My understanding of Bitcoin.

Bitcoin is a peer-to-peer decentralized value transfer protocol. It is the Internet of money. It is the marriage of transparency with privacy, among other paradoxes. I can send you 10 cents or 10,000 dollars in a text message, an email, or a QR code. Wealth can be coded into a drawing, a song, a radio transmission, or simply written onto a piece of paper. Money is now a content type. The medium is not the message. Bitcoin as a store of value transforms tangibility into thin air. Using Bitcoin, you can send almost any amount of money anywhere in the world almost instantly, for a transaction fee of a few pennies. Even less in some cases. No other monetary system in the world currently allows for this.

This technology that Bitcoin is built on is called the blockchain. The blockchain is a distributed public ledger and token based transaction maintained by a millions of users across the globe electronically. This computational capability is so large, you could combine all of the fastest super computers in existence, and they would still be thousands of times less capable than the blockchain network. In fact, the fastest super computer in the world is the blockchain network. A transaction is created and injected into the network, e.g. (someone sends you one US dollar worth of BTC), and that transaction is then publicly verified and published to the blockchain on cryptographic consensus.

Once a transaction is confirmed and published to the blockchain, no one can reverse, alter, counterfeit, or double spend it, because doing so would require that entity to input false information faster than half of the nodes on the network. Due to the blockchain’s decentralization, it would be impractical and prohibitively expensive to even try. Besides, it’s a public ledger, right? I can prove to anyone that I send you that dollar, because EVERYONE on the network gets a copy of the receipt for that transaction. If someone tried to inject a fraudulent transaction in an attempt to claim, "No he did not.", the network would kick it back and say, "Yeah, well, millions of other users on the network have verified the transaction, and consequently we all have it on a verified record that he did." Transactions on the blockchain are irreversible and permanent. The ledger is recorded in pen, not pencil.

This may seem startling at first, because what if you sent money to the wrong person? That is the beauty of it. Bitcoin is programmable money. You can design different transactions the same way you decide what to make for supper during the week. You can add multiple elements to a payment, and prepare them per you taste or needs. What works for some applications, does not work best for others. With Bitcoin, you can program your level of protection and other requirements into the transaction itself.

Once the network verifies a transaction, it is then packaged with other transactions into a type of digital information "block". Those blocks of transactions are then "chained" together in sequence, hence the blockchain. The network then goes on to utilize the math / cryptographic data established in these blocks as a type of continuous and empirical root value data point used in the computational equations and verification of subsequent transactions. The answer is based on the answer is based on the answer, etc. Think of how a physical chain works. A link is linked to link, etc. To go backwards in the blockchain to try altering something means that the all of the math used to verify the preceding blocks would be invalidated. Transactions are therefore un-falsifiable.

Bitcoin has a fixed supply, making it deflationary. This is in contrast all fiat currencies, where the issuer can arbitrarily create more, making it inherently inflationary; money that loses value by design. The Bitcoin protocol is open source, and anyone can review how it works. There are exactly 21 millions founded by design into Bitcoin’s protocol. One Bitcoin is currently divisible to a hundred millionth. And since a Bitcoin is actually just a record of a Bitcoin transaction, and not something physical (outside of hard drive it’s stored on), they are in essence infinitely divisible. In theory can we keep going. We are just adding zeros. The code could be modified over time to accommodate any growth or changes. So in principle, we have created a resource with infinitely divisible scarcity. More people can have access to it, and it becomes more valuable over time.

For the venerable service of digitally authenticating the network’s transactions and maintaining the blockchain ledger, newly created Bitcoins are awarded to users on the network known as “miners”. Borrowed for the similarities to the process of mining other precious commodities (like gold), digital work is required for new bitcoins, and thus they are brought into circulation at a fixed, yet adjustable rate orchestrated by the network. How can it be fixed and adjustable? Think of it like driving under a speed limit. We get the same outcome, but we can adjust the conditions for getting there. The network protocol can increase or decrease the difficulty of work done by the miners to keep Bitcoin production at predictable rate. Imagine adding or subtracting rows and columns from a Sudoku puzzle. We can go as fast or slow as we need.

The blockchain network creates security through employing enormous calculations of numbers in the quindecillions. The calculations utilized are easy to do in one direction, but basically impossible to perform in the reverse. Any attempt to "hack" these one-way function mathematics, would require years of sustained computational power, at which point you could, in theory, re-write or double spend ONE transaction on ONE of these blocks, at which point the system would kick the attacking node off of the network, and pick up where it left off on the previous block. There is not enough metal on the earth to even build the computers required to even attempt something like this, let alone go unnoticed for years. Not even the projected developments in quantum computing come close to how large these numbers are.

This network is described at "trustless". Current transactional systems require a "trusted third party". Banks, insurance companies, notaries, and brokers all perform the function of mitigating counter party risk, by doing the “trusting”, for us. Since two parties involved in a transaction can't necessarily trust each other, these third parties bare the risk, and basically rob us blind for the service. This could be illustrated in thinking of how insurance actually works in practice. Generally, the insurance company is trying fraud you, and in turn you try to fraud the insurance company. Or put another way, you want them to pay out a much as possible, while they try to pay out as little as possible. They don’t trust you anymore than you trust them. The riskiness measured in value of this trust, in part determines your premiums. This reasoning can be applied to most “if x, then y” contracts of any sort.

With the blockchain, we no longer need to trust one sole party, or any party for that matter. This trust is inherently “built in” to the network’s code through cryptographic consensus, and creates even further confidence by using a hardened, tamper-resistant, "proof of work" formula. This provides the transacting parties absolute assurance that the agreement will be, or has been upheld; all without the need for a trusted third party. And remember, we can program arrangements and conditions into a blockchain transaction. We are now free to be our own banks or insurances companies if we choose to be. Please understand, we are not erasing the market for trusted third parties agreements, we are simply giving ourselves more options. As a consumer, what is more valuable than options?

The blockchain is independent of any policy governments might impose, a bank's liquidity, or it’s standards of practice. It runs parallel to sovereign fiat currencies, along with the "good faith" of its issuance. The fractional reserve dollar is backed by debt and war, among other things. The US government is in effect a giant insurance company to the American public stating, "Trust us. We “promise” that your money will be good tomorrow, and Federal Reserve's manipulation of interest rates and the money supply is necessary to protect us from the threat of another Great Depression."

But we don't have to trust the promises of these institutions anymore. We trust math. We no longer depend on currencies backed by the mere good faith and policy of governments, we now have currency backed by immutable arithmetic. It’s correct or it’s not. There are no opinions, agendas, or biases on the blockchain. We're not taking it on faith that a ledger is actually what a government or a corporation says it is, because our numbers are published for the world to see. What is Bitcoin backed by? It is backed by the largest decentralized network/super computer in existence, and in effect, the common good it’s users and participants.

Nobody owns the Bitcoin technology. It is back backed by no one, and no one is in charge. In turn, everyone owns Bitcoin. It is backed by everyone, and everyone is in charge. As wild as it seems, this is nature taking it course. The issue of whether or not people will be honest, is designed out of Bitcoin’s framework altogether. In this system, malicious actors aren’t provided any avenues to attempt cheating the system. On the contrary, there is great incentive to play by the rules, and receive a fair compensation. With Bitcoin, it cost more to lose than it does to win.

Any changes to the network that are viewed as universally advantageous, would go into effect on consensus. No different than a update like you might see on any software. Any changes collectively deemed hostile to the network would be disregarded. Some users could very well splinter off in an attempt to use their own “superior” version of the software. But the Bitcoin network would go right along without them, and users on the wrong side of the fork would lose the potency of the network, and consequently the usage and incentive structures. Again, consensus and compromise are rewarded by the network, while intransigence and disregard earns you nothing. All for one and one for all.

The old ways are done for. This technology cannot be un-invented. And Bitcoin is just the first application of the blockchain technology. There are numerous implications for a staggering variety of uses. Some big ones being voting, remittances, smart contracts, ID services, insurance, loans, property titles, crowd-funding, micro-transactions, information security, and information leaks.

There are certainly some complexities as to how the system runs under the hood, and we all understandably will have a plenty of questions, but don't be overwhelmed. Most people thought the early Internet was too complicated as well, and lacked usability for the average user, and applications for usage are still being developed to this day. Soon you won't have to look at funny numbers or addresses, any more than the average Internet users needs to look at IP addresses. We still use them; they are just hidden under a veneer of usability. This is only the 6th year of this technology. You should have no doubts that it will be refined.

This future is so fundamentally different than how things work now, that it is crazy to think about. This is the first time in history that human beings have a utility like this. People all over the world will now have the means to control their own wealth. “With great power, comes great responsibility.” Even with cash, we don't actually control our own money. Bitcoin's most similar analog theoretical e-gold. But how do you secure gold besides a vault? How do you divide gold to pay for a home, or a coffee? Most people today likely wouldn't want to be in charge of their own money, and that's fine, but the direction we are moving in really is revolutionary.

It may not seem pertinent to those of us in first world nations, but think about the people who aren't afforded the privileges we enjoy… People that live in countries that have no institutional trust or financial security. Or where there is no infrastructure for these services anyway. Where voting or transacting the wrong way could get you persecuted, disappeared, or murdered. To them this technology brings hope. We can have safety through anonymity; growth through diffused liquidity; and greater collective power through open and growing networks. This technology has the potential to pull a lot of people out of helplessness and poverty. It’s a modern economic Bill of Rights for the citizens of world; for the billions of people who have been ostracized and not afforded a chance to enter the global economy.

The network is borderless and independent, free from the fetters of those who would use the free market to exploit human beings. Nationless, fair, and equitable, with the blockchain comes the potential to bring peace and prosperity to those who have been excluded. It's human law, if there were such a thing. And no entity or authority can transgress against or thwart these rights. The compliancy is built in. The playing field has been leveled. Put succinctly, it's on.