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After 14 years of existence of Bitcoin (BTC) we still cannot stop marvelling at the amazingness of the invention. A decentralized monetary system for the internet. The separation of money and state. Gold but inside the internet. A feat that some were seeking but no one could achieve, except Satoshi Nakamoto.
However, Bitcoin is a collection of components that were all known in general, and to the men who were researching the subject before January of 2009, the time Bitcoin was launched.
There is no innovation in Bitcoin’s parts, and, in fact, the majority of their concepts and ideas were years or even centuries old!
In this post we go over the major components of Bitcoin, explain their preexistence, and prepare the stage to explain what was Bitcoin’s true revolutionary invention.
It could be said that the internet itself is a peer-to-peer network. It was developed in the 1960s and consists of a series of computers that share the same protocol to send messages between each other.
Then, in 1999 the concept of file sharing in a peer-to-peer network was popularized by Napster, which enabled people to share music files over the internet.
Bitcoin is a global peer-to-peer network of computers that hold the same exact copy of the blockchain, which is the database with the property titles that contains the cryptocurrency.
The idea of putting property titles in a peer-to-peer network was known and written about as early as 1998.
Gold is money because it is divisible, portable, and durable, but most importantly because it is scarce.
Scarcity is what gives a money its property of hardness. The more scarce the currency is, the harder it gets, and the harder it gets, the more it holds it value over time.
This lesson is something that humans had understood for millenia. When the Roman emperors started debasing their money by mixing the gold with lower value metals, they knew what they were doing and its inflationary consequences.
When Europe experienced high inflation in the 16th and 17th centuries because of the massive inflow of Spanish silver coins from the new world, they knew what was the source and the cause.
If a new digital currency were to be created it had to be hard money.
When we are figuring out our budget or keeping track of money flows we may write a single column with the credits and debits. This is what is called “single entry accounting” because each transaction is just one entry in our column.
A few hundred years ago, to solve the accounting of more complex organizations, the “double entry accounting” system was developed. This consists of making two entries of the same transaction in two different ledgers, usually as a credit in one account and as a debit in another. This was a significant advance because when the accounts balanced, then they had a higher guarantee of accuracy.
Bitcoin uses what is called “triple entry accounting” which is to put in the same transaction the initial credit and debit, and to add to them a cryptographic signature to seal them. This increased the security and accuracy of the system even more.
The heart of Bitcoin’s security is the idea that the blockchain must be fully replicated in all participating nodes of the system.
The more nodes hold the fully replicated ledger in as different continents, regions, cultures, and countries as possible, the more secure the system is because it becomes practically impossible to tamper with or damage by man or nature.
The concept of networks of computers holding redundant copies of the information had been a standard in networking systems since the 1980s.
The problem that these networks had was that if as little as 1/3 of the nodes of the system were to fail, then the whole system would fail. This is what was called the Byzantine Generals Problem.
The idea that an object with the same characteristics of gold but inside the internet could theoretically be created was developed by Nick Szabo in early 1998.
HashCash made computers do a lot of computational work to create a cryptographic stamp, also called a “proof of work”, that would be attached to an email. As each email would have to be stamped, then it would prevent spam, because whoever wanted to flood the internet with emails would have to spend a lot of computational cycles and electricity doing it.
Nick Szabo’s brilliant idea was that the proof of work cryptographic stamp could be analogous to gold but in the internet. If an ounce of gold requires a lot of work by gold miners to produce, and this makes it scarce, then if a cryptographic stamp requires a lot of work by computers to produce, this makes it scarce as well, hence “digital gold” or “Bit Gold”.
The heart of Bitcoin’s monetary system is this Bit Gold.
Based on the idea of Nick Szabo to create Bit Gold, Wei Dai thought of a system that would create coins backed by Bit Gold in a peer-to-peer network.
He called his idea “B-money” and the way it worked was in the following steps:
Some computers in the peer-to-peer network work to produce a cryptographic stamp using a lot of computing power and electricity
Then, they send the stamp to the rest of the network for verification that the work was done
When the rest of the nodes in the system verify that the stamp is legitimate, then they pay the producers of the stamp a set number of newly created coins inside the system
As you may have realized, the above is how Bitcoin works! However, Wei Dai’s paper about B-money was published in late 1998!
The whole point of the blockchain industry is to reduce trust in third parties because trusted third parties tend to abuse their power.
Indeed, Satoshi Nakamoto mentioned trust minimization 14 times in the Bitcoin white paper!
The idea is that the property of the coins, meaning the ledger with the accounts and balances, should not be under the custody of a trusted institution, and that the supply or monetary policy of the cryptocurrency should not be dictated by a group of people or government.
The full replication of the Bitcoin blockchain in thousands of computers worldwide, and that the network is totally decentralized makes it trust minimized because there is no party that can tamper with the ledger or change its monetary policy.
However, this concept and goal of trust minimization had already been developed and written about by Nick Szabo in 2001!
This is an excellent question that many asked themselves in the early days!
The amazing invention by Satoshi Nakamoto was not hard money, peer-to-peer networking, triple entry accounting, trust minimization, digital gold, a cryptocurrency, or a fully replicated ledger.
His invention was what is called “Nakamoto Consensus” which is HOW all these parts WORKED TOGETHER.
We will explain how Nakamoto Consensus, also known as “Proof of Work”, works in the next class!
Thank you for reading this article!
To learn more about ETC please go to: https://ethereumclassic.org