Many attempted to create cryptocurrencies in the past, but it was not until the enigmatic Satoshi Nakamoto created Bitcoin in 2008 that cryptocurrencies started to take off.
Early in 2018 Coinmarketcap valued the cryptocurrency market at $321 billion with Bitcoin representing a 42% share. The creation of a $321 billion market out of nothing in 10 years is an amazing achievement and a testament to the strength and value of cryptocurrencies. Many attempted to create cryptocurrencies in the past, but it was not until the enigmatic Satoshi Nakamoto created Bitcoin in 2008 that cryptocurrencies started to take off. Bitcoin has proven to be a robust platform and, to my knowledge, the core protocol has never been breached in over 10 years of usage.
Bitcoin is underpinned by a technology called Distributed Ledger and Blockchain. A Distributed Ledger is the sharing and synchronization of transactions across a set of computer nodes. Instead of recording all transactions in one central location, they are captured by all nodes in the network. A Blockchain is a type of Distributed Ledger that makes the ledger immutable by applying a cryptographic function to transactions across the chain.
More broadly, what makes Bitcoin important is it proposes a solution to a general problem called the Byzantine General Problem (BGP). This problem explores how to build consensus in a distributed environment where nodes may fail, or pass incorrect information and there is no single decision maker or arbiter to resolve conflicting information.
Bitcoin solves the BGP in the context of a value transfer system, i.e. agreement on the transfer and ownership of Bitcoins. However, Bitcoin’s technique can be applied to any deterministic compute process where rerunning the process under the same conditions reliably returns the same result. Ethereum’s Smart Contract and Decentralized Application Platform is a good application of Bitcoin’s technique.
Some interesting Bitcoin qualities are:
- No reliance on a central authority to operate.
- Participants can join and leave at will.
- Transaction acceptance is a well-defined competitive process in which anyone can participate through a process called ‘Mining’.
- Transaction confirmation increases with time.
- The complete transaction chain is publicly visible, which thwarts use for criminal activity (see Exposing the Pathway of Ransomware Payments for a NYU professor’s analysis of Bitcoin activity).
- Transaction addition rate is limited to one block/10 minutes.
- Anyone can earn 2.5 Bitcoins, or about $20,000 USD (as of April 2018), if they successfully mine a Bitcoin block. But competition is fierce and significant compute power and electricity are required.
Blockchain, Distributed Ledgers and Bitcoin represent a new paradigm for building trusted computation across an untrusted network. Of particular interest is Bitcoin which has been successfully achieving consensus for payment transfer over the past 10-years in a completely decentralized manner – there is no central authority and the Blockchain is the trusted party. The number of experiments in this space is exploding, but it’s difficult to clearly see viable use cases and only time will see which succeed and which fail, but it is certainly here to stay!