What is Bitcoin? A Short Intro Lead You to The Crypto World

Currency, Financial Crisis, and Cypherpunks

Gold became a currency about 2000 years ago. Around 1000 years ago, silver was gradually adopted as the general equivalent for market circulation. In ancient times, humans also used livestock, slates, shells, jades as currencies. In the past, humans chose a substance as currency basically based on its rarity and stability. As the economy developed and trading flourished, the barter form was gradually replaced by paper money or credit vouchers. And the earliest use of paper money can be traced back to China, in the 7th century A.D. National fiat currencies gradually became the mainstream transaction mediums about 300 years ago — the GBP is the most “oldest” fiat currency. From the early gold standard to modern credit currencies, the problem of fiat currencies has become increasingly apparent — fiat currency has no intrinsic value and no use value. It has “value” only because the people who use it as a medium of the exchange agree on its value: people trust it will be accepted by merchants and others. And the guarantee of all this only comes from the government’s credit and people’s trust behind the currency.

Therefore, the overissue of fiat money became the inevitable end. In terms of real purchasing power, the GBP has lost more than 99% of its value in 300 years, while the U.S. dollar has lost about 90% over the last century. Most fiat currencies suffer from high inflation for a long time, which has devastating effects on savers—high inflation can make it difficult for everyone except the rich to save for the future, because saving money causes their real purchasing power to drop rapidly.

In fact, modern currencies have entered an era of chaos and disorder. After the gold standard was abandoned, the pure credit currency system was riddled with holes, and the fiat money over issue became the government’s “fiscal opium”. In a word—the government was unable to control itself running on the road of currency overissue, then the financial crisis came from this. The most recent financial crisis with a huge impact was the global financial crisis of 2007-2008. The results were catastrophic. In September 2008, the financial crisis began to spiral out of control and caused several fairly large financial institutions collapsed or were taken over by the government. This precipitated the Great Recession, and it took years for the whole world to recover.

On October 31, 2008, a few weeks after the U.S. government authorized a $700 billion bailout of banks, an anonymous person — Satoshi Nakamoto — released a technical white paper outlining a new electronic payment system called Bitcoin. Satoshi submitted the white paper to a cryptography researcher email list called Cypherpunks.

The Cypherpunks can be traced back to 1993, a “Cypherpunk Manifesto” issued by mathematician Eric Hughes. And the early initiators also included Intel senior scientist Timothy C. May and DHCP author John Gilmore. They realized that the Internet had to be able to transmit not only information, but also value—the Internet should have its own currency.

On this path, in 1994, Nick Szabo proposed the concept of smart contracts. In 1998, Wei Dai designed B-Money, which proposed a way for everyone to participate in bookkeeping. In 2002, Adam Back invented POW technology. Then 2008, Satoshi Nakamoto published the Bitcoin white paper. At 18:15 on January 3, 2009 (UTC), on a server in cold Helsinki, Satoshi created the first block (Block 0) of Bitcoin. This moment was so inconspicuous at the time, but perhaps no one including Satoshi Nakamoto could have imagined that Bitcoin would grow into what it is today.

The New Cornerstone of Trust—Mathematics

Compared with the chaotic credit currency, Satoshi proposed a mathematics-based electronic cash system. Using cryptographic algorithm as a mathematical weapon, bitcoin builds a decentralized payment network without the intervention of a trusted third party. The Bitcoin chain is made up of many blocks formed over time. A simple diagram is as follows, each block records the details of transactions.

The right of who can pack block and write it on the chain comes from competition, which is called POW (Proof of Work). We can simply think of it as a math guessing game: anyone in the bitcoin network can fight for the right of confirming transactions, whoever solves the math problem first will pack the block first. This kind of mathematical problem has a characteristic: it is difficult to solve and easy to verify. Competitors are called miners, and this process is also described as mining—because the miner will receive bitcoin as rewards from the network, including block rewards and transaction fees. Bitcoins can only be minted by mining, and every time a new block is generated, new bitcoins are generated—the reward for miners (rewarding them for confirming transactions and maintaining the stability of the network). The amount of rewards for each block is 50 at the beginning, and this number will be halved every 210,000 blocks, which corresponds to about 4 years (it takes about 10 minutes for bitcoin to generate a new block).

In this way, in about 140 years, bitcoin will be infinitely close to its upper limit: 21 million, which is a number that cannot be changed. In other words, the total supply of bitcoin is constant and cannot be issued additionally. Today, bitcoin has experienced 3 halvings, the first on November 28, 2012, the second on July 9, 2016, the most recent one on May 11, 2020, and the next one is expected in the spring of 2024.

How to ensure the accuracy and integrity of the chain? Bitcoin uses a principle called the longest chain. For example, A and B pack a new block almost at the same time, but A packs a bit faster, then the others will perform the next operation based on A’s block. Even if B is not willing to admit defeat, he cannot change the existing fact. Because of the longest chain principle, everyone only recognizes the longest and latest blockchain, and all B can do is to recalculate based on the latest block. How to ensure that no one can fake it? The answer is that it is not 100% guaranteed, but it’s very difficult to fake.

Due to the existence of blockchain, faking a transaction must fake all the transactions related to this. Otherwise, for example, you faked the No.123 transaction. If others compare the thumbnail of No.123 in No.124, they will find that the traces of the thumbnail are different. So they will refuse to recognize your legitimacy. That means you need to deceive everyone at the same time. Another characteristic of the bitcoin network is decentralized. People can participate in mining by having a mining machine and without any additional permissions, also anyone can run a bitcoin full node (recording all transactions since 2009) on their own computer. This means that there is no single authoritative center that controls the bitcoin network. Each of us can be a part of bitcoin, which is the essence of bitcoin: it is completely decentralized.

For users, on the bitcoin network, we use public/private keys to replace the account/password. The public/private key generation process is roughly as follows:

  • First, generate an elliptic curve through the Secp256k1ECDSA standard, and use the ellipse to generate a 256-bit private key;
  • Secondly, the private key derives the public key through the SECP256K1 elliptic curve, and then obtains the hash value of the public key through the SHA-256 and RIPEMD-160 algorithms;
  • Finally, the public key hash value is transformed by Base58 encoding to a common address, such as 1PzbQUBZUENedEaUN6s35Hm6zbSTFk2try;

Here are a few simple principles:

  1. The public key and private key are in one-to-one correspondence;
  2. Public key and address are equivalent;
  3. As long as the private key is known, the corresponding public key can be calculated;
  4. Information signed with the private key can be verified by the public key;

Remember, keeping your private key safe make your coins safe. “Not your keys, not your coins!” The transaction process is roughly like this:

  1. Confirm the recipient’s address, confirm the amount of bitcoin in the transaction, and ensure that you are in control of your own private key;
  2. Then initiate a transaction through the bitcoin client (or wallet), and sign the transaction request with the private key you own;
  3. After that, this transaction will be sent to the network broadcast, waiting for miners to pack it into blocks. When a miner has the right to confirm transactions, and after verifying that your signed hash is valid (for example: check if you have enough balance for this transaction), the transaction record will be packed to the block, and the transaction succeeded.
  4. Then we can see the transaction record on the block explorer and notify the receiver.

From the above, we can see that the bitcoin network is completely built on the guarantee of public rules and mathematical weapons, which means that we have been able to choose to change the cornerstone of trust by using bitcoin—from government credit to mathematics.

The Future Belongs to Crypto

Looking back at the history of humans, we can clearly see that economic activities cannot be separated from “trust” at any time. In contrast, bitcoin’s mathematically-based trust mechanism may be a more desirable approach in the future. Bitcoin’s mathematical mechanisms are invulnerable, it has gathered the wisdom of generations of Cypherpunks.

The Bitcoin network is stable and performing perfectly. After 13 years, the bitcoin network has become more and more robust (currently, the hash rate of the entire network exceeds 200m TH/s). From the perspective of social impact, it is inspired by bitcoin that we can see the emergence of Turing-complete blockchains such as Ethereum, where people are gradually building more complex functions. Concepts such as DeFi, NFT, and Web3, which have been popular in recent years, are also grown on the blockchain…… And all of this originated from January 3, 2009.

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