Bitcoin is a cryptocurrency and a decentralized settlement network, which was defined by its creator Satoshi Nakamoto, an unknown individual or a group, as “a peer-to-peer electronic cash system.” Bitcoin was first released as open-source software in 2009, after the release of the whitepaper of Satoshi Nakamoto. The eight-paged document listed the technical intricacies and structure of bitcoin which includes mining, transactions, time-stamp server, the proof-of-work consensus protocol, blockchain technology, decentralized network, incentive, nodes, and monetary supply.
As a distributed protocol, Bitcoin operates without the existence and necessity of intermediaries and network administrators. The network is sustained by a decentralized community of miners, node operators, and developers. As of October 2017, Bitcoin is regulated in most countries except Bangladesh, Bolivia, Ecuador and Kyrgyzstan. Most notably, Bitcoin is acknowledged as a legal currency and remittance system in the Philippines, Japan, South Korea, and Australia.
Bitcoin was defined in its whitepaper released on 31 October 2008, as a combination of the words bit and coin. Most dictionaries and newspapers including the Oxford English Dictionary and the Wall Street Journal use bitcoin in lowercase to refer to the cryptocurrency, and use Bitcoin, the capitalized term, when referring to the technology (e.g the Bitcoin protocol, the Bitcoin network, the Bitcoin software).
The definition of bitcoin as a cryptocurrency also varies. Merriam Webster defines bitcoin as a “truly untraceable” form of money, while Satoshi Nakamoto’s bitcoin whitepaper described Bitcoin as a transparent settlement network, in which transactions can be traced and analyzed through the public Bitcoin blockchain.
Each unit of account of the Bitcoin network is referred to as bitcoin. Two tickers or monikers, BTC and XBT, are used to represent bitcoin in trading platforms, exchanges, and stock markets. The smallest unit in bitcoin is a satoshi, which originates from the name of the bitcoin creator Satoshi Nakamoto. One satoshi represents 0.00000001 bitcoin, or one hundred millionth of a bitcoin. Many bitcoin wallet platforms use a millibitcoin, better known as mBTC, which equates to 0.001 bitcoin, or one thousandth of a bitcoin.
Bitcoin was first released in January 2009, as open-source software by Satoshi Nakamoto, whose identity remains anonymous, upon the mining of the genesis block. Nakamoto was rewarded with 50 bitcoins for mining the first bitcoin block.
The coinbase of the genesis block included an embedded text, which read: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” Prior to the release of the Bitcoin software, in August 2008, the domain bitcoin.org was registered. Two months thereafter, the Bitcoin whitepaper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” authored by Satoshi Nakamoto was officially published on a cryptography mailing list.
Computer programmer Hal Finney, bit gold creator Nick Szabo, and b-money founder Wei Dai, were some of the few early supporters of bitcoin. Finney contributed` to the development of bitcoin, assisting Nakamoto in developing the protocol and the decentralized settlement network. In the early phase of the development of bitcoin, Nakamoto had mined 1 million bitcoins. Shortly after releasing bitcoin as open-source software, developer Gain Andresen took over the role as the lead bitcoin developer.
Eventually, Andresen resigned from his role as the lead Bitcoin developer and consequently, the Bitcoin Core development team took charge of developing and sustaining the Bitcoin protocol. The Bitcoin Core development team includes Greg Maxwell, Pieter Wuille, and Eric Lombrozo. Specifically, Jonas Schnelli, Wladimir J. van der Laan, and Marco Falke were assigned to maintain the Bitcoin protocol and commitments--also referred to as pull requests-- from the open-source development community of bitcoin.
According to Bitcoincore.org, project maintainers “perform a janitorial role merging patches that the team agrees should be merged. They also act as a final check to ensure that patches are safe and in line with the project goals. The maintainers’ role is by agreement of project contributors.”
Each bitcoin, or pending balance of bitcoin on wallets, represents a log of transactions and their inputs. Bitcoin cannot be attributed to a single file or physical object. Rather, each bitcoin is a direct representation of its previous transactions.
A transaction is a combination of information that includes inputs, outputs, and amount. An input is defined as a record of the bitcoin address that is initially used to send a bitcoin transaction. An output holds the bitcoin address of the receiver of the transaction. The amount represents the amount of bitcoin a sender sends to a recipient in the Bitcoin network.
In concept, sending a bitcoin transaction in the Bitcoin network signifies the process of broadcasting the inputs, outputs, and amount of the transaction to the Bitcoin blockchain network, which are then verified by nodes and eventually, by miners.
Like fiat currencies, banking systems, and credit cards, bitcoin users can send transactions to multiple recipients. Vice versa, a user can receive multiple transactions from different senders to the identical wallet. The increase in inputs and outputs cause the size of the transaction to rise, which results in a higher transaction fee.
In the Bitcoin network, miners are incentivized for confirming transactions and broadcasting them to the blockchain. Users are required to attach fees to transactions to have miners confirm them. Confirmation periods can vary depending on the transaction fee. If the fee is higher, miners are likely to confirm the transaction substantially faster. If the fee is lower than other transactions, miners will confirm the transaction with the lower fee last.
The procedure of bitcoin mining and transaction confirmation system creates the fee market, which Bitcoin developer Jimmy Song noted in his research that the existence of the fee market prevents the abuse of public resources in Bitcoin, as Song wrote, “miners naturally will choose the transactions that have the highest fees per byte as this will maximize their revenue. Miners are thus incentivized to only put transactions with the highest fees on the blockchain. This prevents the abuse of a public resource.”
Mining is a crucial system which operates as the backbone of the Bitcoin network’s security. Through the usage of computer power, also known as hash power, miners discover new blocks that contain bitcoin transactions. Structurally, bitcoin transactions are sets of information of senders, recipients, and amounts. Blocks which contain these bitcoin transactions are mined or solved by miners using hash power, effectively verifying and confirming bitcoin transactions.
Mining bitcoin is expensive because it requires significant amounts of hash power, mining equipment, and electricity. A recent study by Dutch bank ING revealed mining one bitcoin trade requires electricity which can power a house in the Netherlands for one whole month. In return, miners receive incentives with newly produced bitcoins and transaction fees. Each block a miner mines produces a certain amount of bitcoin, which changes over time through difficulty adjustment and block reward halving. When the supply of bitcoin reaches its maximum capacity of 21 million bitcoins, miners are rewarded with transaction fees users attach onto transaction fees.
Mining is the third phase of transaction verification within the Bitcoin network. First, nodes broadcast transactions to the Bitcoin blockchain and send them to the Bitcoin mempool, wherein unconfirmed transactions are stored. Miners confirm transactions within the Bitcoin mempool, creating blocks of transactions on a chain, which is referred to as the blockchain.
Using the SHA-256 hashing algorithm, miners provide each block a cryptographic hash of the previous block. The chain of blocks with unique cryptographic hash eliminates the possibility of the Bitcoin network being breached by hackers. To alter information stored within blocks, the entire blockchain is required to be set apart.
Bitmain, a bitcoin mining company, officially became the first multi-billion dollar company within the bitcoin industry in 2016, as profits for mining bitcoin increased significantly.
Bitcoin’s monetary supply is unique as it evolves from an inflationary currency to a deflationary currency. Through bitcoin mining, new bitcoins are produced at a rate that is established through block reward halving. As of 9 July 2016, miners are rewarded with 12.5 bitcoin per block that is broadcasted to the public bitcoin blockchain.
Every 210,000 blocks, Approximately every four years, the reward for miners and the production rate of bitcoins are halved. Structurally, the bitcoin block reward system was designed to slow down the rate of bitcoin production as it reaches closer to the 21 million capacity. Once the supply of bitcoin reaches 21 million, miners are solely incentivized with transaction fees.
The fixed supply of bitcoin makes the currency a deflationary currency by nature, as the supply of bitcoins can only decrease when it achieves its maximum capacity of 21 million bitcoins.
Bitcoin wallets are platforms that allow users to transact bitcoins. Wallets simplify the process of sending, receiving, and storing bitcoins, by removing complex operations in the front-end and allowing users to solely deal with sending and receiving bitcoins.
Bitcoin wallets contain private and public keys which are required to sign transactions and broadcast them to the Bitcoin network for nodes and miners to confirm. Public key cryptography integrated into bitcoin enables users to remain in full control over their funds, by managing private keys securely.
In bitcoin, there exists two main types of wallets: hot and cold wallets. Hot wallets refer to bitcoin wallets that are connected to the internet. Most web and mobile-based wallets are considered as hot wallets. Notably, Coinbase and Blockchain, two of the largest bitcoin wallet applications by user base, are hot wallets. There also exists two different types of hot wallets: custodial and non-custodial wallets. Custodial wallets manage the private keys of users, therefore remaining in control of user funds. Coinbase, the world’s largest bitcoin wallet app, is a custodial platform. Non-custodial wallets enable users to remain in full control over their private keys and funds. Blockchain is an example of a non-custodial platform.
Cold wallets, also known as offline wallets, refer to bitcoin wallets that are not connected to the internet. Some major bitcoin markets like South Korea sell bitcoin in the form of USB drives, metal coins, and paper wallets, with private keys and funds stored in them.
By nature, Bitcoin is a decentralized, peer-to-peer, and distributed network. Developer activities to sustain the BItcoin network and improve its infrastructure are managed by an open-source development community of developers. Anyone within the open-source development community can contribute to the codebase of bitcoin. According to Bitcoin.org, more than 365 developers have contributed to the codebase of bitcoin since 2009.
While anyone can contribute to the development of the Bitcoin network, developer activities are maintained and overseen by a group of developers known as the Bitcoin Core development team. Its primary aim is to sustain the codebase of bitcoin by managing tens of thousands of code additions, pull requests, and commitment to the bitcoin codebase through Github, an open-source repository.
Developments such as scalability solutions, privacy improvements, and major bitcoin software upgrades are overseen by the Bitcoin Core development team. As Bitcoin Core developer Eric Lombrozo noted, “The BIP editor's responsibility is to make sure the BIP repository is properly maintained and that all the BIPs that get merged into it follow procedure and have the proper format.
The BIP editor does not decide whether the soft fork will activate nor even if the code for it will get merged into Bitcoin Core.” BIP editors are also a part of the Bitcoin Core development team.
Scalability is an underlying issue of public blockchains such as bitcoin and Ethereum. The bitcoin block size is capped at 1 megabytes. Consequently, each bitcoin block can handle 2,000 transactions and process approximately three transactions every second. The user base of bitcoin is expected to grow at an exponential rate based on mathematical frameworks such as the Metcalfe’s law. To confirm transactions efficiently, bitcoin is required to scale proportionally with the growth of its user base.
The first ever solution implemented onto the Bitcoin network was the Bitcoin Core development team’s Segregated Witness (SegWit), a transaction malleability and scaling fix introduced by Bitcoin Core developer Pieter Wuille. A part of the community is preparing a hard fork solution known as SegWit2x in November of 2017 to further increase the bitcoin block size to 2MB.
A group of 58 companies initially agreed to increase the bitcoin block size to 2MB in May. An open letter from a consortium that represents 83.28% of hashing power, 5.1 billion USD monthly on chain transaction volume, and 20.5 million bitcoin wallets read, “We agree to immediately support the following parallel upgrades to the bitcoin protocol, which will be deployed simultaneously and based on the original Segwit2Mb proposal: Activate Segregated Witness at an 80% threshold, signaling at bit 4 Activate a 2 MB hard fork within six months.”
As bitcoin grows, more scalability solutions are expected to be implemented. Already, two forks of the original bitcoin blockchain (Bitcoin Gold and Bitcoin Cash) have been introduced due to conflicts around scalability and mining. In November, the launch of SegWit2x is expected to result in three forks of bitcoin by the end of 2017.
Bitcoin is a transparent financial network and its transactions are publicly accessible on the bitcoin blockchain. Through blockchain explorers such as Blockchain, anyone can view transactions of bitcoin addresses and wallets through the public bitcoin blockchain.
Government agencies and global law enforcement have enforced Know Your Customer (KYC) and Anti-Money Laundering (AML) policies and systems to link bitcoin addresses to real identities. Bitcoin addresses and wallets operated by custodial platforms or regulated applications can be linked to personal identities through KYC and AML systems.
Several solutions are being explored to improve the privacy measures of bitcoin. Solutions such as TumbleBit and MimbleWimble, which theoretically can confine inputs and outputs in bitcoin transactions, can provide significant privacy to users. The development of privacy solutions and systems are expected to take several years.
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