Blockchain Blog

How Bitcoin and the block chain are a transformative technology

For the past 25 years, great thinkers and innovators in the cryptography field have been looking for solutions to create virtual currency. Reasons for this have varied but the promise of bringing digital efficiencies to legacy systems has been a motivating factor. There have been substantial challenges but incredible progress has been made quickly.

Recently we talked about the top reasons why you should use bitcoin. But, do you know why bitcoin is so game changing? Today we will talk about why and how it is improving the world around us, and how bitcoin solves problems that once were thought to be unsolvable.

**Bitcoin is a clever and genius puzzle **

Since the early 1990’s, it was known that there was strong cryptology to support digital exchange securely and privately, but nobody knew how to implement it. Because of such of an interest and the technology becoming possible to do it, a movement was created by the “Cypherpunks.”

*“The technology for this revolution–and it surely will be both a social and economic revolution–has existed in theory for the past decade. The methods are based upon public-key encryption, zero-knowledge interactive proof systems, and various software protocols for interaction, authentication, and verification. The focus has until now been on academic conferences in Europe and the U.S., conferences monitored closely by the National Security Agency. But only recently have computer networks and personal computers attained sufficient speed to make the ideas practically realizable. *

And the next ten years will bring enough additional speed to make the ideas economically feasible and essentially unstoppable. High-speed networks, ISDN, tamper-proof boxes, smart cards, satellites, Ku-band transmitters, multi-MIPS personal computers, and encryption chips now under development will be some of the enabling technologies.”Timothy C. May, 1992.

What was the right structure, and how could this be accomplished? How would it impact society? Would it be accepted and used? These are just some of the questions that circulated within cryptography email lists back during the 1990’s.

Over the decades, there were several attempts at creating digital currency. In 1998, Wei Dai wrote about b-money, a scheme for a group of untraceable digital pseudonyms to pay each other with money and to enforce contracts amongst themselves without outside help. In 2002, Adam Back wrote about Hashcash, a proof-of-work algorithm including time-stamping, which has been used as a denial-of-service counter measure technique in a number of systems. In 2005, Nick Szabo wrote Bit Gold, a protocol whereby unforgeably costly bits could be created online with minimal dependence on trusted third parties, and then securely stored, transferred, and assayed with similar minimal trust. All of these attempts were precursors and building blocks to what we know today as bitcoin.

Putting the puzzle together

In 2007, Satoshi Nakamoto began building the Bitcoin protocol, and by 2008 the Bitcoin whitepaper was published. One could say that Nakamoto stood on the shoulders of giants, taking all the innovations from the past 25 years and applied it to bitcoin in a way that was delicate and well thought out. In January 2009, the very first block of the block chain occurred, the Genesis Block, and the rest as they say, is now history.

![Five dimensional block puzzle via Wikipedia](http://blog.blockchain.com/content/images/2015/05/block-puzzle1.png)
Five dimensional block puzzle via [Wikipedia](https://en.wikipedia.org/wiki/N-dimensional_sequential_move_puzzle)
**Solving the double-spend problem**

In the past, a major obstacle facing anyone that tried to create digital currency was double-spending, which couldn’t be overcome, making digital money impossible. How can you enforce a digital file to not be copied over and over? If someone tries to send a bitcoin transaction (digital data) to two different recipients at the same time, this is double-spending (see our common terminology). However, with bitcoin, once a transaction is confirmed, it’s nearly impossible to double-spend it. The more confirmations that a transaction has, the harder it is to double-spend the bitcoins. By solving the double-spend problem, digital currency has now become possible.

The block chain

Another major breakthrough with bitcoin is the block chain. In the block chain, transactions are part of blocks. Each block refers to a previous block adding to previous proofs-of-work, which forms a chain of blocks. Once a chain is formed, it confirms all previous bitcoin transactions and secures the network. Because of the proof-of-work and the block chain, this has created an immutable open and decentralized ledger. This not only helps solve the double-spending problem, but it opens the doors for a myriad of powerful applications. There hasn’t been a time in human history where there was a decentralized global ledger that couldn’t be changed. Things such as smart contracts and proof-of-existence are now possible, thanks to the Bitcoin network and its public ledger. With this technology, history cannot be manipulated or rewritten.

Byzantine Generals Problem

In 1975, the Two Generals’ Problem (Byzantine Generals Problem/BGP) was discovered, which in computing illustrates the pitfalls and design challenges of attempting to coordinate and decide an action by communicating over an unreliable link; every general must agree on a common decision. The problem is complicated by the presence of traitorous generals who may only cast a vote for a suboptimal strategy. For instance, if nine generals are voting, four of whom support attacking while four others are in favor of retreat, the ninth general may send a vote of retreat to those generals in favor of retreat, and a vote of attack to the rest. Those who received a retreat vote from the ninth general will retreat, while the rest will attack (which may not go well for the attackers). Bitcoin solves the BGP through the use of proof-of-work and the block chain. Satoshi Nakamoto said in an email exchange in 2008, “the proof-of-work chain is how all the synchronization, distributed database and global view problems you’ve asked about are solved,” when referring to the BGP.

**No Trusted Third Party (decentralized) **

Through the use of the Bitcoin network, which is peer-to-peer, there is no central authority that needs to oversee the network to police it; think about the double-spending problem and how Bitcoin solves it. In a conventional financial model, we are trusting central banks to manage our wealth and protect us from fraud. With the Bitcoin network, proof-of-work and the block chain, third-parties are no longer necessary as the network is completely decentralized and void of any one entity controlling the network.

![A centralized and decentralized network comparison by Ioptio](http://blog.blockchain.com/content/images/2015/05/bitcoin-decentralized.png)
A centralized and decentralized network comparison by [Ioptio](https://github.com/ioptio/design/blob/master/networks/networks.png)
**Privacy**

In its simplest form, bitcoin is just like digital cash. When you tender cash, there is no person to tie the cash to. However, since bitcoins are transferred via a globally accessible open ledger we call the block chain, transactions are visible to everyone. Being anonymous is a bit of a myth, since tracking transactions via the block chain is possible. Despite the myth of absolute anonymity, significant layers of privacy are still achievable. As a matter of fact, bitcoin is much safer to use than credit cards because merchants don’t need to collect any personal details during a transaction. In other words, bitcoin actually provides the general population with an avenue to pursue a new method of privacy.

“Privacy can still be maintained by breaking the flow of information in another place: by keeping public keys anonymous. The public can see that someone is sending an amount to someone else, but without information linking the transaction to anyone.”Satoshi Nakamoto, 2008.

![Privacy Model from the Bitcoin Whitepaper, provided by the Nakamoto Institute](http://blog.blockchain.com/content/images/2015/05/bitcoin-privacy-diagram.png)
Privacy Model from the Bitcoin Whitepaper, provided by the [Nakamoto Institute](http://nakamotoinstitute.org/bitcoin/)
**Remittances**

Another way bitcoin is breaking barriers is through remittance. Over $120 billion in remittances were sent from United States to other countries in 2012. Think about anytime someone wants to send money from one country to another, how much time, energy, and money on both ends of the remittance, it takes to make get money from Point-A to Point-B? Bitcoin is improving remittance globally by having extremely low fees and instant transfer of value. Gone are the days of paying exorbitant fees to send money abroad and having to wait days to get your money. Bitcoin simplifies the experience, makes it much faster, and requires no middle-company to authorize, oversee and release the payment.

There’s a reason why so many people are passionate about bitcoin and block chain technology. It’s never been done before, it solves problems never solved before. It creates new jobs, and has created a new economy. We’re all pioneers in a new era, that is being written now.

New to these ideas? Check out some of our tutorials. If you have a specific bitcoin topic that you’d like us to cover, get in touch!