Bitcoin: A Beginner’s Guide to the Revolutionary Digital Currency
• Bitcoin was created in 2009 by an anonymous individual or group under the pseudonym Satoshi Nakamoto, embodying a philosophy of economic libertarianism.
• Bitcoin operates on a decentralized network using a technology known as blockchain, where transactions are verified by miners through a Proof-of-Work consensus mechanism and recorded in groups called “blocks”, forming a secure and transparent ledger.
• Bitcoin's economics are underpinned by its finite supply of 21 million coins, the halving of its block rewards every four years, and the dynamics of supply and demand within free markets.
• Maya strives to reflect all of Bitcoin's core values, including decentralization, permissionlessness, security, and trustlessness by allowing anyone to trade cryptocurrencies without the need for a centralized third party.
Ah, Bitcoin! You've probably found yourself in the middle of more than one heated debate about it, about the future of finance, decentralization, and the viability of global digital currencies. Welcome to our full guide to Bitcoin - a technological innovation, an investment asset and a revolution in the making!
A statue in Budapest, dedicated to Satoshi Nakamoto. Retrieved from Reddit.
By now you probably know that Bitcoin's journey started with a person, or possibly a group of people, under the pseudonym Satoshi Nakamoto and that Nakamoto published the Bitcoin nine-page Whitepaper on the cryptography mailing list at metzdowd.com in October 2008. This paper proposed a system of online payments that would circumvent the need for financial institutions - like banks – and that could serve as “peer-to-peer electronic cash”. Did you know, though, that you can still read Satoshi’s original forum entries or take a sneak peek at the Bitcoin wallet that he used to receive the rewards for the first block ever mined?
Leaving the enigmatic subject of Satoshi aside – perhaps for another article – it is important to know that Bitcoin has some philosophical roots in the principles of libertarianism. The goal of Bitcoin is to provide individuals with the power to control their own money, free from government control and censorship. At its core, it challenges the state's control over money by use of cryptography, privacy and decentralization.
When discussing this cryptocurrency in a more strict setting, remember that "Bitcoin" - with a capital 'B' - refers to the Bitcoin network, or the system as a whole, whereas "bitcoin" - with a lowercase 'b' - refers to the digital currency itself, namely the tokens or units of value that are used within the Bitcoin network.
Similarly, “Satoshi” refers to the Bitcoin creator, while “satoshi” or “sat” is a unit equaling 1/100,000,000 bitcoins.
Bitcoin Halving history. Source: StormGain
Bitcoin design has been linked to the traditional Austrian School of Economics, which emphasizes the importance of sound money—money that maintains its value and is not subject to sudden bouts of inflation — and criticizes central banks' ability to influence the money supply.
An example of this is also one of the defining characteristics of Bitcoin, the finite supply of its currency. New bitcoins are issued – and awarded to a lucky miner - with every mined block, so approximately every ten minutes, however the Bitcoin protocol includes a process known as "halving," which cuts the block reward in half approximately every four years. It is projected that in the year 2140, after 33 halvings, the block reward becomes so small that it effectively reaches zero.
At this point, the total number of bitcoins will be 21 million, a limit that is considered into the Bitcoin protocol and cannot be changed. This implementation was a conscious decision by Satoshi Nakamoto, and serves to make Bitcoin a deflationary asset. Initially, the reward for mining a new block was 50 bitcoins, as of today, July 2023, the block reward is 6.25 bitcoins.
Bitcoin also exhibits other characteristics that make it economically practical: it can be used as a medium of exchange, as a unit of account, it is portable, durable and non-counterfeitable. This is the reason why its potential adoption as a means of payment or store of value (“Digital Gold”) is still hotly debated.
Arguably, volatility remains one of the main reasons causing skepticism about Bitcoin's reliability as a financial instrument. In the realm of traditional finance, “strong” currencies and economic value storage instruments are typically marked by consistent value over time. This stability enables individuals to predictably save, manage, and access their wealth in the future. However, Bitcoin's significant and often sudden price fluctuations challenge this norm, in its relatively short existence, the value of one bitcoin has crashed and soared repeatedly - with an all-time high of USD $69,000 in December 2021.
In June 2021, El Salvador pulled a major economic and political move by becoming the first-ever country to give Bitcoin the status of legal tender. This effecetively allows the prices of all goods and services in the country to be shown in bitcoin, tax contributions to be paid with the digital currency, and to exempt all Bitcoin exchanges from capital gains taxes. The government of El Salvador also presumably holds some of its national reserves in Bitcoin.
The implementation and longer-term impact of this decision are yet to be seen, but will definitely offer valuable insights into the potential for Bitcoin to foster financial inclusion, its viability as a medium of exchange and the overall impact on the country's economic development.
A Bitcoin mining farm. Source: Cnet
Bitcoin operates on a technology called blockchain, a public, decentralized ledger of all transactions that have ever occurred in the network. Interestingly, the blockchain technology exists almost as a by-product of the creation of Bitcoin.
With the right software, anyone can connect to the Bitcoin network and indicate that a new transaction exists, however this information is not instantly accepted in the ledger (i.e., blockchain). Instead, transactions are first verified and agreed by the network's nodes, which ensure that they adhere to the network's rules and group them in batches, called “blocks”.
Blocks are then added to the ledger through a process known as mining, which [very] basically prevents spam by forcing the nodes to demonstrate 10 minutes of computational work between one block and the next one. Miners rush to compute the necessary computational operations because adding a block to the chain rewards them with new bitcoins. You can read more about Proof of Work in our article about Consensus Mechanisms.
In the early days of Bitcoin, anyone running the Bitcoin software could mine new blocks. However, as the network’s popularity grew, the difficulty of the mining process increased and specialized hardware became necessary. This development led to a practical separation of roles; today large communities with the resources to invest in powerful mining hardware work full time to mine new blocks, while other, smaller entities run “full nodes” primarily to validate and save the blockchain history.
The proof of computational work required by the Bitcoin network is also the reason for the environmental concerns regarding this cryptocurrency system. According to some estimates, the Bitcoin network's energy consumption rivals that of some medium-sized countries, leading to criticism about its sustainability. At its core, this dilemma is reduced to deciding whether this state-independent system of payments is worth the natural resources that it consumes, and naturally, everyone is entitled to having their own opinion.
The “blockchain scalability trilemma” suggests that it's challenging for any blockchain network to simultaneously achieve all three: decentralization, security, and scalability. In the case of Bitcoin, the network has achieved decentralization and security but has experienced difficulties with processing times (i.e., scalability) whenever there has been heavy loads on it.
The Lightning Network was designed to address this, and facilitate faster and cheaper transactions. It works by creating an off-chain relation between two users and an initial balance that is called a “payment channel”. These users can conduct an unlimited number of transactions with each other - without interacting with the blockchain - and “close” the channel anytime, with only the initial and ending balance being recorded into the blockchain.
In an attempt to expand Bitcoin’s capabilities, in January 2023, the Ordinals protocol was introduced. It allows “inscriptions” of data to be made to any individual satoshi, to be uniquely identified and transacted with additional information attached to it. This effectively enables NFTs in the Bitcoin blockchain, something that has been highly controversial.
Despite that, since its inception, the Ordinals protocol has grown steadily as a growing number of users contribute by uploading different types of content, such as images, audio, and videos.
Maya strives to reflect all of Bitcoin's core values, including decentralization, permissionlessness, security, and trustlessness. We believe that these foundational principles enable a free and open financial system, rooted in the ethos of self-sovereignty.
If you are curious about decentralized finance and eager to be part of an innovative community, don't hesitate to join us on our official Discord server where you can connect with like-minded individuals, explore new ideas, and stay updated on the latest developments in the Bitcoin and crypto ecosystem. Remember, the future of finance is being built here, and you can be a part of it!