Kryptolesson #2

What is Bitcoin?

Bitcoin can be described many different ways, including “money over internet protocol (IP)” or “digital gold”, depending how one approaches it. Bitcoin is a network, a technology and a currency – and these three things are closely intertwined. The essence of Bitcoin is the ability to operate in a decentralized way – without any central authority and without having to trust anyone. It does not rely on an established legal system or a state to enforce the rights. The rights are enforced through cryptography.

‍The term Bitcoin (with an uppercase B) typically refers to the protocol that allows its users to send value through a communications medium. In contrast, the underlying monetary asset bitcoin (with a lowercase b), also referred to as BTC, describes the monetary unit. Bitcoin is often compared to a monetary commodity or an emerging digital store of value. Unlike fiat currencies like the U.S. dollar or the euro, it is a global, immutable and non-state monetary asset that has a limited supply of only 21 million units. New bitcoin are created through a process called “mining” in which participants compete to find solutions to a mathematical problem while processing bitcoin transactions.

‍Contrary to popular belief, Blockchain is not the sole technology behind Bitcoin. Rather, blockchain is one of four foundational technologies behind Bitcoin which elegantly combines 1. blockchain, 2. a peer-to-peer network, 3. public-key cryptography and 4. a consensus mechanism for achieving agreement on the network called Proof-of-work (PoW). While blockchain is an integral part of Bitcoin, it cannot stand alone. Put differently, what made Bitcoin work was not the blockchain itself, but its ingenious combination of a technical mechanism and clever incentive-engineering. Nakamoto solved a hitherto insurmountableproblem with digital money which was how to prevent it from being spent twice,without relying on a central authority.

Photo by Taras Chernus