The supply of bitcoin is capped in the long run.

Bitcoin halves the block reward every 210,000 blocks and stops block rewards entirely after 21 million coins have been mined, in order to keep the supply of the currency relatively fixed in the long run. The reasoning here is that, while inflation is good in the short-term because it serves as a distribution mechanism for the coin and incentivizes more people to participate in validating the blocks, in the long run, after the currency is diffused, the incentive is no longer needed.

There are lots of arguments for and against inflationary features of coins, and some other coins have chosen to implement different inflationary structures, but this was the choice bitcoin in particular made.

Validators and Proof-of-Work

Validators are actually miners, and they aren't chosen at random.

Now we know that there's this block chain, and that new blocks can only be added by "validators" that are selected every ten minutes. These validators are knows as miners.

But how does the bitcoin protocol select who gets to validate the new blocks that are being created, especially given that the network is completely decentralized?

This brings us to the second incredible innovation that bitcoin made, a system called Proof-of-Work (PoW for short). Bitcoin selects the next miner based on having everyone solve an incredibly computationally expensive mathematical puzzle (technical details at the bottom). Every time a block is created, a new mathematical puzzle that should take approximately ten minutes to solve, is assigned to everyone in the network. After the puzzle is out there, every miner runs ...

So far we have covered:

• Transactions are bundled into blocks
• Blocks are signed by the validators
• There's a limited block size and block time (rate at which blocks can be created).

The next thing to understand is that blocks are also chained.

Transactions are approved in units called "blocks."

The bitcoin protocol validates or "confirms" transactions in chunks called "blocks." It specifies that blocks can be no bigger than 1 megabyte, which means the number of transactions each block can contain is "capped." Not only that, but blocks can only be created once every ten minutes (on average).

Going back to the concrete example from earlier, it'...

The first thing to remember is that bitcoins don't actually exist. Note that nothing in the earlier example requires real-world assets or paper money in order to function — everyone's money is just information listed on the chalkboard. This is actually similar to how modern digital banks work. The savings in your account aren't backed by gold or anything real, they're just numbers in a database, and if the bank lost that data nobody would know how much money you had. Similarly, when you "buy" bitcoin, you're not getting anything real — rather, you're just increasing your balance in the global bitcoin database (the decentralized ledger), and decreasing your balance in the traditional banking database. This is a critical point in understanding how bitcoins (or any other cryptocurrencies) are stored.

Addresses as Wallets

Addresses are public keys and they're like wallets.

In the concrete example we had earlier, everyone sto...

Enter bitcoin.

At a high level, bitcoin describes what's known as a consensus protocol that allows for the successful implementation of a decentralized ledger.

What is a consensus protocol?

It's a set of rules that you and everyone around you follow so that everyone can agree on which transactions are legitimate, and which aren't. American democracy, for example, can be thought of as a very complicated and very slow consensus protocol. The rules described in the constitution and all the other legislative documents dictate what laws are created, and ultimately lead to a population-wide "consensus" on what constitutes proper behavior and what doesn't. The bitcoin protocol is effectively a very, very clever constitution for transactions that allows us to implement a decentralized ledger.

So, how does bitcoin s...

The big insight that bitcoin makes here is that the ledger doesn't have to be centralized.

Going back to the town example, imagine that instead of having a chalkboard ledger in the middle of the town, you instead had everyone keep an up-to-date notebook containing the balances of themselves and everyone else in the town. Then, if you wanted to pay someone, you'd have to update the balances of yourself and your counterparty not only in your own personal ledgers, but you'd also have to update them in everyone else's ledgers as well. If you could do this, you'd have what would collectively be called a decentralized ledger, consisting of all the information across everyone's notebooks.

To understand how the Bitcoin protocol is able to work in a decentralized fashion, without any middlemen, let's take a simple example of how modern banking institutions function today.

The Town Ledger

Imagine you live in a small town where everyone starts off with $100 in cash in the form of paper money. Whenever you want to pay someone, you give them some of your paper money, and whenever you get paid, you receive paper money. The paper money serves as a basic form of accounting and makes intuitive sense. But the big insight that modern finance makes here is that you don't actually need the paper in order to do the accounting.

Imagine that there was a big chalkboard in the center of the town that kept track of everyone's cash balance. We'll call this chalkboard the ledger. In particular, the ledger has everyone's name with their balance in dollars right beside it.

There are still several things about the origin of Bitcoin that are quite mysterious...

Nobody knows who created it.

Even to this day, the jury's out on who wrote the initial paper and software. We just know his alias: Satoshi Nakamoto. There's a lot of speculation about who did it — check out the top candidates on Wikipedia. Most of people on the list are just the earliest adopters who admit to having downloaded Satoshi's software in the early days, but when you ask any of them if they're actually Satoshi, they all refute the possibility pretty firmly and pretty believably.

Satoshi Nakamoto

In late 2008, a person with the alias Satoshi Nakamoto published a technical white paper describing the bitcoin protocol to a cryptography mailing list.

A few months later, in early 2009, he released a full, open-source implementation of the protocol described in the paper.

Current System

Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. — Satoshi Nakomoto

Over the last decade, we have seen a huge rise in e-...