Smoothbrain explains - Bitcoin

Hoooo boy, this one is a long and complicated one. With all the hype around the Spot Bitcoin ETFs, (something that won't be covered here), it's a great time to revisit this abandoned segment.

As you can see from the introduction paragraph, this is an informal thing as I try to explain it as casually as possible without using the technical jargons.

Background on BTC

Now, the million dollar question.

What is Bitcoin?

Bitcoin was a cryptocurrency built on top of blockchain technology. I'm stopping there as it is important to note that Bitcoin is not Blockchain. Blockchain is not Bitcoin. Bitcoin is a technology that utilizes the blockchain, as it wanted to be able to validate it's transactions in an infallible way. So, every single transaction can be proven to have happened, there are no fake transactions and the technology is impossible to be falsified. To this extent, it has achieved it. It is effectively a token that is used to facilitate transactions that occur and are recorded on a blockchain network.

Now, what did Bitcoin try to achieve?

Satoshi Nakamoto is an infamous name because they had created Bitcoin, and no one knows who this person or even possibly group of people is/are. They drafted a whitepaper, which effectively outlines the purpose of what each project is trying to achieve. Subsequently, every project writes a whitepaper that outlines their objective.

According to the Bitcoin whitepaper, (found here: https://bitcoin.org/bitcoin.pdf), Satoshi essentially got tired of banks. According to Satoshi, the current financial system is all based on trust. To which I fully agree. Currently everyone has to trust that their banks are functioning as they are telling us, and as regulated, i.e. they are not stealing our money, and when we need our money, they can give it to us. Everyone has to trust that our money is worth that much because our governments can support it. BTC was designed to replace that system where monetary transactions don't need to be verified by the institution but rather by the blockchain technology and the public.

In summary, Bitcoin wanted to get rid of the middle man. Make a fully decentralized method of facilitating transactions that don't need to rely on financial institutions. Decentralized meaning that no single person/company/institution or government controls it.

How is this achieved?

This is the part that is going to destroy my mind and I have no idea how anyone can wrap their minds around this, much less design one of these.

So, first important concept is proof of work. Proof of work is effectively the computer generating a formula that would give you the answer you need. I think it is pretty commonly known that mining BTC is computers doing math problems until you find a solution and then it moves to the next one. How this works is basically, if I asked you all the possible combinations to get to the answer of 10 using addition. First you could say, oh there's additions, there's 10 combinations, 0+10, 1+9, 2+8 ... all the way to 10+0. So once you've used one, there's only 9 combinations, then 8, then 7 all the way down. Each time you solve one combination, the number of combinations gets lower and it becomes harder to come up with another one. Of course, this is extremely simplified as there are other solutions, but effectively, there's a certain solution that every computer is trying to get to, but has to run millions of different combinations to try reach that solution.

Now each of those possible combinations would result in a block. These blocks contain all the information required to continue processing transactions. It would contain the information of multiple transactions, and most importantly a Hash for the block. This acts as an identifier for the block. The hash of each block contains the hash of the previous block as well. So using one block, you can trace it to the previous block that connects the one before that, forming a chain. Hence the name, blockchain.

The security part of blockchain features here, where if someone changes the details of the previous hash, that would require a change in every subsequent hash. That means the person changing the information would have to outpace every computer that is currently processing bitcoin and creating blocks.

Each of these blocks basically have a list of transaction hashes. Each transaction hash identifies the transaction which would display the details of the transaction including various details such as timestamp, to/from address, values and all other information that the developers would want to include there.

So at the end of the day, what you have is: a bunch of computers creating new blocks along a chain where transactions can be slotted into. If someone wanted to change the chain, they would have to change everything that comes after it.

Just a FYI, Bitcoin mining is basically the process of that proof of work, and trying to create new blocks.

What was the hype of the Bitcoin Mining?

So with the mining of Bitcoin, the question is why. Why would I spend so much processing power, electricity and all that from my computer to process transactions for other people?

This is where the rewards system comes out. Initially within the code, each block would give 50 bitcoin to the CPU that created the block. Thereafter, each time 210000 blocks are created, the amount of bitcoin that is given is halved. So, from the 210001th block onwards, the rewards is 25 bitcoin per block. And so on and so forth. Using this, the theoretical maximum was calculated to be the 21 million BTC. This is effectively the total supply of BTC that will every happen.

Could people create more BTC after this maximum is reached? The answer is yes, but it would require the change of every single BTC block processed in history, as well as every BTC block that is being processed currently. It's the same security feature as before that prevents fraudsters and people changing information on the blockchain.

So with this maximum supply, economics say that if there's a demand, then there would be a value to this item. Mining has become a big thing because, it felt like the money spent to process transactions was less than the value of the BTC received. And everyone loves earning that extra cash!

My opinions on BTC

Before getting into this section, I'll also add an extra section of other things I found that I just found cool. If you don't care for my opinion, but still want to learn more, feel free to jump to the end!

So with BTC I have an extremely controversial opinion, so before I get cancelled by the crypto community, I need to preface my argument with a few things.

First off is the idea of money. Money itself has no value. Paper has no value, and neither do the numbers on your bank statement. Money has value because of the backing behind it. For most currencies it's the country that backs it. There's some countries that tied it to gold, i.e. the gold standard, which is physical gold. But basically, it's that people trust this 10 dollars would and can be traded for at least 10 dollars worth of stuff. That trust comes from the government/systems behind it, whether you agree with it or not.

This means that BTC's value is purely based on the public's opinions. Let's imagine a world where everyone wants to trade in BTC rather than any other forms of cash. Then the value of BTC could become theoretically infinite as it represents the value of everything, and no one is able to "regulate" or control it.

This means that the value of BTC, should be tied into what people think about its objective. How useful will this thing be in the future. According to the whitepaper, BTC wanted to be a currency that can be used by everyone so that they don't have to go to the bank. This to me is an all or nothing deal. Either everyone in the world uses Bitcoin and it can actually reasonably represent the value of things, but in order to get there, everyone will need to buy into it. Which means the price of BTC will get to a point where it can't reasonably represent things anymore. Right now, 1 BTC is above 50,000 USD, but if more people use it, and it eventually becomes 1 million USD per BTC, then you're going to be trading things with 0.000000001 BTC. The infamous story of the million dollar pizza comes to mind. At the time it made sense to spend BTC to buy the pizza, because that's what it is worth. But then more people started using it, which means more people wanted it, which means it becomes more expensive, which means that more people are scared to spend it and lose out on it.

That's why BTC has become no longer a crypto currency. It's a "value-store" as I've been seeing on the internet, which is a place to park your money and it'll just never lose that value. That just doesn't feel like that's what BTC was about. And when people find an actual alternative that is viable to use, then BTC might no longer have any value. More people using an alternative means less demand for BTC until the point it crashes to no value. BTC has just lost its identity.

This becomes dangerous when the mining ends. When the only incentives to processing BTC becomes the transaction fees, the higher the volume of transactions means people want to still do the "proof of work". But should BTC become a "value-store" with low transaction volume, then that incentive diminishes. It may have a knock-on effect, resulting in not enough people actually wanting to process BTC transactions anymore, starting the "devaluing" of BTC.

My controversial opinion is that I dislike BTC. I have a love for crypto and blockchain technology, but I have a dislike for BTC. As I don't believe BTC will ever reach what it set out to do.

Wrinkled Appendices

After that long rant on BTC, here's other really interesting things I've found.

A Satoshi

As shown previously, BTC can be split into much smaller increments to finance smaller transactions. The smallest increment of this is called a satoshi or sat for short. There is 100 million sats in one bitcoin, meaning that 0.00000001 BTC is the smallest amount of BTC you can spend. To the best of what I can find, it's a fairly arbitrary number. A source I found, that I can't verify, is a comment by someone who said they worked with Satoshi on the Bitcoin forum. They stated that it was tied to the eventual limit of 21million bitcoin and the M1 money supply. This is a calculation that is used to represent the most liquid money supply that is currently around, including money, and some deposits.

Block Size Limit

The blocks on Bitcoin are limited. The sizes of these blocks are limited which means that the amount of information that can be contained within the blocks is limited. This is a debate among Bitcoin funds, because this causes some possible problems. One of these is the scalability of the chain as the frequently of the creation of these blocks will eventually be limited. This will cause slow processing of transactions.

Transaction processing

The way transactions are processed is mind-boggling to me. Firstly, when you want to send, for example, 1 BTC out of 50 BTC that you own to someone. The transaction is processed as 50 BTC is sent to that person, and then 49 BTC is returned to you, ignoring fees. But this is not too terrible, as it's similar to receiving change when you pay with cash.

And one of the things that concerned the creator is that although he wanted the ability of anyone publicly being able to prove any transactions, he also wanted to give people the ability to be anonymous. So now there's the sub-addresses, pseudo addresses that link to one wallet where transactions are performed in order to "hide" the identity of the sender. Of course this only half works, which means with enough time and energy you can still find the master address. But it also serves to make it significantly harder for people who want to verify things like auditors. Just a personal gripe with our field of work, when it comes to BTC.

And that's going to be it for now. A bit of a controversial one. Next one probably going to be about Ethereum. Going to be another beast of an article. ETA another year? No promises.