Unit 1: Introduction to Bitcoin Technology
In this first unit, you'll learn the basics of Bitcoin and open blockchain systems. We'll cover open, decentralized networks and how Bitcoin maintains a balance of power, what a Bitcoin actually is, the basics of network consensus, and more. Later units of the course will dive into more depth on much of what is covered here. This unit aims to provide you with a basic understanding of what Bitcoin is doing and how this open and decentralized system can function without centralized control.
After completing this unit, you will be able to explain the structure of the Bitcoin system and summarize how these components were put together to create the first open blockchain network.
Completing this unit should take you approximately 2 hours.
Upon successful completion of this unit, you will be able to:
- describe the structure of a peer-to-peer network;
- describe how Bitcoin keeps track of value on the network;
- explain how a balance of power is maintained in Bitcoin to keep the system open and decentralized;
- discuss what makes a blockchain "open"; and
- look up a transaction and explain its current status on the network.
1.1: What is Bitcoin?
Let's start right at the beginning. What is Bitcoin?
It certainly is software, but it's also more than that. It's a digital currency, but it's not like the digital currencies that came before it. Bitcoin is the first of its kind, a truly decentralized digital currency that uses economics to incentivize a decentralized ecosystem around it.
Wrapping your head around the Bitcoin ecosystem can be a challenge. We'll begin by diving into what Bitcoin is, and its history so far.
When trying to understand what Bitcoin is and does, it's helpful to start with an understanding of the context in which it was build and the problem it was trying to solve. There were many digital currencies before Bitcoin, but Bitcoin was the first decentralized digital currency. Creating a digital currency without a central authority was the problem that was being solved for.
Bitcoin was first introduced to the world On October 31, 2008, with the publishing of the Bitcoin white paper Bitcoin: A Peer-to-Peer Electronic Cash System. The paper gives insight into the motivations and architecture of the system. Much of what is covered in the paper are topics that we will dive into in later units. So, we recommend reading through it briefly now and coming back to it often throughout your studies.
1.2: P2P Networks
One of the core components of the Bitcoin system is the peer-to-peer network that it runs on. While peer-to-peer, or P2P, networks existed before Bitcoin, understanding what is happening on the Bitcoin P2P network is fundamental to understanding Bitcoin.
To grasp what is happening on the Bitcoin network, read this chapter that discusses what the computers, or nodes, on the Bitcoin network are doing. It covers node functions such as running a wallet, mining, maintaining a copy of the blockchain, and routing. We'll get more in-depth on wallets and mining in later sections. Here you'll want to focus on the last two functions mentioned, maintaining a record of all transactions made on the network by keeping copies of all blocks in the blockchain and validating and propagating transaction data.
1.3: Ledger Entries
Very understandably, given the name, when people visualize the Bitcoin network they often picture individual coins moving around a network. However, when you dig into the software you'll find that the concept of individual coins does not exist in the Bitcoin program. What does exist is software that helps the network to manage a shared ledger, the blockchain. It's a ledger that keeps a track of the inputs and outputs of transactions. The unit that the software calculates transactions in is what has become known as a "satoshi" which is 0.00000001 of what we generally think of as a Bitcoin.
This chapter covers transactions and starts by explaining transaction inputs and outputs, and unspent transaction outputs, or UTXOs.
1.4: Intro to Consensus
How does the Bitcoin network decide who has what? If no one is in control of the network, how is sharing of the ledger maintained? What happens when nodes on the network disagree about what transactions took place? Wrapping your head around consensus algorithms is one of the trickier parts of understanding how Bitcoin and other cryptocurrencies work.
This video introduces and walks through the mechanics of consensus. We'll cover some of the technical specifics of consensus (more specifically, the Nakamoto Proof-of-Work consensus) in Unit 7.
1.5: Decentralization and Balance of Power
If no one is in control of Bitcoin why can't someone take it over? With so much value in the network, there is a huge incentive to do so. Can the developers control Bitcoin? Can the miners control Bitcoin?
This video covers the 5 consensus constituencies and how it would not be to the advantage of any of them to ignore the others. You'll want to watch the section between 1:13 and 1:16.
1.6: Open Systems
It all started with Bitcoin, but since then many more versions of this technology have sprung up. Bitcoin is an open system, but many of the other blockchain-based systems that have come around since Bitcoin's invention are closed systems.
Why does this distinction matter? What makes a blockchain-based technology an "open blockchain" system? This video covers the features of an open blockchain system such as neutrality and censorship resistance and why they matter.
1.7: Exercise: Look Up a Transaction on a Blockchain Explorer
Now that you have an idea of what Bitcoin is doing, let's go see it in action! In this quick exercise, we'll learn how to use a blockchain explorer to find the status of a transaction on the network.
Study Session Review Video
Unit 1 Assessment
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Take this assessment to see how well you understood this unit.
- This assessment does not count towards your grade. It is just for practice!
- You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.