Bitcoin: A beginner's overview from origin and principals to current issues facing the community

In the first installment of my cryptocurrency series I will be addressing Bitcoin, the only logical way to begin such a project. These posts will be my attempt at providing an entry point into blockchain technology along with my insights into the bigger picture of decentralization.

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Preface

Before I begin this series, I think it is important for me to declare a few things: This series is going to be filled with both facts and my opinions, I will try to differentiate the two as best I can but as with anything you should do your own research and challenge my opinions in the comments.

Bitcoin and cryptocurrency is an area that is filled with scammers and others who do not share the same idealistic values about decentralization and privacy that created this movement. I have been following the cryptocurrency industry since the early days of Bitcoin and since then I have developed an understanding of the design principals required for decentralization and freedom. Everything I write in this series has the ultimate goal of enabling freedom and decentralization. My strong opinions come from someone who is concerned with the ultimate positive outcome of blockchains and humanity as a whole. I am not a day trader so don't expect me to support many random altcoin projects and trading methodology.

Inception

Any Bitcoin introduction worth its salt needs to explain how the currency was created. As far as the history is concerned, there are entire books on the subject so let this serve as an overview for newcomers.

Bitcoin arouse from existing ideas about decentralization and digital cash projects like hashcash. In November of 2008, the pseudonymous Satoshi Nakamoto posted a paper entitled bitcoin: A Peer-to-Peer Electronic Cash System detailing his ideas for a peer-to-peer network that is able to facilitate digital transactions without relying on trust.

Importantly, the first "block" was mined (blocks and mining will come later) by Satoshi giving him the reward of 50 BTC. At this early point in time, the coins were essentially valueless and people casually sent them to each other across the world. During this process some people who recognized the value of the network early were able to amass large amounts of bitcoin, although it is current belief that many of these coins are "lost", it is impossible to know for sure. Satoshi is thought to have somewhere between 1 and 1.5 million BTC, although you can see on the blockchain that none of the coins have ever been moved from these wallets.

Through the years from 2011 to now, Bitcoin has seen tremendous growth, climbing from a dollar then to over 1000 now. I don't plan to discuss the various ups and downs in the currency nor the insecure companies that have been hacked because Bitcoin, when used as directed, is extremely secure and safe and this is not the place to speculate on market values.

Why should I care?

The fact that you are reading this means you are already at least interested in Bitcoin but I believe you should truly care about what is going on in this space.

you own it, not the government

We are living in a time where the justified distrust of governments and nation-states is essentially a survival requirement. Using Bitcoin, you own your assets, period. Unlike PayPal or a bank, no one is able to freeze your account for any reason. You don't need to trust anyone else to handle your assets; no more trusting the payment processor, merchant or credit card. These properties are valuable and Bitcoin's price today shows how well they are working.

Unlike the USD, the value of Bitcoins, as well as the network itself, is not controlled by any government. The rate of inflation is fixed in code and can't be changed, unlike a government printing more money.
To me, it is the decentralized and peer-to-peer nature that is the real pull factor to cryptocurrency today.

it is damn secure

The Bitcoin network has endured almost a decade of attack as well as development. The Bitcoin network has demonstrated that it is more than 16 billion dollars secure and the market cap is only growing. The fundamentals of blockchain technology at the heart of Bitcoin are very sound and have been well tested. There are no chargebacks, once you send a coin, that transaction is visible and verifiable on the blockchain forever. Because of the work the miners do, this blockchain is immutable and can not be edited by any party. These factors make Bitcoin transactions many times more secure than using a credit or debit card.

it is pretty fast and cheap

Although there are some caveats to this point that can be discussed later, overall, Bitcoin transactions are extremely fast and cheap when compared to other forms of payment. Transactions are visible immediately and are permanently confirmed on the blockchain in around 10 minutes. This is many times faster than a bank wire. Bitcoin transactions are able to send thousands of dollars with fees less than a dollar. That's a lot less than Western Union.

In my opinion, however, Bitcoin is not ideal for instant transactions. This is because in order to get your transaction recorded into the blockchain, around ten minutes is required for a new block to be mined. This does not mean that Bitcoin is bad, just there exists another space in the market for a blockchain with a faster blocktime on the order of seconds. Several of these projects exist and will be discussed in future posts.

How does it work?

blocks? chains?

Okay so now you have been reading about these things called blocks and they seem to be a part of this chain thing, what is going on?

Bitcoin was the first example of what we now term a blockchain. Bitcoin is simply that, a chain of blocks each mathematically connected to one and other. This blockchain stretches all the way back to the first block mined by Satoshi; a new block containing recent transactions is added to the top of the chain every ten minutes.

Blocks are digital containers used to contain and help verify the transactions passing through the network. Now I won't be diving into concepts like UTXOs and the specifics of the block structure. All you need to understand is that on average, every ten minutes a new block containing all transactions since the last block will be verified by miners and added to the blockchain. It is this verification and work done by the miners that give the Bitcoin network its security whilst staying decentralized. You can actually see the blocks and transactions going through the network here!

Another important point about blocks is they have a size cap. This was implemented early in development to prevent network spam with the idea that it would eventually be raised or removed as problems were solved. This is important because at the moment the Bitcoin network has begun to process more transactions than can fit in the blocks and there is disagreement on how to properly raise the limit. I will discuss this further as well as share my opinions later.

wallets, clients, and addresses

Clients/nodes are pieces of software that allow your device to connect to other devices on the bitcoin network. Initially, they will download and independently verify the entire blockchain from Satoshi's block to today. These pieces of software enable the decentralized and peer-to-peer nature of Bitcoin. There exist several competing implementations of the Bitcoin protocol, each developed by different teams or groups of individuals. The main implementations today are Bitcoin Core and Bitcoin Unlimited each with their own philosophy, the merits of which will be discussed below.

Wallets are a type of client that are able to generate a secure address and key pair. Addresses are what store Bitcoins and the generated key can be used to sign transactions from its corresponding address allowing coins to be sent. Wallets are able to store different addresses and keys allowing the user to keep funds separate and secured with different passwords. The key point about Bitcoin wallets is that ideally they put the owner in total control of their assets because they are the ones generating their own addresses and keys. Although, some wallets/services have you forfeit your total control of your Bitcoins in exchange for them allowing you to recover lost passwords and such.

At the core of the Bitcoin network is the ability to run whatever client or wallet software you want.

mining

Mining is at the highest level, the way the network is able to maintain consensus without a centralised authority. The miners spend energy doing lots of math verifying every transaction; for their expenditures they are rewarded with newly minted Bitcoins proportional to their contribution to the network. Mining is a topic that could be discussed at length, but here I will simply attempt to give a good overview to people who are new to Bitcoin.

I am going to start with a quote from the bitcointalk forum that I think provides a very accurate but high-level overview of the concept much better than I ever could:

"Imagine you have a hat with 100 pieces of paper in it, numbered 1 to 100. You pull out a piece of paper every minute and look at what you got (then put it back and shake up the hat). If it is lower than 20, you win, and you would win on average every five minutes. If you started checking numbers faster than every minute, I could slow down how often you win by making the highest winning number 15 instead of 20.

Bitcoin mining is kind of like that, but instead of 1 to 100 numbers, there are 1 to 1.1579E+77 possible numbers that you get when you take the hash of some data, and Bitcoin awards you 50 BTC if you find a hash of the current transaction block that is 1.7248E+61 or smaller.

A SHA hash is a complex mathematical formula that original data is put through, and the formula creates a number on the other side, like a 'signature' of the original data. Other hashes you might be familiar with in computers are MD5 or CRC. Since hashing the same transaction block over and over would always give you the same SHA hash, your computer adds some more random data to the end of a transaction block (called a nonce), to change the hash that comes out. SHA is cryptographically secure, in that it is impossible to tell what the hash will be from the nonce you add, so there is no shortcut around just trying billions of different nonces and checking the hash that is generated."
source

Collectively, the bitcoin miners are solving these hash problems at a rate of more than 3,000,000,000 GH/s, that is 10E+18 hashes per second, completely crazy. Collectively they use the entire power consumption of a small nation. You can look at that hash rate and power consumption as indicators of the security of the network. For an ill actor to try and attack the network, they would need to amass more than 51% of the mining power. At this point, that sort of attack is essentially impossible in the interest of conciseness. There is plenty to read about the hypothetical attack vectors but for this story, I am going to regard most as very improbable (I have much less faith in the USD than I do Bitcoin's resilience to these attacks at the moment.)

I am going to leave here some links for you to explore more about how mining works; I am sure some of you are going to be interested in understanding how this process works.
medium blog post
great YouTube video
Khan Academy blockchain lesson

I'm sold, how do I get some and where do I keep it?

Now here is a section that is going to be entirely my opinion, there are many competing companies and projects that provide the ability to buy and sell Bitcoin. Due to the nature of most of these entities, they are a form of centralization and in most cases involve trusting a third party. Both things Bitcoin was set to eliminate the need for. Considering the history of such entities like Mt.Gox, the need for decentralized and trustless methods of purchasing and exchanging Bitcoin is clear. It is this fact that influences most of my opinions in this space.

how to get some

To be strictly honest, at this point in time using the utopic-decentralised methods to acquire Bitcoins from USD is not a very easy process, yet. Until decenteralized markets like Bitsquare or Openledger become more beginner friendly and more liquid, I will present a few ways of buying Bitcoins that are perfectly safe to get your feet wet. Read more about decentralised exchanges here.

Coinbase is in my opinion, the easiest way to get Bitcoin. In fact, it is where I purchase all of my Bitcoins and Ether (a post on Ethereum coming soon). They have a proven track record of very good customer service and security. All currency kept online is insured- for whatever that is worth to you. Coinbase pays all transaction fees and even offers instant exchange. They have a mobile wallet for iOS + Android making what I would call the easiest entry into Bitcoin.
note: It might be a good idea to call your bank before linking your debit or credit card. Although I have never had an issue myself, I have seen banks reject the two authorization charges needed to prove your ownership of the card. This triggers Coinbase's security and prevents you from adding a card for a week.

If you so choose, you can also use a centralized exchange to acquire Bitcoin in a method that would be more like a financial exchange.
Bitfinex is currently the largest exchange by volume and they allow margin trades.
Poloniex is a US-based exchange that also offers margin trades.
You can see other exchanges here, but if you are new to Bitcoin I would not suggest any them as an entry point.

where should I keep them?

Now this section is going to be targeted at newcomers, if you are planning on keeping a lot of money, you should do much more research than this simple blog post.
First off, here are some places where you should never store your coins: an exchange, a library computer or any hardware you don't own. These places are not a secure place to store your coins and your funds can be easily compromised a thief.

A good mobile wallet like Breadwallet is available for both iOS + Andriod and allows you to control the private keys to your Bitcoin. For most casual users, this is most likely the best place to keep your relatively small amount of coins. Their support page is a great resource and provides clear instructions on safely managing your BTC. This is the wallet that I personally use. You can take a look at other wallets here. You should take a look at each and make your decision based on the security recommendations clearly listed for each. You will see that Breadwallet has been validated and gives you complete control over your money.

As far as wallets for your computer goes, I would recommend Electrum because again, they are completely open source and allow you to have complete control over your Bitcoin. Electrum also implements many security features like allowing you to use a hardware wallet like the Ledger to keep your keys off your internet connected computer and safe from a hacker.

Issues and things to consider

In this section, I plan to discuss some of the current issues that the Bitcoin community is dealing with. Keep in mind that this is an abridged history and if these issues interest you, do plenty of your own research. Due to the nature of decentralisation and the freedom that Bitcoin users have, solutions to problems can be difficult to agree on. This section will be certainly full of my opinions but keep in mind that I try to base them on the principles of decentralization and freedom for all users.

The current issue plaguing Bitcoin today is simply this: Bitcoin is full, running at maximum throughput. Like mentioned before, the blocks used to store transactions are capped at 1MB and you can take a look on Blockchain.info and see that they are full. In order to support more transactions something must be done: allow for bigger blocks. How to do that exactly? People have both competing opinions and motives.

Blockstream, SegWit and Bitcoin Unlimited? What the heck.

As mentioned earlier, there are two main implementations of the bitcoin protocol, Bitcoin Core and Bitcoin Unlimited. There exists a for-profit company called Blockstream that employs many of the Bitcoin Core developers. Now a lot of Blockstream's core business model relies on these things called "sidechains". Without getting technical, sidechains allow for a layer to exist on top of bitcoin that allows for many use cases; one of which is allowing for transactions to occur securely off the main bitcoin chain thus increasing transaction throughput. These sidechains (the Lightning Network being one example being developed by Blockstream) causes concerns of centralization and other problems.

SegWit is the proposed fix for the full blocks problem developed by Bitcoin Core (and thus Blockstream). In addition to slightly raising the block size limit (not even by double), SegWit allows for several improvements to the bitcoin protocol that are required for their Lightning Network to function. These sidechains are needed when the main bitcoin network is unable to process all the transactions. Because of all this, SegWit and the Bitcoin Core client that implements it have been heavily criticized by the community. Their solution merely directs the overflow transactions to the Lightning Network which they control. You can see here the current support for each implementation.

The takeaway from all this is that users have a choice to run the code they want. This is why I currently run Bitcoin Unlimited nodes. Let these issues facing the community serve as the reason why choice is so important.

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I hope that this post has been informative, follow @kyle.anderson for more like this.

Stay decentralized.