• Cryptoasset Report
  • November 30, 2018

Bitcoin is the first digital peer-to-peer currency system that ushered in the era of cryptocurrency and blockchain.


Bitcoin is the first true digital peer-to-peer currency system and ushered in the era of cryptocurrency, blockchain, and other distributed technologies. Bitcoin was announced by Satoshi Nakamoto in November 2008, and the first block was mined in January 2009. Its code has been forked and used directly or indirectly for many other cryptocurrencies. Bitcoin remains the most prominent cryptocurrency today in terms of market capitalization, popularity, and media attention.

Today, Bitcoin is largely used as a general-purpose, borderless monetary asset. Bitcoin’s proponents in recent years have increasingly focused on its potential as a store of value rather than for its use as a day-to-day currency.. Bitcoin payments are generally processed by payment processors like Coinbase or BitPay and converted into the merchant’s local currency to avoid exchange rate volatility. Layer 2 networks such as the Lightning Network aim to facilitate scalable off-chain instant BTC payments with lower fees than the base chain transactions, while sidechain projects such as Rootstock and Liquid expand functionality to smart contracts and transaction privacy respectively.

Bitcoin History

Bitcoin was first announced on the cypherpunk mailing list by Satoshi Nakamoto on November 1st, 2008 under the subject “Bitcoin P2P e-cash paper” describing “…a new electronic cash system that’s fully peer-to-peer, with no trusted third party” along with a link to the original Bitcoin Whitepaper. Bitcoin’s genesis block was mined on January 3rd, 2009. In order to prove that Satoshi himself had not mined blocks in advance of the public announcement, the genesis block contains a headline from that day’s New York Times: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”, alluding to the philosophical motivations for a non-sovereign, peer-to-peer monetary system. Initially greeted with skepticism on the cypherpunk mailing list, Hal Finney, a noted computer scientist, early PGP developer and a regular poster on the cypherpunk mailing list took interest in the project. The first Bitcoin transaction was from Satoshi Nakamoto to Hal Finney. On December 12, 2010, Satoshi made his last post in the Bitcointalk forums, explaining that he has moved on to other things, leaving Bitcoin Core in the hands of Gavin Andressen as the maintainer and lead developer. Gavin subsequently transferred these duties to Wladimir van der Laan in April 2014.

Protocol Details

Bitcoin built on previous attempts to create a monetary system that obviated the need for a trusted third party, instead utilizing innovations in cryptography and distributed systems to maintain integrity of the ledger. These previous attempts include W. Dai’s b-money. The Bitcoin protocol records transactions by hashing them to an ongoing Proof of Work chain; the longest such chain, having the most computational weight, is considered the correct record of the ledger’s current state. In order to alter this chain, nodes would have to redo the previous Proof of Work, which is computationally expensive. This competitive system to maintain the state of the ledger eliminates the need for a third party to monitor transaction flows. The process of determining canonical chain state as that with the most accumulated hash power is known as Nakamoto Consensus. Honest miners can earn block rewards and transaction fees for being the first to find a solution to the current block’s hash puzzle.

Bitcoin transaction fees vary depending on the size and priority of the transaction. The reference implementation of Bitcoin Core has a default fee of 0.0001 BTC per KB of data. However, fees also depend on the priority of the transaction, which in turn depends on the size of the outputs and coinage of the inputs spent in the transaction. For example, if someone wants to transfer 100 BTC that has not moved in 5 years, the transaction will have a high priority and will likely be accepted by the miners without fees. However, in order to speed-up the processing, adding fees is generally advisable. During certain peak periods, it is possible that the default fees may result in large delays in the transaction getting confirmed. Several wallets are working towards a dynamic fee system that adjusts the transaction fees based on the number of pending transactions. The activation of segregated witness in August 2017 and the use of transaction batching by service providers are intended to reduce network fees

As an expressly general-purpose monetary system, Bitcoin’s possible use cases are broad and have periodically shifted in the course of finding product-market fit. These major use cases (or, in retrospect, perceived use cases) and themes include its functionality as an:

  • An inexpensive payment network, particularly cross-border remittances
  • Scarce, censorship-resistant “digital gold”
  • Fringe market currency, particularly for darknet markets
  • Reserve currency for the maturing blockchain industry

Bitcoin Mining

Bitcoin uses the SHA-256 hash algorithm, which relies on computer processing power (as opposed to memory in subsequent protocols) to find a nonce lower than a dynamic target value. Bitcoin’s PoW system was heavily inspired by Hashcash, developed in 1997 and previously used to limit email spam and denial-of-service attacks. The original whitepaper describes the hashing/mining process as 1 CPU: 1 vote in establishing consensus. Early Bitcoin mining was conducted by hobbyists using generally consumer-grade, non-specialized hardware. GPU mining emerged in 2010 and ASICs in 2013, both causing multiple orders of magnitude increases in SHA-256 difficulty, thus eliminating the possibility of non-technical or non-well-capitalized operations from participating meaningfully in Bitcoin mining. Following the development of ASICs, Bitcoin mining has become much more concentrated; innovations in ASIC efficiency are dominated by firms including Bitmain, InnoSillicon, and Canaan, and as of late 2019, mining pools controlled by Bitmain produce roughly 30% of blocks while the majority of Bitcoin’s overall hash rate comes from China. As the longest-running protocol, the significant majority of global activity surrounding mining has been Bitcoin.

Bitcoin Supply Schedule

The Bitcoin protocol mints new Bitcoin every block (approximately 10 min) and distributes 100% to miners. There was no genesis supply. The block reward, which started at 50 BTC / block at launch, drops in half every 210,000 blocks (approximately 4 years). This yields an eventual total supply of 21 million BTC, with 20,989,800 by 2052.



Management of the Bitcoin network is achieved through the complex interplay of users, miners, and developers; governance is effectively an ongoing decentralized decision-making process that is played out at the point of protocol implementation. In lieu of formal governance systems, Bitcoin empowers users with the right to fork the code (i.e., beginning a new development effort using the existing code as its starting point). If users want to run different versions of the software and can agree on a new version, they are free to do so. Providing a mechanism for the community to safeguard against unfavorable actions and serving as a catalyst for innovation, forking is central to Bitcoin governance. As such, Bitcoin’s governance model involves no other on-chain governance mechanisms or formal off-chain governance structure (other than Bitcoin Improvement Proposals or BIPs). According to the BIP process memorialized in BIP 2 and written by BIP editor Luke Dashjr:

“The BIP process does not aim to be a kind of forceful “governance” of Bitcoin, merely to provide a collaborative repository for proposing and providing information on standards, which people may voluntarily adopt or not. It can only hope to achieve accuracy in regard to the “Status” field by striving to reflect the reality of *how things actually are*, rather than *how they should be*.”

Bitcoin seeks to foster a meritocracy that is open to all, emphasizing long-term developer engagement. In practice, however, a minimal level of hierarchy is required to facilitate coordinated operations. As such, there are Github repository ‘maintainers’ who are responsible for merging pull requests, as well as a ‘lead maintainer’ (currently Wladimir van der Laan) who is responsible for managing the release cycle, overall merging, moderation and the appointment of maintainers. While individual developers within the Bitcoin Core organization are often involved in the development of protocol enhancements, there are no limitations as to who can propose changes to the codebase. The project utilizes an open contributor model in which anyone is welcome to contribute towards development in the form of peer review, testing, and patches. However, changes to the underlying codebase must ultimately be approved by the Bitcoin Core developers. Companies such as Blockstream and Chaincode Labs effectively fund the development of the Bitcoin project through research and extending the Bitcoin protocol to add new features; many key employees of Blockstream are members of Bitcoin Core, including Adam Back.

As with most open-source development, a developer’s track record of contribution is viewed in the context of domain expertise when determining the merits of proposed changes, particularly in the case of mission-critical consensus code updates. While small enhancements are typically injected into the project-specific development workflow via a patch submission to the relevant issue tracker, larger enhancements are formalized through the BIP process. Modeled after the Python Enhancement Proposal(PEP) model, BIPs have their roots in a July 2000 commit written by Barry Warsaw in which he outlines how Python enhancements should be managed. Indeed, there are many sections of the BIP framework that have been copied nearly word for word from the PEP framework, suggesting that developers have been paving the way for Bitcoin’s governance model for several years leading up to the protocol release in January 2009.

The primary difference between Python’s PEPs and Bitcoin’s BIPs relates to the removal of the ‘final authority’ construct that was included in the PEP process. In the PEP framework, a ‘BDFL’ or ‘Benevolent Dictator for Life’ is defined and refers to Guido van Rossum, the original creator of, and the final design authority for, the Python programming language. Irrespective of the decision to exclude this feature in the BIP framework, the BDFL model has worked quite well historically. Prominent examples include the creator of Linux, Linus Torvalds, and the creator of the widely-used Python data science library Pandas, Wes McKinney. In the BIP model, this final authority construct is diminished, instead appointing an ‘editor’ who fulfills administrative and editorial responsibilities without any absolute authority.

The decision to eliminate the BDFL element in the Bitcoin protocol carries profound implications. Despite the unparalleled success of Bitcoin, many stakeholders and observers argue that Bitcoin’s lack of formal governance is suboptimal given the difficulty associated with reaching consensus on proposed protocol enhancements. Most notably, Bitcoin stakeholders engaged in a contentious multi-year debate on how best to scale the network’s transaction capacity. This process ultimately resulted in the Bitcoin Cash fork, which aims to scale transaction throughput by increasing the base block size. Furthermore, some suggest Bitcoin’s governance structure has room for improvement given the absence of any institutional framework that is capable of accommodating the political and social aspects inherent in Bitcoin’s technocratic power structure. In contrast, others argue that this lack of formal governance is one of the key features that has made Bitcoin so successful, arguing that the right to fork the code is an intentional and sufficient form of governance in itself. In fact, many believe forking represents the single most important tool for guaranteeing ecosystem sustainability in the long term.