People often ask me, “Just what exactly is a Bitcoin?” This book will hopefully answer that question fully in later chapters about mining and the mathematical hash functions and the mathematical cryptography the various blockchain based crypto currencies use to keep their system safe from hackers. For now suffice to say that Bitcoins are designed not to need a central authority to manage security. This is quite the opposite of traditional secure payment systems like Visa, Mastercard ,and Pay Pal. Since 1973, the banks and ATMs have used the Society for Worldwide Interbank Financial Telecommunications, ‘SWIFT’ system which is headquartered in La Hulpe, Belgium. One of the biggest design criteria with cryptos is that there is no one- single point of failure. Think of the recent Equifax hack where over one-hundred million people’s most confidential financial records, and identity markers such as date of birth, and social security number where stolen. Whenever accounts are verified in a central repository that holds personal data to be checked against; that system creates a data-bank that can conceivably be hacked. Bitcoin has no single point of failure. Crypto currencies are designed to function in a trust-less environment. Just to clarify the point in our minds lets define ‘trust’. Trust is the emotion of confidence that comes from belief that some party in a scenario involving risk will behave according to a set of tacit expectations or an explicit agreement. The Bitcoin protocol is similar to the Internet which can not be taken down by removing one or even several links in the network. We often say the original Internet web.1 was designed for communication, Bitcoin and the Internet of Money is called web.2, and Ethereum is considered to be web.3. The Internet of Things IoT will mark another great leap forward in the next few years as well.
A fresh new Bitcoin is created by miners every ten -minutes. That Bitcoin is merely a credit to a Bitcoin address that is controlled by the miner who was the first to solve an extremely long and complex mathematical puzzle in the Bitcoin algorithm. There will only ever be twenty-one million Bitcoins made, and over sixteen- million of those Bitcoins have already been mined. That leaves about six- million more Bitcoins to be made before the 2140 deadline, when the last coin ever will be created. When someone wishes to spend a Bitcoin, or a fraction thereof, they must prove to the system that they have sufficient funds by showing where they got the Bitcoin from. Every transaction input to acquire the Bitcoin balance along with the locking script signatures from the block headers is sent along with the transaction request to prove ownership. The Bitcoin protocol uses a system named UTXO or unspent transaction output; and is very different from Ethereum in this regard. “So how can criminals get away with making illegal transactions on the network?”, they usually ask next. My answer is that they can’t. Every dirty little deal ever done is recorded indelibly on the blockchain. Sure, aliases can be used. IP address that could pinpoint the exact computer that the dirty transaction was done on may be masked by using VPN or virtual private network tunnels, or by using the TOR browser; but the government could probably catch the criminals if they ever chose to do so.
The crypto community was concerned that some Bitcoins might become tainted because they had been used in criminal activity such as having been a payoff to ransomware hackers, or having been used in a drug deal on the ‘Silk Road’, a TOR browser based online wholesale and retail drug market. Contrast that tainted coin to one of the fresh new Bitcoins that was just mined. Could there be a two- tiered pricing system where innocent Bitcoins might conceivably become more valuable than tainted Bitcoins? The community views tainted Bitcoins as by necessity having an equal value to new Bitcoins; and we refer to this attribute as ‘fungibility’. Think of one gram of gold , or a ten- dollar bill; any other gram of gold or other ten -dollar bill is capable of mutual substitution . In our crypto currency society it was decided to mask tainted Bitcoins so that all coins would be treated equally. We do not discriminate against those items regardless of their provenance or history. The developers have come up with coin- mixing tools that mask tainted Bitcoins. These common tools exchanges use mix the good and the bad alike, in an effort to maintain fungibility, an essential Bitcoin feature. The critical features of Bitcoin and for that matter any other currency being used as money are: scarcity, fungibility, divisibility, durability, and transferability. Cryptos are an advanced third-generation of money, and our community has very strong views, and we often disagree about the following central philosophical tenants: Lack of a central authority, permission-less participation, anonymity, scaleability, and that the systems be as distributed as possible.
