Simplified explanation of Bitcoin

Hey, I've written this short post as explanation for user @Nish who asked a few questions about what Bitcoin Cash is, as there didn't seem to be enough visibility for BCH tutorials at that point.

Here is my take on how to explain how Bitcoin works in a simplified manner. Nish asked if it was a company of some sorts, so let's just start right there:

Bitcoin is not run or created by a company. It is an open-source, permissionless software, that anybody can run on computer hardware to connect and interact with it. The software of Bitcoin was developed by an anonymous developer, who is known under the pseudonym of Satoshi Nakamoto. We have a few guesses, but have yet to find out or prove, who he really is or if he is even alive, as no one has contact to this person anymore. You can learn about him by searching about his name. Please don't believe the next best guy, that he can 'prove' to be Satoshi. Be vigilant, if you look up his name and want to learn more about him and his invention.

👉🏽Permissionless software means that it is accessible to anyone at anytime who wishes to run the software and no entity of any kind can hold anyone back from doing so. There is no central server or company or institution, that could be able to hold you or anyone back from accessing it.

In other words, if you make transactions on Bitcoin or Bitcoin Cash, you are for the most part directly communicating with the network itself and there is no central server or middleman in between, that could grant or deny you access.

The network consists of 'nodes', which we also often refer to as 'miners'. These miners are nothing more than specialized computers, that run Bitcoin software and is connected to the internet. Let's distinguish correctly now by calling the person or company running the node a miner and the hardware used as 'mining rig'. More on miners later...

👉🏽Bitcoin Cash and Bitcoin are two distinct Bitcoin versions, running a different protocol and thus are distinct from another. But they, as you rightly guessed it, share the the same 'genesis transaction' and transaction history up to some point in 2017. Let me explain in a simplified way, what all of this means and the implications of it, by explaining a bit more about how Bitcoin works.

You might have heard about 'Blockchain technology'. With the invention of Bitcoin, a system running like it is considered a blockchain. You can imagine this as a fancy type of digital ledger. It is in essence not much more than a file, containing a list of all transactions ever made, from the beginning of the chain up to the present and coming. The first transaction ever, is the so called 'genesis transaction', I spoke of before. There is a bit more to that, but let's just revise the history of how Bitcoin came to be.

So Satoshi Nakamoto wrote the software and started running it. He basically was the first miner with a single node with just a laptop as a mining rig. He contacted other developers and cryptography-experts and some of them joined in over time and connected with their computers running the same node-software as him, making all of them miners as well. And so the network grew.

Some of them, actually quite a few, also helped him develop his software further. Some even wrote their own Bitcoin node software, which might have been written in a totally different manner and with other minor differences in execution, but regardless of that still following the same base protocol as the node software, that Satoshi and others were using to communicate over the network. As long as every node/miner follows the same protocol, everybody is connected to the same blockchain and contributes towards the same fancy ledger of transactions.

The downside to normal digital systems is clear, it's easy to copy and manipulate digital data. Without getting too specific, using a digital database for financial activity always involves trust of the users, that the maintainer of this database doesn't simply 'forge' a transaction he has central access to. That's why you couldn't simply email someone money. You wouldn't accept it, just because your friend wrote you an email with '$500' in the subject, right? Only big financial institutions could establish the trust of the people over decades if not centuries and have the privilege to be custodian of peoples funds. When they send us $500 via digital means, we trust them, that there is real value behind those numbers and that they do not forge transactions behind our backs in their own network. But with Bitcoin, we don't need to trust them anymore. That's why it is called a 'trustless system', by the way.

One fancy part of this digital ledger file of Bitcoin is, that it makes the weakness of digital data to its core strength. Every participant on the network simply has a copy of this file. This ever increasing file is constantly being updated and synced by the entire network of nodes. New nodes joining in simply download the shared file from the majority of the nodes and once they have the entire file stored, they can start adding to it, just as any other node.

This way, whenever a miner would try to make a 'forged' transaction, for example spending the money he has at two places at the same time (so called 'double-spend problem'), all the other miners can match their ledger with the proposed fake transaction and expose the 'rogue node' as a fraudulent, or hostile miner and stop accepting his version of the ledger.

To 'fool' the network with such a double-spend attack, the hostile miner would have to have at least half the computing power of the entire Bitcoin Cash network, or half the 'hashpower' of all the nodes on the network. The bigger the Bitcoin Cash network gets, the more costly it will be for a mining node, to try to 'overpower' the entire network. Hashpower is computing power and computing power needs electricity. The mining rigs used are highly specialized and, simply put, put a lot of energy into maintaining the ledger. We won't talk about why exactly they do it just yet, but just note, that participating in the network for a miner is tied to the cost of electricity and since these miners need a lot of energy, it is very costly to run a decent amount of such mining rigs.

It is only viable, because these nodes produce new Bitcoins over time, with every update cycle of the ledger. This is also known as the 'Block reward'. The miners make profit, as long as the new Bitcoins, they are rewarded with over time, are more valuable, than the electricity they put in the network. On top of that, the more hashpower they put into the network, the stronger the network gets. Remember, a hostile miner has to have at least 51%+ of the hashpower directed to the network, to have a chance to mess with the ledger. This means the more honest miners participate in the network with their hashpower, the harder it gets for the hostile miner to overpower the network.

👉🏽It is far more profitable for a miner to direct the amount of hash power towards strengthening the network to get money in transaction fees and block rewards, simply by following the network-protocol aligned with the majority of the network while forwarding of user transactions, than it is to attack it.

Bitcoin participation is indeed all about incentives. If you are a miner with a lot of hashpower, you have the choice to 'attack' the system and pay a lot of money in form of hash power/ electricity to overtake and manipulate it, or you simply direct that hash power towards honest mining and earn a lot of money for it.

What do you think miners chose to do? Paying let's say $100.000 per day in electricity bills to defraud the network, destroy the value proposition of it and make the money you have stolen worthless in the process? Or simply earning money by securing the network with honest hash power? It's pretty clear, what sane and smart people would rather chose to do.

Now what's the fancy part in detail about that revolutionary invention?
How does a system like that update its ledger in sync and how does it keep it identical with all other nodes all over the world? And why is this data not called a fancy-ledger instead of block-chain, anyway?

👉🏽We are now emphasizing on the revolutionary aspect of Bitcoin and the core aspects of blockchain-technology. What miners actually do, when they participate with 'hashpower' and the method we call 'Proof Of Work' to reach consensus on what is perceived by the entire network as 'true' and what's not.

That's the point, where I can share a good video with you. Kindly watch this. It may make sense, it may not. And maybe both at the same time. Be sure to revisit this video as you learn more details about how Bitcoin works or why it is so groundbreaking. Just be sure, if you understand Proof of Work, you understand Bitcoin. Good luck!