Bitcoin is hard to explain in a book-like manner. Start from A and go to Z. At least I think so. Some things just click immediately and others are left hanging until they click too in a later point of time when knowledge builds up. I hope these 6 random ideas about Bitcoin click with you in some way. Enjoy!

Digital scarcity

Everything digital is easily replicated. Until Bitcoin. One of the unique propositions of Bitcoin is its scarcity. Just like gold. How is that achieved, though:

  • By the code. Bitcoin is artificially capped by the software code that runs Bitcoin. There can only be a little less than 21 mln. Bitcoins ever. Sounds like a magic number? It is. It is a widely accepted magic number.

  • Consensus. This is more important. Code can easily be changed, consensus not. 21 mln. is what it is because all parties have agreed to accept that as a Bitcoin cap. Simple as that. Any attempt to change that would probably fail or result in a Bitcoin fork.

As long as sufficient enough parties want to accept Bitcoin’s 21 mln. cap, Bitcoin will be scarce.

Consensus

Consensus are all the rules that define what is Bitcoin and how does it operate.

Bitcoin’s mining reward goes down by half every 200 000 blocks (~ 4 years)

One block is mined ~ every 10 mins.

Bitcoin number is capped at ~ 21 mln. coins.

All these are examples of consensus rules. They are defined with code. They are widely accepted and are extremely hard to change. People like and value Bitcoin, because of the consensus rules. They are the true value. Everyone can make up a digital asset with their own consensus rules. The trick is to make up such rules that people would value. Not easy by any means.

Checks and balances

Bitcoin ecosystem is a hostile one. You have miners, users, exchanges, full nodes as main parties. Some of them would gladly break the rules and profit more if they can. Still they don’t do, although there is no super authority to watch them. Why?

Checks and balances. This is article on its own, but let me give a trivial example: If a miner mines a block that has higher reward than the rules dictate, this block won’t be accepted by full nodes and users so the miner will lose all the resources to mine the block and gain nothing. If a miner cooperates with full nodes to accept the block, that means a fork effectively. Will the fork have value? Probably not. Again, a lot of resources wasted, dubious reward. 11 years in, this system of checks and balances has not failed ONCE. In a hostile, open system as Bitcoin, this is YUGE. Something un achieved before.

Forks

Bitcoin fork is nothing else than another digital asset with its own consensus rules and ecosystem of parties willing to accept them.

They can be valuable or just trash. In reality so far is that 100% of them are trash. Why? Their consensus rules are inferior to Bitcoin’s consensus rules and people stick with Bitcoin, which defines value.

Scalability

Bitcoin is not designed and can not be scalable. To remain decentralized and to retain the system of checks and balances, the underlying blockchain can not grow exponentially (more on that in another article).

So Bitcoin is not good enough for everyday transactions. It is good for larger ones that can bare the fee and for store of value. Many see Bitcoin as payment system and say things like “Paypal is way cheaper/faster/convenient”. And they are right. However, the elephant in the room is store of value in my opinion. That’s where it really shines. Scalability for payments will come from protocols on top of Bitcoin like lightning network. A long way to go though, don’t expect mass coffee buying with crypto in the next couple of years. It will come though.

## Open source

Bitcoin is open source. Everyone can read the code, propose changes and make changes. Everyone in the world. And that is easy. It is hard to make others accept your changes (consensus, you know).

Open source software is very robust when the community is there. The collective wisdom is painfully slow at times but is superior to everything else in terms of end result.

Good example here is Linux vs Windows. Linux rules over the server world. Majority of servers in the world run some kind of Linux and not Windows. How open source system with volunteers, working for free won over Microsoft’s money, talent and connections? As I said, open source systems are very robust and the collective wisdom compressed in them is superior to everything else.

So how does that help Bitcoin? I think the effect is huge. You can think of Bitcoin as the whole world’s effort to create sound digital money. Many smart people iterate on it day in day out, motivated by the success of the protocol. That is huge.