When I first learned about Bitcoin, it was just a symbol, a target that I could stare at the screen to go long and short. Buy at a low point, sell at a high point, and get the money, nothing more. But in fact, the connotation of Bitcoin is much more than that. It is a kind of contempt for me to treat this miraculous gift that mankind has harvested like that. It deserves more respect.
In the bear market of 2018, after the excitement disappeared along with the profit, I decided to “hold”, that is, “hoard money”. I know that it is impossible to do without patience. But all I have is time. So I decided to learn more about the internals of Bitcoin. How lucky! Then I was shocked. Since then, I have been learning; the more I understand, the more I understand that all of this is of ulterior motives, and my beliefs have grown accordingly; so have my investments.
I often ask myself: “Did I choose a path blindly and credulously?” Investment due diligence requires me to look for the weaknesses of Bitcoin very carefully. In 18 months of searching, I have never found a satisfactory objection, and my desire to hoard coins has almost increased day by day.
In this series, I will first explain what Bitcoin is and how it works. In subsequent articles, I will review these objections and the risks that I and others have discovered. I will also show the responses and insights I found.
It is difficult to understand Bitcoin, but you will find that everything else is easy
It’s not easy to understand Bitcoin right from the start. I think that for those who are new to Bitcoin, it would be better to explain what Bitcoin is (rather than how it works ). What can it do, what problem it has to solve, and why this problem is important. and many more. We shouldn’t start exploring how it actually works too early. Without this need, understanding its working principle will not allow us to better understand the magical properties of Bitcoin, nor will it increase appreciation.
But that’s it, Bitcoin is not easy to explain. There is no succinct paragraph that can cover all the key attributes of Bitcoin. Simplify the explanation, in some degree on all misleading interpretations.
Part of the reason is that something like Bitcoin has never existed before, so there is no analogy. In order to understand concepts, people naturally turn to analogies; but analogies are also inaccurate and may lead to wrong conclusions. Bitcoin challenges many stereotypes about currencies (saying they are stereotypes because they are wrong). It also challenges the worldview of many people, and naturally makes people feel uncomfortable.
Another reason that makes it difficult to understand is that it has many different and complex parts, and each part carries different functions. You can only fully understand the whole if you understand each part. A basic understanding of some disciplines, such as computer science, cryptography, Austrian economics, currency history, social networks, game theory, human psychology, and evolution theory can help you master these complex parts.
Bitcoin itself is just a string of numbers. But it is a scarce number. How is this done? Intuitively, there is no scarcity of numbers, right?
But Bitcoin is like that. There are 21 million such “things”, each of which can be divided into very small parts (8 digits after the decimal point). That is to say, the bitcoins you own can be refined to 8 decimal places; at least you can only hold 0.00000001 btc (no less). Bitcoin has no tangible physical form, they are just special numbers.
These figures represent the data (bit) can be transferred from one place to another, but the numbers themselves can not belong to two people . Copying these data does not increase the number of bitcoins. This is the special place.
If I had 0.5 btc and passed it to you, I would have nothing left. Unlike email, even if I forward it to you, I may still keep a backup. Maybe you can think of a certain amount of Bitcoin as a unique and recognizable email with a number written in it, and this email has a clear attribution at any time, and there is only one attribution, not two Attribution.
Before Bitcoin was invented, no virtual goods had such attributes. However, without this attribute, digital currency must rely on an authoritative coordinator.
It’s more difficult. Bitcoin just numbers , it is a set of electronic books , recorded on digital books. We use “bitcoin” starting with a lowercase b to refer to these numbers (that is, btc as a currency unit), and “Bitcoin” starting with a capital B to refer to this ledger. The books also recorded these btc belong address . Now, you can think of these addresses as bank accounts. These addresses (accounts) are “holding” Bitcoin.
The Bitcoin blockchain, or Bitcoin ledger, records the balance of each address (account) and every transfer (that is, all “transactions”) of all Bitcoins since the birth of Bitcoin. Note that since the birth of Bitcoin per transaction for each account . This is a completely transparent currency system. It is not open bank accounts , but it is a transparent monetary system .
Note that the ledger does not record personally identifiable information related to these addresses (so it is not a public bank account), but the owner’s information can be inferred from the activities of the address. Therefore, Bitcoin does not inherently have privacy protection features, but using reasonable methods can improve the privacy of your account. If Bitcoin becomes completely private, there will be no way to audit the fairness of the currency system.
Because adding data depends on blocks, and each block is connected to the previous block, this kind of ledger is called a “blockchain”-a chain of successively increasing blocks.
The creation of Bitcoin
The Bitcoin blockchain was born on January 3, 2019, and was launched by a person or a group of people under the pseudonym “Satoshi Nakamoto”. No one knows his or her true face, TA also disappeared shortly after the creation of Bitcoin.
On the first page of the ledger, which is the first block, the moment Bitcoin was born, only 50 Bitcoins were created. what does this mean? This means that on the first page of the ledger there is a transaction of 50 btc-like you open a new notebook and write the first sentence: “I have 50 dollars.”
Don’t rush to ask how it came out of nothing-this naive criticism will be answered in a follow-up article in this series.
Every time a page of Bitcoin’s account book is added, 50 new “coins” are created. On each page, in addition to the records of the additional issuance of these coins, there are also records of bitcoin transfers-the “transactions” mentioned above.
For every additional 210,000 pages, or blocks, of the ledger, the rate of Bitcoin creation will halve afterwards; for example, starting with 210001 pages, only 25 btc (instead of 50 btc) will be created. Starting from block 420001, only 12.5 btc was created. At block 63001 (in history, it was May 12, 2020), each block will only create 6.25 btc. These events are called Bitcoin’s “halvening” (or “Halvenings”-we have something to say about this term later).
The additional bitcoin issued by a single block will continue to decline over time. Around 2140, the additional bitcoin issued per block will be reduced to the smallest unit of bitcoin (o.ooooooo1 btc, called “1 Satoshi”). “), and no longer halved. This puts an upper limit on the number of btc: 21 million, there will be no more. Currently, 18.5 million bitcoins have been created.
Node: Blockchain can be copied, Bitcoin cannot be forged
Importantly, although the number of bits per unit of currency in the books is strictly controlled, which is not forged ( “copy”), but the books themselves, that bitcoin block chain, is can be replicated, and in fact all the time in the copy, which is critical to its ability to resist attacks and unplanned downtime.
Copies (replicas) of this ledger exist in thousands of computers all over the world, and these computers are all connected to a network and kept in sync. We call these computers “nodes”.
After the new node synchronizes with other nodes, it waits to receive new blocks (produced by “miners”) (the same goes for other nodes). These blocks will be propagated in this network, and every node that receives the block will update its own data. Nodes can go offline at will or come back at any time, just download the blocks they missed again.
The history of the blockchain is immutable, it is a permanent record of historical transactions, and it has thousands of copies all over the world. This is why it cannot be eliminated. To eliminate Bitcoin, you have to find and destroy all nodes one by one. Because this is almost impossible, Bitcoin is also almost indestructible.
The Bitcoin blockchain is a chain of connected blocks. Each block contains a newly created Bitcoin (“made out of nothing”) and some Bitcoin ownership transfer records (transactions). On average, a new block is stored every 10 minutes, and thousands of computers store identical copies of the entire chain and update them in real time.
Save Bitcoin: Private Key
What’s interesting is that if we use the literal meaning of the word “own”, you will never “own” some bitcoins. The number of bitcoins is just a number recorded on a copy of the blockchain (that everyone can see), and it belongs to a string (composed of letters and numbers) called a bitcoin “address”.
What you have is not Bitcoin, but the key corresponding to this address (“private key”). The private key is like a mysterious formulas – it is actually a randomly generated , and a very large binary number (a bunch of “0” and “1” number composed), basically only you know the number. You can know a number, but you can not occupy this number, right? So you just know a private key, but can not say that they occupy a private key. However, it is relatively simple to use “own” in daily communication, and everyone has accepted it.
Because this number is large and it is randomly generated, generally no two people happen to generate the same private key.
An example of a Bitcoin private key (actually it can be twice this length):
This private key can use a set of pre-appointed mathematical methods to create a unique set of addresses containing almost unlimited Bitcoin addresses. Here are a few addresses that this private key can create:
If it is recorded on the Bitcoin blockchain that there are some bitcoins in a certain address, and you have the private key to create this bitcoin address, then you have the right to transfer these bitcoins and send them to other addresses.
If you transfer these bitcoins to the address created by someone’s private key, that person can control these bitcoins and decide where they will go next. This is actually a payment. How much your address is missing, the other party’s address will be too much.
Therefore, another way to understand the Bitcoin blockchain is to imagine it as a whiteboard that everyone can see. If you can prove that you are the holder of the private key, you can write something on the whiteboard.
Proven approach is to use your private key signing a deal. This proof method is based on cryptography-if you just want to use Bitcoin, you don’t need to understand it too deeply. Your wallet software will do all this for you…
Safekeeping Bitcoin: Wallet
The so-called wallet is a software that keeps your private key. The wallet is not part of the Bitcoin blockchain, it is just software that interacts with the blockchain. They are private.
In fact, there are no bitcoins in the wallet. It just asked the Bitcoin network: “How many Bitcoins are in this address of mine?”
Again, a private key can create countless addresses and control the bitcoins under these addresses. For this private key, all these addresses are unique and cannot be confused or mistaken. When the wallet has the private key, it can find out these addresses. The wallet that keeps the same private key can run on multiple devices at the same time, and each device will display the same balance.
If the private key is lost, the bitcoin it controls will never be spent. These bitcoins (the ownership record) still exist on the blockchain, but they can’t be spent anymore (can’t be transferred to others), so they are essentially “lost”.
The word “wallet” may confuse newcomers because it has two meanings: one meaning is software that keeps your private key, and the other is all addresses derived from an address.
Software (called wallet) –> Hold private key –> Private key can derive many addresses (also called wallet)
An example of a newly created wallet:
A bitcoin transaction can be understood as a small piece of data, stating that a certain amount of btc is to be transferred from a certain originating address to another address, plus the signature of the private key corresponding to the originating address. It’s kind of like a bank check (with quantity, sender, receiver, signature).
The transaction is generated by the sender’s wallet software and signed by the private key kept in the wallet, and then the data will be sent to a Bitcoin node. It’s like a person signs a check, not directly to the payee, but to deposit it in the payee’s account.
The node that receives the transaction data will check the validity of the transaction (whether it meets the Bitcoin spending rules), including: checking that the signature is indeed checked out by the relevant private key. It is similar to a bank manager who wants to check that there is so much money in the account that issued the check, and the signature on the check is true.
Only when the transaction is valid, the node will keep the data of the transaction and forward it to the node that has a communication connection with itself. Note that the private key is only used for signing in this process, and it is not the private key that is transmitted between nodes, but the signature.
Each node accepts new transactions and adds valid transactions to a waiting list called “mempool”. Each node has its own waiting list.
The transactions lie in the mempool, waiting for Bitcoin miners to take them out and pack them into the next block (what is mining is explained in the next section). After a miner digs a valid block, it is sent to a node, and the node checks the validity of the block, and then propagates it to other nodes (other nodes will also decide whether to continue propagating depending on whether it is valid or not). The block and the transactions contained in it therefore become part of the blockchain.
If a transaction is sent from the address monitored by the wallet software, it will check the transaction that was recently added to the Bitcoin blockchain. The data from the blockchain is used to update the balance displayed in the wallet.
The figure below is an example. Alice is paying Bob 1.0 btc (for the sake of simplification, let’s not mention the transaction fee for the miner). On the left side of the picture, Alice’s wallet has an address (the third address) with 1.0 btc, then she pays this amount to Bob’s third address, which has a balance of 5.15 btc. Bob tells Alice what his third address is (that is, sends a payment request), and Alice’s wallet generates a transaction describing the originating address, receiving address, and transfer amount.
Then she publicized the transaction to the Bitcoin network (that is, sent the data to a node, the node broadcasted, a miner put the data in the block, and then the block was mined and sent back Give the node, gradually complete the spread of the whole network). Both wallets update their balances based on the data of the blockchain (they request data from the nodes via the Internet).
On the right side of the figure is the display status of the wallet of two people after the transaction is completed (on the chain). The balance of Alice’s third address becomes 0, and the balance of Bob’s receiving address becomes 6.15. Then Bob gets a payment.
To understand how Bitcoin works, you don’t actually need to understand the internal process of Bitcoin mining. You don’t have to dream of mining Bitcoin as an individual, and you won’t make much money. Only large companies that can get cheap electricity (lower than residential electricity prices) can make a profit from mining. The picture below is a photo of a small mining “mine”:
To understand how Bitcoin works, you only need to know that there is mining – just like you don’t need to know how to mine gold if you want to store gold.
Mining is like a turn-based game. Each block is a round, and all miners are competing to dig the next block. The main thing is to use computer violence to exhaust a special number. In fact, there is no such thing as “calculation” (just constant trial and error), although most people say so. This process consumes power (because of the need to run the computer).
When a miner finds such a number for a block that he has packaged, the TA can obtain the additional Bitcoin issued by the block. In addition to the Bitcoin transfer transaction initiated by other people in the block, the miner will also initiate a new transaction, which means “I have 6.25 newly mined Bitcoins in my address”. All other transactions in the block only involve the transfer of Bitcoin, not the additional issuance of Bitcoin.
This award also Bitcoin can block the production speed by regularly issuing. Because the miner discovers such a special number, it proves that he has done some work, so that when the block is sent to the node, the node will accept the bitcoin created by the block to be valid. No matter who finds the block first, TA can get rewards. And the second person found was nothing. After a block is dug out, all miners start looking for the next block.
Those who want to deceive the entire network are doomed to fail, because they do not have the correct numbers and will be seen through. Such a number is difficult to try, but it is very fast and easy for nodes to check their validity.
The computing power invested in trial and error is not a waste of energy ! This is a defense mechanism. Miners spend energy to get bitcoin rewards. Any attacker who wants to deceive the Bitcoin network must spend more energy than the mining power of the entire world combined, and if they fail, they will lose money . The more energy miners spend, the higher the cost of attacking Bitcoin.
All the mining power in the world jointly protects the integrity of the entire Bitbi system. The computing power protects the blockchain, so that no one can shake the rules of Bitcoin, nor can it be stolen.
In addition to this overall security, there is also security at the individual level. When you use a private key to control Bitcoin, your “right to control” is determined by your own custody measures. If someone else gets your private key, they can steal your money without violating the rules of Bitcoin.
Why can Bitcoin become currency?
Bitcoin can become currency because it has all the characteristics of a good currency. It can be divided, is easy to transport, can be stored for a long time, is easy to identify, can be transferred (a medium of exchange), can measure value (a unit of account), and is easy to verify. The most important thing is that it does not rely on the good quality of human beings (or authoritative coordinators), and will not depreciate because of additional issuance.
One objection is that money needs “intrinsic value”-but in reality, nothing has “intrinsic value”. A more refined form of expression of this opinion is: “It needs to be able to provide humans with value beyond money.” This is also wrong. Because money does not need to have other value. It is a language, the language of value:
Compare currency with English: the “storage” of the purpose of English and the semantics of communication . English has no “intrinsic value”. English words themselves are just abstract symbols, even noise. People speak English not because of the intrinsic value of the language, but because the people they communicate with speak English. The network of people who speak the same language started from an early age and gradually expanded.
In the case of a free market currency (not a currency enforced by the government), people use this language about value because other people also accept it. Just as English does not need intrinsic value, currency does not need to have intrinsic value if it is to become a language.
Any other value of currency is only useful in the initial stage of language communication. Once it is accepted, these other effects are irrelevant-it doesn’t even matter if it disappears completely. This is how gold becomes the language of money. It’s good to have other uses, but it doesn’t matter if you don’t. It has better currency attributes and scarcity, which makes it gradually become the dominant currency, but it has nothing to do with its other uses.
Now, for the first time in human history, we have found something better than gold. People just take time to learn this language.
The candidate of currency not only needs to have the right attributes, it also needs social acceptance. In the free market, it needs the best characteristics to get started. And once its acceptance is ahead, it no longer needs to be the best. As long as it is good to use as currency to other competitors if just a little bit better , it is impossible to replace it.
Let’s take language as an example. If a new language similar to English appears now, but the pronunciation is better, we can speak a little better, but English will not be replaced. English will still maintain its dominant position because it is already mainstream. This is the characteristic of the network.
And say Bitcoin can replace gold, not gold because it is more than a little bit better , but because it all aspects better than gold. It may replace the free market dominance of gold because it solves the biggest weakness of gold.
Weaknesses of gold :
- It is not easy to divide, and it is not convenient to make small payments
- It’s not easy to carry (try taking a few kilos of gold across the ocean)
- Not electronic
- Final settlement is very slow and expensive (to be delivered to the physical entity)
- High storage costs
- Has been confiscated by the government (Order 6102)
In order to overcome these limitations, paper money with gold as a deposit was invented. Therefore, it is easier for people to carry and exchange value, and can be divided into smaller units. Later, electronic paper money was developed, but some new limitations were introduced as a result: a trusted third party . Bitcoin overcome the shortcomings of gold, but do not need you trust a third party . This is the most amazing place.
Since President Nixon completely abolished the dollar’s gold reserve requirement in 1971, the dollar has become currency, not currency. It is an easy-to-print currency, not a hard currency. Not a sound currency.
We have seen many government-issued “currencies” without any endorsement-we can conclude that gold has failed. If the world returns to the gold standard again (almost impossible), then the same thing may happen again. We need a better solution, and there is one now. The government is unlikely to actively accept Bitcoin (but it is still possible). However, as an Austrian school economist said (this passage is already well-known in Bitcoin circles):
“I think that unless the currency is completely separated from the government’s control, we will never have a good currency again. However, we can’t resort to violence to get the currency out of the government’s control, so what we can do is Design some cunning methods to introduce something that the government can’t stop.” — Hayek, 1984
Even if it is better than gold in all aspects, Bitcoin is not yet a currency, and it will be accepted by most people. It takes time. It does not need to be a currency that everyone has a number of Bitcoin, but let everyone want to have a number. This is the last obstacle.
What is the importance of Bitcoin?
The importance of Bitcoin is that we now have no free market currency. Our currency is created and controlled by the government and the central bank. This kind of control allows them to forcibly deprive us of our time (savings)-by inflation. This is a humanitarian disaster. In order to let myself know more about this injustice, I mustered up the courage to read Robert Breedlove’s handed down work, “The Master and Slave of Money”.
There are many other reasons why Bitcoin is important, but this is the most important. Some people (including myself) foresee that a world where free market currencies replace central banks is a peaceful and prosperous world. Such a world is our dream.
Free market currency vs. barter
In a free market, there will be only one currency in the end. Multiple currencies only increase friction and develop in the direction of barter. Currency solve the problem of barter. If free market currency can circulate, barter will eventually disappear. Note that today, most countries have government-issued currency, and the law forces people to use it for transactions, as the subject of contracts, and to pay taxes. This is not a free market currency, which is why there are so many currencies in the world and why foreign exchange exchanges are indispensable for international trade.
When hoarding one’s own wealth, individuals have an incentive to choose the currency that is accepted by the most people — not the currency that is less acceptable. This pressure will eventually cause one currency to stand out and defeat other sub-optimal means of storage. But it also takes time.
I hope this article can help you understand what Bitcoin is and why it is not a worthless, “no endorsement” thing that the government can easily trample to death. This is just an unbiased first impression, but when you touch it, you will realize that it is amazing. In a follow-up article, I will list people’s prejudices (that’s a lot) and my personal responses to these opinions. I will also write about the concerns that people have raised after learning about Bitcoin – but they all have a good response.
The original intention of writing this article is “Don’t be too constrained to technology.” If you are ready to learn more about the technical details, I strongly recommend you to read this wonderful talk by Andreas Antonopoulos. Incomparable.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/popular-science-an-overview-of-bitcoin-without-technology/
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