On Oct. 31, 2008, an anonymous individual who went by the name of Satoshi Nakamoto published a white paper detailing a design for a “peer-to-peer electronic cash system,” a global financial infrastructure based on cryptographic proof instead of trust. Over a decade later, cryptocurrencies are now being discussed regularly in the context of global economic policy, with some nations even researching and developing their own digital currencies.
The underlying data structure of Bitcoin (BTC), often referred to as the blockchain, has also been researched and implemented in use cases ranging from supply chain management to logistics, cross-enterprise resource planning, energy trading, decentralized autonomous organizations and much more.
The purpose of this guide is to provide the newcomer with a comprehensive understanding of Bitcoin, covering the social and technological context of its inception, key events in its history, how it works, descriptions of its unique properties, and guides on how to participate within this new financial paradigm.
It is hoped that by the end of this guide, the reader will have a balanced perspective of one of the most fascinating technological and financial developments of the modern era.
The pre-history of Bitcoin
While the story often begins with the anonymous Satoshi publishing a white paper on Halloween 2008, there is an often neglected yet vibrant pre-history of Bitcoin that is essential to understanding it as a techno-social phenomenon decades in the making.
This guide to Bitcoin will begin by first charting the social and technical currents that led to its inception. Examining these currents is useful for discussing the past, present and future of Bitcoin.
The ideology of Bitcoin
While it might seem odd to suggest a Bitcoin ideology — considering its decentralized nature — the fact is that Bitcoin’s initial support base consisted mostly of tech-savvy individuals, libertarians and crypto-anarchists. Bitcoin’s inception and adoption within this community have come to define its values, virtues and fundamental design.
When Satoshi revealed their proposal for Bitcoin, it garnered just a small amount of interest and criticism from a very niche online community of cryptographers and computer scientists. Many of these individuals had been involved in digital cash experiments throughout the eighties and nineties.
To them, Bitcoin was simply the latest in a long sequence of experiments in creating monetary systems that respected individual freedom and privacy. In tracing the ideological roots back far enough, it can be found that Bitcoin’s formative influence largely stems from the discourse surrounding two particular communities.
In 1988, a futurist named Max More put forth the philosophy of “extropianism” in a series of written principles that detailed an “evolving framework of values and standards for continuously improving the human condition” through the use of emerging technologies such as cryogenics, artificial intelligence, robotics, memetics, genetic engineering, space travel and more.
An extropian individual is someone who actively builds and tests these systems for the betterment of humanity while adhering to a strictly rationalist mindset unhindered by dogmatism. One of the core concepts of this community is life extension through the use of cryogenics, mind-uploading and other means.
This transhumanist ideology brought together a community of scientists and futurists who shared these ideas on early online forums. From the late eighties into the early to mid-nineties, the extropians prototyped designs for alternative currencies, idea markets, prediction markets, reputation systems and other experiments that foreshadowed much of the current crypto space. A number of cryptocurrency pioneers were active in the extropian community, including Nick Szabo and Hal Finney.
Similar to the extropians, the cypherpunks were united by a shared emphasis on technology to create a better world. The cyberpunk subgenre of sci-fi literature often portrays a future in which a global cabal of corporations effectively rules the world through ubiquitous surveillance systems, with the protagonists often being hackers or other individuals maneuvering through this dystopian society.
The cypherpunks were so called because they saw the works of authors John Brunner, William Gibson and Bruce Sterling as plausible scenarios given the trends in sociopolitical progress and technological innovation. They believed that the rise of global computer networks mediated by governments and corporations would systematically compromise liberty and freedom.
The cypherpunks were a community of cryptographers, computer scientists and futurists dedicated to building the systems necessary to secure individual sovereignty amid a potential surveillance state.
Contrary to the extropians, the cypherpunks emphasized a particular set of technologies around encrypted communication networks, including anonymous messaging and electronic money. Many of the digital currency experiments throughout the 1990s and early 2000s were directly driven by the cypherpunk movement. This community is the soil from which Bitcoin grew.
Bitcoin’s technical lineage
The key to understanding Bitcoin is realizing it not as a singular, unique invention but a clever synthesis of prior work that succeeded where past efforts failed. Satoshi sought to build a trust-minimized financial infrastructure that could persist years into the future.
Instead of building a new solution in a vacuum, he built upon past research in distributed systems, financial cryptography, network security and more. First, this guide will describe the foundational technology of “crypto.” Then, it will describe some of the digital cash experiments that preceded and influenced Bitcoin.
Public key cryptography
For centuries, cryptography, or the technology of secret-sharing, relied on multiple parties to agree on a shared private key to decrypt messages. This is known as symmetric key encryption. This method consistently ran into the problem of key distribution. Past methods included face-to-face meetings or the use of a trusted courier. Not only was this system vulnerable on many points, but it was also impractical to implement at scale.
In the 1970s, an alternative method of secret-sharing emerged known as asymmetric key encryption, or public key cryptography. In this system, each party would have a pair of public and private keys. If Alice wanted to send a secure message to Bob, she would encrypt the message with Bob’s known public key. Bob would then decrypt Alice’s message with his own private key. In this system, neither party has to agree on a shared secret in advance. Alice can also digitally sign her message to Bob using her private key, allowing Bob or anyone else with knowledge of her public key to verify the message’s authenticity.
This combination of public key cryptosystems and digital signatures is the bedrock technology of what is now broadly called “crypto” and has successfully secured communication networks and the protocols that comprise the internet for decades. It is also a key element in digital cash systems.
The Crypto Wars
It is important to note that public key cryptography was discovered nearly simultaneously in the 1970s by the United Kingdom’s Government Communications Headquarters and by two independent American researchers named Whitfield Diffie and Martin Hellman. Governments had no intention of giving the public access to privacy-preserving technologies like public key cryptography, as it would fundamentally shift the balance in power.
When the World Wide Web arrived in the nineties, creating an explosive demand for online messaging and e-commerce, governments pushed back against the adoption of encryption by the masses, citing concerns around security and criminal activity.
Known unofficially as the Crypto Wars, this era of friction between governmental powers and the entrepreneurs and builders of a new technological paradigm echoes to the present day as governments are forced to acknowledge the emergence of a borderless, leaderless financial system heralded by Bitcoin.
David Chaum is perhaps the most influential person in the cryptocurrency space. His pioneering work in digital currency systems dates back to the eighties when the internet was still in its nascent stages before the launch of the World Wide Web.
In 1981, Chaum published a groundbreaking paper, “Untraceable Electronic Mail, Return Addresses, and Digital Pseudonyms” — a foundational document in the realm of privacy on the internet that directly led to the creation of privacy protocols such as Tor. In 1982, Chaum published “Blind Signatures for Untraceable Payments,” a keystone document that detailed an anonymous transaction system that would directly inspire future digital currency experiments.
The eCash payments system was Chaum’s attempt at bringing the privacy of physical cash and coins to the digital realm with the advent of electronic banking services. In 1989, Chaum founded DigiCash. Headquartered in Amsterdam, Chaum and his team built out the eCash protocol. Throughout the latter half of the nineties, Chaum struggled to secure enough partnerships with merchants and banks to sustain the project and ended up declaring bankruptcy in 1998.
While the venture didn’t last, eCash blazed new trails in the digital currency space. While not a natively digital currency like Bitcoin, eCash foreshadowed what have now come to be known as central bank digital currencies, or CBDCs, and stablecoins — digital assets backed by reserves and issued by a trusted third party such as a bank or corporation.
Founded by Douglas Jackson and Barry Downey in 1996, E-gold was a digital currency system backed by gold reserves in vaults in London and Dubai. Denominated in grams, E-gold provided an alternative online payments system capable of fast, borderless value transfer, but the project faced significant legal and systemic issues.
The E-gold economy was conducted via a central server maintained by a single company, which produced a single point of failure or disruption in the event of a dispute between operators or shutdown/seizure by authorities. The E-gold system originally didn’t have many restrictions in terms of account creation, which lead to the currency being used in various criminal activities. While Jackson and the team made efforts to counter the criminal use of E-gold, they were ultimately found guilty of running an unlicensed money transmission enterprise, and the venture was shut down.
Whereas eCash was an electronic currency system implemented in coordination with the legacy banking system, E-gold was operating as a parallel financial system built entirely without the acknowledgment or input of regulatory authorities. During this time, the United States government was wary of the public having access to public key cryptography and the means to encrypt their presence on the internet. Ventures like E-gold brought such concerns to the act of transacting over communication networks. Much of the regulatory friction around alternative digital currencies that sparked during this time has persisted to this day.
Peer-to-peer digital cash: Cypherpunk edition
While the previous digital currency systems were influential in the design of electronic cash, the builders were not directly involved with that community. Chaum, for example, did not particularly subscribe to the cypherpunk ideology.
The following digital cash experiments, however, were conceived by active members of this community and can be seen as direct precursors to Bitcoin. Either directly or indirectly, these proposals and implementations were influential to Satoshi’s invention of Bitcoin.
In 1992, IBM researchers Cynthia Dwork and Moni Naor were exploring methods for combatting Sybil attacks, denial-of-service attacks and spam messaging on burgeoning internet services such as email. In their paper “Pricing via Processing or Combatting Junk Mail,” the pair proposed a system in which a sender of an email conducts some amount of computational work to solve a cryptographic puzzle.
The sender would then attach proof of the solution to the email: a proof-of-work, or PoW. While the computational cost of this process was fairly trivial, it would be enough to effectively inhibit spam. The system would also feature a “trapdoor” that would allow a central authority to instantly solve the puzzle without expending work.
In 1997, 26-year-old University of Exeter graduate and active cypherpunk Adam Back took to the cypherpunk mailing list and proposed a similar system called Hashcash. In this system, there was no trapdoor, central authority or emphasis on cryptographic puzzles. Instead, the process centered around hashing.
In Hashcash, a sender would repeatedly hash the metadata of the email — such as the sender’s address, the receiver’s address, the time of the message, etc. — along with a random number called a “nonce” until the resultant hash begins with a predetermined number of zero bits.
Because the sender can’t know the correct hash off the bat, they must then repeatedly hash the email metadata using a different nonce until a valid combination is found. Similar to Dwork and Naor’s system, this process requires computational resources, generating a proof-of-work.
As the name indicates, anti-spam was not the only use case Back had in mind for Hashcash. However, the proof-of-work tokens were useless to the recipient and could not be transferred, rendering them ineffective as digital cash. The currency would have also been subject to hyperinflation, as the ever-improving computation speed of new machines would make generating proofs easier and easier. Nevertheless, Back’s Hashcash would inspire the further application of proof-of-work in two proposed digital cash systems and precursors to Bitcoin: B-money and Bit Gold.
In 1998, active cypherpunk Wei Dai proposed B-money, an alternative peer-to-peer, or P2P, financial system for conducting online commerce outside of the legacy financial system controlled by enterprise gatekeepers and regulated by governments. The system would allow for the creation of digital currency and the enactment and enforcement of contracts complete with an arbitration system to resolve disputes. Dai’s post consisted of two proposals.
Dai’s first proposal removed the central authority’s singular control of a transactional database and replaced it with a shared ledger system among a network of pseudonymous peers represented as public key addresses. To mint a digital currency, a node would have to solve a computational problem and broadcast the solution to the network (a proof-of-work) in a multiphase auction. The number of assets issued would be determined by the cost of computation effort undertaken in relation to a basket of standard commodities.
If Alice wanted to transact with Bob, she would broadcast a transaction to the entire network that includes a packet of information containing the amount and Bob’s public key address. However, Dai realized that this initial proposal did not solve the double-spend problem because it would be possible for Alice to simultaneously spend the same assets with Bob and Carol.
In his second proposal, Dai suggested that instead of everyone having a copy of the ledger, a special subset of peers, called “servers,” would maintain a shared ledger while regular users simply verified that the transactions had been processed by the server. To ensure trust and prevent collusion, servers would deposit a certain amount of money in a special account, which would be used as a fine or reward in the event of malicious behavior, similar to proof-of-stake systems in other blockchains.
Dai’s proposal for B-money was never implemented in any way, yet what is striking about it is how similar to Bitcoin it was, particularly with the use of the shared ledger and PoW-based digital currency. The main difference, however, was that B-money’s currency was tied to a certain value of commodities, making it an early model for what would now be called a stablecoin.
Formerly an active member of both the extropian and cypherpunk communities, Szabo is one of the most influential figures in the development of cryptocurrency and blockchain technology. He is a polymath traversing disciplines ranging from computer science and cryptography to law.
Szabo’s North Star is the vision of creating a free economic society outside the control of corporations and nation-states. In 1994, he proposed smart contracts — essentially, digital contracts executed and enforced via code rather than jurisdictional law — as a fundamental building block of borderless e-commerce.
He later realized that a key element was missing: a natively digital currency that could flow through these contracts. After witnessing a litany of digital cash experiments face obstacle after obstacle (and even working at Chaum’s DigiCash for a time), Szabo decided to work on a new proposal that could succeed where past efforts failed.
In studying the history of money, Szabo identified commodity money like gold bullion bits as a strong conceptual foundation for a new currency of the internet. This new money had to be digital, scarce, incredibly costly to forge and not rely on trusted third parties to secure it and give it value — a digital gold, in a sense. His proposal: Bit Gold.
Bit Gold works similarly to Hashcash and particularly B-money in that it uses an accumulating chain of hash-based proofs-of-work that is periodically timestamped and published to a network of servers. The issuance and ownership of Bit Gold are recorded on a distributed property title registry — basically, a protocol that allows for the governance of certain classes of property using a quorum-based voting system.
Where Bit Gold fell short as a currency was its lack of fungibility — i.e., when each individual unit is interchangeable for an identical unit for the same value. This is essential for any viable form of currency. Because the cost of a Bit Gold is related to the computational cost of the proof-of-work at a specific moment in time, and because the cost of computation would decrease with better machines, a unit of Bit Gold mined in 2015 would be worth less than a unit of Bit Gold mined in 2005.
Szabo proposed a second-layer solution involving a secure, trusted, auditable bank that could track the issuance of Bit Gold over time, continuously packaging the proof-of-work tokens into equal units of value, creating a stable medium of exchange. However, the system would be susceptible to Sybil attacks that could cause a split in the network. Szabo believed any potential network split could be fixed with the honest participants continuing on their own system and that the users would naturally side with them through social consensus.
Szabo was gearing up to finally implement Bit Gold shortly before Satoshi published the design for Bitcoin in 2008. After Bitcoin launched, he abandoned the Bit Gold project, believing that Bitcoin cleverly solved the shortcomings of Bit Gold and prior digital cash experiments by synthesizing prior attempts into a system that simply worked.
These two digital cash experiments were crucial to the invention of Bitcoin. In a 2010 Bitcointalk forum post, Satoshi stated, “Bitcoin is an implementation of Wei Dai’s B-money proposal […] in 1998 and Nick Szabo’s Bitgold proposal.”
The birth of Bitcoin
While entire books and podcasts have covered the history of Bitcoin in great detail, for the purposes of this guide, only the landmark moments in Bitcoin’s history will be covered, and their significance within the evolving story of cryptocurrency will be unpacked.
After Satoshi published their eight-page proposal for a new digital cash system on a mailing list, they opened the project up to discussion and debate from an online group of cryptographers, computer scientists and digital cash veterans. While Satoshi had written much of the Bitcoin codebase before publishing the white paper, they opened it up to public scrutiny among an online community of peers.
From the early days, Bitcoin was an open-source software project built and maintained by a community of developers and enthusiasts. On Nov. 8, 2008, Bitcoin was registered on the open-source software development platform SourceForge. This was when Bitcoin became a team project.
On Jan. 12, 2009, the first post-genesis Bitcoin transaction occurred between Satoshi and cryptography activist Finney in block 170. Finney is also reported to have been the first person to mine Bitcoin alongside Satoshi after the network’s launch.
Bitcoin Pizza Day
The first recorded use of Bitcoin in the exchange of a good or service occurred on May 22, 2010 when Floridian programmer Laszlo Hanyecz offered to pay 10,000 BTC for pizza. The initial exchange rate for Bitcoin had only been established a few months prior. The price of the two large Papa John’s pizzas was estimated at around $25 at the time of purchase. As of March 2021, those two pizzas would now exceed $500 million in value. While many commentators joke about Hanyecz’s transaction in retrospect, it is important to note how nascent the Bitcoin network was at the time.
In the discourse around Bitcoin’s use case as a medium of exchange, Hanyecz’s famous transaction is often brought up as an example of how the incredible range in Bitcoin’s price history would seem to run counter to its use as an effective currency. With a scarce supply capped at 21 million, people may not wish to use it as cash but rather as a long-term investment — to “HODL,” in industry parlance. Nonetheless, Hanyecz’s pioneering purchase proved that Bitcoin could, in fact, be used as a digital, P2P transaction system.
BTC rush: The birth of the mining industry
In the early days of the Bitcoin economy, the way people participated in the network and obtained Bitcoin was through the mining process. Mining is the process by which the network continuously validates broadcasted transactions and records them in the distributed ledger in the form of linked “blocks” of transaction data, producing a cryptographically secure, verifiable history of transactions over time. The Bitcoin network is designed such that miners are rewarded for securing uptime of the network through block rewards issued in Bitcoin. This also serves as the minting process for the Bitcoin currency.
On Nov. 27, 2010, Slush Pool launched. The oldest mining pool in the Bitcoin industry, Slush Pool provided prospective miners a means to pool together computational resources to mine Bitcoin and share in the block rewards proportionate to work done. This allowed individuals lacking in abundant CPU power to collectively participate in the network’s operations and earn Bitcoin in the process.
Since then, the mining industry has become less of a cottage industry and more of a large-scale, energy-intensive business operation with a relatively small number of companies producing the majority of the hashing power. While the scope of cryptocurrency mining has changed considerably with the emergence of many other cryptocurrencies, Slush Pool marked an important milestone in the history and maturation of the Bitcoin network.
No history of Bitcoin would be complete without a chapter on Silk Road. Launched in February 2011 by Ross Ulbricht, who used the pseudonym “Dread Pirate Roberts” (named after a character in the movie The Princess Bride), Silk Road was an online darknet marketplace accessible only through the Tor anonymous browsing service, with Bitcoin as the currency.
The site was envisioned as a free, open bazaar where people could transact freely with one another outside the constraints of regulation. As well as being a marketplace, the site also featured a forum in which users could discuss libertarianism, crypto-anarchism and other dissident views. The site also featured a reputation system in addition to an automated escrow system to reduce fraud.
After the site had become a haven for illegal drug trade and other sorts of criminal commerce, federal law enforcement authorities began investigating its operations, culminating in Ulbricht’s arrest on Oct. 2, 2013. He is now serving multiple life sentences with no possibility of parole.
Silk Road is a key moment in Bitcoin’s history. The narrative of Bitcoin as a currency of choice for criminal activities stems from cases such as the infamous marketplace. What was intended as an expression of libertarian idealism around personal liberty and free markets became the most legendary black market in the modern era.
It’s important to note that the United States Marshals Service auctioned off nearly 30,000 BTC that had been seized during Ulbricht’s arrest, which in itself lends credence to Bitcoin’s base legality. Despite the dark turn in Silk Road’s story, the marketplace did exhibit Bitcoin’s capability of facilitating P2P trade in an open market.
Unfortunately, the legal goods and services available on Silk Road — ranging from art, to clothing, to handcrafted artisanry — comprised a much lesser volume of the market’s activity. As sci-fi author and cyberpunk visionary Gibson once said, “The street finds its own uses for things.”
On April 26, 2011, Satoshi departed the Bitcoin project, handing the reins of development to Gavin Andresen and the open-source community. Until this point, Bitcoin’s development had basically been led by Satoshi, whoever they may have been.
In retrospect, the inventor’s anonymity was core to the success and persistence of the Bitcoin project. With law enforcement agencies cracking down on nefarious uses of cryptocurrencies in the years that followed, it would have been natural that had Satoshi been irrefutably identified, the creator(s) of a borderless, permissionless, privacy-preserving alternative monetary system would have received a sentence not unlike Ulbricht’s. Satoshi walking away from the project was essential for Bitcoin to remain true to its foundation as a trust-minimized, decentralized, resilient financial system.
WikiLeaks and censorship-resistant money
Founded in 2006 by Julian Assange — an active cypherpunk — the whistleblowing site WikiLeaks developed a tense relationship with governing bodies and abbreviated agencies around the world after leaking classified documents pertaining to shady, clandestine operations of governments and corporations.
On June 14, 2011, WikiLeaks began accepting donations in Bitcoin after PayPal froze the nonprofit’s accounts and Visa and Mastercard suspended payments. It made sense: WikiLeaks sought to be an unwavering example of the Fourth Estate’s commitment to truth amid censorship and pressure by the powers that be, and Bitcoin provided a global, borderless, censorship-resistant accounting system to complement these efforts.
Notably, Satoshi expressed concern regarding Bitcoin use on WikiLeaks. “It would have been nice to get this attention in any other context,” they said in a 2010 post. “WikiLeaks has kicked the hornet’s nest, and the swarm is headed towards us.”
The pairing of these two entities cemented Bitcoin’s identity as a technology of dissent in the eyes of the public. Assange’s arrest on April 11, 2019 further highlighted the vulnerabilities of a public persona at the head of a movement, however flawed they might be. Taken into custody in London in 2019, Assange’s U.S. extradition had still not come to fruition by the start of 2021.
The rise and fall of Mt. Gox
Launched in July 2010 by P2P software developer Jed McCaleb before being sold to Mark Karpelès, Magic: The Gathering Online eXchange, better known as Mt. Gox, became the largest Bitcoin exchange in the world, facilitating around 70% of the network’s transactions at its peak from 2013 into 2014.
On Feb. 7, 2014, the exchange halted all withdrawals following a security breach. Later that month, Mt. Gox went offline, with 744,408 Bitcoin stolen by hackers — around $43 billion worth as of March 2021. There are efforts to compensate Mt. Gox users for the loss of their Bitcoin, but the story is still ongoing. Some folks who saw their assets disappear via the Mt. Gox calamity submitted reimbursement claims to get funds back, but such payments have seen multiple setbacks.
The fall of the once leading exchange due to a security breach has become a Tacoma Narrows Bridge disaster for the crypto industry, highlighting the systemic risks around the centralized custody of crypto assets. In a sense, it is a cautionary tale for those participating in the crypto economy. Do you trust others to secure your assets, or do you trust yourself? For entrepreneurs and builders in this space, it has become an example of the considerations and risks of creating services and infrastructure around a valuable asset that is in itself decentralized.
The New York BitLicense and crypto regulation
Technology and its adoption rarely match the pace of regulation. Entrepreneurs and builders of emergent technologies often experience friction with regulatory authorities if there is some ambiguity around whether the legacy frameworks apply within the new paradigm.
In the case of cryptocurrency — where the asset is pseudonymous, non-repudiable and operating under a fundamental set of rules outside of any sovereign control — the clash between the old and the new is inevitable. Between the shutdown of the Silk Road marketplace and the collapse of Mt. Gox, regulatory state authorities began to implement specific regulations for businesses dealing with crypto assets in any administrative capacity.
On July 17, 2014, the New York State Department of Financial Services proposed the “BitLicense,” a business license that imposes strict restrictions on digital currency businesses operating within the state of New York that provide custodial, exchange and/or transmission services for customers.
Authored by New York’s first superintendent of financial services, Benjamin Lawsky, the license was heavily criticized by the industry for its inhibitive, expensive demands, as the sheer costs of acquiring the license would make it impossible for small to medium-sized businesses to remain compliant. When the BitLicense came into effect on Aug. 8, 2015, 10 prominent cryptocurrency companies left New York in what the New York Business Journal called the “Great Bitcoin Exodus.”
While the NYDFS is currently planning to revisit the BitLicense, the regulatory framework set a precedent for how authorities at the state and federal levels can choose to cultivate or inhibit commercial and technological innovation. In 2020, the NYDFS introduced the conditional BitLicense — a variation of its standard framework for crypto regulation. PayPal began offering crypto assets, including Bitcoin, on its platform the same year under a conditional BitLicense.
Since its inception, the U.S. regulatory landscape for crypto ventures has become a patchwork state-by-state affair with a pervasive lack of clarity to this day. Although crypto industry regulation has historically had its gray areas, a number of U.S. regulatory bodies have come forward with various actions and enforcements. Included in the mix: the Securities and Exchange Commission’s crackdown on initial coin offerings after 2017 and the Office of the Comptroller of the Currency’s approval of U.S. national banks to offer digital asset custody services in 2020.
In terms of more localized U.S. regulation, state crypto laws can vary, resulting in different U.S. platforms opening availability for customers of some states before others, as seen with Binance.US, for example. Wyoming, in particular, has positioned itself as a region in support of crypto and blockchain industry growth on a number of levels.
The Lightning Network
For an alternative digital cash system to compete with established global payment providers like Visa or Mastercard, it must be capable of handling the numerous day-to-day transactions that permeate our lives. Bitcoin, in its current iteration, is not yet equipped to handle the thousands of transactions per second on its base blockchain that Visa can, so when developers and builders in the space began to increasingly debate the scalability of Bitcoin, a myriad of scaling solutions were proposed.
On Jan. 14, 2016, Joseph Poon and Thaddeus Dryja released a white paper detailing the Lightning Network, a layer-two scaling solution for Bitcoin in which transactions could occur over payment channels off-chain to later be settled and cryptographically verified on-chain. This would reduce the transaction load on the base blockchain while allowing for faster, cheaper transactions. The system has been live on Bitcoin’s mainnet since March 2018 and has continued to mature as a key Bitcoin infrastructure.
The Lightning Network facilitates “instant payments,” which are “lightning-fast blockchain payments without worrying about block confirmation times,” as described by its website. Bitcoin, however, has taken on more of a store-of-value role as opposed to functioning as a transactional currency, so transaction speeds and costs arguably have become less important.
Bitcoin’s main blockchain seemingly still operates adequately in tandem with big purchases if acting in a store-of-value role, as evidenced by some of business intelligence outfit MicroStrategy’s buying. In September 2020, Michael Saylor, CEO of MicroStrategy, detailed how the firm bought 38,250 Bitcoin, using the asset’s main blockchain in the process. The company, however, only sent 18 transactions on Bitcoin’s blockchain, conducting 78,388 maneuvers off its native chain.
The Bitcoin Scaling Wars
While the Lightning Network is a technical solution that could theoretically facilitate high-frequency Bitcoin transactions, there is still the notion of scaling the main Bitcoin blockchain as the network continues to grow. Between 2016 and 2017, the shareholders of the Bitcoin network — the miners, developers and companies building on it — were embroiled in a tense debate around various routes toward scalability.
While a full exploration of the Bitcoin Scaling Wars, as they’ve been called, is beyond the scope of this guide, the debate can be distilled down to two concepts: the Bitcoin block size and the distribution of power across the network.
Proponents of increasing the block size of the Bitcoin blockchain believed that increasing the number of transactions that can be validated within a block could increase the overall transaction throughput of the network. Critics countered the idea, saying that increasing the block size would greatly increase the data size of the entire network, burden the miners with even more computation demands, inhibit smaller players from effectively mining Bitcoin and centralize power among the established mining monopolies.
In two closed-door roundtables among industry stakeholders, known as the Hong Kong Agreement and New York Agreement, a consensus was reportedly set for the path forward. Yet, on August 1, 2017, the Bitcoin network forked as big-block proponents implemented changes to the codebase and began mining a new chain, now dubbed Bitcoin Cash (BCH).
The scaling debate brought to light the challenge of a decentralized network in achieving consensus around critical protocol updates when so much value is at stake. With Satoshi’s absence, it was only a matter of time until stakeholders would diverge on the Bitcoin development roadmap.
After Bitcoin forked into BTC and BCH in 2017, more hard forks of Bitcoin surfaced, including Bitcoin Gold (BTG) in late 2017. In late 2018, Bitcoin Cash itself also hard forked into BCH and Bitcoin SV (BSV).
While the standard for developing open-source software projects has been the Request for Comments proposal system that brought us the internet, the process is further complicated when the software in question is directly facilitating a global monetary system.