An anonymous individual under the name of Satoshi Nakamoto released a white paper on Oct. 31, 2008, outlining a concept for a “peer-to-peer electronic cash system,” a worldwide financial infrastructure based on cryptographic evidence rather than trust. Cryptocurrencies are now routinely debated in the context of global economic policy, with several countries even studying and creating their own digital currencies, more than a decade later.
The blockchain, which is the underlying data structure of Bitcoin (BTC), has been studied and applied in a variety of use cases, including supply chain management, logistics, cross-enterprise resource planning, energy trading, decentralized autonomous organizations, and much more.
The goal of this book is to provide newcomers with a thorough knowledge of Bitcoin, including the social and technical background in which it was created, important events in its history, how it works, explanations of its distinctive characteristics, and how to participate in this new financial paradigm.
The reader should have a balanced view of one of the most interesting technical and financial breakthroughs of the modern age at the end of this book.
While the narrative usually starts with the mysterious Satoshi releasing a white paper on Halloween 2008, there is a rich pre-history of Bitcoin that is critical to understanding it as a decades-long techno-social phenomenon.
This Bitcoin tutorial will start by tracing the social and technological currents that led to its creation. Examining these currents is helpful when analyzing Bitcoin’s history, present, and future.
While it may seem strange to propose a Bitcoin ideology given its decentralized structure, the truth is that Bitcoin’s early supporters were mostly techies, libertarians, and crypto-anarchists. The origins and acceptance of Bitcoin within this community have come to define its ideals, virtues, and basic design.
Satoshi’s idea for Bitcoin drew just a limited amount of attention and criticism from a small online community of cryptographers and computer scientists when it was first published. During the 1980s and 1990s, several of these people were engaged in digital currency experiments.
To them, Bitcoin was only the latest in a long line of experiments aimed at developing monetary systems that value human liberty and privacy. If you go far enough back in time, you’ll discover that Bitcoin’s formative impact is mainly due to the conversation around two distinct groups.
In 1988, a futurist named Max More published a set of written principles describing an “evolving framework of values and standards for continuously improving the human condition” through the use of emerging technologies like cryogenics, artificial intelligence, robotics, memetics, genetic engineering, space travel, and more.
Extropians are those who actively develop and test these technologies for the benefit of mankind while maintaining a purely rationalist mentality free of dogmatism. Life extension via cryogenics, mind-uploading, and other methods is one of the community’s fundamental beliefs.
This transhumanist philosophy drew together a group of scientists and futurists who discussed their views on early internet discussion boards. Extropians prototyped ideas for alternative currencies, idea markets, prediction markets, reputation systems, and other experiments from the late 1980s to the early to mid-1990s, foreshadowing much of the present crypto sector. The Extropian community included a number of cryptocurrency pioneers, notably Nick Szabo and Hal Finney.
The cypherpunks, like the extropians, were brought together by a common belief in the power of technology to improve the world. The cyberpunk subgenre of science fiction often depicts a future in which a worldwide cabal of companies essentially controls the globe via omnipresent monitoring technologies, with the protagonists frequently being hackers or other people navigating this dystopian society.
The cypherpunks were named after writers John Brunner, William Gibson, and Bruce Sterling, who viewed the writings of John Brunner, William Gibson, and Bruce Sterling as realistic scenarios given current socio-political tendencies and technical advancement. They think that the emergence of global computer networks mediated by governments and businesses will progressively erode liberty and freedom.
The cryptographers, computer scientists, and futurists that made up the cypherpunks were committed to developing the technologies needed to protect individual sovereignty in the face of a future surveillance state.
The cypherpunks, in contrast to the extropians, focused on a specific set of technologies centered on encrypted communication networks, such as anonymous messaging and electronic money. The Cypherpunk movement was directly responsible for many of the digital money experiments that took place in the 1990s and early 2000s. Bitcoin was developed in the dirt of this community.
Bitcoin’s Technical Pedigree
Understanding Bitcoin requires seeing it not as a single, original innovation, but rather as a smart synthesis of previous work that succeeded where previous attempts had failed. Satoshi was aimed at creating a trust-free financial system that would last for years to come.
Rather than creating a new solution from scratch, he relied on previous work in distributed systems, financial encryption, network security, and other areas. The fundamental technology of “crypto” will be described first in this tutorial. The book will then go through some of the digital currency experiments that came before and inspired Bitcoin.
Public key cryptography
Cryptography, or secret-sharing technology, has depended on several parties agreeing on a shared private key to decode communications for decades. Symmetric key encryption is the term for this kind of encryption. The issue of key distribution was always a concern with this approach. Face-to-face encounters or the employment of a trusted courier have been used in the past. This method was not only susceptible in numerous ways, but it was also difficult to deploy on a large scale.
Asymmetric key encryption, often known as public key cryptography, became popular in the 1970s as an alternate way of secret sharing. Each party would have a pair of public and private keys under this scheme. If Alice wished to send Bob a secure communication, she would use Bob’s public key to encrypt the message. Bob would then use his own private key to decode Alice’s communication. Neither side needs to agree on a shared secret in advance under this arrangement. Alice may also use her private key to digitally sign her message to Bob, enabling Bob or anyone else with access to her public key to authenticate the message’s validity.
This combination of public key cryptosystems and digital signatures is the foundation of what is now often referred to as “crypto,” and it has effectively protected the communication networks and protocols that make up the internet for decades. It’s also an important part of digital cash systems.
The Crypto Wars
It’s worth noting that the United Kingdom’s Government Communications Headquarters and two independent American academics called Whitfield Diffie and Martin Hellman developed public key cryptography almost simultaneously in the 1970s. Governments don’t want the public to have access to privacy-preserving technology like public key cryptography because it would tip the power balance.
When the World Wide Web came in the 1990s, causing a surge in demand for online communications and e-commerce, governments resisted widespread use of encryption, citing security and criminal activities as reasons.
This period of tension between political authorities and entrepreneurs and builders of a new technology paradigm is known informally as the Crypto Wars, and it continues today as governments are compelled to recognize the development of a borderless, leaderless financial system prophesied by Bitcoin.
David Chaum is perhaps the most powerful figure in the bitcoin world. His groundbreaking work in digital money systems goes back to the 1980s, when the internet was still in its infancy before the World Wide Web was launched.
In 1981, Chaum had published “Untraceable Electronic Mail, Return Addresses, and Digital Pseudonyms,” a seminal work in the field of internet privacy that paved the way for the development of privacy protocols like Tor. Chaum published “Blind Signatures for Untraceable Payments” in 1982, a seminal paper that described an anonymous transaction system that would go on to influence subsequent digital currency experiments.
With the introduction of electronic banking services, Chaum attempted to transfer the anonymity of physical currency and coins to the digital world with the eCash payments system. Chaum created DigiCash in 1989. Chaum and his colleagues, based in Amsterdam, developed the eCash protocol. Chaum failed to obtain enough partnerships with merchants and banks to keep the project afloat in the second half of the 1990s, eventually declaring bankruptcy in 1998.
eCash blazed new paths in the digital money sector, even if it didn’t survive. eCash anticipated what are today known as central bank digital currencies, or CBDCs, and stablecoins – digital assets backed by reserves and issued by a trusted third party such as a bank or company.
E-gold was a digital money system backed by gold reserves in vaults in London and Dubai, founded by Douglas Jackson and Barry Downey in 1996. E-gold, which was denominated in grams and capable of rapid, international value transmission, offered an alternative online payment system, but the initiative ran into major legal and structural problems.
The E-gold economy was run via a single company’s central server, which created a single point of failure or interruption in the case of a disagreement between operators or a government shutdown or seizure. The E-gold system had few limitations on account creation at first, which led to the money being utilized in a variety of illegal acts. While Jackson and his staff tried to stop criminals from using E-gold, they were eventually found guilty of operating an illegal money transfer business, and the company was shut down.
Unlike eCash, which was an electronic currency system that worked in tandem with the traditional banking system, E-gold was a stand-alone financial system that existed without the approval or involvement of regulatory authorities. During this period, the US government was concerned about the public’s access to public key cryptography and the ability to encrypt their online activities. Such issues were raised by companies like E-gold when it came to transacting via communication networks. Many of the regulatory squabbles that erupted around alternative digital currencies at the time have continued to this day.
Cypherpunk Edition of Peer-to-Peer Digital Cash
While earlier digital money systems influenced the development of electronic cash, the creators were not actively engaged with the community. Chaum, for example, was not a big fan of the cypherpunk philosophy.
The following digital currency experiments, on the other hand, were created by members of this community and may be considered the direct forerunners of Bitcoin. These ideas and implementations influenced Satoshi Nakamoto’s creation of Bitcoin, either directly or indirectly.
In 1992, IBM researchers Cynthia Dwork and Moni Naor were looking at ways to protect emerging internet services like email against Sybil attacks, denial-of-service assaults, and spam messages. The duo suggested a method in their article “Pricing via Processing or Combatting Junk Mail” in which an email sender makes some computing effort to solve a cryptographic problem.
The sender would then attach a proof-of-work, or PoW, to the email as evidence of the answer. While this method has a low computing cost, it would be sufficient to successfully prevent spam. A “trapdoor” in the system would enable a central authority to quickly answer the problem without having to make any effort.
In 1997, Adam Back, a 26-year-old University of Exeter graduate and an avid cypherpunk, suggested a comparable system dubbed Hashcash to the cypherpunk mailing group. There was no trapdoor, no central authority, and no focus on cryptographic problems in this system. Instead, hashing was the focus of the procedure.
The technique of converting every piece of data of any size into a random string of characters of a specified length is known as hashing. The smallest change to the underlying data would result in a completely new hash, making data verification simple. A SHA-256 hash of the text “What is Bitcoin?”, for example, yields the following hexadecimal number:
In Hashcash, a sender will hash the email’s information — such as the sender’s address, the receiver’s address, the message’s time, and so on — with a random integer called a “nonce” until the resulting hash starts with a specified amount of zero bits.
Because the sender does not know the proper hash right away, they must hash the email information several times with a different number until they find a suitable combination. This method, like Dwork and Naor’s, requires computing resources in order to generate a proof-of-work.
Back had other uses in mind for Hashcash beyond anti-spam, as the name suggests. The proof-of-work tokens, on the other hand, were worthless to the receiver and could not be transferred, making them useless as a digital currency. Money would have been susceptible to hyperinflation as the speed of new machines improved, making it simpler and faster to generate proof. Back’s Hashcash, on the other hand, would inspire the use of proof-of-work in two proposed digital cash systems and Bitcoin forerunners: B-money and Bit Gold.
Wei Dai, an active cypherpunk, suggested B-money in 1998 as an alternative peer-to-peer, or P2P, a financial system for conducting internet trade outside of the traditional banking system governed by governments and controlled by corporate gatekeepers. The system would allow for the production of digital money as well as the enactment and enforcement of contracts, as well as the resolution of disputes via an arbitration mechanism. Dai made two suggestions in his post.
Dai’s initial concept substituted a shared ledger system among a network of pseudonymous peers represented by public key addresses for the central authority’s exclusive control over a transactional database. A node would have to solve a computational challenge and broadcast the answer to the network (a proof-of-work) in a multiphase auction to mint a digital currency. The cost of calculation effort in proportion to a basket of standard commodities would decide the quantity of assets distributed.
If Alice wished to transact with Bob, she would send a transaction packet to the whole network that included the amount and Bob’s public key address. However, Dai recognized that this original approach could not address the double-spend issue, since Alice could spend the same assets with both Bob and Carol at the same time.
Instead of everyone owning a copy of the ledger, Dai proposed that a limited group of peers dubbed “servers” maintain a shared ledger, with ordinary users merely verifying that the transactions had been completed by the server. Servers would deposit a set amount of money in a separate account, which would be utilized as a fee or reward in the case of harmful conduct, similar to proof-of-stake systems in existing blockchains, to guarantee trust and avoid collusion.
Despite the fact that Dai’s concept for B-money was never implemented in any manner, it is remarkable how close it was to Bitcoin, especially in terms of the shared ledger and PoW-based digital currency. The major distinction was that B-currency money was linked to a specific commodity value, giving it an early prototype for what is today known as a stablecoin.
Szabo is one of the most important people in the creation of Bitcoin and blockchain technology, having previously been an active part of both the Extropian and cypherpunk groups. He is a polymath who excels in a variety of fields, including computer science, encryption, and law.
Szabo’s North Star is his vision of a free economic world free of corporate and national-state domination. He suggested smart contracts as a key building element of borderless e-commerce in 1994, essentially digital contracts performed and enforced through code rather than territorial law.
Later, he recognized that a crucial component was missing: a natively digital money that could be used in these transactions. After seeing a slew of digital currency initiatives fail (and even working for a while at Chaum’s DigiCash), Szabo decided to embark on a fresh idea that might succeed where others had failed.
Szabo recognized commodity money, such as gold bullion bits, as a solid conceptual basis for a new internet currency while researching the history of money. This new money had to be digital, rare, and very difficult to counterfeit, and it couldn’t depend on trusted third parties to protect and value it — digital gold, in a way. Bit Gold, he proposes.
Bit Gold utilizes an accumulating chain of hash-based proofs-of-work that is regularly time stamped and broadcast to a network of servers, akin to Hashcash and especially B-money. Bit Gold is issued and owned via a distributed property title registry, which is essentially a protocol that provides for the governance of specific types of property through a quorum-based voting mechanism.
The absence of fungibility — when each unique unit may be exchanged for an equal unit of the same value — was where Bit Gold fell short as a currency. This is necessary for any currency to be viable. A unit of Bit Gold mined in 2015 would be worth less than a unit of Bit Gold mined in 2005, since the cost of computing is linked to the computational cost of the proof-of-work at a particular point in time, and because the cost of computation would drop with better computers.
Szabo suggested a second-layer solution, including a safe, trustworthy, and auditable bank that could monitor Bit Gold issuance over time and continually package proof-of-work tokens into equal units of value, resulting in a stable medium of exchange. However, the system would be vulnerable to Sybil assaults, which may lead the network to split. Szabo felt that any possible network split could be resolved by the honest players staying on their own system and the users naturally siding with them due to social agreement.
Shortly before Satoshi released the concept of Bitcoin in 2008, Szabo was preparing to develop Bit Gold. He abandoned the Bit Gold project after the introduction of Bitcoin, saying that Bitcoin ingeniously addressed the flaws of Bit Gold and other digital currency efforts by synthesizing previous attempts into a system that simply worked.
These two attempts at digital money were important in the development of Bitcoin. “Bitcoin is an implementation of Wei Dai’s B-money proposal […] in 1998 and Nick Szabo’s Bitgold proposal,” Satoshi said on the Bitcointalk forum in 2010.
While many books and podcasts have been written on the history of Bitcoin, for the sake of this guide, just the pivotal events in Bitcoin’s history will be discussed, along with their importance in the developing narrative of the cryptocurrency.
After posting their eight-page proposal for a new digital currency system on a mailing list, Satoshi invited an online community of cryptographers, computer scientists, and digital cash veterans to discuss and debate the idea. While Satoshi had developed most of the Bitcoin software before releasing the white paper, they exposed it to an online community of peers for public review.
Bitcoin has always been an open-source software project that has been developed and maintained by a community of developers and enthusiasts. Bitcoin was registered on the open-source software development site SourceForge on November 8, 2008. This was the point at which Bitcoin became a collaborative effort.
Satoshi Nakamoto mined the genesis block (or block zero) of Bitcoin on January 3, 2009. (over seven days). Satoshi famously added the following statement in this first transaction, often known as a genesis transaction or “coinbase”:
This sends a clear message about Bitcoin’s objectives.A new vision of a monetary system independent from the state has emerged as the globe has faced its worst financial crisis since the Great Depression.
The first post-genesis Bitcoin transaction took place on block 170 on January 12, 2009, between Satoshi and the cryptography activist, Finney. Finney is also said to have been the first person to mine Bitcoin with Satoshi after the network became live.
Bitcoin Pizza Day
On May 22, 2010, Florida programmer Laszlo Hanyecz offered to pay 10,000 BTC for pizza, which was the first documented usage of Bitcoin in exchange for a product or service. Bitcoin’s first exchange rate had just been set a few months before. At the time of purchase, the two large Papa John’s pizzas were expected to cost about $25. Those two pizzas will be worth more than $500 million in March 2021. While many people now laugh at Hanyecz’s transaction, it’s essential to remember how new the Bitcoin network was at the time.
Hanyecz’s famous transaction is often brought up in discussions of Bitcoin’s use case as a medium of exchange as an example of how the enormous range in Bitcoin’s price history seems to run counter to its usage as an effective currency. People may choose to utilize it as a long-term investment rather than cash, since the supply is limited to 21 million coins. This is known as “HODLing” in the industry. Nonetheless, Hanyecz’s groundbreaking purchase demonstrated that Bitcoin could be used as a digital, peer-to-peer payment mechanism.
The Birth of the Mining Industry: The Bitcoin Rush
In the early days of the Bitcoin economy, the mining process was the only method for individuals to participate in the network and acquire Bitcoin. Mining is the process through which the network continually verifies broadcasted transactions and stores them in the distributed ledger as linked “blocks” of transaction data, resulting in a cryptographically secure, verifiable transaction history over time. The Bitcoin network is set up in such a way that miners are paid with Bitcoin block rewards for ensuring network uptime. This also acts as the Bitcoin currency’s minting procedure.
The Slush Pool was introduced on November 27, 2010. Slush Pool, the first mining pool in the Bitcoin business, allowed potential miners to pool computing resources to mine Bitcoin and participate in block rewards proportional to the amount of labor done. This enabled those who didn’t have a lot of CPU power to jointly participate in the network’s operations and earn Bitcoin.
Since then, the mining industry has evolved from a small-scale, energy-intensive company to a large-scale, energy-intensive one with a relatively small number of firms providing the bulk of the hashing power. The Slush Pool represents a key milestone in the development and maturity of the Bitcoin network, even if the scope of cryptocurrency mining has altered significantly with the introduction of numerous new cryptocurrencies.
Without a mention of Silk Road, no Bitcoin history would be complete. Silk Road was an online darknet marketplace accessible exclusively via the Tor anonymous browsing service, using Bitcoin as the currency. It was founded in February 2011 by Ross Ulbricht, who used the pseudonym “Dread Pirate Roberts” (named after a character in the movie The Princess Bride).
The site was designed to be a free, open marketplace where individuals may trade freely with one another without being restricted by regulations. In addition to being a marketplace, the site had a discussion forum where members could debate libertarianism, crypto-anarchism, and other alternative viewpoints. To combat fraud, the site had a reputation system as well as an automatic escrow mechanism.
Federal law enforcement officials started investigating the site after it became a refuge for illicit drug trafficking and other forms of criminal activity, resulting in Ulbricht’s arrest on Oct. 2, 2013. He is now serving a number of life sentences with no chance of release.
The launch of Silk Road was a watershed event in Bitcoin’s history. Cases like the notorious marketplace have contributed to the perception of Bitcoin as a currency of choice for illicit operations. What began as a manifestation of libertarian ideals centered on personal liberty and free markets has evolved into the most famous black market of the contemporary age.
It’s worth noting that the US Marshals Service auctioned off over 30,000 BTC confiscated after Ulbricht’s arrest, a fact that gives credibility to Bitcoin’s fundamental legitimacy. Despite the dark turn in the narrative, Silk Road demonstrated Bitcoin’s capacity to facilitate P2P commerce in an open market.
Regrettably, legitimate products and services on the Silk Road — ranging from art to apparel to handmade artisanry — accounted for a far smaller portion of the market’s activities. “The street finds its own uses for things,” as sci-fi novelist and cyberpunk visionary Gibson famously remarked.
Exit: The Mysterious Satoshi
Satoshi Nakamoto left the Bitcoin project on April 26, 2011, turning over development to Gavin Andresen and the open-source community. Until this moment, Satoshi, whomever he or she was, had essentially been in charge of Bitcoin’s development.
In hindsight, the founder’s anonymity was crucial to the Bitcoin project’s success and longevity. With law enforcement agencies cracking down on nefarious uses of cryptocurrencies in the years since, it would have been natural if Satoshi or the creators of a borderless, permissionless, privacy-preserving alternative monetary system had been irrefutably identified, and the creator (s) of a borderless, permissionless, privacy-preserving alternative monetary system had received a sentence similar to Ulbricht’s. For Bitcoin to stay loyal to its origins as a trust-minimized, decentralized, and resilient financial system, Satoshi’s departure was necessary.
Wikileaks and Money That Is Unaffected By Censorship
After releasing secret information relating to shady, covert activities of governments and businesses, the whistleblower site WikiLeaks, founded in 2006 by Julian Assange, an ardent cypherpunk, established a strained relationship with governmental bodies and security agencies across the globe.
After PayPal blocked the nonprofit’s accounts and Visa and Mastercard stopped payments, WikiLeaks started taking Bitcoin contributions on June 14, 2011. It made sense: WikiLeaks aimed to be a steadfast example of the Fourth Estate’s dedication to truth in the face of censorship and pressure from the powers that be, and Bitcoin offered a worldwide, borderless, censorship-resistant accounting system to support these efforts.
Notably, Satoshi voiced reservations about Wikileaks’ usage of Bitcoin. In a 2010 piece, they stated, “It would have been nice to get this attention in any other context.” “WikiLeaks has stung the hornets’ nest, and the swarm is heading straight for us.”
The combination of these two organizations reinforced Bitcoin’s reputation as a dissenting technology in the eyes of the general public. The arrest of Julian Assange on April 11, 2019, underlined the weaknesses of a public personality at the helm of a movement, no matter how misguided it may be. By the start of 2021, Assange’s extradition to the United States had not materialized after he was arrested in London in 2019.
MT. Gox’s Ascent and Descent
Magic: The Gathering Online eXchange, better known as Mt. Gox was founded in July 2010 by P2P software developer Jed McCaleb before being sold to Mark Karpelès. It quickly became the world’s largest Bitcoin exchange, facilitating roughly 70% of the network’s transactions at its peak in 2013 and 2014.
Following a security compromise on February 7, 2014, the exchange stopped all withdrawals. Mt. Gox fell down later that month, with hackers stealing 744,408 bitcoins, valued at $43 billion as of March 2021. Mt. Gox customers are being compensated for the loss of their Bitcoin, but the narrative is still unfolding. Some people who lost money as a result of the Mt. Gox disaster have filed compensation claims, but the payouts have been delayed many times.
The collapse of the once-dominant exchange due to a security breach has turned into a Tacoma Narrows Bridge catastrophe for the cryptocurrency sector, exposing the systemic dangers associated with centralized crypto asset custody. In some ways, it serves as a warning story for anyone involved in the crypto economy. Do you put your faith in others to protect your possessions, or do you put your confidence in yourself? It has become an example of the concerns and dangers of building services and infrastructure around a valuable commodity that is inherently decentralized for entrepreneurs and builders in this area.
Crypto Legislation and the New York BitLicense
Technology and its acceptance seldom keep up with the rate at which regulations are enacted. When there is some uncertainty about whether old frameworks apply inside the new paradigm, entrepreneurs and designers of emerging technologies often encounter conflict with regulatory authorities.
The conflict between the old and the new is unavoidable in the case of Bitcoin, which is pseudonymous, non-repudiable, and operates on a basic set of rules independent of any sovereign authority. Between the closure of the Silk Road marketplace and the collapse of Mt. Gox, regulatory state agencies started enacting specific rules for companies dealing with crypto assets in any form.
The New York State Department of Financial Services proposed the “BitLicense” on July 17, 2014, a business license that puts severe limitations on digital currency companies that offer custody, exchange, and/or transmission services for clients in the state of New York.
The license, which was written by Benjamin Lawsky, New York’s first superintendent of financial services, was heavily criticized by the industry for its prohibitive and expensive demands, as the sheer cost of obtaining the license would make compliance impossible for small and medium-sized businesses. When the BitLicense went into force on Aug. 8, 2015, ten major cryptocurrency businesses departed New York in what was dubbed the “Great Bitcoin Exodus” by the New York Business Journal.
While the NYDFS intends to review BitLicense, the regulatory framework has established a precedent for how state and federal authorities may choose to encourage or discourage economic and technical innovation. The New York Department of Financial Services (NYDFS) launched the conditional BitLicense in 2020, which is a modification of their normal framework for crypto regulation. Under a conditional BitLicense, PayPal will start selling crypto assets, including Bitcoin, on its platform next year.
The regulatory environment for crypto enterprises in the United States has been a patchwork state-by-state affair since its beginning, with a persistent lack of clarity to this day. Although there have been some murky areas in the regulation of the crypto sector in the past, a number of regulatory agencies in the United States have stepped up with different measures and enforcements. The Securities and Exchange Commission’s crackdown on initial coin offerings in 2017 and the Office of the Comptroller of the Currency’s permission for US national banks to provide digital asset custody services in 2020 are among the factors to consider.
State crypto regulations may vary, leading to various U.S. platforms expanding their availability for clients in some states before others, as seen with Binance.
Consider the United States. Wyoming, in particular, has positioned itself as a location that supports the development of the crypto and blockchain industries on many levels.
The Lightning Network
To compete with major worldwide payment providers like Visa or Mastercard, an alternative digital currency system must be capable of managing the many day-to-day transactions that pervade our lives. When developers and builders in the space began to debate the scalability of Bitcoin, a variety of scaling solutions were proposed. Bitcoin, in its current iteration, is not yet equipped to handle the thousands of transactions per second on its base blockchain that Visa can, so when developers and builders in the space began to debate the scalability of Bitcoin, a variety of scaling solutions were proposed.
On January 14, 2016, Joseph Poon and Thaddeus Dryja published a white paper outlining the Lightning Network, a layer-two scaling solution for Bitcoin in which transactions are resolved and cryptographically confirmed off-chain before being settled and verified on-chain. This would decrease the transaction burden on the main blockchain while allowing for quicker, more cost-effective transactions. Since March 2018, the system has been active on Bitcoin’s main network and has continued to evolve as a crucial Bitcoin infrastructure.
According to its website, the Lightning Network enables “instant payments,” which are “lightning-fast blockchain payments without worrying about block confirmation times.” However, since Bitcoin has become more of a store of wealth than a transactional currency, transaction speeds and prices have arguably become less significant.
As demonstrated by some of MicroStrategy’s transactions, Bitcoin’s primary blockchain seems to still function effectively in tandem with large purchases while serving as a store of value. MicroStrategy’s CEO, Michael Saylor, revealed how the company purchased 38,250 Bitcoins via the asset’s primary blockchain in September 2020. The firm, on the other hand, only transmitted 18 transactions on the Bitcoin blockchain and carried out 78,388 transactions off the original chain.
The Battle for Bitcoin Scaling
While the Lightning Network is a technological solution that may potentially help with high-frequency Bitcoin transactions, the primary Bitcoin blockchain is currently being scaled as the network grows. Between 2016 and 2017, the Bitcoin network’s shareholders — miners, developers, and businesses that use it — were locked in a heated discussion over different scaling options.
While a comprehensive examination of the so-called Bitcoin Scaling Wars is beyond the scope of this book, the argument can be boiled down to two concepts: Bitcoin block size and network power distribution.
Proponents of expanding the block size of the Bitcoin blockchain think that doing so would improve the network’s total transaction throughput by increasing the number of transactions that could be verified inside a block. Critics say that raising the block size would significantly increase the data size of the whole network, load miners with even greater computing needs, prevent smaller players from mining Bitcoin efficiently, and concentrate power among the existing mining monopolies.
An agreement was allegedly reached on the way ahead in two closed-door roundtables with industry players, known as the Hong Kong Agreement and the New York Agreement. However, on August 1, 2017, the Bitcoin network split when proponents of large blocks made code modifications and started mining a new chain, now known as Bitcoin Cash (BCH).
When so much wealth is at risk, the scaling discussion highlighted the difficulty of a decentralized network in reaching agreement on important protocol changes. With Satoshi’s departure, it was only a matter of time until opinions on the Bitcoin development plan began to diverge.
Following the split of Bitcoin into BTC and BCH in 2017, additional Bitcoin hard forks emerged, including Bitcoin Gold (BTG) in late 2017. Bitcoin Cash was split into BCH and Bitcoin SV in late 2018. (BSV).
While the Request for Comments proposal method that gave us the internet has been the gold standard for creating open-source software projects, the procedure becomes much more complex when the program directly enables a global monetary system.