Inventing Bitcoin Notes

The below notes are from the book Inventing Bitcoin by Yan Pritzker. The entire book is available for free here.

Bitcoin is a peer to peer electronic cash, a new form of digital money that can be transferred between people or computers without any trusted middleman (such as a bank), and whose issuance is not under the control of any single party. In some ways, it’s more similar to cash than digital payments made over the Internet by means of a middleman (e.g., Visa, PayPal, Apple Pay).

Bitcoin offers an alternative to centrally controlled digital money with a system that gives us back the person to person nature of cash, but in a digital form:

  1. A digital asset whose supply is limited, known in advance, and unchangeable.
  2. A bunch of interconnected computers (the Bitcoin network), which anyone can join by running a piece of software. This network serves to issue bitcoins, track their ownership, and transfer them between participants without relying on any middlemen such as banks, payment companies, and government entities.
  3. The Bitcoin client software, a piece of code that anyone can run on their computer to become a participant in the network. This software is open source, which means that anyone can see how it works, as well as contribute new features and bug fixes to it.

Where did it come from?

Invented by a person or group known by the pseudonym of Satoshi Nakamoto around 2008.

On Feb 11, 2009, Satoshi wrote about an early version of Bitcoin on an online forum for cypherpunks.

What problem does it solve?

I’ve developed a new open source P2P e-cash system

Peer to peer eliminates the need for a middleman.

The software is open source, which means anyone can see how it works and contribute to it. This is important as it removes the requirement to trust Satoshi.

It’s completely decentralized, with no central server or trusted parties…

Centralled controlled money systems are doomed to failure; people can’t rely on a money that can disappear when the company goes out of business, gets hacked, suffers a server crash, or is shutdown by the government.

Bitcoin, on the other hand, is not run and controlled by a single company, but rather by a network of individuals and companies all over the world. To shut down Bitcoin would require shutting down tens to hundreds of thousands of computers around the world, many in undisclosed locations. It would be a hopeless game of wack-a-mole as any attack of this nature would simply encourage the creation of new Bitcoin nodes, or computers on the network.

…everything is based on crypto proof instead of trust

The Internet, and indeed most modern computer systems, are built on cryptography, a method of obscuring information so that only the recipient of the information can decode it. How does Bitcoin get rid of the requirement of trust? The basic idea is that instead of trusting someone that says “I am Alice” or “I have $10 in my account,” we can use cryptographic math to state the same facts in a way that is very easy to verify by the recipient of the proof but impossible to forge. Bitcoin uses cryptographic math throughout its design to allow participants to check the behavior of everyone else without trusting any central party.

We have to trust [the banks] with our privacy, trust them not to let identity thieves drain our accounts

Unlike using your bank account, digital payment system, or credit card, Bitcoin allows two parties to transact without giving up any personally identifying information. Centralized repositories of consumer data stored at banks, credit card companies, payment processors, and governments are giant honeypots for hackers.

Bitcoin decouples financial transactions from real world identities. After all, when we give physical cash to someone, they don’t need to know who we are, nor do we need to worry that after our exchange they can use some information we gave them to steal more of our money. Why shouldn’t we expect the same, or better, from digital money?

The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust

Fiat, which is Latin for “let it be done,” refers to government and central-bank issued currency which is decreed as legal tender by the government. Historically, money was created from things that were hard to produce, easy to verify, and easy to transport, such as seashells, glass beads, silver, and gold. This is why gold was considered such a good money for so long—it was hard to produce more of it quickly.

We slowly shifted from a world economy that used gold as money to one where paper certificates were issued as a claim on that gold. Eventually, the paper was entirely separated from any physical backing by Nixon, who ended the international convertibility of the US dollar to gold in 1971.

The end of the gold standard allowed governments and central banks full permission to increase the money supply at will, diluting the value of each note in circulation, known as debasement. Although government-issued, redeemable for nothing, pure fiat currency is the money we all know and use day to day, it is actually a relatively new experiment in the scope of world history.

Satoshi wanted to offer an alternative to fiat currency whose supply is always expanding unpredictably. In order to prevent debasement, Satoshi designed a system of money where the supply was fixed and issued at a predictable and unchangeable rate. There will only ever be 21 million bitcoins, though each bitcoin can be divided into 100 million units now called satoshis, producing a final total of 2.1 quadrillion satoshis in circulation around the year 2140.

Bitcoin is the first digital system which enforces scarcity without any middlemen and is the first asset known to humanity whose unchangeable supply and schedule of issuance is known completely in advance.

Data could be secured in a way that was physically impossible for others to access, no matter for what reason, no matter how good the excuse, no matter what. […] It’s time we had the same thing for money

Bitcoin does not rely on trust in a third party to secure your money. Instead Bitcoin makes your coins impossible for others to access without a special key that only you hold, no matter for what reason, no matter how good the excuse, no matter what. By holding Bitcoin, you hold the keys to your own financial freedom. Bitcoin separates money and state.

Bitcoin’s solution is to use a peer-to-peer network to check for double- spending […] like a distributed timestamp server, stamping the first transaction to spend a coin

The idea of double-spending refers to the ability to spend the same money twice. This is not a problem with physical money as it leaves your hand when you spend it. Digital transactions, however, can be copied just like music or movies. When you send money through a bank, they make sure that you can’t move the same money twice. In a system without central control, we need a way to prevent this kind of double-spending, which is effectively the same as forging money.

Satoshi is describing that the participants of the Bitcoin network work together to timestamp (put in order) transactions so that we know what came first, and therefore we can reject any future attempts to spend the same money.

Satoshi tackled a number of interesting technical problems in order to address the issues of privacy, debasement, and central control in current monetary systems:

  1. How to create a peer to peer network that allows anyone to voluntarily join and participate.
  2. How a group of people that don’t have to reveal their identities or trust each other can maintain a shared ledger of value, even if some of them are dishonest.
  3. How to allow people to issue their own unforgeable currency without relying on a central issuer while maintaining the scarcity of that currency so that production of new units isn’t a free-for-all.