Chapter 1.
Bitcoin & the Blockchain
Bitcoin gives us, for the first time, a way for one Internet user to
transfer a unique piece of digital property to another Internet
user, such that the transfer is guaranteed to be safe and secure,
everyone knows that the transfer has taken place, and nobody
can challenge the legitimacy of the transfer. The consequences of
this breakthrough are hard to overstate.
—Marc Andreessen, co-founder of Andreessen
Horowitz[22]
Trusted third parties are security holes. Anybody in the
blockchain space, I would like to get that in their head. That’s
basically the key to the whole design.
—Nick Szabo, creator of Bit Gold (a precursor to Bitcoin)
On Halloween 2008,
[24] a computer scientist who called himself Satoshi
Nakamoto published a whitepaper introducing Bitcoin, a digital
currency that lets people exchange money without going through a bank,
credit card processor, or other financial institution.[25] Nobody knew who
Satoshi really was, but everyone on the mailing list where he announced the
paper took notice.
With a single email, Satoshi introduced the world to blockchains and
cryptocurrencies, a pair of technologies that have become household names.
But to understand those technologies, we have to start by unraveling the
mysterious scientist’s invention.
The trouble with money
Throughout most of human history, there have been two ways to hold
money: owning physical items (cash, gold pieces, cattle, salt, etc.) or having
a trusted institution like a bank or chieftain track how much money you
have.
Both these forms of money have their problems.
The shortcomings of physical, or tangible, forms of money like cash or
cows are pretty clear: it’s easy to steal, it can’t be used for online or long-
distance transactions (try buying something with cash from someone in a
foreign country), it can often be counterfeited, and it’s a pain to store and
transport.
Middleman-mediated money
To solve these problems, humanity invented money mediated by a trusted
institution like a bank or local chief. Many forms of money and payment
fall under this umbrella: bank accounts, bank loans, credit cards, checks,
and many of the other financial tools we use these days. By trusting a
central institution, or middleman, you can solve most of the problems of
tangible money:
You can trust a bank to keep your money safer than you could
keep it at home (compare a bank account to stuffing cash
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