A new mini series focused on answering the fundamental questions on crypto in bitesize chunks for your friends and family

Bitcoin was born on October 31, 2008 posted on a cryptography mailing list by its pseudonymous founder(s) Satoshi Nakamoto with the comment:

“I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.“

Now you’d be forgiven for thinking so what, we already have digital cash right? so let me lay out why this breakthrough is so important and its potential implications for how we store, record and transact value.

Before we move on to Bitcoin, let’s provide some context for how the current payment infrastructure works. While cash payments still happen, most of us use our debit and credit cards for every day use.

While using our cards to pay for a morning coffee may seem pretty seamless, behind the scenes there’s a number of intermediaries and steps that happen for that transaction to take place. **It’s the difference between what the daily user sees and what happens behind the scenes as to why I think many people fail to grasp the potential massive implications of blockchains. **In the transaction steps above between the person paying and the shop we have:

• Card provider company

• Visa

• Person’s bank

• Shop’s bank

• Bank of England

That’s a lot of middlemen to simply send money from one person to another isn’t it? There must be a better way to send money digitally don’t you think!

“I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.“

The Bitcoin blockchain was a solution to enabling two parties anywhere in the world to transact without the need to trust each other. The current system relies on central parties such as banks holding ledgers (record of transactions) to understand who owns what and who owes who. We trust banks (largely). But this system is cumbersome, slow and is prone to hacks and data leaks. So how would we remove banks and other middle men enabling two parties to transact with each other without the need to trust each other?

Enter the Bitcoin blockchain.

What people don’t often realise is that Bitcoin was not the first attempt at building a digital currency. In fact there has been multiple attempts with the first cryptocurrency created by David Chaum’s in 1980/90's called eCash. Other notable attempts that laid the groundwork for Bitcoin included B-money, Bit Gold, and Hashcash. While Satoshi might not have been the first to build a digital currency, he/she/they were the first to solve the major issue holding it back — the double spending problem.

Double spending refers to spending the same money twice. While this isn’t a problem with physical money, digital transactions are easier to replicate. As such our traditional financial system relies on the trusted third parties outlined above. The magic of Bitcoin is the blockchain that solves the need for central intermediaries. In my ‘What is crypto’ article I explain the blockchain in a little more detail. Think of the blockchain as a digital ledger which records transactions. Importantly, this ledger is transparent and distributed meaning thousands of nodes (computers) all have an exact copy of the same digital ledger. Every time a transaction takes place, it is bundled together with a number of other transactions in a block and added to the chain i.e. blockchain. The records are immutable meaning they cannot be altered in any way once they have been verified as valid and added to the blockchain. Because the record of transactions is distributed amongst thousands of computers around the world, if someone tried to alter or defraud the system in any way the transaction would not be declared valid.

The importance of this breakthrough is monumental. Marc Andreessen explains it well:

“The practical consequence of solving this problem is that Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.”

It’s not a big stretch to imagine both digital and real world assets moving to using a blockchain ledger in the future given the benefits in speed, cost and security. The Bitcoin blockchain is very focused and specific in its goals to be a decentralised uncensorable money however its invention has given birth to a whole new industry worth over $1 trillion. A number of other blockchains have been born, each with their own goals and trade-offs such as Ethereum, the second largest blockchain by market capitalisation. Ethereum will be the focus of a separate article however it aims to add flexibility and programmability to the Bitcoin blockchain to expand the use cases beyond just money.

Whether Bitcoin succeeds in its original purpose as a new form of digital money is yet to be seen but its growth so far and the industry that has been built off of the back of it cannot be understated.

If you have any burning questions on the basics of crypto you want me to cover next, please reach out.

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