Bitcoin Explained at 5 Levels - Crypto #2
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Bitcoin Explained at 5 Levels - Crypto #2

Category
Crypto
Publish Date
Sep 25, 2021
Status
Published
Tags
Featured
As with any complex thing, there are various levels of understanding that one can reach. Almost everyone could see Bitcoin as "digital money", but there are much deeper levels of understanding that one can reach by reading more, and potentially even reviewing Bitcoin's code (which is fully open-sourced).
So let's talk through a few levels for Bitcoin:

Level 1:

Bitcoin is digital money.

Level 2:

Bitcoin is a digital currency that is stored and protected via encryption, and it can be sent or received, and stored in a digital wallet.

Level 3:

Bitcoin is a decentralized digital currency that acts as a store of value. That value is stored on the blockchain, which is a ledger that keeps track of the money that comes in and out of each account. New bitcoins are provided to miners who use computing resources to validate transactions.

Level 4:

Bitcoin is a protocol for storing value on a distributed ledger, or blockchain. Bitcoin has a limited supply of 21 million bitcoins, which are slowly released into the market as rewards for miners who use computers to solve encryption challenges that also help validate all of the transactions. Each account is secured by encryption keys. So while the value of each account (and transactions) are public, the key is required to authorize transactions from that account. This is managed by a "wallet" which is essentially a software program (or physical device) that stores your private key and helps you to send or receive money.

Level 5:

Now it starts to get tough to provide a single train-of-thought that enhances the comprehension of Bitcoin. Rather, it is necessary to delve deeper into specific points mentioned on Level 4:
  • Limited supply - this is specified by the protocol and the rate of new coins being provided as mining rewards is cut in half approximately every 4 years until the full 21 million bitcoin are distributed, about 100 years from now.
  • Mining - miners use massive computing power to attempt to find a valid number such that the encryption of a block of transactions meets a certain criteria. This problem is algorithmically adjusted based on the amount of computations being done to ensure the difficulty stays constant even as computing power increases.
  • Distributed Ledger or Blockchain - the ledger of all bitcoin transactions is stored on many different nodes in the network, such that there is no single point of failure for the network. As long as the internet is around, bitcoin can function.
  • Distributed Network - Bitcoin uses a consensus algorithm to ensure that the various nodes that hold the distributed ledger don't try to cheat and ensures that they all stay up-to-date. In short - if there are conflicts, the longest chain is determined to be the real chain. This works with the fact that mining takes time and is difficulty-adjusted to prevent attacks if some entity gained control of much of the mining capacity.
  • Crypto Wallet - your money or "bitcoins" are not actually digitally represented by anything. Rather they are simply the difference between your debits and credits in this single source of truth distributed ledger. Since the ledger is public, all accounts and balances are public information. What is not known/secures your account and privacy are 1 - that you own an account, and 2 - the private keys that are needed to authorize a transaction from that account.
  • Permissionless - because Bitcoin is a protocol that essentially only requires the internet, and because it is distributed, there are no direct intermediaries or ways for entities to ban you from the network or from performing certain transactions. This differs from modern finance currently where banks can close your account, credit card processors can decline your transactions, or the government can freeze your account. For this reason, Bitcoin is considered censorship resistant.

And Beyond...

Undoubtedly, there are more levels to go here! The whitepaper that outlined Bitcoin in full is nine pages long (and actually quite readable). This explains how the supply is limited, how the encryption challenges are adjusted for total computing power, and how incentives are aligned to prevent anyone from gaming the system:
And of course, if you want to go further than that, every last line of code used in the Bitcoin protocol is here:
In addition to all that, there is a lot of resources out there that go deeper into the concepts that underpin Bitcoin and what makes it such a secure network.
For 99% of us, we can rest on the fact that, hey, the code has been open-source for 12 years, it is now worth close to a trillion dollars, and still no one has managed to hack or undermine the network. But you should also know that all of the potential approaches to hack or hijack the network have been game planned and meticulously detailed and planned against. That is not to say that there isn't some novel way of attacking the network, but it should let you sleep easier at night.
Even with all this, we are still just scratching the surface of Bitcoin, the ecosystem building around it, and what the future holds. Bitcoin continues to be developed, and other protocols use Bitcoin as a base layer but add functionality on top of it. Digital money can evolve.
Did this help you level up your crypto understanding? Let us know! Also, let us know if there are other concepts in the crypto universe that you'd like to see this type of explainer for!