HISTORY OF BITCOIN

When internet finally opened to general public and became used widespread, people immediately started to wonder about how Internet commerce would be handled. Lots of people saw the enormous potential of selling goods through the Internet, since systems that enabled home shopping through computer terminals had been around since the 1970s.

The problem was that there wasn’t a system that made transactions on the Internet secure. If you wanted to buy something from someone, you had to send them your credit card number through email, and hope that they wouldn’t overcharge you and that the email would not be intercepted or compromised.

This situation was not ideal—and without established, legitimate companies doing business online, the thought of handing out your credit card information to an anonymous individual on the other end of the world wide web was seen as not the ideal way to conduct business online.

A common proposal was to create a currency for the Internet that could operate separately from the fiat (or government-issued currency) world. Bitcoin was not the first attempt to create such a currency. In 2008, a man named Satoshi Nakamoto published a paper on the Internet which describes bitcoin software. In 2009, he released the first software to initiate the bitcoin network as well as the first units of bitcoin currency. None of the list’s veterans had heard of him, and what little information could be gleaned was murky and contradictory. In an online profile, he said he lived in Japan. His email address was from a free German service. Google searches for his name turned up no relevant information; it was clearly a pseudonym. But while Nakamoto himself may have been a puzzle, his creation cracked a problem that had stumped cryptographers for decades.

The idea of digital money—convenient and untraceable, liberated from the oversight of governments and banks—had been a hot topic since the birth of the Internet but none of the many attempts were successful before. The closest anybody else got to creating a digital currency was the guy who invented E-gold. E-gold was a digital currency which was backed by gold. A "Digital Gold Standard" was reinvented: the company held actual gold bullion that backed its digital currency.

It was started in 1995 by a former oncologist, Douglas Jackson but it was too heavily dependent on Jackson and only lasted till April of 2009 when he was charged and pleaded guilty to money laundering and running an unlicensed money transmitting business. Since the currency could not function on its own, that was the end of it when he got indicted. Jackson did try to revive E-gold after getting released from jail and chose to do it the hard, legal way, which was never gonna move fast enough for the currency to get revived. That was the end of it. Plus, a better alternative was created already -- the bitcoin.

There was another cryptocurrency idea proposed by Nick Szabo called bit gold. In fact, it had so many similarities with the actual bitcoin that it is believed by many today that Szabo is the one who hides under the pseudonym Nakamoto. Just a few months before Nakamoto would publish his white paper describing Bitcoin in 2008, Nick Szabo had proposed his bit gold idea which was just way too similar to the bitcoin proposed by Nakomoto just a month afterwards, to be a simple coincidence. Bit gold was never actually created. Instead, it was a proposal that incorporated nearly all of Bitcoin’s major characteristics,which places Nick Szabo is one of the most credible candidates for the real identity of elusive Satoshi Nakamoto. Unlike E-gold, Digicash and the other early attempts at electronic cash, bit gold would have been decentralized. It would have had a time-stamped public ledger and a limited hard set quantity.

The problem that no one had been able to solve with a decentralized ledger is called the Byzantine Generals problem, where a network in which information has to be propagated by its participants relies on the honesty of these participants. If they are not honest, incorrect information could be propagated through the network by honest actors who had been fed incorrect information by the dishonest ones. Proof-of-work, pioneered by Nick Szabo and perfected by Nakamoto, addresses this problem. Every transaction is time-stamped and includes a hash of the transaction before it, which, again, includes a timestamp and a hash of the transaction before it. Therefore, if a malicious actor wanted to propagate a new chain, he or she would have to go back in the ledger to the transaction they wanted changed and then remove the subsequent transactions and recalculate all the work that happened after that point. Otherwise, the hash of each subsequent transaction would not match mathematically. So if that malicious party wanted to catch up to the legitimate chain, he or she would have to be faster at mathematical equations than the group of people working on the legitimate chain together. In real-world terms, this means a miner trying to issue a false blockchain and have it accepted would have to have more computational power than the miners working on the legitimate chain. In order to remain secure, there needs to be more computational power working on the legitimate blockchain than there are malicious actors working on any single false chain. The simple genius of this technology is that it cuts away the middleman yet maintains an infrastructure that allows strangers to deal with each other. It does this by taking the all-important role of ledger-keeping away from centralized financial institutions and handing it to a network of autonomous computers, creating a decentralized system of trust that operates outside the control of any one institution.

At their core, cryptocurrencies are built around the principle of universal, inviolable ledger, one that is made fully public and is constantly being verified by these high-powered computers, each essentially acting independently of the others. In theory, that means we don’t need banks and other financial intermediaries to form bonds of trust on our behalf. The network-based ledger—which in the case of most cryptocurrencies is called a blockchain—works as a stand-in for the middlemen since it can just as effectively tell us whether the counterparty to a transaction is good for his or her money.

By eliminating middlemen and their fees, cryptocurrency promises to reduce the costs of doing business and to mitigate corruption inside those intermediating institutions as well as from the politicians who are drawn into their prosperous orbit. The public ledgers used by cryptocurrencies can bring into the open the inner workings of an economic-political system that was previously hidden within impenetrable, centralized institutions. Indeed, the technology’s potential as a force for transparency and accountability goes far beyond money and payments, as it can strip out information-controlling middlemen from many other forms of human exchange—in elections, for example, where cryptocurrency enthusiasts see the capacity to end voterigging. At its core, this technology is a form of social organization that promises the shift of the Power to Control Money Flow from the few powerful elite groups at the very top of the food chain, controlling the Governments around the world, back to the hands of the the people to whom it belongs, consisting of ordinary folks and putting them back in charge of their assets and talents population.

" I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party. The paper is available at: http://www.bitcoin.org/bitcoin.pdf The main properties: Double-spending is prevented with a peer-to-peer network. No mint or other trusted parties. Participants can be anonymous. New coins are made from Hashcash style proof-of-work. The proof-of-work for new coin generation also powers the network to prevent double-spending."

—Satoshi Nakamoto’s announcement of Bitcoin, The Cryptography and Cryptography Policy Mailing List, November 1, 2008

Nobody really knows for sure, if the name Nakamoto represents an individual or a group of individuals as he was extremely careful at protecting his identity and was able to maintain anonymity to this very day. It is even believed that Nakamoto might have been motivated to initiate bitcoin in reaction to the 2008 financial crisis. He posted a note in the bitcoin network’s transaction database which reads “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” Soon afterward, a comment on bitcointalk forums remarked about a purchase of two pizzas from Papa John’s. A bitcoin miner from Florida – Laszlo Hanyecz paid 10,000 bitcoins – the equivalent of $25 – for the pies. The first bitcoin transaction and the first mobile transaction took place in 2010.

On November 10 of that same year, bitcoin’s transactions exceeded $1 million. At this point the value of a bitcoin was $0.50. In the spring of 2011, BitPay, a large merchant services provider, introduced a smartphone wallet. They also created large Bitcoin partnerships, embracing, for instance, WordPress, Newegg and The St. Petersburg College Football Bowl in “The Bitcoin Bowl.” BitPay declared in October 2012 that over 1,000 merchants were now accepting bitcoin through its payment processing system. In February 2013, Coinbase, a bitcoin payment processor, announced it sold $1 million worth of bitcoins in one month at more than $22 per bitcoin. The Internet Archive declared it would now accept bitcoin donations and it would offer employees the option to receive a portion of their compensation in bitcoin.

On the heels of new China exchanges and bitcoin miners, the value of bitcoin jumped from US$125 in September, 2013 to over US$1,100 by the end of November in the same year. Subsequently, the market capitalization value of bitcoin went from US$1.5 Billion to US$13.5 Billion in about sixty days. In October, 2013 Bitcoiniacs and Robocoin initiated the world’s first bitcoin ATM in Vancouver, British Columbia in Canada. The following month, the University of Nicosia began accepting bitcoin for the payment of tuition. In the latter half of 2014, Overstock.com announced it would accept bitcoin. Also in 2014, the D Las Vegas Casino Hotel and Golden Gate Hotel & Casino Properties in downtown Las Vegas began accepting bitcoin. As a dramatic development in the history of currency, bitcoin has had its share of legal challenges. On August 6, 2013, in Federal Court, the Eastern District of Texas of the Fifth Circuit ruled that bitcoins are a “currency or a form of money”, as defined by Federal Securities Laws, and were therefore subject to the court’s jurisdiction. Also, Germany’s Finance Ministry defined bitcoins as a “unit of account,” a financial instrument (though not a currency) with legal and tax ramifications. The company TeraExchange, LLC, received approval from the U.S. Commodity Futures Trading Commission (CFTC) in September, 2014, to list an over-the-counter swap product priced in bitcoin. This was the first time a regulatory agency in the United States approved a financial product in bitcoin.With increasing privacy concerns and the desire for a faster clearing process than what banks now offer, the public will increasingly choose merchants who accept bitcoin for products and services. The Nakamoto legacy – the creation of a digital and decentralized currency peer-to-peer network, not linked to a promise or government fiat – has finally emerged. The concept behind the technology is as old as commerce itself: cut out the cost of a middleman and you can reduce the cost of product significantly.As soon as it became possible to trade bitcoin for something else, it became a currency, and the big factor wether people were willing to use it, as with any other currency is its security, and with bitcoin, secuirty was its strong quality. Bitcoin was designed in such a unique way that from the very second it is mined, its every consequetive move is recorded to make sure that it cannot be counterfeited. This creates a unified global ledger, called Blockchain where approximately every 10 minutes the Bitcoin software compiles all the transactions that have occurred into a file called a block. This block contains a reference to the previous file and is a record of every transaction that has ever occurred. When all the blocks are linked together, it forms a chain of blocks, thus the blockchain.

The security of Bitcoin depends on the process of linking all the transactions. Imagine if a one dollar bill were tracked each time it was used, from its printing to eventual retirement. Every pack of gum, soda, flower, or toy that was ever bought with that dollar would be recorded. If a counterfeiter made a copy of this dollar bill, it would contain a record of the rightful owner, and when he attempted to spend it, the built-in security would disallow the transaction. A counterfeiter would have to go back and convince each merchant that the transaction never tookplace. Inessence,acounterfeiterwouldhavetochangeeverysingle transaction prior to making the copy. Bitcoin’s solution to the counterfeit problem is the combination of the blockchain and miners. As more transactions are added, the blockchain makes it virtually impossible to change prior transactions. The miners are charged with confirming that the bitcoin being transferred is not counterfeit. The act of mining for bitcoins involves using powerful computers to solve a complex mathematical equation. The answer to the equation contains a key that verifies all the previous transactions. If this key does not match the previous transactions, then the miners know the bitcoin is counterfeit. If you want to send a bitcoin to a friend, you can only do so by broadcasting that message to the Bitcoin network. The miners listen for this message and then use supercharged computers to ensure that the very same person you sent that bitcoin gets it and not anybody else in the world. When the miners verify your friends ownership, they allow the transaction to occur and always record it in the blockchain for as a proof. In order to get paid, the miners must verify a certain amount of transactions called “block” for which they get paid 12.5 Bitcoins today (to make sure the miners always have incentive to keep mining, Nakamoto devised a much more strictly prescribed monetary policy than the Federal Reserve’s, a key element of which halves the bitcoin issuance every 210,000 blocks—roughly every four years. As of 2014, blocks were paying 25 bitcoins each, down from 50 before 2012 and “halved” again to 12.5 in July 2016. This schedule means bitcoin is heavily front-loaded, with more than half of the 21 million lifetime supply of coins created in the system’s first six years of existence. This creates a sense of scarcity over time, which warrants to increase the value of bitcoin over time.) New bitcoins aren’t the only way that miners get compensated. The core software also contains the ability to charge transaction fees, paid by the sender, the higher the fee the sender agrees to pay, the faster his transaction will take as miners give priority to the transactons with highest fees obviously. Those who interacted with Satoshi agree that the one thing the creator did not want was Bitcoin to be associated with any one individual. As a decentralized system it needed to remain about the software, not the creator. If indeed the blockchain was to become the new trusted third party, a single point of failure could not be present.

Bitcoin needed to be a community, a group of people coming together to solve a task. What Satoshi Nakamoto had done was to solve the Byzantine Generals’ Problem, and his elegant solution required consensus. The Byzantine Generals’ Problem was first proposed by computer scientists Leslie Lamport, Robert Shostak, and Marshall Pease in 1982. In essence, the Byzantine Generals’ Problem is the problem of establishing trust among unrelated parties over a communication network that cannot be trusted. The Internet has given access to information to anyone who connects to the network. This in itself is unprecedented in human history and has sparked numerous democratic revolutions. Never before has the mass population had access to the same information as the leaders. However, as we know all too well, since anyone can post information to the Internet, that information cannot always be trusted.

Before Bitcoin, trusted information was centralized at third parties like respected media outlets and government agencies. Of course, these third parties represent a single point of failure and have been found to not always perform their duties. In fact, some of these third parties have used their position of power to manipulate information for their own benefit. The Byzantine Generals’ Problem has confounded computer scientists for over three decades, and until Bitcoin, many thought the problem was unsolvable. Satoshi Nakamoto’s solution, called the Bitcoin protocol, not only gives every user of the Internet a way to securely transfer information, it also ensures the information is legitimate. This is a breakthrough in computer science and human history that cannot be overstated. With Bitcoin, the old saying that “you can’t trust everything you read on the Internet” is just that…an old saying. Bitcoin was designed to be trustless. That is to say, the system does not require the users to trust each other. All the users need is access to the “pictures” taken by the paparazzi to verify where every single bitcoin has been. A trustless system cannot have a central figure; it would undermine the entire project.

Bitcoin was born out of the financial crisis of 2008, a time when trust was a scarce commodity. At the core of our financial system is a confidence that the currency we are exchanging will be accepted elsewhere. This confidence is a direct result of trusted third parties vouching for its value. Whether this currency is the U.S. dollar, Japanese yen, or even a mortgage-backed security, if the belief in third party deteriorates then the entire system fails. Bitcoin was the right solution at the right time. It offered a way to be confident about value without the need for a third party. Bitcoin stepped in where investment banks had failed. The disaster of Bear Stearns and the collapse of Lehman Brothers showed that single points of failure can lead to a complete system failure. The Federal Reserve saved the system by acting as the centralized lender of last resort, but the Fed paid for these actions with a loss of credibility. Even the revered former Federal Reserve Chairman Paul Volcker said in a speech that the Fed had taken “actions that extend to the very edge of its lawful and implied powers.” Bitcoin may be a response to this loss of credibility and whoever created it went to great lengths to remove any centralized third party.

It is likely that Satoshi knew all too well that a centralized system is only as strong as the belief in central authority to do the right thing. If the Bitcoin creator intended to spark a revolution, it could not be constructed on a single point. It is for this reason that we may never know the real Satoshi. A skilled cryptographer who does not want to be found has the ultimate advantage, and Satoshi has so far demonstrated that anonymity is paramount. The number one use for Bitcoin has been and remains speculative investment. For good or ill, the buying and selling of Bitcoin remains the most common reason behind Bitcoin transactions.

The wild swings in price make the digital currency extremely attractive to day traders. When the Silk Road marketplace came along, it gave Bitcoin another use: buying things you didn’t want the credit card companies or the authorities to know about. Eventually, the currency was also adopted by more mainstream merchants and became relatively more widely used as a legitimate way to pay salaries, buy goods and services, and so on. Every one of these things can be, and more often are, done with fiat currencies. But cash and other forms of currency also have countless uses. You can use fiat money to pay rent or for education or groceries. You can use it to invest and save and do a million other things. Initially, cryptocurrencies were limited to a few uses and many of them, like the Silk Road, were less than attractive to the average person. What makes Bitcoin and blockchain technologies inherently attractive are the things they can do better than other currencies: Bitcoin and other digital currencies are perfectly designed for remittance, i.e., sending money from one person to another, usually overseas.

When we set aside the current difficulties people can have exchanging Bitcoin for a fiat currency, Bitcoin is undoubtedly better for remittance than any other service out there. Roughly 2.5 billion adults in the world don’t have access to banks, which means somewhere in the order of 5 billion people belong to households that are cut off from a financial system that the rest of us take for granted. They can’t start savings accounts. They don’t have checking accounts. They can’t get credit cards. They live in places where banks don’t want to go, and because of this, they remain effectively walled off from the global economy. They are called the unbanked. But they are not unreachable, not by a long shot, and one of the biggest and most exciting prospects proponents of bitcoin talk about is using their cryptocurrency to bring these billions of people roaring into the twenty-first century. People should realize that money is neither good nor bad. It is simply a system of exchange and accounting—a way for society to efficiently and effectively swap goods and services and to keep track of it all on a large scale. People have, nonetheless, invested it with transcendent values. “Money” has become as much a mental construct as “value” itself.

Bitcoin enthusiasts are no different in how they describe their currency. In their minds, bitcoin is a force unto itself that will reshape and improve people’s lives everywhere it goes, which leads them to this notion that they can both get rich and do tremendous good. It’s like capitalism with a radically altruistic bent. Nowhere is this more evident than in how bitcoin is being offered as a solution for the world’s poor—and in this case they do have a compelling case to make for a better, more widely accessible form of mon Cryptocurrency’s great promise is not that the wealthy will rush into it and bid up its price, but that the poor will find it extremely useful. It’s time to explore one of bitcoin’s most exciting ideas: that it can liberate the “unbanked.” Money, it has been said, is the cause of good things to a good man and of evil things to a bad man. It can either help a good person do more good in this world, while a bad one will use it to accomplish more wrongdoings. It is just an instrument of amplifying your actions. With the direction chosen, Satoshi’s creation can be an elixir for our financial system. If we have learned anything from the financial crisis of 2008 it is that a single point of failure has the potential to destroy the entire system. Satoshi’s legacy will be one solution to this problem.

Bitcoin and the concept of the blockchain is an elegant way to reduce the single points of failure and decentralize the financial system. To be sure, all human creations are flawed and along the way we will discover Bitcoin’s limitations. However, decentralization is a step in the right direction. As Victor Hugo once said, “Nothing can stop an idea whose time has come.”

 

 

 

A brief visual lesson on the shared history of Bitcoin Cash and Bitcoin Core

For the uninformed, it may come as a surprise that Bitcoin split in two in August 2017 when the network forked. The event split the original Bitcoin blockchain into two distinct chains, referred to generally as Bitcoin Cash and Bitcoin Core.

For an in-depth exploration on the split including how Bitcoin Cash was born out of the split, please read how Bitcoin Cash is Bitcoin in this article

For a visual representation of the Bitcoin fork in August, Reddit user “writingabout” made a wonderful illustration (which is embedded below) of the split highlighting three key different areas of importance in understanding what happened: misguided users, confused users, and the well-informed users.

For the first group of misguided users, they think that the Bitcoin blockchain diverged where one side soft-forked and the other hard-forked and that Bitcoin continued on as normal on the soft-forked chain. This logic is simply untrue using the argument that since there was a soft-fork it makes Bitcoin the “true” Bitcoin. The fallacy that soft-forks are preferred, and hard-forks are not, was debunked when Ethereum co-founder and Russian-Canadian programmer Vitalik Buterin wrote that soft-forks are dangerous and coercive. Just because one side soft-forked doesn’t mean that it carried on as the true Bitcoin.

For the second group of confused users, they think that the Bitcoin blockchain split where one chain forked off from the other. Similar to the group of misguided users, this group of people believe that Bitcoin carried on after the fork as normal simply because there was a hard-fork event.

And for the third group of the well-informed users, you can see that Bitcoin split in August into two separate chains sharing the original Bitcoin history, splitting Bitcoin into Bitcoin Cash and Bitcoin Core. The original chain no longer continued on, but was split where one side carries on with a particular vision, while the other side has their own vision of what Bitcoin should be. Using this comparison chart, it is clear that Bitcoin Cash is the only version of Bitcoin that can be used as digital money as intended by the original design laid-out in the Bitcoin whitepaper by Satoshi Nakamoto.

Bitcoin August 2017 Fork Event Infographic

 

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