What Bitcoin Achieves
As a currency, Bitcoin solves several problems that legacy currencies faced. The Bitcoin network allows for peer-to-peer payments without requiring a trusted third party. Additionally, Bitcoin solves the Byzantine Generals Problem by implementing a Proof-of-Work mechanism and maintaining its data on a decentralized ledger so that all members of the network can agree on a single state of the ledger.
Bitcoin’s Technological Prerequisites
The whitepaper that put forth these solutions was proposed in 2008, prior to Bitcoin’s creation in 2009, but the ideas and technologies employed for its creation had been in development for several decades prior.
Bitcoin’s process for ensuring that only the rightful owner can spend their bitcoin, the Elliptic Curve Digital Signature Algorithm, relies on elliptic curve cryptography. The idea and mechanics of elliptic curve cryptography were proposed by mathematicians in 1985.
Another crucial piece of Bitcoin’s technology is Proof-of-Work. This technology is the backbone of Bitcoin’s mining operations, a necessary component of the Bitcoin network’s functionality. Proof-of-Work systems were developed progressively throughout the 1990’s with the biggest leaps being Wei Dai’s b-money in 1998 and Adam Back’s Hashcash in 1997.
➤ Learn more about how Bitcoin uses cryptography.
Bitcoin’s Conceptual Prerequisites
In addition to technological components, Bitcoin employs several economic ideas that were developed beforehand.
The idea of an anonymous payment network was initially popularized by DigiCash in 1989. Over the following decade this idea was iterated on several times, with DigiCash rebranding to eCash. However, both of these projects were designed to facilitate anonymous transactions of existing fiat currencies.
Virtual economies, which created and employed their own currencies, were introduced by video games such as RuneScape and World of Warcraft in the early 2000’s. The persistent value of these virtual currencies served as an important proof of concept as to what could give a currency value.
Liberty Reserve, founded in 2006, popularized the idea of anonymously processing payments outside of the legacy financial system for the broader market of global currency, taking the idea of video game’s virtual currencies to the global scale. Liberty Reserve was dissolved in 2013 as a result of legal issues.
Bitcoin’s Innovations
In addition to utilizing the best parts of past projects, Bitcoin implements innovations that were uniquely its own. Bitcoin’s blockchain was the first successful implementation of an electronic currency that didn’t rely on a centralized ledger.
In Bitcoin’s whitepaper, Satoshi Nakamoto cited this centralization as a critical flaw in existing electronic payment systems.
— Satoshi Nakamoto discussing Bitcoin with the P2P Foundation Forum Post
The decentralized ledger removed the need for a trusted third party to control the currency, instead letting it be governed by every actor in the network. Operating on a decentralized ledger required a solution to the Byzantine Generals Problem to ensure that users could agree on a single state of the ledger and thus avoid double spends and other invalid transactions.
➤ Learn more about the Double Spend Problem
To solve this problem, Bitcoin deploys a Proof-of-Work mechanism. By using an adapted version of reusable Proof-of-Work, Bitcoin is able to reach consensus without the need for intervention or dispute resolution from a central authority. Although prototypes for this concept were proposed in 2004 by Hal Finney, Bitcoin was the first project to successfully implement the idea.
Another factor that allows the Bitcoin network to successfully operate without the oversight of a central authority is Bitcoin’s difficulty adjustment. This novel concept allows the Bitcoin network to automatically adjust the degree of difficulty associated with mining a single block.
Difficulty adjustments are made based on the speed at which miners are creating new blocks. By adjusting the difficulty of mining, Bitcoin can ensure new coins are mined at the predetermined rate, regardless of the amount of computing power participating in the network. This automatic adjustment makes the network incredibly robust and scalable, without concerns of hyperinflation or a lack of network security.
Finally, Bitcoin introduced the concept of blockchain immutability to ensure that past transactions on the network could not be tampered with. Every new block is appended to the end of the existing blockchain, further cementing past transactions.
The only way to edit a past transaction would be by rewriting the entire block containing the transaction and all subsequent blocks. Additionally, the malicious actor would then need to create additional blocks to append to the edited block. This actor would need to create new blocks at a higher rate than the rest of the entire Bitcoin network in order to catch up and create the new longest chain.
➤ Learn more about Bitcoin’s security.
Key Takeaways
- Bitcoin implements several technologies developed by previous projects.
- Prior attempts at digital currency laid the groundwork for Bitcoin’s novel implementation of established economic principles.
- Bitcoin’s creation required the invention of new technologies.
