Here is the accompanying article for the video I made explaining Bitcoin.

What is cryptography

  • Science of secure communication between parties in an insecure environment
  • Key breakthroughs
    • Public key cryptography like RSA
      • A picks two prime numbers P & Q (N = PQ), hard to get P & Q from N
      • A finds D & E s.t. E * D ≡ 1 mod (P-1)(Q-1)
      • B sends M^E mod N = C to A
      • C^D mod N = M^(E*D) mod N = M (by Fermat’s little theorem, a^(p-1) mod p = 1)
    • Cryptographic hash functions like SHA256

What is currency

  • Essential criteria
    • Store of “consensus” wealth
    • Medium of exchange
    • Unit of account
    • Unforgeable scarcity
  • Examples: precious metals (gold / silver), fiat money, commodities, Bitcoin, time

Centralized control mismanages money (inflation)

  • Deflation is bad
    • Makes debt hard to pay over time
    • Incentivizes people to hoard money
  • But so is hyper-inflation
    • Price of goods become too expensive too quickly
    • People less likely to loan out money
  • Historically, government don’t have a great track record of managing inflation
World currencies
World currencies
USD track record
USD track record

What is Bitcoin

  • A network protocol to reach consensus on a sequence of transactions without trust
  • Protocol
BTC blockchain
BTC blockchain
1. Every transaction has a source, destination, timestamp, amount and signature
2. Miners listen for and group signed transactions, mine the nonce and broadcast the block
    - Nonce is a number s.t. SHA256 of the whole block results in a hash starting with 0s
3. Every block has signed transactions, a nonce, hash of previous block and a block reward
4. Everyone trusts the longest chain of blocks
    - Solves Byzantine generals' problem

Characteristics of Bitcoin

  • Predefined inflation
    • Every block, new bitcoins are created
    • That amount halves every 210K blocks
    • In total 21M bitcoins will be mined (by 2140)
BTC inflation
BTC inflation
  • Highly volatile!
BTC volatility
BTC volatility
  • Who controls it? Miners? Users? Programmers?

Role of Bitcoin in society

  • Insurance policy against today’s economic system messing up
  • Deregulates money supply and enables more economic inclusion
  • Most companies outsource their digital infrastructure, should countries outsource their monetary policy to Bitcoin?
  • If and when China’s GDP surpasses that of the US, will everything still be priced in the USD or the Yuan? Will Bitcoin be the happy neutral?

References