Acknowledgements

No words describe how much Daz and myself (Seb) appreciate the support and encouragement we received while turning this book from an idea into a reality. 

First, we want to thank the Bitcoin community and the countless individuals who reached out and offered their time to read over the first draft and give feedback.

Second, we want to thank Keysa and Gary for their numerous hours scouring the manuscript and giving their input, feedback and revisions.

And lastly, we want to thank the rest of the Looking Glass team for the time and effort they've dedicated to bringing this platform to life.

Thank you, everyone!

Seb and Daz

And on a personal note I want to thank my wife Carissa and boys Archer and Fletcher. I want to recognise the  family time we sacrifice in order for me to pursue these projects.

I truly believe in the message we are trying to spread and this would not be possible without your support. 

Love Daz (Dad) 

Introduction

So, you want to learn about Bitcoin? Well, you've picked up the right book!

One of the long-standing tenets of bitcoiners worldwide is "don't trust, verify."

It can be easy to jump on board the rocketship that is Bitcoin, whether through purchasing, mining or simply involving yourself in the community, without truly understanding what it is. 

We believe Bitcoin is arguably the most remarkable technological advancement in history. But don't take our word for it. We want you to verify for yourself and come to your own conclusion.

For this reason, we have written this book, an in-depth exploration of the ins and outs of Bitcoin. 

And in true LookingGlass-style, we have taken thousands of hours of research, stripped out the technical jargon, and distilled down the key concepts to give you a thorough understanding of this unique, nascent, paradigm-shifting monetary asset. 

We will cover everything from: 

• Who is Satoshi Nakamoto, and what is the white paper?
• How does Bitcoin actually work?
• What is the role of the miners, nodes and network participants?
• What options do I have for purchasing and securely storing my Bitcoin?

...all to significantly increase your understanding of this nascent technology. 

That may sound a little dry, but we promise to keep it fun, educational and definitely… interesting.

Enough rambling. Let's crack on…

*Side note: If you want to understand how bitcoin fits into the larger financial world, we highly recommend you head over to our Foundation's course, "Debt, Inflation and the Bigger Picture." That is if you haven't already.

Chapter 1 - Section 1: The Legend of Satoshi Nakamoto

Key Questions Answered:

• Who is Satoshi Nakamoto?
• What do we know about Satoshi Nakamoto?
• Why did Satoshi create Bitcoin?

Bitcoin wouldn’t exist if it weren’t for the shadowy faceless super-coder¹, the myth, the legend, Satoshi Nakamoto. We, therefore, felt that there is no better place to start this book than with a deep dive into the mysterious developer behind Bitcoin. 

What’s more, understanding the origins of Bitcoin helps us gain insight into the “Why” surrounding Bitcoin and helps set the stage for a deeper, more holistic understanding of Bitcoin.

And so, without further ado, let’s dive in.

Who is Satoshi Nakamoto?

Honestly, we have no idea who Satoshi Nakamoto is. There is much speculation on who people believe him to be. Some have publicly come forth, claiming that they are, in fact, this mystical figure. But, to this day, no one has been able to prove the identity of the mysterious Satoshi Nakamoto. 

Side Note: Due to the limited information available, we must embrace the fact that we are in the dark about whether Satoshi is a guy, a girl, a group of people, or even an organization. With that said, we will refer to Satoshi as a male throughout this book for clarity and consistency, based solely on the fact that the name “Satoshi” has a male connotation in Japanese.

What do we know about Satoshi Nakamoto?

Satoshi first appeared out of the dark shadows of the internet in October 2008 when he sent a nine-page paper² titled: “Bitcoin: A Peer-to-Peer Electronic Cash System” to the cypherpunk mailing list³.

“The Cypherpunks mailing list was… a very active forum with technical discussion ranging over mathematics, cryptography, computer science, political and philosophical discussion, personal arguments and attacks, etc., with some spam thrown in.”

Dr. Adam Back, one of the most active contributors and creator of an early e-cash version (Hashcash), explains the introduction of Satoshi here⁴.

These cypherpunks were the perfect audience for Satoshi to propose his ideas. They were advocates for cryptography and for the use of privacy-enhancing technology as a means of social and political change. Initially, the mailing list members dismissed the idea, believing it to be just another one of many attempts⁵ at a digital form of payment, i.e. B-Money, Bit Gold, and Hashcash, to name a few.

 In the words of Satoshi:

“A lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990?s. I hope it’s obvious it was only the centrally controlled nature of those systems that doomed them. I think this is the first time we’re trying a decentralized, non-trust-based system.”

Eventually, however, Bitcoin sparked enough interest for one of the cypherpunks to reach out, a guy by the name of Hal Finney. Hal was well-known in the cryptography space due to his deep knowledge base, exceptional coding ability and connections within the community. Satoshi and Hal's relationship quickly grew to the point where Hal would be the first developer to work on Bitcoin alongside Satoshi. Satoshi would focus on updates while Hal assisted with bug fixes. After this, Bitcoin started gaining momentum, triggering more individuals to reach out and offer their assistance to the project.  Then, just over two years after releasing the Bitcoin White Paper, Satoshi disappeared.

Fun fact: Hal was ​​the first person to ever receive a bitcoin transaction. On January 12, 2009, Satoshi sent him ten bitcoin.

As far as we know, Satoshi's last message⁶ was an email to a fellow developer on April 23, 2011, where he said, "I've moved on to other things." Since then, there has been the occasional interaction under the name Satoshi. However, every interaction has been shrouded in doubt, lacking evidence of legitimacy. 

One example was a message by an account claiming to be Satoshi declaring: 

"I am not Dorian Nakamoto," 

This was posted on the p2pfoundation.ning.com⁷ forum on March 7, 2014, after a man named Dorian Prentice Satoshi Nakamoto⁸ was gaining unwanted publicity from people purporting that he was indeed the real Satoshi. It is believed that Dorian Prentice Satoshi Nakamoto is not the real Satoshi, nor is the account forum posting from March 2014. 

As it stands, the consensus amongst the community deems the last official communication from Satoshi to be the message relayed on April 23, 2011. 

Why did Satoshi disappear? 

We may never know for sure, and so at the moment, all we can do is speculate. Some of the more popular theories are:

• He might have felt his job was done. He had created this new form of internet money and handed it over to the community. 
• Satoshi may have been nervous about the attention Bitcoin was getting. In December 2010⁹, WikiLeaks was banned from using traditional payment methods (e.g. Paypal, Visa, Mastercard). With no way of obtaining funding, they decided to use Bitcoin. With Bitcoin being only one year old, Satoshi felt this was not the attention Bitcoin needed, “It would have been nice to get this attention in any other context. WikiLeaks has kicked the hornet’s nest, and the swarm is headed towards us,” he wrote. Considering that it is a criminal offence¹⁰ to create a currency in the US, tied with the fact that Bitcoin was gaining significant adoption, it may have instilled fear and caused him to move on.
• He might have switched gears to focus on another project, which was the essence of what he wrote on April 23, 2011, in his last email.
• He may have passed away.

Although alluring, piecing together the puzzle of the identity of this mysterious figure doesn’t provide us with much information. Therefore, let’s shift focus and look at the “why” surrounding Bitcoin’s creation.

Why did Satoshi create Bitcoin?

Although we don't have much to go on when answering "who is Satoshi?" when it comes to the question of "why?" we have much more information. Luckily, Satoshi was quite vocal online in the early days of Bitcoin. Through his interactions, we can better understand why he created this magical internet money. 

Bitcoin emerged out of the turmoil of the 2008 Global Financial Crisis as distrust grew around banks, their role in the financial system and the role of central banks and governments.  We can see from Satoshi’s communication that he had cynicism toward the traditional monetary and banking system. This can be seen in the first-ever Bitcoin block, known as the genesis block, where he posted a message which said: 

"The Times 03/Jan/2009 Chancellor on brink of second bailout for banks" - Satoshi Nakamoto, Genesis Block

This quote references a Times newspaper article¹¹ titled "Chancellor on brink of second bailout for banks." In the article, the author highlighted that “the (British) Chancellor will decide within weeks whether to pump billions more into the economy," effectively encouraging banks to engage in risky behaviour, with little consequence to them. This behaviour sent a clear message to the public that fiscal irresponsibility would be “socialized.” In other words, losses would be shared amongst currency holders rather than the banks taking responsibility for their actions.

Additionally, we know from his more recent messages that Satoshi disagreed with how our current monetary system functioned:

"The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust." - Satoshi Nakamoto

When we combine what we know about Satoshi, a clear picture emerges: 

1. Satoshi was part of the cypherpunk mailing list. 
2. This group focused on privacy-enhancing technology as a means of social and political change, and various members had previously proposed and tried to implement digital currencies. 
3. He proposed a form of electronic cash that does not rely on trusted third parties.
4. He felt it was important to attach the message “Chancellor on brink of second bailout for banks" in the first Bitcoin block.
5. He was vocal about his views on the problems with conventional currency.

Satoshi understood the drawbacks and issues with conventional currency. He, therefore, felt that these issues were big enough for him to focus on proposing another option: A digital peer-to-peer (p2p) cash system that did not require trusted third parties. This would be a currency for the people, by the people, controlled by math. A currency that was not beholden to a centralized authority. 

Fun fact: Satoshi accumulated a large amount of bitcoin through mining in the early days of Bitcoin. If someone wanted to prove that they are indeed Satoshi, they could simply move some of this bitcoin. To this day, no one has ever moved any of Satoshi’s bitcoin, and if they did move, we would know, as every transaction is public and transparent, but more on that later…

To summarize, we know that Satoshi played a pivotal role in making digital cash a reality by bringing Bitcoin to life with the help of the community. However, there is still much more that we don't know. This begs the question, does it really matter? If Satoshi turned up today, would it change anything? 

Keep these questions in the back of your mind as we continue exploring this revolutionary technology and monetary asset. 

Chapter 1 - Section 2: Clarity

Key Questions Answered:

• What is the difference between Bitcoin and bitcoin?
• What are these things called Satoshis?
• How many other ways is bitcoin expressed?

Digitally native cash created by a mysterious shadowy figure may be a new concept for most. Moreover, you may come across unfamiliar terms and phrases as you interact with the community. We, therefore, feel it is important to set the stage and clarify some terminology. That way, as you interact with Bitcoiners, you’ll understand what on earth they are talking about.

What is the difference between Bitcoin and bitcoin?

You may have noticed that sometimes Bitcoin is spelt with a lowercase “b” and sometimes with an uppercase “B.” This is no mistake. Each variation represents something unique. Let’s start with the lowercase bitcoin: 

bitcoin - “b”

When spelt with a lowercase “b,”  we are referring to the asset. The asset is the unit of currency for the Bitcoin network (explained below). It is the asset which holds value and can be exchanged between people. For example, if we were to send someone 0.001 bitcoin, they would be receiving bitcoin, the asset.

However, the asset is useless without a network that allows us to send and receive this asset. 

This brings us to Bitcoin the network:

Bitcoin - “B”

Bitcoin, spelled with an uppercase “B,” refers to the Bitcoin network. It is through the network that the asset is both created and moved. Without the network, we would have no way of sending bitcoin, the asset, to one another.

If this sounds confusing,  here is an example: 

In the traditional monetary system, we have the wire network and the US Dollar. If we wanted to send a larger sum of money from our bank account to a friend's bank account, we would use the wire network. You can liken this to uppercase Bitcoin. 

However, the wire network only facilitates the transfer. It does not store the value. That value is stored in the asset, which in this case is the US Dollar.

Here are a couple of scenarios for each:

• Looking Glass Education aims to educate individuals as to the power of Bitcoin - The network
• I’d like to send Hillary 0.0001 bitcoin - The asset
• Did Satoshi Nakamoto come up with the idea for Bitcoin? - The network
• I have used bitcoin as a savings vehicle for a few years now - The asset

What are these things called satoshis?

Within the Bitcoin community, you will regularly hear people referring to satoshis, or sats for short, as an alternate reference to bitcoin. Simply put, a satoshi is the smallest denomination of a bitcoin, similar to how cents make up a dollar, or a penny is a fraction of a pound. 

At today’s price (~July 2022), bitcoin is trading around $20,000 US dollars. People, therefore, incorrectly believe that to buy bitcoin, they need to spend $20,000. The truth is we can easily purchase a fraction of a bitcoin. Even as little as 0.00000001 bitcoin, otherwise known as one satoshi. That is currently $0.0002.

Each whole bitcoin is made up of 100,000,000 satoshis. To convert between them, take the amount of bitcoin and multiply it by 100,000,000. The result is the amount in satoshis (sats). For example:

• 0.004 bitcoin  = 400,000 sats
• 0.000965 bitcoin = 96,500 sats
• 1.38 bitcoin = 138,000,000 sats

With this new understanding, the next time you hear someone talking about sats, you will be up-to-date and in-the-know!

How many other ways is bitcoin expressed?

As Bitcoin has no central controlling entity or governing body pushing a marketing plan, no one is dictating how Bitcoin should be portrayed publicly. With that being the case, you’ll encounter a few different Bitcoin abbreviations. Let’s focus on two of the primary abbreviations for bitcoin. 

"BTC"  is the abbreviation/ticker symbol that has been adopted most widely. This originated in the early days of Bitcoin and is regularly used today. However, "XBT" is another that you’ll come across. It is used mainly on exchanges to reflect Bitcoin’s growing legitimacy as an international currency.

The characters "XBT" come from the International Standards Organization (ISO), which maintains a list of internationally recognized currencies. XBT is to bitcoin as USD  is to the United States Dollar, CAD to the Canadian Dollar, MXN to the Mexican Peso etc. 

What's interesting to note is that similar to gold (XAU), bitcoin (XBT) has an “X” leading the abbreviation. This is not by chance. If a currency is not associated with a particular country, ISO states that it should begin with an “X,” hence "XBT."

Lastly, you may have seen the Bitcoin logo expressed as ₿. This is no different from the dollar symbol ($), or the Great British Pound symbol (£). In terms of usage, the symbol proceeds the quantity of bitcoin, i.e. 0.001 bitcoin = ₿0.001 =  100,000 sats. There is also a symbol for sats. That said, this is still gaining in popularity amongst the community, but it remains to be seen if it will be widely adopted and accepted.

Two bitcoin or two bitcoins? - Plurals

Do you say bitcoin or bitcoins when talking about more than one bitcoin? While Satoshi used 

“bitcoins” to denote the plural, over time, “bitcoin” (with no “s”) has become the standard. You will, however, still find some old-timers in the space refer to them in their plural form, “bitcoins.” There is no right or wrong answer. 

On the other hand, satoshis/sats are usually referred to in the singular and plural forms. One satoshi, two satoshis, one sat, two sats, for example. 

Section Summary

With Bitcoin becoming the globally recognized asset that it is, there are many variations to how it is portrayed. One that often creates confusion is the difference between bitcoin, the asset, and Bitcoin, the network. An easy way to remember this is:

The network (Bitcoin) transfers value from A to B. 

The asset (bitcoin) is the value that moves from A to B. 

In an attempt to simulate the real world, throughout this book, we will frequently refer to the network and the asset. Additionally, we will use satoshis, sats, and the BTC symbol interchangeably and bitcoin (with no ‘s’) when referring to multiples of bitcoin.

There is no better time than the present to build this knowledge into your vocabulary. 

To summarize:.

1. Uppercase Bitcoin refers to the network.
2. Lowercase bitcoin refers to the asset.
3. A satoshi, or sat for short, is the smallest denomination of a bitcoin and is equal to 0.00000001 bitcoin, or 10^-8 for the math nerds.
4. BTC and XBT are both commonly used abbreviations for bitcoin.
5. ₿ is the bitcoin currency symbol.
6. Bitcoin and bitcoins are used interchangeably for multiples of bitcoin,  but it is more common to see bitcoin (no “s”). Satoshis and sats are used in singular and plural forms.

Chapter 1 - Section 3: Bitcoin's Inception

Key Questions Answered:

• What is the Bitcoin White Paper?
• What is the Byzantine Generals' Problem?
• What hurdles did bitcoin face?

With a clear understanding of bitcoin, the asset, Bitcoin, the network, and a patchy understanding of Satoshi, let’s now direct our attention to Bitcoin's origin and how this magic internet money first came into existence.

What is the Bitcoin White Paper?

The word ‘Bitcoin’ was first used publicly on the 31st of October 2008, when Satoshi Nakamoto released what is known today as the Bitcoin White Paper. This is the document which proposed the new peer-to-peer (P2P) electronic cash system.

This doesn’t sound too wild until you realize that peer-to-peer means NO intermediaries and NO third parties. This is a lot harder to achieve than it sounds! Before the introduction of Bitcoin, every form of electronic money required intermediaries and trusted third parties.

Previously, we introduced:

bitcoin, the asset– the thing we purchase that’s accessible from our wallet; 

and 

Bitcoin, the network– the rails which facilitate the trade of bitcoin-the-asset. It is the network that allows individuals to send, verify and secure transactions. 

When we look at our current monetary system through this same lens of ‘the asset’ and ‘the network,’ we realize that we have to trust and rely on third parties and intermediaries in both situations. For instance:

The Asset 

The fiat currencies we use as a store of value (E.g. US dollar, euro, yen, franc,  pound sterling, etc.). 

*Fun Fact: ‘fiat’ literally means ‘by decree’ or forced to be used with implied threats for non-compliance.

Central Banks oversee Monetary Policy – Monetary Policy is the management of interest rates and the total supply of money in circulation. If the central bank decides to lower interest rates or increase the total money supply, new money suddenly enters the economy, diluting the value of any existing currency in circulation, reducing its purchasing power and contributing to inflation. The exact quantity of most major existing fiat currencies is unknown, even by those that produce them.

Governments oversee Fiscal Policy – Fiscal Policy deals with taxation and government spending. Suppose the government decides to stimulate the economy through lower taxation and stimulus cheques. The population will have more disposable income, which means greater spending which drives up prices (inflation), lowering our purchasing power over time.

We, the people, are at the whims of these decision-makers. We have to trust that our government and the (unelected) central bankers have our best interests at heart regarding monetary and fiscal policy. Otherwise, their decisions can negatively impact our currency’s purchasing power and, thereby, our quality of life. Unfortunately, history has shown us that there have been many examples of breaches of this trust.

The Network 

The rails that allow us to transact with one another.

When purchasing a coffee using our credit card, there are four or more different intermediaries - First, there is the institution that the coffee shop banks with. Secondly, there are the networks which allow the banks to communicate with one another. Then, there is the association that facilitates the transaction (Visa, Mastercard, Discover etc.). And finally, there is our banking institution. 

When sending a wire transfer, we touch four or more third parties - First, we have to provide our bank with the recipient's bank details. Then, as our bank most likely doesn't have direct communication with the recipient's bank, using the SWIFT (Society for Worldwide Interbank Financial Telecommunications) network, the wire information is sent through a correspondent or intermediary bank. Finally, these banks reach out to the recipient's bank to finalize the transaction. 

Regulatory bodies oversee various arms of the financial rails that we use day-to-day - For example, suppose our political views oppose those regulating the monetary networks or any part of that intermediary process; our transactions can be blocked, assets seized, and we may be locked out of the financial system entirely.

Does this sound scary or unlikely? This happened in early 2022 when individuals donated to the trucker rally in Canada, and Prime Minister Trudeau had some of these individuals' bank accounts frozen by his decree. Regardless of your views on that particular matter, the fact that people’s assets were seized due to their differing views might give you pause for concern. 

As is now evident, we must rely on multiple intermediaries and third parties in every transaction within the fiat system, hoping they meet our needs and continue to operate and fulfil our transactions. In the words of Satoshi:

“Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”

Outside of the physical, peer-to-peer transfer of cash, we previously had no way of transacting with one another without using trusted third parties. That may seem like a non-issue. However, what happens when a  trusted third party doesn’t have our best interest at heart, provides unfavourable terms, takes advantage of its users, or devalues the currency for its own benefit? 

It should now be clear that we unwittingly place an immense amount of trust in third parties. It is reasonable to conclude that it is due to this potentially dangerous reliance on trust that Bitcoin was born. Satoshi wanted to create a trustless means of transacting that removes reliance on third parties or knowledge of the counterparty in an exchange. 

That brings us to the question, how is it possible to create a monetary system that allows individuals to transact with one another without needing to trust third parties? 

The Byzantine Generals' Problem

For Bitcoin to offer a viable solution to that question, Satoshi would have to overcome an age-old conundrum known as the Byzantine Generals Problem. Prior to the Bitcoin White Paper, this was a problem thought to be unsolvable.

How can we send a message without the need for trust or a third party? 

Or, in the case of Bitcoin, how can we send or receive bitcoin without this need for trust? 

This is going to get a little philosophical for a moment, so please bear with us. We trust it will be worth it.

The year is 2000 BC. Imagine there is an enemy city surrounded by two armies, one on each side of the city. Both armies need to attack simultaneously to conquer the city, as it is fortified enough to defend itself against either one of the armies, but not both. If they don’t attack simultaneously, the city will obliterate one or both armies.

With this in mind, the generals of each army must agree on an exact time to attack to ensure they do so simultaneously. Because of the landscape, the only way to communicate is by sending a messenger back and forth through the enemy city (unfortunately, cell phones aren’t invented yet).

The conversation goes something like this. General One sends the message, “Yo, General Two, how does an attack at sunrise on Saturday sound?” The messenger sneaks through the city, delivering the message. General Two responds, “Dang, Saturday doesn’t work. We have a full-moon party the night before. What about sunrise on Sunday?” General Two’s messenger then quietly runs through the city to deliver the message to General One. This goes back and forth until a decision is made.

This all sounds fine and dandy until we realize that the messenger could be captured in the city and replaced with a conspirator messenger, someone who intentionally deceives the other general, causing one army to attack at the wrong time.

We now face a problem. There is no way to check if a message received is authentic. How can we create a “trustless” system that ensures victory for the attacking armies? 

This is known as the Byzantine General’s Problem. 

Amazingly,  Satoshi’s Bitcoin White Paper solved it! He devised a way to build a peer-to-peer, trustless form of electronic money so that we don’t have to rely on trusted third parties, i.e. little messengers running through enemy cities, Visa, Mastercard, banks, governments or other actors. With this in mind, let's look at the hurdles bitcoin faces in solving this trust issue.

The hurdles

For Bitcoin to achieve its lofty goal of becoming a peer-to-peer electronic cash system, it had to overcome some significant hurdles. It had to find a way of removing this trust in third parties. The challenge, each of these trusted third parties served a purpose in the fiat system. They set the rules, verified and settled transactions and prevented the double-spending of money.

Let's explore these:

Rules 

From an asset perspective, decisions must be made, such as:

• How much currency should there be in circulation? 
• What is the supply schedule? 
• How divisible/what denominations should there be?

Currently, these decisions are made by the central banks.

From the network perspective, third parties, such as banks, Visa, Mastercard etc., decide who can and can't transact, what information is needed to transact and transaction costs.

Transaction Verification + Settlement

Each third party in a transaction plays a role in facilitating the exchange. They see to it that every initiated transaction meets the necessary requirements, which allows the transaction to be completed, also known as transaction settlement. Combined, these third parties ensure the transaction network is functionally operational and running smoothly.

Double-spend Problem 

Before Bitcoin came to be, digital scarcity did not exist. If we took out our phones to take a picture of a sunset, initially, there would only be one of these pictures in existence. However, we could easily copy and paste that sunset picture as many times as we like and send it to many recipients, eliminating any notion of scarcity. 

With this in mind, what is to stop someone from spending their bitcoin, only to have copied their bitcoin's digital information before sending it (just like copying the sunset picture), and spending the bitcoin for a second time? This is known as the double-spend problem. These network third parties, such as Visa and Mastercard, monitor all transactions, ensuring that money is correctly debited from our account and credited to the recipient's account. That way, no one can double spend. They are the overlords of the ledger.

You’re now probably wondering, if we remove trusted third parties and intermediaries: 

1. Who sets the rules? 
2. Who verifies and settles transactions? 
3. And how do we ensure money can’t be double-spent?

By the end of this book, you will be able to answer how Bitcoin overcame each of these hurdles. Additionally, you will have a deeper understanding of how bitcoin works and everything involved in making this mystical internet money operational.

For further resources, we highly recommend:

“Bitcoin: A Peer-to-Peer Electronic Cash System” - Satoshi Nakamoto

Chapter 1 - Section 4: Bitcoin Overview

Key Questions Answered:

• Who are the participants in the  Bitcoin ecosystem?
• What is the Bitcoin protocol?
• What technology underpins Bitcoin?

Alright!! With some of the history behind Bitcoin’s origins out of the way, it's time to tear the lid off this and get our hands dirty. 

If you’re wondering, “what the hell is Bitcoin?” Or “how does it work?” You’re in luck, as we are about to find out.

The concepts covered in this section deserve elaboration. So don’t be too concerned if the ideas are foreign or ill-defined. We will introduce them here so you can start to piece together the jigsaw puzzle that is Bitcoin. Then throughout the following chapters, we will explore the nitty-gritty details.

Topics surrounding Bitcoin can be vast and complex, from computer science or philosophical debates to how a sound money standard can benefit humanity. However, from a functionality point-of-view, Bitcoin can be distilled down into a few key participants, rules and technologies:

The Participants 

• Nodes
• Miners
• Developers
• Community

The Protocol (The Rules)

• Fixed Hard-Cap Supply
• Block Reward & The Halving Cycle
• Block Time & The Difficulty Adjustment

The Technology

• Blockchain
• Distributed Ledger
• Public/Private Key Cryptography

Let’s explore each of these, starting with the participants.

The Participants 

Nodes 

Nodes can be thought of as computers which monitor every Bitcoin transaction. They ensure everyone is playing by the rules and that every transaction meets the requirements set forth through consensus.

Additionally, as Bitcoin is decentralized ( there is no reliance on a central authority), the nodes, through consensus, decide what new features and changes to the rules are implemented.

Miners

After a transaction is initiated, but before it is completed, there is no certainty that the transaction will settle– just like one has pending and processed transactions on one’s credit card statement. Therefore, the miners' role is to organize and commit these transactions to the permanent record of transactions in the blockchain.

Like a node, a miner is simply a computer, but instead of monitoring transactions, the miners process the transactions.

Bitcoin wouldn’t exist without the miners, and the nodes wouldn't have any transactions to monitor.

Developers

The developers are a diverse group of people consisting of highly skilled programmers and digital authors, all working to maintain the network and improve security, privacy, scalability and user experience. They fix any issues and bugs and propose new features that will help keep Bitcoin robust, up-to-date and secure from malicious attacks.

Community

The community is what brings Bitcoin to life and gives it value. They use the network and transact back and forth, incentivizing the nodes, miners and developers to continue working on Bitcoin. As an increasing number of people like you learn about Bitcoin, the community grows, and so does the value of the Bitcoin network.

As should be evident, each and every player plays an integral role in bringing Bitcoin to life. 

To summarize the players:

• Nodes are standard computers that set and enforce the rules
• Miners are specialized computers that verify transactions
• Developers are people that keep the software up-to-date and propose upgrades
• The community, everyone enamoured by Bitcoin, is what gives life and value to this ecosystem

The Protocol (The Rules)

A protocol is simply a procedure or system of rules which govern the way something functions. For example, if one was to meet a monarch of a country, there are said to be protocols¹² (rules) in place which need to be followed to show appropriate respect. Similarly, in computing, there are many protocols which make the internet work, which we don’t often see and take for granted. These include HTTP (web), SMTP (email), TCP/IP (networking) and now Bitcoin (money). 

Figure 1.31: The Building Blocks of the Internet¹³

Therefore, when we say the Bitcoin protocol, it's a technical way of saying the rules that make Bitcoin what it is. 

With this in mind, let’s look at some of the fundamental rules of Bitcoin.

Fixed Hard-Cap Supply

Arguably, the most critical element of what makes Bitcoin a sound monetary good is that there will only ever be a maximum of 21 million bitcoin. This is known as the fixed hard-cap supply. 

If you own 0.1 of 21 million bitcoin today, you can be confident that you'll still own 0.1 of 21 million bitcoin in ten years. This is unlike any other currency where the issuance and supply are unknown and at the whim¹⁴ of governments and bankers, removing any attribute of scarcity.

Block Reward & The Halving Cycle

The Block Reward is how new bitcoin is birthed and introduced into the world. When miners solve/mine a block (thereby committing it to the permanent blockchain), they are rewarded for their efforts. This reward consists of:

• The block subsidy, which is new, virgin bitcoin of a specified amount (more on that below).
• The transaction fees paid by users to have their transactions included in the block. 

An important detail is that if miners were rewarded the same amount of bitcoin every time a new block was discovered, there would be no cap on how much bitcoin could enter circulation. 

This is where the Halving Cycle comes in.

Every 210,000 blocks (roughly four years), bitcoin has a halving event that is programmed into the base protocol. At this point, the bitcoin block subsidy that miners receive for verifying transactions is halved. 

Pre-programmed into Bitcoin’s code is a total of 32 of these halving events, spanning roughly 128 years. That means, by 2140, all 21 million bitcoin will have been mined, which is why Bitcoin is said to have a hard-capped supply.

Block Time & The Difficulty Adjustment

Since the inception of Bitcoin in 2009, a new block has been mined on average every ten minutes. This is not by chance. Satoshi designed it this way to ensure a predictable issuance rate for new bitcoin. 

The protocol targets this block time of ten minutes through a feature known as the "difficulty adjustment." By fixing the supply of bitcoin entering the market, you remove the potential for unexpected devaluation from dilution. 

Every 2,016 blocks (around two weeks), the protocol assesses how quickly miners verify transactions and create blocks. It then adjusts the difficulty of mining accordingly. This was one of Satoshi’s genius solutions to help protect the bitcoin issuance from outrunning itself as more advanced computers are developed. 

These are the fundamental rules that give bitcoin scarcity, making it desirable. The nodes enforce these rules, ensuring every miner and all transactions abide by them. On every Bitcoin node, a copy of these rules is written into its software.

The Technology

The Blockchain 

The blockchain is quite literally how it sounds. A chain of blocks. Blocks of data, one after the other, linked together to form a chain. 

Think of these blocks as little containers that store information, such as transactions. Through this data, we can determine how many bitcoin are in existence, who owns what, and who has sent what to whom. 

The first block, known as the Genesis block, was mined by Satoshi on January 3rd, 2009. Since then, a new block containing the most recent transactions has been created and appended to the blockchain roughly every ten minutes. Every one of these new blocks has been checked to be correct by the thousands of nodes enforcing the rules. 

Distributed Ledger

As mentioned above, the blockchain contains lots of information. This information makes up what is known as the Bitcoin ledger. It contains a record of who owns what bitcoin and the transaction history of everyone who has ever transacted using bitcoin. All bitcoin transactions are inherently pseudonymous, with transactions being identified by numbers rather than names.

The distributed part of the "distributed ledger" comes from the fact that this information is not centralized. Instead, a copy of this ledger is stored on every node within the Bitcoin network. That way, we never have to rely on trusted third parties or intermediaries to tell us who owns what, as we have a globally distributed record of this information that can easily be accessed by anyone who wishes to do so.

Private/Public Key Cryptography

It is through cryptography or, more specifically, private/public key cryptography that we send and receive bitcoin. You can liken a public key to your bank account number and a private key to your account password. By giving someone your public key, they can send you bitcoin. You can then use your private key to sign transactions (unlock your ability to spend) and spend your bitcoin.

 Section Summary

Hopefully, by now, you’ve completed the border to the jigsaw puzzle that is Bitcoin. Over the following sections, we will fill in this puzzle so that by the end of the book, you will have a complete picture of how everything within the Bitcoin ecosystem intersects.

As highlighted at the start, our goal in this section is to introduce each of the key concepts that make up Bitcoin, so don’t worry if things don’t yet make sense. Bear with us as we explore these concepts in much more detail as we progress through the following chapters.

In the next chapter, we will step away from Bitcoin’s history and start unravelling the intricacies of the protocol and technology underpinning this magic internet money.