Bitcoin 101

Bitcoin 101

“I don’t even know what to ask” — Everyone.

Bitcoin has really been following the trajectory often misattributed to Gandhi“first they ignore you, then they laugh at you, then they fight you, then you win”and is now successfully navigating its MOP and sociopath invasions. The entire movement is in the “fight you/you win” transition in the first, and has built up a solid technological base regarding the second, now drawing in the Members of the Publicthe consumers who bring the capitalistic sociopaths in like piranhas. But I mean, with one BTC suddenly equalling over $12,000 CAD ($10,000 USD, ~€8,500), of course everyone wants in. The train may have left the station, but at least you can still see it.

I first heard of bitcoin around 2011 but only actively started dipping into the cryptosphere after discovering Vancouver’s DCTRL community four years later. This was for two reasons. First, I suddenly met people who were fascinated by this topic and the potential it had for making the world a better place–people who were quickly becoming experts in this field when literally no one else had ever even heard of it yet, and secondly because it suddenly started to dawn on me how cryptocurrency could improve many, many other fields outside of just finance. Crypto’s potential for fixing social networking in particular set me off on thoughts I’m still exploring.

This past spring I was invited to explain how bitcoin works and why it is so revolutionary at the Eine Welt Camp outside Mainz, Germany. The EWC is a conference/weekend seminar operating since the 80s for mostly young German-speaking Christians who spend at least a year working in the Global South, generally through networks running orphanages, hospitals, schools, and the like. As such, they regularly see the triad of capitalism using racism for exploitation throughout the world, and are exceptionally well-read in and sensitive to these topics of global injustice. The camp happens once every two years under a specific topic. Past renditions have explored Fair trade, Mobility, and Water, and this year it was time for Money to go under the microscope. Among the presenters were Leipzig’s Steffen Henke, a proponent of demurrage (famous in the successful Wörgl experiment), and Enno Schmidt, a main voice behind the Swiss, and indeed, global unconditional basic income movement.

Introduction done, here’s my talk on the tech first heralded by Nakamoto’s seminal 2008 whitepaper. It’s intended for complete newbies to the scene, springing from a little bit of social networking history right into the hearts of mining, ether, the blockchain, and all the other tech terms briskly becoming buzzwords. As always, chapter (and FAQ) navigation is available right on YouTube.

Now the written summary (but watch the video first). For starters, the above video was filmed six months ago and the crypto landscape has changed a lot since then. Secondly, everything in it is information I’ve Frankensteined together in my free time between full-time work and graduate school in very different topics… so don’t exactly expect mistakes, but also don’t be surprised a whole lot if they happen. With these caveats in place, let’s get to some key definitions. Cryptocurrencies (akadigital currencies“) can best be thought of as “points” recorded digitally and verified by the entire community, where a flaw in any account renders that account void but doesn’t break the system. This is due to the system’s decentralized architecture: everyone in the system holds a copy of the entire system so you’d have to knock out every node for any of it to go down. That’s the “currency” bit: the “crypto-/digital” bit refers to the advanced use of cryptography and informatics to run the network and keep it secure. At its base crypto is simply information. All money is simply information.

Bitcoin (“BTC”, “XBT”, or simply “₿”) was just the first such currency. There are now hundreds of others. To understand this entire ecosystem I’ve found the metaphor of gearing up in a car to be useful: there are about eight main “gears” you need to understand, each building on most of its predecessors. The key idea, however, is that you’ll need to change your perspective on money and, indeed, information to proceed. This really is one of those “forget everything you thought you knew” moments.

The first gear is understanding that bitcoin, at its core, is a “programmed ledger“. That is it is an open source computer program (meaning anyone can view it in its entirety) containing both the rules outlining how it behaves as well as a database of all its past behaviour: a “chain” of code that updates with each additional command sent to it. The second gear is that the ledger gathers new commands sent to it in bundles (monetary transactions in the case of bitcoin), tying each irreversibly and linearly to the remainder of the chain in “blocks“, building block on top of block on top of block approximately every 10 minutes (one of the rules in the ledger)… ergo the blockchain. This tie is called “hashing” if you’re wanting to google it later and it involves some fancy mathematics. Every member of the network operates on their own copy of the ledger, thereby ensuring all ledgers are the same (though, since the blockchain has grown to 150GB, more people are trusting companies to hold their copies for them). Any ledger that isn’t becomes immediately incompatible with the rest of the system and so is cast aside by the network. This is the heart of crypto.

The next three gears run deeper and are slightly more complex but are very key in understanding the ecosystem fully. They address the concept of mining, how it works, and how it creates new bitcoins. Mining is the act of third-parties (miners) verifying transactions in the network against their copies of the blockchain using very advanced computers. Miners verify transactions by pitting their computers against each other to mine the next block. Whoever can solve an incredibly difficult mathematical equation first, based only on random attempts, wins the block reward plus all its associated fees. Since attempts are all random, having a computer with the greatest processing power is key. Having multiple computers is even better. Currently, the biggest mining organizations have entire warehouses of the stuff, on 24/7. So the chances of becoming a successful miner is quite, well, minor. Miners are highly disincentivized to be corrupt because verifying the blockchain is very expensive both in terms of specialized equipment and energy consumption required. On top of this, they are very highly incentivized to provide accurate verifications because, in doing so, they not only receive all the transactions fees in the block they mine (bundle of transactions” they “verify and add to the blockchain”), currently amounting to about ₿2.5, but they also receive a mining reward in the form of newly-created bitcoins, currently ₿12.5 (another rule in the blockchain). All told, a miner receives the equivalent of about $150,000 USD ($190K CAD, €125K) in bitcoin fees and new bitcoins at today’s prices, a process that repeats, again, every ten minutes. This mining reward halves approximately every four years, starting at ₿50 in 2009, dipping to ₿25 in 2012, then ₿12.5 in 2016, and the next “halvening” is set to drop the reward to ₿6.25 in 2020, a trend that will keep going until the last satoshi is earnedas a dollar has a hundred cents, a bitcoin is divided into one hundred million satoshis. When the last satoshi is mined, bitcoin transaction verification via mining will run solely on transaction fees. Though satoshis are not really used as a unit of currency just yet because of their extremely low worth, as bitcoin’s value escalates so too its main operating unit changes. Currently, a millibitcoin (mBTC) is the unit that makes most sense, worth ₿0.001 or about $10 USD ($13 CAD, €8).

The above paragraph is the toughest idea to chew through in the whole bitcoin explanation because of its application of triple-entry accounting, the biggest breakthrough the blockchain offers humanity. Single-entry accounting was used as early as 5,000 years ago in the Sumerian cultures, with a simple note from either the buyer or seller that money had been exchanged. This system was easily corruptible. Double-entry accounting raised this a notch by suddenly requiring both the buyer and seller to keep copies of their ledgers, copies that had to be in agreement. It came about independently in several cultures, from early Muslim cultures in the Arab world 1300 years ago to Korean dynasties 1000 years ago, but wasn’t preserved globally until after the invention of the printing press. Used by Venetians in the 1400s, it was finally formally codified by a Franciscan friar living in this naval merchant republic in 1494. Double-entry accounting is much more accurate than its predecessor, but still allows for bad actors to collude in “cooking the books“. Triple-entry accounting, on the other hand, well:

“Triple-entry accounting and by extension blockchains and crypto are a way of agreeing on objective reality. It’s not the objective reality. That’s a philosophical black hole we’ll ignore for now, but it’s an objective reality. It’s two parties agreeing on a version of past events. The third entry in the system, entered into the blockchain, is both a receipt and a transaction. It’s proof that something happened between two parties, which goes beyond the receipts that each party holds in double entry.”

This explains why every transaction on the bitcoin network must be verified by miners to be valid, why some transactions take a few minutes to take hold, why forging bitcoins is currently impossible, and why the system doesn’t rely on trust as with normal banking. Not only do your and and your transaction partners’ ledgers have to match, but they must match a random, unknown miner’s ledger. The chances of all three being corrupt in the same way are currently inconceivable. Bitcoin has harnessed human greed for human good.

The sixth gear addresses forks. Sometimes two blocks are created almost simultaneously, temporarily creating a fork in the blockchain. This is quickly resolved because the next block automatically picks the most appropriate ending to join based on factors I don’t understand just yet. Subsequent blocks mine on this new length because the most trustworthy chain is the one that is most verified, so the longest one (because in miningaka verifyingone block, a miner actually re-verifies the entire chain behind it).

The seventh gear addresses altcoins: alternative coins, mentioned earlier. Altcoins copied the idea behind bitcoinand often its code as wellto build more specific cryptocurrencies for more specialized uses. Some were made to improve on bitcoin (decreasing block size like Litecoin, speeding up the network like Dash, increasing anonymity like Zcash and Monero), some were inside jokes based on internet memes (Dogecoin, Pepecash), some adopted the blockchain for their own preexisting projects in related industries (Ripple, MaidSafe), and some catered to replacing “likes” with money on social networks to fuel content creation and curation (Steemit, LBRY, Yours, Synereo). Many altcoins are sold in Initial Coin OfferingsICOssimilar to IPOs from companies going public on the stock exchange. The past few months especially have seen a real flurry in ICOs with increasingly sketchy ones showing up as people realized that hundreds of millions of dollars in crypto could be made by trading their own altcoin for established crypto like bitcoin or ether, backing it by a promise to build some technology that would use their coin and so raise its value, therefore increasing the wealth of the original ICO investors now holding this coin. This is unprecedented in human history, that individuals can create their own point system that is suddenly directly tradeable for other point systems, including money. It immediately brings to mind Andreas Antonopoulos’ great quip:

“Every single child born today will never have a bank account. They will have a bank app. A bank app that doesn’t give them an account: a bank app that makes them a banker. An international banker. In an app. They will not be permitted to open a bank account until they’re 16 years old. By that time I hope they will have at least six or more years of experience with digital currencies, and I would like to watch them walk into a bank branch to have someone explain to them what 3-5 business days means.”

The entire talk housing this clip is well worth the watch:

The eighth and final gear is the realization that money is just one type of information that can be transferred via blockchain. In addition to it, directions, stipulations, commands, and requests can be build into transactions as well. At its simplest level, a transaction of the type “pay 10 satoshis to account #12345 if account #67890 logs 10 seconds” is suddenly possible. These transactions are called smart contracts, and are the main force behind perhaps the most famous altcoin out there, ether, made on the Ethereum platform. Ethereum went through its own fork due to its DAO hack and forked off into what is now called Ethereum and Ethereum Classic. On top of this, communities are now building altcoins based on the smart contract-enabled ether code, just as they are with bitcoin, for the same reasons outlined earlir (eg: Ubiq). Prices for all altcoins vary daily and on what exchange you’re using, but I got all my prices on CoinGecko. I use Bittrex for trading but will be moving to Bitfinex soon. If you’re Canadian then QuadrigaCX is an exchange where you can purchase bitcoin, ether, and litecoin.

If you understand all the above then you’re in the same boat with me now, suddenly knowing as much as I was able to piece together since 2012. Now here follow links to the resources mentioned in my video at the beginning. First, my single greatest source of information regarding all the above has been Vancouver’s wonderful DCTRL community. They often run Bitcoin 101 nights where Alex Sterk from #Blocktalk often shows up and where things get quite technical real fast, until you realize wow man, you’re in the future. The second was the University of Nicosia’s Introduction to Digital Currencies free MOOC, a part of their master’s program in the same. Now follow the other items mentioned in my talk: MIT, Stanford, VISA, Toyota, lost hard drive, Pizza Day, BitBonkers, FiatLeak, CoinMap, Asic boost scandal, Microsoft, Facebook profile profit, decentralized netowkrs, bitcoin on crime, Cyprus, Mining farm, Steemit articke, heidi, syrian girl, 106:53 buying house, 107 04 tesla, centralized netowrks paper

uber, centralized nwtowkrs,

 

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