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What is Bitcoin? A Beginner’s Overview

by | Dec 17, 2017

Welcome to Bitcoin for Beginners!  We are excited that you’re interested in learning about cryptocurrency and blockchain technology.  To start things out, let’s chat a bit about Bitcoin since it’s likely that hearing about this cryptocurrency is what got you interested in the first place.  This article will review:

  • What is Bitcoin
  • Who created it
  • Who controls it
  • How it works

Let’s dive in!

What is Bitcoin

At its core, Bitcoin is a currency: a way of sending money to other people. However, unlike traditional currency in which a central entity (such as a bank, for example) oversees your transactions, Bitcoin transactions are decentralized. This means that instead of a bank tracking who sends and receives a unit of currency, oversight is provided by a network of peers.

Every currency system needs a way of tracking account balances as money moves around. If you transfer money from your bank account to your friend’s account, your bank will record who sent the money, how much it was, and who received it. With Bitcoin, this happens in the form of a public accounting ledger called a blockchain. Every transaction of a Bitcoin is aggregated into a “block” and linked to the last set of transactions, creating a “chain.” Hence…. blockchain. The blockchain is public and unchangeable, which means that the record of every transaction is recorded and available to anyone forever.

Who Created Bitcoin?

One of the fascinating things about Bitcoin is the mystery around the coin’s creator.  Surely you’ve heard the name Satoshi Nakamoto, but who is he? Has anyone ever met him in person?  Why don’t we see him on television or quoted in CoinTelegraph? Believe it or not, to this day, no one is able to confirm Satoshi Nakamoto’s true identity.  Is Nakamoto a real person or a pseudonym?

Bitcoin’s Development

In October 2008, a white paper titled “Bitcoin: A Peer to Peer Electronic Cash System” was released. The paper, written by a Satoshi Nakamoto, detailed the core design of Bitcoin as decentralized digital currency using blockchain technology that could support a broad range of transaction types, be immune to the double-spending problem and inflation.

Nakamoto then released the first version of Bitcoin software and effectively mined the first coins in January 2009. Mining this initial block known as the genesis block, Nakamoto used custom code to do so. As the first miner, Nakamoto received block rewards of close to one million Bitcoins which have not been moved, even though the value of these coins is over $10 billion in 2018.  Nakamoto continued to modify the source code by himself until 2010. The website bitcoin.org was eventually created and Nakamoto later collaborated with other developers until becoming completely absent.

Theories On Nakamoto’s True Identity

During the early phases of Bitcoin’s development, someone claimed to be Satoshi Nakamoto, born in 1975 and living in Japan.  However, even these small bits of information are up for debate since Nakamoto seemed to communicate in fluent English and there’s very little documentation available in Japanese.  Also, based on Nakamoto’s active internet time, patterns show he almost never posted between 2:00 pm and 8:00 pm Japanese time, adding to the theory that Nakamoto wanted to remain anonymous.

Dorian Nakamoto

A 2014 an article emerged wherein a journalist identified a Japanese American man in California as Nakamoto due to his birth name matching the Bitcoin founder. Dorian was also an engineer. Dorian denied making Bitcoin or even being aware of what it was. The original founder of Bitcoin later posted stating he was not Dorian Nakamoto.

Nick Szabo

Nick Szabo, the founder of bitgold — what some consider to be a precursor to Bitcoin — has also been suspected of being Nakamoto. Szabo is a cryptographer with an interest in digital currencies and usage of pseudonyms. Szabo has repeatedly claimed he is not Satoshi Nakamoto.

Hal Finney

Hal Finney is another cryptographer and the first person to use and collaborate on Nakamoto’s Bitcoin software. He lived a few blocks from Dorian Nakamoto and writing samples compared to the elusive Bitcoin founder carry a close resemblance. Finney has denied the claims and shared email correspondence between him and Nakamoto, in the hopes of proving to the public they were separate individuals.

Craig Wright

In 2016, Craig Wright, an Australian computer scientist, publicly claimed to be Satoshi Nakamoto on his blog. After attempting to present some cryptographic proof in his post, Wright announced he could not handle the media attention he was receiving and failed to provide further evidence of being Satoshi Nakamoto. His claims have been discredited by most of the community.

Government Project

There have been theories that Bitcoin was created by intelligence agencies. This conspiracy is fueled by the incentives governments would have by designing a project like Bitcoin; it would solidify a monetary instrument for the future; it could be used provide quick funding to governments, and it might help keep financial economies under government control.

Why Did Satoshi Nakamoto Remain Anonymous?

Due to the nature of Bitcoin and the goals the project aimed to accomplish, it is likely Nakamoto did not want the attention. He handed the project over to another computer programmer named Gavin Andersen after Andersen mentioned he would discuss the program with the CIA. Around the same time, Nakamoto disappeared.

Interestingly, the lack of a clear leader behind the Bitcoin project further perpetuates the nature of its decentralization. Without clear leadership, development for Bitcoin cannot be pinned to one single person or entity. Although every other coin on the market has a clear founder, Bitcoin still continues as an active project still worked on by many developers today with a massive and growing community.  Despite its mysterious inception, Bitcoin lives!

Who Controls the Network?

Before he disappeared in 2010, Nakamoto turned over the network alert key and the Bitcoin Core code repository to Gavin Andresen. Once it was in his hands, Andresen decentralized the project; in the event something happened to him, the project could continue.

So who controls Bitcoin today? Interestingly enough, there is no signal person or entity that controls the Bitcoin network. The signature characteristic of Bitcoin is that the network was designed not to need a central authority. The Bitcoin network is a decentralized peer-to-peer network which shares a public ledger called a blockchain. Because Bitcoin is a public blockchain, there are many stakeholders. Those stakeholders consist of three primary groups: users, developers, and miners.

Bitcoin is run managed by a distributed network of “nodes” (computers) that are run by individuals and follow the Bitcoin protocol, which is a predefined set of rules dictating how the system is supposed to function. Two fundamental components come together to make the system work: cryptography (fancy, clever math), and the blockchain (unique ledger that stores transaction history). Together, they make sure that only you can spend your coins, you cannot spend more money than you have, and you can’t spend your balance twice.

In a centralized system like a bank, these rules are easy to enforce. The bank can simply check their database and follow some simple logic to make sure that any given transaction is valid. But because Bitcoin is decentralized, the nodes must systematically validate and document each transaction using cryptography and the blockchain.

Besides nodes, there are two other important participants in the Bitcoin network: miners and wallets (users). Miners are in charge of adding new blocks to the overall chain, and for doing so they earn newly created Bitcoins and fees. Wallets are our interface to the Bitcoin network, and let us transact with each other.

Since there is no centralized governance, all changes to the code and economics of Bitcoin need the participation of all three groups to be implemented. Developers write the software that runs on the protocol, but miners and users vote on it, through their use of it.

How Does the Network Work?

The Bitcoin network is a collection of “nodes” running the Bitcoin peer-to-peer protocol. A node is a powerful computer that runs the Bitcoin software and helps to keep Bitcoin running by participating in the transferring of information over the network. If a node in the network were to go down, the network would still continue working. Every node on the network is tasked with routing. This means they must all validate and pass on transactions and blocks, as well as discovering and maintaining connections to other nodes. Nodes can serve different functions:

Lightweight nodes, unlike full nodes, do not download every transaction nor do they verify the Bitcoin rules. They only download block headers, to validate the authenticity of transactions ensuring against the problem of double-spending. Lightweight nodes use a method called Simplified Payment Verification (SPV) to verify transactions.

Mining nodes, referred to as miners, group outstanding transactions into blocks and add them to the blockchain. Each block contains a SHA-256 crytographic hash of the previous block, which links it to the previous block, hence the term blockchain. To be accepted by the network, a new block must contain a ‘proof-of-work’. In order to do this, miners must solve a complex mathematical puzzle that is part of the Bitcoin program, and include that answer in the block. The first miner to solve the puzzle is rewarded with newly created Bitcoin. Satoshi created the first Bitcoin through this process of mining.

Full nodes are the backbone of the network. They are tasked with routing, mining, and providing wallet services. They must also download every block and transaction and check them against Bitcoin’s core consensus rules.

The consensus rules are Bitcoin’s most important rules. They establish among other things – the amount of the Bitcoins included in the block reward, the mining difficulty, the type of proof-of-work required and the block size. These rules are very important because they determine which blocks are deemed valid by full nodes. If all the full nodes, apply the same consensus rules, it ensures that they all maintain an identical.

To answer our original question, “Who controls the Bitcoin network,” we refer to the network’s architect. Nakamoto’s white paper says: “We have proposed a system for electronic transactions without relying on trust. The network is robust in its unstructured simplicity. Nodes vote with their CPU power, expressing their acceptance of valid blocks by working on extending them and rejecting invalid blocks by refusing to work on them. Any needed rules and incentives can be enforced with this consensus mechanism.” Who controls the Bitcoin network: A consensus of nodes on the network.

So there you have it — your introduction to Bitcoin, Satoshi Nakamoto and how the network is run.  We hope we’ve piqued your interest sufficiently with these topics to spur you to learn more.

Disclaimer:

This article was written to the best of our knowledge with the information available to us. We do not guarantee that every bit of information is completely accurate or up-to-date. Please use this information as a complement to your own research. Nothing we write in any of our articles is intended as investment advice nor as an endorsement to buy/sell/hold anything. Cryptocurrency investments are inherently risky so you should never invest more than you can afford to lose.

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