Defining Bitcoin
“If you can’t explain it simply, you don’t understand it well enough.” - Albert Einstein.
The month of April for The Bitcoin Curve is all about defining Bitcoin’s principles. While I won’t reinvent the wheel, it is essential that we start with a solid understanding of Bitcoin and then dive into its principles, which will form one of three critical pillars for my research moving forward.
To get to this article, I’ve spent hundreds of hours listening to lectures and podcasts, reading several books, and exploring academic literature. Bitcoin has fascinated me since 2017 and then obsessively since 2021.
And here is a quick note about how this is laid out. For elements where I’m directing you to a video or book, I’ll use hyperlinks so it’s easy to navigate. Where I’m using a reference to justify a position I’m taking, I’ve used footnotes so if you want to validate it yourself you can do so. I’m keen to hear whether you like this style, so reach out to me with feedback.
Building out your knowledge foundation
Key videos and podcasts to get you started
Introduction to Bitcoin - video by Andreas M. Antonopoulos
The Beginner’s Guide to Bitcoin - What Bitcoin Did Podcast w/ Peter McCormack
On a personal note, the What Bitcoin Did podcast has significantly impacted my journey in Bitcoin. The easiest way to describe Peter McCormack is that he is the Joe Rogan for Bitcoin, and he approaches a diverse audience with an open mind, minimal ego, and an authentic way.
Books that dive deeper
The three books below have been critical in shaping this month’s writings on Bitcoin principles and my worldview. They detail the history of innovations that led to the technology underpinning of Bitcoin, the history of money itself, and what the world would look like on a Bitcoin standard.
The Bitcoin Standard - Safedean Ammous
Broken Money - Lyn Alden
The Genesis Book - Aaron Van Wirdum
The above resources will give you a solid Bitcoin foundation, and I will reference them in the following few articles as I define Bitcoin principles. Also, I’m not affiliated with those authors and don’t receive any financial incentives through the links to the books above.
So what is Bitcoin?
Setting the scene
Before offering my definition, to give you an appreciation for what the internet currently thinks, here are a few others
“Bitcoin (BTC) is a cryptocurrency, a virtual currency designed to act as money and a form of payment outside the control of any one person, group, or entity, thus removing the need for third-party involvement in financial transactions.” - Investopedia1
“Bitcoin (abbreviation: BTC; sign: ₿) is the first decentralized cryptocurrency. Nodes in the peer-to-peer bitcoin network verify transactions through cryptography and record them in a public distributed ledger, called a blockchain, without central oversight. Consensus between nodes is achieved using a computationally intensive process based on proof of work, called mining, that requires increasing quantities of electricity and guarantees the security of the bitcoin blockchain” - Wikipedia2
“Bitcoin is a decentralized digital currency used for encrypted, peer-to-peer transactions without needing a central bank” - Coinbase3
“Bitcoin: A Peer-to-peer Electronic Cash System” - Satoshi Nakamoto4
When I first started my journey, I accepted definitions like this as a given. As I started talking to people about it, I struggled to explain Bitcoin simply to very different people. Upon reflection, that should have been obvious, given how different each of the above four definitions are (hindsight is a funny thing). That’s where the quote from Einstein at the start of this article came in for me.
I was talking about something, thinking I properly understood it. The fact that I couldn’t simply explain it showed me I hadn’t done the work to understand it fundamentally myself. Since then, it’s taken me hundreds of hours and significant thinking to realise my simple yet powerful definition of Bitcoin.
Definition
The idealist in me who assumes that we are way ahead of our global adoption journey would tell you that.
Bitcoin is a peer-to-peer digital asset
The reality is that this field is in its infancy, and until there are some widely held truths, this definition needs a level of detail that makes up for this. With that in mind, the definition I’ve settled on is
Bitcoin is a scarce, secure and decentralised digital asset
At first, you may say, “That’s way too simple to be accurate” or “You haven’t put much effort into that definition.” That statement is fair if one considers those four other definitions as a starting point. However, I will argue now that my definition covers everything that every other definition tries to convey more simply and concisely.
The Methodology
The mental model I used to work through this was the Why/How Ladder. This tool, which I picked up during my time at Telstra in strategic planning, is an exercise in understanding the most fundamental reason behind the discussed topic.
When you look at the definitions above, you realise several keywords exist. The below word cloud was what I came up with
You can then apply the Why/How ladder and cluster these words into themes. What was helpful in this exercise was that I could understand the purpose of each of these elements and the relationship between them, so if I’m ever questioned about this in the future, I’ll know exactly how to describe the detail in context.
From this point, it was easy to define Bitcoin: “Bitcoin is a scarce, secure, and decentralised digital asset.”
Breaking down the keywords
Digital
Bitcoin being digital is something that most people would agree with. But if you asked them if they could define digital and digital technologies, I expect you’d find a wide array of explanations. To ensure we were all on the same page, I turned to the academic literature. This search found that most literature focuses on digital transformation and often doesn’t define what digital is.567 However, I did find two papers that describe it well and came to this definition: digital technologies combine information (reduced to binary code), computing, communication, and connectivity technologies.89
Using that definition as a framework, we can see how all the elements line up.
Information: Blockchain, consensus, cryptography, 21,000,000
Computing: Proof-of-Work, Mining, consensus, node
Communication: Peer-to-peer, decentralised, consensus, node
Connectivity: Peer-to-peer, decentralised, node
This could be seen as going too far into the weeds. However, my approach is that if we build our classifications robustly early on, as we encounter challenges in the future, we can frame those problems better. An example could be that we are seeing challenges in the cost of mining. If technology is the problem, our minds can instantly use the above as a checklist to diagnose whether it’s a connectivity, computing, or communications challenge.
Asset
Firstly, what is an asset?
“An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits” - IFRS (International Financial Reporting Standards)10
Asset was tricky for me as we use a term widely adopted by multiple industries. It led me to explore the research literature to see what experts in their fields say. Significant literature points to Bitcoin as a high-risk asset and a new asset class.1112131415
This was also interesting, highlighting that what something was intended to be versus what it eventually becomes can be different. Satoshi Nakamoto intended this to be a peer-to-peer electronic cash system. However, given its current state of evolution, it is better described as an asset. This may change over time as we achieve price stability, allowing this to act as a medium of exchange and a form of currency. However, today, Bitcoin is a high-risk asset, an emerging asset class, and, more recently, classified as a commodity.1617
Scarcity
21 Million is something you will always hear when talking about Bitcoin, as that is the maximum supply that will ever exist.18 Why is it so important? Because it is in stark contrast to the current fiat system, in which money can be printed out of thin air.
Economics 101, supply and demand. If you have an increasing supply and static or decreasing demand, the price or value will go down19. In this system, the increasing supply without bound means it isn’t an effective store of value. This is why as you dive into this space you will also hear that inflation is theft.20 If you want to explore further, I would point you toward understanding the difference between Keynesian and Austrian economics. Our current systems are based on Keynesian ideas, and most university economic teachings are based on this. The Bitcoin ethos is founded in the Austrian school, which I subscribe to.
As an appetiser to this economic debate, the first video below gives you a simple answer to the difference between Keynesian and Australian economics. The second, with Milton Friedman, will make sense in my next two articles as he describes the changes in Keynes’s initial economic principles compared to what they have become today.
For more detailed reading (71 pages), this paper is a great resource
Returning to scarcity, this element of the definition has become increasingly important as other blockchain-based projects like Ethereum, Solana, Cardano, and meme coins like Dogecoin and Pepe have gained mainstream popularity. The challenge is that Bitcoin is being lumped into this basket and seen as the same. As Bitcoin is the only proof-of-work blockchain of note with a hard-coded cap in supply (21,000,000), scarcity becomes even more important to ensure that the rest of the blockchain and cryptocurrency market understands this differentiation.
Secure
For those old enough to have been around in the early 2000’s as the internet started to take off, can you remember whether you would use your credit card online back then? If we were honest with ourselves, most of us would have said no because we thought our details would be stolen. Fast forward 20 years, and using a credit card online is almost an afterthought as it’s become as natural as breathing for many of us.
Bitcoin is in a similar boat to credit cards on the internet in the 2000’s. While the security of this will become an afterthought, today it needs to be spelled out. The first hurdle is what the majority of people think security is vs. what it is for a blockchain platform. It is a little more abstract as you may have noticed in the word cloud above. You wouldn’t think that mining was an element of security, nor would you think consensus or proof of work were. But when you ask why against these items enough, you end up at security.
Using the Why/How ladder and asking why mining, we explore this element of Bitcoin's true purpose.
What is mining?
Mining consists of solving a cryptographic puzzle using computational power. Adding a block onto the chain can only be done once this puzzle has been solved, which occurs on average every 10 minutes.21 Solving this puzzle is what is referred to as proof of work and rewards the miner that solves this problem with a set amount of Bitcoin22
What is Proof-of-Work?
A proof-of-work puzzle effectively asserts that someone has expended a certain level of computational effort to produce a valid solution to the cryptographic puzzle.232425
Why do we use proof of work with miners?
The mining process has the right incentive mix to ensure that only valid transactions appear on the blockchain. Miners who expend large amounts of computational effort in the form of electricity and hardware depreciation are rewarded in Bitcoin. Satoshi explains why this is important in his white paper.
“If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or using it to generate new coins. He ought to find it more profitable to play by the rules, such rules that favour him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth.”26
In addition to this, we have cryptography, encryption, and consensus, which are further technology tools to cover the security basics. However, the point of this above was to highlight the less obvious security foundations of Bitcoin.
Decentralised
Peer-to-peer and decentralised was another one where I hit a stumbling block in my thinking as they are related but two distinct concepts. This author on Quora has one of the best descriptions of what they are and how they are different.
“Peer-to-peer is a network architecture in which each node in the network is both a client and a server. This means that each node can share resources and communicate with other nodes directly, without the need for a central server.
Decentralized means that no single entity has control over the system. Instead, the system is governed by a consensus of the participants in the network. This makes decentralized systems more resilient to failure and attack.
P2P networks can be either centralized or decentralized. For example, the BitTorrent file-sharing network is a decentralized P2P network, while the Napster file-sharing network was a centralized P2P network.
Decentralized systems can also use non-P2P network architectures. For example, the Bitcoin blockchain is a decentralized system, but it is not a P2P network in the traditional sense. Instead, Bitcoin nodes communicate with each other using a gossip protocol.”27
The key to my choice here again was timing. Bitcoin today will be different from Bitcoin in the future. So, instead of defining what it could be, I’m interested in defining what it is now but with an eye on the future. To that end, the ability for bitcoin to be a peer-to-peer medium of exchange (or money) is still years away from reality. This cannot happen until bitcoin hits the following milestones
Is widely adopted and accepted in a geography. For money to be a medium of exchange, it must be adopted by a majority of merchants in a geography. This will require both bottom-up acceptance by the people and top-down acceptance by governments.
It needs to have a stable price. While Bitcoin is going through its adoption journey, its price is incredibly volatile, which is why it’s a high-risk asset. For money to be effective, it needs price stability.
It is clear that Bitcoin isn’t a good form of money today. While anyone utilising the Bitcoin network can send their Bitcoin freely to whoever they want, this is still at such a small scale that it isn’t meeting Satoshi’s vision for Bitcoin.
While Bitcoin is technically both Peer-to-peer and decentralised, I’m forcing myself only to include one as they are similar in their impact for my definition. Noting this and what has been discussed above, Bitcoin is a high-risk asset. For me, in this context, I believe decentralisation has more meaning for most people.
Conclusion
Again, I’ll leave you with my definition of bitcoin.
Bitcoin is a scarce, secure and decentralised digital asset
Firstly, this is the definition for the point in time now, so it is very relevant for 2024. However, as one of the core premises of this publication is that we cannot be complacent, I’m almost certain that this definition will evolve as Bitcoin evolves as more of the world’s population adopts this digital asset. This definition also de-emphasises the peer-to-peer element that brings the sending and receiving of Bitcoin between people. I see this as a necessary inclusion into the future as this asset matures and the world is ready for the next step, which is bitcoin as a currency.
Secondly, this article was meant to get us all on the same page about how I view Bitcoin and what I define it as. It ensures you know the lens I use to understand subsequent articles better. If you are new to this space and start to dive in a little deeper, I hope you challenge this definition as you learn more, and I’d love to hear from you if you come to something different. And this is another mantra in the Bitcoin space: “Don’t trust, verify”. If you live by that ethos in your journey as I do, I hope you verify the above and challenge where you find contradictions and errors.
Finally, in the next article, I will elevate this beyond a definition to the foundational principles underpinning Bitcoin. Bitcoin's principles are a key pillar of my holistic thesis, so hopefully my perspective on this will be a unique contribution to the space.
If you’ve made it this far, thanks so much for the support this early into the journey. I look forward to seeing you in the next one.
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