Understanding Bitcoin: Cryptography, Engineering and Economics

CHAPTER 1Foundations

There has been ample media coverage of Bitcoin, and many public figures have been compelled to state their opinion. As Bitcoin is a complex topic, covering cryptography, software engineering and economics, it is difficult to grasp its essence and implications with only a superficial look at it. Thus some commentators might not have a clear picture of how it works and the implications. It is the goal of this book to equip the reader with the knowledge to evaluate the merits of this technology.

Figure 1.1 summarizes some misconceptions around Bitcoin.

FIGURE 1.1 What Bitcoin is (and isn’t)

Bitcoin is a decentralized digital currency. This means there is no person or institution behind it, either backing it or controlling it. Neither is it backed by physical goods, such as precious metals. This might seem counter-intuitive at first glance: how could it exist if no one controls it? Who created it then? How did the creator lose control over it?

The answer to this seeming paradox is that Bitcoin is just a computer program. How exactly this computer program works is the subject of the second part of this book. The program has a creator (or creators) but his identity is unknown as he released the Bitcoin software using what is believed to be a pseudonym: Satoshi Nakamoto. Bitcoin is not controlled in a tight sense by anyone. The creator did not lose control ...