January 17, 2021
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Bitcoin: what, why and how

Let's try today to understand what Bitcoin is, drawing parallels with the original meaning of the concept "Bargaining": the conclusion of transactions without third parties (brokers, guarantors, insurance agents, etc.).

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To properly evaluate a horse requires experience andskill, and dishonest people quickly figured it out. Therefore, if initially the purchase / sale of horses was called the sale / purchase of horses, then later they began to call the following as hucksters (or, in modern slang, hucksters): 1) dishonest sellers who hide important information about their goods; and 2) people who conduct business in an unethical, prohibited or illegal way.

What comes to your mind when you hear the word"profiteering"? How do two peasants exchange horses? How do real estate agents make deals? Barter at the fair? Whatever image comes to you, at a fundamental level, it all boils down to trust. How can I trust the person I'm trying to do business with? How can I trust the deal?

Part 1: Horses, Cars and Bitcoin

: Wikipedia

Faith and trust

Almost nothing we do isdispenses with faith and trust. This is not about faith in the religious sense - although for many it is also important - but about the belief that everything will work out, that the systems we have built will not collapse. Faith manifests itself in our taken for granted assumptions about how the world works. We believe that the engine of our car will not explode on the move, that no one will crash into us, that tomorrow the price of gasoline will not double and that the global financial infrastructure (the American dollar) will last forever.

The problem is that our confidence is based on"Warranty card", which in the case of the dollar loses its attractiveness. Why should a country give a guarantee for its money? To make citizens feel warm and comfortable. This makes it easier to trust the product.

: inspirisys

Over the past 12 years, the global financial systemhas experienced a series of major shocks, and with the amount of currency injected into all developed economies by central banks, the rabid money printing in 2020 will accelerate the dollar's collapse.

The dollar is not wrecked by actionany particular leader or political party. It doesn't matter who is in power, because in response to economic uncertainty, everyone will make the same decision: start the money machine. The dollar is wrecked by political decisions driven by human desires based on human analysis. But the incessant printing of money cannot last forever. What can replace a monetary system based on a constant increase in the money supply? Bitcoin.

Engineers win and lose

Bitcoin is digital, decentralized,non-state, uncensored, open money network with a tightly limited and preprogrammed money supply. The problem is that such a description is incomprehensible to a beginner.

When engineers, developers and crypto enthusiastssay something like that, they believe others will be impressed or agree with them. People who say this kind of phrases do not understand that almost the worst thing that you can do to a person is to make him feel dumb. And if your goal is a) to convince someone of the idea and b) to convince him of the need for some action, then making the person feel dumb or inferior is not an effective strategy. If we talk about Bitcoin in professional jargon, it will only breed more hatred towards it, instead of recruiting supporters.

Get rid of jargon. Build a dialogue. Welcome questions.

Not so long ago, we already posted a useful article on how to properly talk about the blockchain.

Bitcoin was invented by a very smart person (or people; more on this in the third part of this article)... He combined expertise in the fieldfinance, economics, and new technologies to create a solution to a system he believes is failing (money). 12 years later, this code - a solution to the problem of everlasting arbitrary increase in the money supply - still does what it was designed to do, even though it was printing money wildly in 2020. Every 10 minutes a block is mined and added to the blockchain - an amazing demonstration global collaboration, which you will learn more about in the last part of the article. Mining (literally "mining") is the process of creating new bitcoins by solving a complex mathematical problem. If gold is mined from underground, then bitcoins are from mathematics.

Engineers and crypto enthusiasts have not yet succeededeffectively communicate to the masses what Bitcoin is and why it is such an important innovation. They only support each other on Twitter and Reddit, exchange memes about printing money and attend conferences organized by them. This is not anyone's fault or bad: engineers should be technicians, not masters of persuasion. But it's time to add an astringent layer to Bitcoin's technical underpinnings that connects it to what common people know. Before taking off, technology must keep walking.

Bitcoin has only been around for 12 years. In comparison, gold has been considered a valuable commodity, asset, or money for over 5,000 years, ever since the ancient Egyptians decorated their tombs and temples with it. User base growth rate (already millions of people around the world), prices (from $ 0.008 in 2009 to over $ 10,000 now) and various fundamental indicators (number of wallets, number and cost of transactions, computing power, market capitalization) Bitcoin is amazing. But in a culture dependent on immediate gratification and instant results, Bitcoin is said to be spinning "too slowly." This is not true. When talking about the success or failure of Bitcoin's “mass adoption”, it is important to pay attention to what you are comparing it to.

Bitcoin's creation and growth in these 12 years isa truly outstanding achievement in global human cooperation and decision making. This should be praised, not criticized. But convincing most bankers or bureaucrats of the value of Bitcoin is a difficult task. This is best described in the words of the eloquent writer Upton Sinclair:

"It's hard to make someone understand someone who gets money for not doing that," he said.

Bitcoin has evolved from an idea into an asset with a market capitalization of about $200 billion, which is traded around the clockWhatever the haters say, it should look like a useful innovation.

Cryptospace is a celebration of innovation, a paradise for creativity, where there is nobut sometimes it resembles any experimentation.a large-scale political online campaign, whose supporters are quite swaying in computer chairs and smiling echidnaly, leaving witty tweets, but their energy is mostly spent on those who already already shareThey'll be even faster if ordinary people understand it better, they'll believe it.It should be noted that disbelieving in the currency is not the same as disbelieving in the principles of the state, but I believe that these concepts will bemix and use as a scare tool when Bitcoin starts to really challenge the dollar.

Is Bitcoin the new language of money?

: BitNews

Learning a new language is not easy, especially as we get older and it is more difficult for us to change our habits and attitudes.But if you learn a new language (whether french, algebra, piano playing, Java, basketball or Bitcoin)you get a huge return, because you can now communicate with a whole new group of people and fromthem to learn directly about a completely new way of life, instead of listening to other people's opinions.

Bitcoin is a new language of money, with its own rules, symbols and ways of interaction, very different fromhow most of us think of money.

We rely on our feelings.He's not a zapaha.we've developed a certain perception of money, passed down from generation to generation, and this new form of money looks, sounds, smellsWe trust our feelings because it is our personal toolOur senses are used to seeing money as something tangible, which is why Bitcoin and digital assets leadthis confusion manifests itself as distrust and cynicism about a new instrument that prevents them fromwe need to understand it.

Bitcoin from the inside

Bitcoin is open software, which means that anyone candownload it for free - it does not belong to a company that takes money for it.Bitcoin is also a protocol .But it's not hardware.Computers owned by miners and solve complex mathematical problems laid down in the protocol are not Bitcoin.Bitcoin is a software protocol, a set of instructions on the performance of certain functions or actions.The protocol was originally written in such a way that the Bitcoin network is very difficult to hack, and the protocol itself is to be changed.Think about the internet.instructions that allow computers to connect to each other via the network.it's not infrastructure (cables, satellites, etc.)connects computers, and the software that makes that connection possible.In technical jargon, the Internet protocol is called TCP/IP.

The Bitcoin Protocol eliminates uncertainty from the monetary system and the desire to gain more power through a stable, consistent, algorithmic (instructions created through mathematics) and pre-programmed money supply. It would be useful to give an example.

Cars weren't always what we know them to be today.Much of what we take for granted was absent from the early models at all.Manufacturers experimented with body types, materials, ways to set in motion and location of the engine.The first 15 years of the 20th century on the same road could be found horse-drawn carriages and cars with steam, gasoline and electric engines.Infrastructure for travel in those days was built for horses, not cars, so early innovators in this area had to deal with horse manure, potholes, dirt roads and the lack of road signs and traffic rules.Cars did not have their own "language" (driving rules, its "grammar"), because it was just a pretentious new invention for the rich and techies-eccentrics.

But in just a decade, the car has bypassed horses as the main daily mode of travel in the U.S.The transition from the head to the car was not smooth, linear and smooth, but was fast.There was fierce competition, black PR, deadlocks, bankruptcies, corporate empires and lagging regulation.In the end, everything worked out, because the American transport system is well-established.Horse-drawn carriage manufacturers, who did not ignore the new technology but adopted it and adapted to it, directing their resources to it, succeeded (e.g. Studebaker).Those who clung to their old products, hiding their heads in the sand, went bankrupt.

The first traffic jams in Sweden in the early 20th century. : Wired

Entrepreneurs and innovators of the auto industry had to experiment in order to achieve the right result, which was determined by what people wanted (and bought) and what manufacturers could afford to create.It all comes down to a good old-fashioned concept of supply and demand.And the main difference between Bitcoin and other types of money, perhaps, in its offer.

Bitcoin has a reliable, unchanging way of limiting the number of coins created, which relies on two factors: mathematics and how people fitfinancial motivation. Thus, the logic behind Bitcoin lies in human psychology - as it is rooted in mathematics - but relies on it, given the behavior of people in responsefinancial incentives.

Bitcoin has a solid, predetermined money supply: only 21 million coins will exist (already namained more than 18,380,000)because it was so programmed inoriginal protocol, and changing the protocol is very difficult and miners are financially motivated not to do so. This money supply cannot increase, it is inelastic.

Bitcoin is Wrangler jeans, not stretch yoga pants if you will.

No group of people can conspire andchange Bitcoin, as opposed to what the Federal Reserve System (FRS) can do with the dollar or oil-producing countries with oil. The global reserve currency supply can literally be changed by twelve people, affecting global commerce. They are members of the Federal Open Market Committee, which includes seven Fed governors and chairmen of 5 of the 12 Federal Reserve Banks. Trusting this system effectively means believing that this dozen are doing the best for global commerce.

Bitcoin, on the other hand, isa platform where the guarantor of trust is not the words on paper or the promises of a group of people, but mathematics. The solutions to the math problems that make up the core of Bitcoin are publicly validated, as anyone can see the process happening. If the problem is solved, the miner receives a reward in bitcoins.

Part 2: Horses, Cars and Bitcoin - Continued

Bitcoin has a number of important properties includingpublic verification, lack of censorship and government control, open access, decentralization, digital nature, and the fact that this is hard money with a preprogrammed offer.

Key to Bitcoin stands public verification solving complex mathematical problems. Since the verification takes place publicly, there is no need for any intermediaries who follow the process and charge a fee. The computer code does it all automatically. Bitcoin is also not tied to the monetary system of any state. It is not subject to any authority, but is governed by its own protocol. These properties are so different from what we are used to that it is difficult for us to relate them to our idea of ​​money.

The American dollar can be compared to a horse of the early 20th century - a symbol of strength, comfort, trust, prestige, quality, and even nobility. At this stage Bitcoin is a car of the early 20th century: it seems strange, it's hard to understand, most people don't know how it works, it doesn't look like money, and the companies that support it (exchanges, financial services) technical problems can arise that stop them, just as a broken engine stops a car.

People laughed at early car buyers because they often broke down. : Medium

Like the first car drivers, the developers and early adopters of Bitcoin (and other digital assets) build infrastructure and come up with solutions to the problems that inevitably accompany any new technology. Bitcoin protocol - basic instructions that govern how it works (essential component) - remains intact and retains its original shape (the protocol has never crashed)... Technical issues and disruptions happen at exchanges where people can buy and sell digital assets (e.g. Coinbase, Gemini, Binance)... Of course, this annoys users, traders and investors, companies adapt and improve, and these disruptions attract the attention of regulators.

Officials - regulators, regulatory authorities andThe legislators who make the rules for the financial system and enforce them are always playing catch-up with innovation, because that's how innovation works. People don't first experiment with new rules and regulatory structures, and then build new technologies for them - everything happens just the opposite. It is therefore quite normal that lawmakers (writing rules) and regulators (monitoring compliance with the rules) are not keeping up with new technologies. They are faced with a difficult task: create an environment in which technology can flourish without stifling creativity. Unfortunately, it is easier to find examples where laws and regulations suppressed innovation rather than encouraging it. Ever heard of London's late 19th century red flag laws? You have to think of this ...

Since people were afraid of cars, because inThey were loud, smoking and unpredictable compared to horses, and London passed a series of laws regulating this new technology. One of the laws limited the speed of movement in the city to 2 miles per hour and required each car to have a crew of three people: the driver, the navigator and the person walking in front and waving a red flag. Do you think these laws encouraged or suppressed innovation? This is one of the reasons why, most likely, you drive a car that is not made in Britain, as the auto industry there has not done very well in comparison with other countries whose legislation did not suppress innovation. When something unique is invented and society comes up with rules to limit or eliminate that uniqueness, it slows down innovation, weakens the scientific spirit of entrepreneurs and developers, and depletes investment flows. The same scenario is possible for digital assets and cryptocurrencies if you overdo it with regulation.

There are only 4 options for the development of cryptocurrency infrastructure:

  1. it will grow organically based on user needs;
  2. governments will suppress innovation by overregulating;
  3. governments will develop optimal regulation that will allow innovation to flourish and provide protection and transparency;
  4. one or another combination of these scenarios. I am in favor of the first option, although I realize that the fourth is most likely. The third option is a unicorn, a mythical beast that lives only in our imagination.

How new tools come into everyday use

When the crypto space matures and gets biggerused by ordinary people when it is integrated into mainstream financial systems and when more funds are invested in it, the efficiency and coherence of digital asset exchange will continue to improve. In the absence of government restrictions, new infrastructure will evolve organically based on user preferences. The apps that allow you to use Bitcoin are already solid and reliable and will only get better. If you know how to use the banking app, Facebook and Twitter on your phone, you can easily do the same with digital assets. The use of the first cryptocurrency is now in its early adoption stage.

The life cycle of adopting new technologies.
Innovators and early adopters shape the stageearly market: they take risks, overcome pain points, and lay foundations that will benefit everyone who will later use the new technology. This process is layered learning and growth, and exhibits different levels of comfort in people with regard to risk. : thelib.ru

Another important quality of Bitcoin is portabilitybecause it allows people to move their money very easily, quickly and cheaply, especially when compared to existing alternatives. Even in the case of gold (the best store of value in human history before Bitcoin) buying, storing and transporting it is not sojust. When was the last time you bought a beer with a gold coin? When you went on vacation abroad before the coronavirus, did you stuff your suitcase with gold or wads of cash, then declare it at customs? With Bitcoin, you don't have to worry about all of this.

Decentralization means that the Bitcoin blockchain holds on itscomputers (nodes) of many people around the world. The code is free and open source. You can install it on your computer and see all past Bitcoin transactions. The "independent verifiability" of every transaction ever made increases security.

So what do you actually own in caseBitcoin, and where is it stored? If you have private keys, then you own the transaction data associated with those keys. If you have the keys, then you directly own your coins. That is why you should not keep bitcoins on the exchange, since technically then they do not belong to you, but to the exchange.

Bitcoin blockchain - a wall of glass doors

: Unsplash

Your bitcoins inhabit in the blockchain, like all transactions. Even if you have a "cold wallet" like Ledger, this physical device does not store bitcoins, but only your private keys. And your private keys prove that you belong to certain transactions that took place on the blockchain. So if you think of the Bitcoin blockchain as a giant wall of doors, when your key opens some doors, you can see the data about your transactions and prove that you own the coins associated with them. Your key proves that you own what is behind the door. Better yet, if you imagine all the doors are glass, so anyone can see what's behind them, because this is how the Bitcoin blockchain actually works. And when you have the key to prove the signature of the transaction, you can open the corresponding door, because the data behind it belongs to you. It can also be compared to a storefront. You see everything behind the glass, but it doesn't belong to you. Likewise, anyone holding a Bitcoin network node sees all previous transactions ... but they belong to those who hold the keys to them.

Only you have the keys to one of these doors. : Unsplash

Bitcoin does not need intermediaries toprove your ownership or to guarantee the integrity of the transaction by charging you a fee for this "service". Bitcoin settlements are automatic. Bitcoin (like gold) pays off debts, is not anyone's liability (unlike the dollar), and is free from "counterparty risk" when one of the parties to the transaction may not fulfill its obligations. Once the block containing the transaction is added to the blockchain, this is not possible. The transaction is final and can be independently verified by all network participants who have access to "Wall of glass doors".

Elastic complexity = harder AND easier at the same time

Bitcoin's offer not only preprogrammed in the protocol, but also implemented bya graceful process of adjusting complexity, where math problems become harder or easier depending on how many participants are trying to solve them. The more miners join the Bitcoin network, the more difficult it is to solve problems (hash); the more miners disconnect from the network, the easier it is.

As a consequence, since the birth of Bitcoin in 2009, approximately every 10 minutes in immutable a new block is added to the distributed ledger. Do not forget that the mechanism for managing the money supply (how many and when coins are created) rooted in mathematics, not humandesires based on human analysis. So while the dollar has an elastic money supply that can stretch if a certain group of people decide so (always with political motives ... "human, too human"), Bitcoin has a solid money supply driven by elastic complexity - adjusting the hashing difficulty.

When with the rise in the value of Bitcoin to the networkmore miners are joining, motivated by a large financial reward, math problems become more difficult and more effort is required to solve them. In this case, more coins are NOT created. By adjusting the complexity built into the protocol / code, only 21 million bitcoins will be created, and they cannot be created too quickly. The last bitcoin will be mined in 2140. In short, the rise in the value of each coin cannot increase the supply. It is the hardest money that ever existed, even harder than gold because Bitcoin's supply is of absolute rarity based on mathematics. Gold has only a "relative rarity" associated with the difficulty of its extraction. But theoretically, there is a lot more gold underground.

Bitcoin also resistant to censorship... Except for torture or coercion, nothe government or anyone else has no control over when, where and how it is used. Bitcoin's security doesn't depend on access codes or passwords. Network security relies on a mathematically precise formula, distributed across computers around the world with clear incentives and rewards.

To join the Bitcoin network, not required permission from a central authority... You don't need to fill out any forms - if youable to buy bitcoins, you are automatically part of the network. The answer is always yes, please join the network, open your node, start mining, start buying / selling ... get involved, innovate and enjoy.

And here we meet again the fashion term "Counterparty risk"... Banks view their customers ascounterparties who may not fulfill obligations on their loans, therefore, they provide an additional commission in such a case. You pay this commission whether you fulfill your obligations or not. This is not the case in Bitcoin because there is no counterparty risk: transactions are automatic and final. When you have signed a transaction with your private key, any member of the network (node ​​owner or miner) can independently verify your transaction and add it to the blockchain (immutable registry)... When a block with a transaction is added to the blockchain, it cannot be changed or canceled: it took place.

Jargon: Bitcoin converts energy into a reliable, undeniable ledger using processing power based on pre-programmed mathematical algorithms.

Translated: Bitcoin presents a set of instructions written in software that, with the help of mathematics, turnselectricity in immutable facts (truth) written in a magazine, copies of which are on thousands of different computers and which anyone canFree to view and check.

It's very difficult to change code because it requires the consensus of all developers on the network to make the same changes to their software.In addition to decentralization and the need for independent developers to build a consensus, it is also difficult to change the Bitcoin code because of the way financial incentives are in place for miners.In Bitcoin, there is a strong bias in favor of the status quo: following the original protocol/code and the slow pace of the network is exactly what it givesFollowing the protocol and consensus rules (the need for universal acceptance of any changes in the code) is what supportsnetwork, increases the cost and guarantees limitation of the money supply.Bitcoin is a tortoise and cash is a hare.

Bitcoin is like a tortoise in the world of financial technology. : Unsplash

Horses went out of fashion through no fault of their own.They did not become slower or more expensive and did not become extinct.Horses went out of fashion because people invented the best solution to the transport problem and most people preferred to use it Solution In their first 20 years, the transport solution was not beautiful, clean and comfortable - because cars had to use infrastructure built for the old technology (horses).Bitcoin is still a long way from now.Momentum.

Cars have supplanted horses as a standard vehicle in the U.S. in just 10 years.The 2020s will be the tenth anniversary of the financial infrastructure, when the topdigital assets (both public and private) and there will be a global reserve currency that will abandonchallenge the dollar.

According to Alex Machinskiy, inventor of VoIP (Voice over Internet Protocol), as well as founder and CEO of Celsius, which allows users to earn interest and take loans under the collateral of cryptocurrencies:

"Three horses will participate in the race for the future of money: 1) government coins with unlimited offer (like dollar, only digital); 2) limited-access corporate blockchain (like Libra fromFacebook); 3) Open blockchain (like Bitcoin).

Bitcoin is a strong candidate, but other assets suitable for this role can be (and will be) invented.Which horse would you bet on?

: Pinterest

So here are some questions that will be helpful to ask yourself (and honestly answer them) all the haters of Bitcoin and cryptocurrencies, doubters and "just insecure":

  1. When it comes to financial evolution, what are you up against?
  2. What do you know about how Bitcoin and digital assets work?
  3. How much time have you spent studying these new technologies?
  4. Will your life collapse if the dollar stops being the global reserve currency?
  5. What if our money system is based on another, better tool?

There will be no more dishonest profiteering, becausethat Bitcoin has removed the need for trust, or at least what users trust (mathematics) cannot be easily manipulated by a small group of people. The main source of today's dishonest profiteering is what is happening at the Fed and other central banks. There are no bad, immoral people or conspirators working there, and I realize that they (like all of us) consider themselves to be "good guys." They just work for an organization whose mandate and policies are outdated. Fed expires; her product went bad.

More questions than answers?Keep looking for fact-based answers to your questions.

"You don't look at a horse in the teeth" But I would like you to do it in the case of Bitcoin.Because this great- benefactor is worthstudy and explore on your own. just don't confuse your lack of knowledge or sustained reluctance to change your financial behavior with the problems of the tool itself. This amounts to denying a potential solution or tool out of ignorance (lack of knowledge) or feelings of inferiority (not familiar with jargon)... In this scenario, informed decisions are rarely made and many opportunities are missed. Make financial decisions based on sound information and facts, not fear.

Don't get caught in the rain.

Part 3: Brief Notes on Bitcoin

: Unsplash

Bitcoin is like bamboo. For the first 10 years, it grew underground, almost unnoticed, but then, during a run in 2017, it quickly began to attract public attention. In this part we will discuss the reasons why you should: a) learn more about Bitcoin; and b) buy some coins ... if your financial situation allows... I presented my thoughts in the form of short notes, organizing them according to three topics that helped me understand the uniqueness of Bitcoin myself: people, process, principle.

The "people" theme describes the absence in Bitcoincentralized leadership and its organic growth by joining the network of ordinary people; "Process" - the technical mechanisms and functions of the leading cryptocurrency; and “principle” is aspects of the philosophy behind Bitcoin.

About organic growth: For 12 years, Bitcoin managed to spin up thanks toenthusiasts attracted by its well thought out device. It has evolved organically after being launched by an anonymous creator known as Satoshi Nakamoto. And the fact that no one showed up to prove that he is the creator is a unique and remarkable fact, especially in a world obsessed with attracting attention, fame and intellectual property rights. Bitcoin is an anonymous gift. (People, principle)

Bitcoin grew like bamboo, underground and out of sight during its first decade, taking root before most people noticed. : Medium

About politics and external influence: Bitcoin excludes money from the process anddecision making of politicians, journalists, influencers, fund managers, industry experts, central bankers, presidents, CEOs, lobbying firms, and military leaders. (People, principle)

About open collaboration: Programmers / Developers voluntarily dedicatetime for this open project. The first cryptocurrency is open source, which means it can be downloaded and installed freely and anyone can verify the entire Bitcoin blockchain and contribute to its improvement. Bitcoin's development reveals the best human quality - the spirit of cooperation. (Principle)

About the money supply: Bitcoin has an unelastic money supply.only 21 million coins were created. (Process)

On the lack of corporate structure: Bitcoin's policy is not defined by any corporate structure.only its protocol based on network consensus. (People, principle)

On the lack of central control: There is no central authority or chief programmer who would make decisions - in order for a practical implementation to be adopted, it must follow the parameters of the original protocol.(People, process, principle)

On unstructured development: Bitcoin's development is not dependent on centralized investment, marketing, venture capital, connections, conferences, or advertising. (Principle)

On verification without having to trust a person: Bitcoin is a system built entirely on the "expensive verification process" (i.e. the computing power needed to solve complex mathematical problems)This eliminates theneed to trust a person or to report between the parties.100% mathematical verification; 0% trust to the person. (Process, principle)

On inelasticity: Bitcoin is not an organization with ever-expanding and changing goals.Bitcoin's goals are still; it follows an immutable protocol. (People, process, principle)

On self-sufficiency and learning: Bitcoin supports the access of independent research, which appreciates self-sufficiency, independence and independent decision-making.(Principle)

About censorship: Bitcoin is censorship resistant because no one can control where or how it is used. (Process)

About permissions: You don't need anyone's permission to join the Bitcoin network. (Process)

About immutability: Bitcoin's monetary policy is immutable (undeniable, final)because no one can easily change it. When a transaction is completed and added to the blockchain, it remains there forever. (Process)

About antifragility: Bitcoin is antifragile because the network improves and becomes more secure in the face of chaos, confusion, and hacking attempts. (Process)

About full legal ownership: Your bitcoins are 100% yours if you have private keys. There is no debt tied to your bitcoins. (Principle)

About market mechanisms: Unlike the stock market, there is nomechanisms that could stop trading or affect their speed. Such mechanisms limit choices, whereas Bitcoin allows people to do whatever they want with their money. (Process, principle)

About human decisions: No amount of emergency meetings of commodity producers can change the supply, as is the case in the current global monetary system and the oil industry. (People, principle)

About government intervention: No government has made public promises to buy any amount of the asset (yet). (People, principle)

On minimizing bias: Bitcoin has removed human psychology from the process of making money. (People)

On the lack of management: There is no CEO, management team, or boarddirectors who would determine or influence the direction of Bitcoin's development. No one person or a small group of people can stop what is in motion. (People, principle)

ROI: Bitcoin has become the most productive asset in its 12-year existence (in terms of return on investment) in history. If you invested $ 100 in July 2010 (when 1 BTC was worth $ 0.008), then now you would have $ 125,000,000 (at a price of $ 10,000 for 1 BTC)... If you had invested that same $ 100 in the S&P 500 Index, you would have $ 225 today.

On ever higher lows: Every year, except 2015, cryptocurrency numberone was reaching "ever-higher lows" - indicating a growing number of people who don't want to sell their bitcoins so easily and prefer to hold them for the long term. These people are called hodlers. (People)

On the lack of state control: Bitcoin is self-governing, without the intervention of any outside parties, people or states. (People, principle)

About 24/7 availability: Bitcoin is a global market that never closes and has a very low entry threshold. (Process)

About the source of logic: Bitcoin is replacing human-driven monetary policy with non-political mathematical logic based on predictable and pre-programmed algorithms. (People, process, principle)

About rarity: Bitcoin is the first digital asset to be “absolutely rare”. (Process)

About supply and demand: For conventional products, changes in demand change supply schedules and manufacturers' decisions. This is not the case with Bitcoin. (Process)

About the hard-limited offer: When more energy is thrown into mining as the cost rises, it does NOT lead to the creation of more bitcoins. When it happens with other currencies (such as the American dollar), their value falls over time. (Process)

About fraud: Honest nodes have no financial motivation toconfirm fraudulent transactions. As of May 2020, a Bitcoin hack could cost $ 500,000 / hour, and the attack must be sustained for a long time to truly disrupt the network. The more blocks mined in Bitcoin, the more expensive it will be to hack. (Process)

About centralizing altcoins: The problem with altcoins is that their creators need to attract outside investment and users in a very saturated market. (there are over a thousand alternative cryptocurrencies)... To effectively attract investmentcapital and users, altcoins should have well-organized leadership teams able to succinctly describe the competitive advantages of their product. Due to the “active organization” of such a product - the necessary marketing, technical development and fundraising by a centralized leadership team - it is difficult to prove that this team does not control the currency. (or at least doesn't have a strong influence on her)... (Principle)

On the transfer of power: Bitcoin takes power from institutions and transfers it to platforms and protocols: from the power of the few to the power of the many. (Principle)

About large transactions: Conducting large transactions in Bitcoin is verycheap. For example, there was a recent transaction worth more than $ 1 billion with a commission of only $ 83, and it only took a few minutes. One of the most recent examples is sending $ 450 million in Bitcoin, the sender of which paid only 25 cents in commission. Compare this with sending $ 1 billion through a bank or money transfer services, where you have to pay a commission of 1-3% of the amount, or $ 10-30 million, and even have to wait from 5 to 10 working days. Our society is accustomed to the fact that substantial fees on remittances are normal, because no one has invented a better tool for solving this problem. Now we can transfer large amounts without intermediaries, and much cheaper and faster than through traditional alternatives.

About public verifiability: How is the $ 1 billion transaction known? Bitcoin transactions are public and anyone can verify them on the blockchain. We cannot know who transferred the money, where this person is located and what he is doing with the money, but the Bitcoin blockchain is an immutable ledger whose data is available to a decentralized network of nodes, miners and exchanges.

No debt: Bitcoin is not based on debt and borrowing, unlike the current global monetary system. (Process)

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About "people's money": Bitcoin is the people's money, a shared resource,accessible to anyone with an internet connection. We see this in the poorest regions of Africa, the Middle East and Latin America. (Principle)

About legality and ownership: Wyoming passed a comprehensive set of lawslegalizing Bitcoin. Many other states have copied these laws. The laws enshrine the peer-to-peer nature of Bitcoin, which does not require intermediaries, and recognizes ownership of virtual currencies and the absence of a debtor-creditor relationship. (Process, principle)

About counterparty risk: Bitcoin eliminates counterparty risk, since signing a transaction with private keys allows anyone on the network (node ​​operator) to independently verify it. (Process)

About the legal status of money: In the United States, the legal status of money and its protectionare defined in Article 9 of the Uniform Commercial Code. New Wyoming laws apply key aspects of this code to digital assets. First, digital securities are now treated in the same way as book-entry securities. Second, digital consumer tokens are treated in the same way as other intangible assets. And thirdly, virtual currencies are considered money. (Process)

About custody and deposit: In the case of Bitcoin, if you have privatekeys, then your digital assets are completely yours. This is not the case for many securities. The State of Wyoming was the first to advocate for a clear legal and regulatory environment for Bitcoin and other digital assets. As part of this initiative, Wyoming treats custody of cryptocurrencies as an escrow. This means the owners retain ownership when their cryptocurrency is held by a qualified custodian. (bank, trust fund)... In other words, people are allowed to keepownership of digital assets, rather than giving it to a counterparty, as is often the case with custody services for traditional assets. The process of depositing in Wyoming is like a car service that gets your car at its disposal for a while, but does not have ownership of it. Ownership always remains with you. (Process)

About the core of the system: Bitcoin has no single point of failure (person, database, equipment)... There is no “core of the system” to be compromised, no Wizard of Oz lurking behind the curtain. (Process)

About price and cost: Bitcoin network value and price of one coingrow as more and more people use the network. So there is a positive correlation between the value and use of Bitcoin: the more people join the network and conduct transactions in cryptocurrency or store their wealth in it, the higher the value. (Principle)

Part 4: How Bitcoin Works

Anything worthwhile is never easy. Bitcoin's creator, when inventing blockchain 12 years ago, definitely heeded this popular wisdom. He combined complex concepts and processes from different fields - economics, finance, programming, cryptography - to create a revolutionary technology that could change the way the world uses money.

Due to the scale and complex nature of this project, it is not easy to explain it in a simple way. To paraphrase Einstein: if you can't retell someone's ideas in your own words, then you don't understand them... If we talk about Bitcoin, then I understand itconceptually and as an investor, but its technical details are beyond my competence. So my task, as a simple person who is not an expert in any of the above areas, is to explain how Bitcoin works and help you understand at least a little how it works. If we imagine Bitcoin as having 7 layers in depth, then we will only discuss the two outer layers.

Since Bitcoin is a system, we will organize this part of the article according to the three components of the system: input, processing, output.

entrance

: Unsplash

Reliable electricity

Bitcoin has four main inputs: electricity, equipment, people, and protocol. We will focus on three of these, with the most important being electricity and protocol.

The protocol is remarkable in that it representsis software that anyone can freely download to their computer. It's called open source software. So even if there is a nuclear war in the world and all people go underground for a whole generation, where they will live without electricity, as soon as the electricity returns and computers with Bitcoin are connected to the network again, mining will automatically resume.

But the Bitcoin network is also remarkable in that itdecentralized and distributed around the world, so in order for mining to stop, electricity must be cut off throughout the planet. Therefore, even if a natural or man-made disaster strikes a significant part of the world, mining on the Bitcoin network will not stop. And if all the electricity really turns off, then we will worry about survival, not about cryptocurrency.

It looks like a modern mining farm

Electricity is the main thing to spend on,to mine bitcoins. This is why we see companies move to places where electricity is cheap and / or alternative energy sources are abundant. Large mining organizations operate in the Texas city of Rockdale (cheap electricity), Yunnan, Xinjiang, Inner Mongolia and Sichuan provinces (cheap electricity and access to hydropower) and Kazakhstan (cheap energy, low taxes)... Smaller mining companies exist all over the world. But mining companies are not the only players involved with Bitcoin.

Key players

Although Bitcoin is code, artfully written software,capable of causing many positive changes in the world, for this to come true, he needs people. There are now 5 main groups of people around Bitcoin: miners, node operators, traders, hodlers, and consumers. While these categories certainly overlap, for the sake of clarity I will discuss them separately.

Miners are people or companies whoowns computers that perform hashing to solve complex math problems and get rewarded in bitcoins for it. Miners also act as node operators, but anyone can hold a Bitcoin node. To do this, you need to download the free, open Bitcoin protocol to your computer, which will make it possible to verify any transaction in the blockchain, starting with the first block created in 2009. There is no financial motivation here. People become operators of nodes because it is part of the spirit of decentralization and openness to all that drives Bitcoin.

Traders are those who buy andsells bitcoins on public markets and exchanges. As a rule, this is how they make a living. Many traders, in addition to cryptocurrency, also trade traditional financial assets (stocks, bonds, commodities)... Traders can trade Bitcoin, just like stocks or commodities, via smartphone apps.

Hodlers are long-term investors who buy and hold bitcoins in anticipation of price increases (minimum 1 year, but usually 5+ years)... The name comes from the abbreviation HODL (holding on for dear life - "cling with all your might")inspired by the typo in hold.

Consumers are those who buy bitcoins forin order to spend them. Every day there are more and more of them, as businesses and governments are increasingly accepting payments in cryptocurrency. Over the decade, Bitcoin has evolved from a rare hobby for techies into a form of payment accepted by companies like Amazon, Starbucks, AT&T, Burger King, Microsoft, KFC, Subway, and various governments to pay taxes. It is also being gradually introduced by many other retail chains in different countries.

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As for businesses not yet acceptingcryptocurrency directly, consumers can get a debit card tied to a Bitcoin wallet. Such cards are accepted in all stores, as they are issued in partnership with Visa and are no different from ordinary ones.

Is “Trust” an Entry Factor? Partly

Bitcoin was created with the aim of excluding money fromexchanging and making money trust a person ... in a way. The goal is to get a form of money that can be used without involving third parties. The entire current financial system is built on intermediaries that ensure the proper conduct of transactions. Bitcoin eliminates the need for trust from financial transactions. I said above "in a way," because you still need to trust that the new tools will work as they should.

But we trust the tools and take it for grantedtheir reliability every day. The average person does not worry every morning that the financial foundation he has built for his family will crumble, especially if he “played by the rules”. We are not questioning how cash is created, what digital ledgers the Fed is manipulating, how quantitative easing works, or what capital markets matter.

Likewise, we trust that electricthe system in our house will not cause a fire. But it was not always so. When American infrastructure for residential and commercial real estate switched from gas to electricity, two camps of entrepreneurs fought with each other: gas workers told everyone about the fires that electricity can lead. They weren’t going to give up without a fight and let it take away from them the niche they had been developing for 100 years.

Use gasoline. This is a modern fuel. : Medium

As a result, the more useful and efficient wonsystem, and now almost everyone in the US uses electricity at home. We do not question how the electric companies provide this; we don't need to know all the details of how electricity works; we just believe that it won't kill us when we hit the switch. Bitcoin will also reach a stage where more people, businesses and institutions will understand its benefits. Transferring, storing, and spending wealth easily and with very low fees with Bitcoin will become the new normal.

Bitcoin is a system built entirely on an expensive verification process that uses computer computing to solve complex mathematical problems, verify transactions and receive rewards in cryptocurrency.Bitcoin excludes the need for trust or accountability between the people involved in the transactions.The network is 100% verifiable and requires a 100% trust.the very first unit to those that are being created today is spent on equipment (such as ASIC) and electricity, as well asalternative costs, such as the time it takes to figure out how to set it up (especially those who do not have technical training but want toto take up mining).

Processing

As mentioned above, Bitcoin's immutable distributed registry has been in place since its launch in 2009.About every 10 minutes a new block is added. (how many and when bitcoins are created) it's not based on human desires, but on mathematics.When this is decided by a certain group of people, Bitcoin has a solid money supply controlled by elastic complexity, or the process of adjusting the complexity of hashing.

Hashing is a process in which miners' computers solve complex mathematical problems, for which they then getreward in bitcoins.

The higher the price of bitcoin and the more miners join the network - and they dothis is due to the increased financial rewards resulting from the price increase, the more difficult the maths become, requiring more effort to solve them.That is, this process does not lead to the creation of more coins.The Bitcoin protocol includes a process of adjustment of complexity that will not giveCreate more than 21,000,000 coins to create them too quickly.The last bitcoin will be in 2140.This is the hardest money ever created, even more solid than gold, because Bitcoin hasThe annual supply of gold can be an absolute rarity if mining technologies are improved.

LeBron James. : Medium

Imagine a professional athlete such as a famous basketball player LeBron JamesHe can change his level of concentration, tension and agility depending on theWho he plays with.Make less effort than at NBA matches.similar logic: the level of complexity automatically adjusts to the network conditions.

When more miners join the network,the total computing power increases and the Bitcoin protocol automatically complicates math problems. When computing power drops - if miners turn off their hardware - math problems automatically become easier. This automatic correction is built into the Bitcoin protocol and protected by a distributed, decentralized network.

Bitcoin protocol and its consensus rulessupport the network and its growth. There is a strong bias in favor of the status quo in Bitcoin. If someone wants to change the code, "hard forks" appear. Examples of hard forks - Bitcoin Cash (BCH) and Bitcoin Satoshi Vision (BSV) - are beyond our scope.

It is very difficult to change the code because for thisrequires consensus of all developers present in the global distributed network. But it is further complicated by the financial incentives built into the system for miners. Following protocol and consensus rules maintains the network, adds value, rewards miners, and limits the money supply.

Bitcoin is not just a unique code, but newa form of money based on: a) the economy of the currency; and b) a distributed network. As the network grows, it becomes more secure, valuable and coherent, so it is more difficult for attackers (hackers) to change the Bitcoin protocol without full consensus.

Bitcoin is a peer-to-peer tool likee-mail. You can send emails to anyone, almost free of charge and without the need to get anyone's permission; just have an email address. Another peer-to-peer tool is TCP / IP. It is a set of rules that form the basis of the Internet. Everything we use online is built on this protocol. TCP / IP is a simple network over which various applications can be built.

TCP / IP rules allow computers to communicatewith each other and shape the internet. The whole process boils down to sending and receiving packets of information that allow us to listen to music, watch movies, write tweets, sell cars and do anything else we can imagine on the Internet. Bitcoin is also an underlying protocol that does one task very well (hashing), but allows other applications to be built on top of it. Whereas smart grids offer very sophisticated but limited features, underlying networks like Bitcoin give users virtually unlimited possibilities that depend only on their creativity and perseverance.

Output

The most obvious way out of the Bitcoin system isthe actual coins. Bitcoins are distributed to miners who successfully solve complex math problems. Currently, 6.25 bitcoins are credited for each block successfully added to the blockchain. The protocol of the first cryptocurrency spelled out a process called halving ("halving"), where every four years the amount of remuneration to miners is halved. It is this mechanism that limits the supply. Initially, miners received 50 bitcoins for a successfully hashed block. Then in 2012 the amount decreased to 25 bitcoins, in 2016 - to 12.5, and in May 2020 - to 6.25. This money supply schedule cannot be changed; it is built into the protocol, so the last, 21,000,000th bitcoin will be mined in 2140. This process creates an absolute rarity as the original protocol does not allow more coins to be created.

The most important Bitcoin output is immutability,indisputability and security of transactions after the block containing them is added to the blockchain. Bitcoin's security is based on "proof of work" (PoW) that occurs during hashing. Node operators and miners exchange the ledger of all Bitcoin transactions, much like the BitTorrent network members exchange downloads. The BitTorrent network allows users to download portions of, for example, movies or songs from thousands of computers scattered around the world. The software then combines these parts into a complete product. The Bitcoin Protocol does not collect cryptocurrency piece by piece from different computers, but all network nodes exchange the full ledger in real time when new transactions are added to the blockchain. This protects the integrity of the blockchain, making Bitcoin transactions one of the most undeniable facts on the planet. A transaction added to the blockchain is final.

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Bitcoin is a transparent settlement tool. Once a block is added to the blockchain, it cannot be changed. The settlement has taken place, it cannot be canceled. The instrument for international cash settlement should be neutral in relation to the monetary policy of different countries, and anyone, anywhere in the world, should be able to join the network at any time. And that's Bitcoin.

Bitcoin's open nature is unique becauseAll network participants benefit from innovation, not just its creators. Hundreds of programmers devote their time (without compensation) to maintaining the integrity of the Bitcoin network by finding and fixing bugs, attacking the protocol to make it stronger, and building applications on top of it that improve speed and scalability.

CEO of Twitter and Square Jack Dorsey

Jack Dorsey, CEO of global companies like Twitter (market cap $ 26 billion) and Square ($ 46 billion), went even further and now financesBitcoin developers working on software that benefits everyone on the network, not just its companies. In fact, his companies do not directly benefit from the work of these programmers, apart from the reputation of early Bitcoin proponents. Dorsey is an influential advocate for Bitcoin, calling it "the money of the internet." He is convinced that cryptocurrency has the potential to change the way people think about money and how it is used. Internet money is an important concept, because if the Internet were a country, it would already have one of the largest economies in the world. And over the next decade, its economy could easily become the largest.

Bitcoin has remained consistent and stableduring several crises - the March 2020 recession, coronavirus, protests and unrest in different countries - and continues to regularly add blocks to the blockchain every 10 minutes. The Bitcoin system continues to work despite all this chaos around, but it is important to understand the threats it faces.

Threats to Bitcoin

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Growth in operating costs of mining farms and theirConsolidation is a legitimate threat, especially if the block size increases and computers with less processing power cannot mine. The Bitcoin miner community has already evolved from home-based hobbyists to a commercial industry with soccer field-sized data centers filled with mining hardware.

Bitcoin creation relies on economicincentives that make fraud counter-intuitive, difficult to coordinate due to the scattered nature of different countries, and much more costly than the expected reward. It is more profitable to mine than to destroy Bitcoin.

Honest nodes and miners have no motivation toconfirm fraudulent transactions, because this puts the entire system at risk, negating all the economic value that miners have accumulated for themselves. To destroy Bitcoin, the attacker will need huge sums of money without any financial gain, and the attack will have to be sustained for a long time, because honest nodes can return to the block that preceded the attack and resume work (fork). With each mined block, Bitcoin becomes more expensive to crack and the network gets stronger.

Another legitimate threat to the Bitcoin network isquantum computing, especially a future supercomputer that can crack the SHA-256 cryptographic algorithm that underlies the first cryptocurrency. To overcome this threat, the Bitcoin community could move to a stronger form of encryption.

There is also a threat that some stateat the production stage of mining equipment will embed backdoors to undermine the network. This is possible only if the equipment manufacturer is complicit, which, again, runs counter to the economic incentives for such a company.

And the final threat is if the US government (or some other key country) will create its own "Fedcoin" and people will want ituse instead of Bitcoin. I believe that this is not only possible, but inevitable. The difference is that Bitcoin will have a solid (inelastic) money supply, while the supply of any digital coin created by the central bank will be unlimited, like the American dollar. In addition, Bitcoin is a decentralized network where monetary power is distributed among the participants, while Fedcoin will be a centralized project, giving the government that created it enormous power and information about the financial transactions of citizens. The Fedcoin system will be a "big brother", a police state on steroids where people voluntarily give their economic freedoms to the government. Both public and private centralized digital currencies will always have the problem of limited user privacy and unlimited organizational power. Bitcoin is a pseudonymous currency, people's money, giving back the entire value-creation process to people.

Courage, freedom and optimism are also important exits

The courage to try another financial platformable to provide a fairer and more transparent financial system for everyone on the planet, not just those fortunate enough to be born in a developed country. The freedom to fully control your money however you see fit, without worrying about being frozen or confiscated. And optimism that people will continue to invent new tools and systems to solve unexpected problems posed by old tools and systems.

If you believe in the importance of self-sufficiency,economic freedom and a sense of confidence, then you should learn more about Bitcoin. If you believe that the government and big companies can take better care of you than yourself, then Bitcoin is not for you. Choose Bitcoin, choose yourself.

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