Understanding Bitcoin
Bitcoin is the first example of a peer-to-peer, decentralized, cryptocurrency network. More than a meme or a buzzword, it is also the world’s first and largest (by market cap) blockchain network. Many people invest in Bitcoin, receive payments for goods and services in Bitcoin, or use the network to send money all over the world.
Perhaps most importantly, Bitcoin paved the way for what we now refer to as Web3.
Where Did Bitcoin Come From?
In 2008, Satoshi Nakamoto published Bitcoin: A Peer-to-Peer Electronic Cash System, more commonly referred to as the Bitcoin whitepaper.
Curiously, no one knows who Satoshi Nakamoto is. The name is a pseudonym, with some people believing Satoshi is a single person, and others believing ‘Satoshi’ is a team or a group of people.
Regardless of its mysterious origins, the 9-page whitepaper was the first to describe a computer network run on a decentralized network of computers (i.e., ‘nodes’) all over the world. Though these types of networks had been theorized for decades, the launch of the first Bitcoin node made Bitcoin the first ‘real’ decentralized network ever created.
What Does Bitcoin Do?
The Bitcoin network allows individuals to transact directly with one another. If you wanted to send money to your mom in another country, you could do so. No bank, bank fees, or other third parties required!
How is this possible? Satoshi’s Bitcoin network uses cryptography - a series of methods used to secure and validate communications. Bitcoin’s cryptographic measures ensure the safety and trustworthiness of the network, even if participants don’t know or trust each other.
Imagine that you’re on vacation in a foreign country and get your wallet stolen. You call your spouse or parents for money and they rush to the bank to send you $1,000.
You check your bank account and what do you see? Well, at first, probably nothing. It may take several days for the bank to credit your account with the money, and it may even take longer if they think the international transfer seems fraudulent.
When the money finally arrives, you see that there’s only $890 there… Because $110 was paid out in currency conversion and transfer fees. Then, when you go to access the money to buy a plane ticket home, you may need to pay more fees to a local bank to turn your account amount into physical cash.
Instead of using banks as intermediaries and wasting time and money, Bitcoin users can initiate frictionless, direct payments anywhere in the world, at any time.
Understanding the ‘Trust’ Problem
The Bitcoin whitepaper was published in 2008- October 31, 2008, to be exact. Remember what else was going on in the fall of 2008?
That’s right: the Great Recession, the most debilitating economic downturn since the Great Depression.
Driven primarily by the European Debt Crisis and the collapse of the US housing market, the Great Recession led to a worldwide increase in unemployment, economic stagnation, and political instability.
What does this have to do with Bitcoin? The Great Recession and the resulting Occupy movement introduced the idea of “the 99%” and reinvigorated long-standing debates about inequality and the relationship between individuals and the global financial system.
Although there is no evidence that the Bitcoin network was developed because of the Great Recession, it emerged at a time when many people felt a profound sense of distrust in major governmental and financial institutions.
It was this distrust upon which the Bitcoin whitepaper was premised.
The centralized nature of the global financial system- centered around banks, financial service providers, and the government agencies that regulate them and issue money- fundamentally requires trust. For example, Visa has to trust that the merchant charging your credit card is doing so legitimately, you have to trust that any money you deposit in the bank can be withdrawn at any time, etc.
However, trust is not guaranteed! What happens when you distrust the bank? Well, nothing really. You can keep cash under your mattress, but there aren’t many other options.
What happens when the bank distrusts you? It insures itself against that distrust by charging you fees, limiting your access to cash and credit, or colluding with governments to affect interest rates.
Bitcoin is an attempt to solve this problem by providing individuals who distrust traditional financial institutions with an alternative way to hold and transact money.
With a decentralized, peer-to-peer network like Bitcoin, trust isn’t needed. You can transact on the network directly with those you want to pay or receive money from. You don’t need to trust any other intermediary to process your request or issue your payment.
The ‘intermediary’ that facilitates your payments is the network itself- the code and cryptography that ensure certain rules are followed. Because the Bitcoin network is designed in a way that makes collusion or fraudulent activities extremely difficult, it offers a higher amount of trust than a bureaucratic system could. That’s why you’ll often see blockchain networks called ‘trustless’ - the point is that you trust the network (the code), rather than the humans that run it.
But Wait… Don’t I Need to Trust Bitcoin Too?
When we discuss ‘trust’ in the global financial system, we are referring to the complex relationship between individuals and institutions (like banks). Importantly, this type of trust reflects the integrity of an entire system, which includes companies, technologies, regulators, administrators, private interests, and various other stakeholders and incentives.
In other words, it’s rarely about whether or not we trust a single credit card company or bank. It comes down to our expectations for our money and our access to recourse whenever or if ever our trust is violated.
In most developed countries, for example, banking insurance provided by the government helps to generate trust between individuals and the financial system. So, if you live in the United States and your bank is robbed, it hardly matters. Regardless of what money may have been taken, the government will ensure that the amount attributed to your account is unaffected.
However, this isn’t the case for all relationships and all countries. As discussed, many people feel they do not trust the global financial system, but they can trust Bitcoin.
This is because Bitcoin is a technology, not an institution.
Whereas institutions in the global financial system are changeable- via laws or regulations, or perhaps corruption and collusion- Bitcoin technology is not.
As we already know, the purpose of the blockchain is to be immutable. All of the computers that run the Bitcoin network help to validate the authenticity of transactions, ensuring that no one hacker or company can cheat the balance sheet. They do this through a process called mining.
In general, ‘mining’ refers to the process of validating data on a blockchain. As such, the mining process, purpose, and procedure are different from network to network.
The Bitcoin network mines new blocks and validates transactions using something called a proof-of-work (PoW) algorithm.
During this process, computers compete (or work) against each other to solve complex equations generated by a computer. When they do, four things happen:
A new block is minted- or mined- allowing the Bitcoin network to record more transactions;
New blocks are added to the blockchain, and each node helping to run the blockchain updates their copy of the network;
Miners who have created- or mined- a new block on the chain are rewarded with Bitcoin, and;
Through the mining process, new bitcoins are created, transactions are added to the network, and the entire network is secured. Additionally, this entire process is undercut by an algorithmic limit on the number of bitcoins that can be mined: no more than 21 million bitcoins can ever be created. This cap on the supply of bitcoins makes the network deflationary over the long term, leading many to refer to Bitcoin as ‘digital gold’.
Unlike financial institutions, which are changeable and can be influenced, the Bitcoin network is a simple technology that operates in a closed loop. The network behaves the way it is supposed to, no trust required.
So Why Doesn’t Everyone Use Bitcoin?
Technologies, including Bitcoin, do not exist in a vacuum. They exist in the real-world, where political ideologies, cultures, economics, and value systems affect the way we use, interpret, and understand new tools.
For some people, Bitcoin is a trustless alternative to a fraught financial system. They have chosen to use Bitcoin for transactions, accept Bitcoin as legal tender, and hold Bitcoin as an investment.
Others, however, do not believe that the Bitcoin technology is a satisfactory, safe, or viable solution to perceived dysfunction in the international financial system. Aside from those who simply do not understand the technology or premise, there are genuine criticisms of the Bitcoin thesis that are worth considering.
These are the three primary criticisms of Bitcoin:
Bitcoin’s proof-of-work system is extremely energy-intensive, with many critics arguing that the mining process burns energy without producing an equally useful good.
Bitcoin’s political premise supposes that a technology is capable of issuing a global, decentralized, and deflationary currency, in place of national governments. Critics disagree with this, arguing that national governments play an important role in crafting monetary policy, and that they should continue to do so.
When Bitcoin first launched, the technology could be used to purchase illegal goods in untraceable ways; there were also several high-profile scams and technical failures, which resulted in people losing their investment. Although the technology has significantly matured, some believe that BItcoin is not properly secured or properly regulated and ought not to be used.
Whether you see Bitcoin as a convenient way to send money and buy goods, a strong investment option for your portfolio, or a radical political technology with the power to upend (for good or for bad) the global financial system, is ultimately up to you!
OK; anything else?
So, is Bitcoin “good” or “bad”? Neither- Bitcoin is a technology. It’s only as good or bad as we make it.
Remember what was said about technologies existing in the ‘real-world’? As you learn more about Bitcoin, Web3, and other decentralized technologies, it’s important to remember that most things 1) require trade-offs, and 2) change over time.
For example, it’s true that Bitcoin consumes a massive amount of electricity. It’s also true that changes to the network may reduce the impact of this energy usage, increase the use of sustainable technologies to power the network, or perhaps the technology will fail to adapt and get replaced by a more sustainable future network.
It may also be true that the global financial system is untrustworthy or ought to change, but this doesn’t mean that Bitcoin has to be the solution. Perhaps Bitcoin is an early experiment in the shift towards global cryptographic currencies, or maybe it will become the way we pay for goods and services in the future. There are many ways to think about what could happen next; the world is complex, and many possibilities exist.
It’s important to remember that Bitcoin is one of the very first experiments in blockchain technology, and is (in many ways) the precursor to much of what we consider Web3 to be. As the ecosystem of blockchains continues to develop, there are many new technologies and applications that will allow you to invest your time, interest, and money in the things you care about.
As you navigate these complex questions for yourself, it’s important to remain open-minded, verify new information that you come across, and invest in those things that align with your beliefs and values.
So, tell us: what do you think about Bitcoin? Want to buy it, already use it, or refuse to participate? Join us on Twitter and Discord to share your thoughts, ask questions, and have conversations with other women working and learning in Web3!
