by the consensus of the majority of the network participants. These participants are known as Nodes. And they are nothing more than a computer arranged for these transactions. This information cannot be erased, modified, altered, or falsified, so Blockchain is presented as an immutable and permanent record.
o understand the "Decentralized" concept, we start from the premise that Blockchain was born out of the need to eliminate intermediaries. For example banks, in the case of financial transactions. These institutions have become necessary to be able to make economic transactions, because they are in charge of certifying that we are who we say we are. In exchange for providing this service, they keep users' data in order to trade with them. Thus violating the privacy and freedom of their rightful owners.
Blockchain came to change this. With this technology, it is not a single participant who has the information. Rather, it is distributed worldwide among millions of participants in the network. It is a large database in which each of the Nodes that compose it, keep a copy of the same information, so that all of them participate in the process of verification and validation of transactions, according to the rules of the system. Blockchain bases the certification of information on consensus, i.e., if we all have the same information, it means that this information is true.
How Blockchain works
Blockchain takes its name from the way its records are organized: a chain of blocks linked together. To explain it very simply, although the actual process is much more complex, a block is a piece of data that contains, among other things, a list of recent transactions. Blocks, like transactions, are public and visible, but, as mentioned above, they cannot be altered. As new blocks are added to the blockchain, a continuous record of linked blocks, unambiguously interlinked with each other, is formed.
The main reason blockchains are so resistant (unassailable at present, until quantum technology becomes widespread....) to modification is because the blocks are linked and secured by cryptographic proofs used for transaction validation.
For this transaction validation (cryptographic proof resolution) we must distinguish 2 different protocols on which the various Blockchain networks are based:
Proof of Work (PoW):
It is a protocol that has the main objective of discouraging potential cyber-attacks, such as a distributed denial of service (DDoS) attack, which has the purpose of exhausting the resources of a computer system by sending multiple false requests. This allows for distributed, non-trust-based consensus, meaning that if you want to send and/or receive money from someone you don't need to rely on third-party services. Going deeper, proof-of-work is a requirement to define an expensive computational calculation, called mining, that needs to be performed to create a new set of non-trust-based transactions (the so-called block) on the distributed ledger (Blockchain).
Objectives of mining
Ultimately mining serves two purposes:
Verify the legitimacy of a transaction.
To create new digital currencies by rewarding miners for performing the above task.
To finish with the PoW explanation, I must point out that the amount of cryptocurrencies that a miner receives as a reward for discovering each new block is variable and is defined in the programming of its blockchain. In general, as more blocks are discovered, the difficulty required to solve the mathematical algorithms increases, thus reducing the reward (amount of cryptocurrencies) obtained for mining each new block. This is known as Halving and we are going to discuss it in an exclusive post in the next few days, as we are less than 50 days away from the next one in the Bitcoin network. We will explain what it is and what consequences it has historically had on the price of this cryptocurrency and how it could affect for the future.
Proof of Stake or Proof of Stake (PoS):
Proof of Stake is a different way to validate transactions based and achieve distributed consensus. Although it is also an algorithm, and the purpose is the same as Proof of Work, the process to reach that goal is very different. Instead of miners competing to solve a problem, in PoS, the next block producer is determined by some process based on the number of coins in the wallets. This process trusts that those with the greatest interest will make responsible decisions for the entire network.
In addition, all digital currencies are created prior to the start of the network creation, and their number is invariant.
This means that in the PoS system there is no block reward, so miners can take transaction fees.
NOTE: Although due to the nature of the subject matter we deal with in this Blog, we focus it from the financial/economic point of view, we must make clear that Blockchain technology can also be applied in other activities (medicine, climate, research, production, livestock, population control, etc.) that do not necessarily require financial operations.
Cryptocurrency:
In simple terms, a cryptocurrency is a digital form of money (digital currency) designed to function as a medium of exchange. Unlike traditional banking systems, transactions are recorded in a public digital ledger (the blockchain) and can occur directly (that's the goal!) between participants (point-to-point) without the need for intermediaries. It uses cryptography to secure and verify transactions, as well as to control the creation of new units of that cryptocurrency. Essentially, cryptocurrencies are limited entries in a database that no one can change unless specific conditions are met. There are currently thousands of cryptocurrencies, although the most popular, the first, is Bitcoin.
Although, as we have seen above (in the explanation of PoW and PoS) not all cryptocurrencies are mineable, the many that, like Bitcoin, depend on the mining process, have a slow and controlled growth of their circulating supply. Therefore, mining is the only way to create new units of these currencies and this avoids the inflation risks that threaten traditional fiat currencies, where a government can control the money supply.
Bitcoin:
Bitcoin is the first cryptocurrency created and is naturally the most famous.
Let's go with a bit of history: On October 31, 2008 a programmer (or perhaps a group of programmers) under the pseudonym Satoshi Nakamoto published a white paper on the Cryptography Mailing List of metzdowd.com with the name: Bitcoin: A Peer-to-Peer Electronic Cash System. In this scientific paper he described what Bitcoin is, the functionality of the blockchain network that enables the operation of this cryptocurrency.
Genesis Blockchain
Subsequently, on January 3, 2009, the first block (Genesis block, as the first block of the entire blockchain is called) of Bitcoin was mined. In it there was an encrypted message: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks". Whose translation is: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks".
This text coincided exactly with the headline on the front page of that newspaper on January 3, 2009. Surely he put that date to "confirm" that bitcoin was created on January 3, 2009. The rest of the text is unknown; everyone can think what they want, but very possibly, or at least I think so, his intention was to highlight the uncertainty of the financial crisis that was already hitting the world at that time.
From this first mined block, a reward of 50 BTC was obtained, whoever caught them.....
Open source and limited supply.
The Bitcoin protocol is open source and anyone can review or copy the code. Many developers around the world contribute to the development of the project.
Like most cryptocurrencies, Bitcoin has a limited supply, meaning that the system will not generate more Bitcoins once the maximum supply is reached. Although this varies from project to project, the maximum supply of Bitcoin is set at 21 million units. Generally, the total supply is public information that is defined when the cryptocurrency is created.
Bitcoin:
Bitcoin is the first cryptocurrency created and is naturally the most famous.
Let's go with a bit of history: On October 31, 2008 a programmer (or perhaps a group of programmers) under the pseudonym Satoshi Nakamoto published a white paper on the Cryptography Mailing List of metzdowd.com with the name: Bitcoin: A Peer-to-Peer Electronic Cash System. In this scientific paper he described what Bitcoin is, the functionality of the blockchain network that enables the operation of this cryptocurrency.
Genesis Blockchain
Subsequently, on January 3, 2009, the first block (Genesis block, as the first block of the entire blockchain is called) of Bitcoin was mined. In it there was an encrypted message: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks". Whose translation is: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks".
This text coincided exactly with the headline on the front page of that newspaper on January 3, 2009. Surely he put that date to "confirm" that bitcoin was created on January 3, 2009. The rest of the text is unknown; everyone can think what they want, but very possibly, or at least I think so, his intention was to highlight the uncertainty of the financial crisis that was already hitting the world at that time.
From this first mined block, a reward of 50 BTC was obtained, whoever caught them.....
Open source and limited supply.
The Bitcoin protocol is open source and anyone can review or copy the code. Many developers around the world contribute to the development of the project.
Like most cryptocurrencies, Bitcoin has a limited supply, meaning that the system will not generate more Bitcoins once the maximum supply is reached. Although this varies from project to project, the maximum supply of Bitcoin is set at 21 million units. Generally, the total supply is public information that is defined when the cryptocurrency is created.
Bitcoin, the new type of (technological) money.
Bitcoin was the first digital money in history. It was born with the aim of solving the shortcomings of the different types of money that preceded it and about which you can learn more in this interesting article. Among its many undeniable advantages, it offers the population a monetary alternative that cannot be controlled by any public or private institution. It also lacks counterparty risk and more than fulfills the three main functions of money; means of payment, unit of account and store of value.
As explained above, Bitcoin was created in 2008 with the purpose of offering an alternative to the current monetary system. Its creator, Satoshi Nakamoto, was aware that the central problem with fiat money is that it depends on the trust that the public and private agents that control it will not use it to advance their particular interests. However, trust always ends up being violated. Human beings are easily corrupted, as Satoshi himself expressed in a cryptocurrency forum:
"The fundamental problem with conventional money is all the trust that is required to make it work. We must trust the central bank not to devalue the currency, but the history of fiat money is full of abuses of that trust. We must trust the banks to hold our money and transfer it electronically, but lend it in credit waves with a tiny fraction in reserve."
For that reason, Satoshi sought to create the first decentralized money in history. A mathematical monetary system established by source code, immutable and unbreakable, that could not be controlled by any government or private institution. This system (Bitcoin) follows transparent rules that we all know, but that no person or institution can alter.
Bitcoin offers a new monetary paradigm built on immutable axioms, determined by mathematical algorithms and without any room for arbitrariness, corruption and incompetence. This technological marvel (so I hope it will be recognized in the history books of the future) replaces trust in bureaucrats with trust in mathematics and cryptography, which cannot be corrupted or manipulated by anyone. In this way, transparent and fair money is achieved; no person or institution, regardless of their level of wealth, popularity, power or influence can change the rules of bitcoin for their particular benefit.
The digital currency introduces a fully transparent monetary policy, based on two pillars: absolute scarcity and decentralization.
If you have found this information interesting, but you still have some doubts, I invite you to read the following books (each one better than the next), besides asking me whatever you want through the form below and following the different posts that I will publish:
The Internet of Money by Andreas Antonopoulos.
The Bitcoin Pattern by Saifedean Ammous.
The Blockchain Revolution by Don Tapscott and Alex Tapscott.
And finally Mastering Bitcoin by Andreas Antonopoulos.
