From Basics to Advanced: A Comprehensive Beginner's Guide to Bitcoin
New to Bitcoin? Want to learn about Bitcoin but don't know where to start? This comprehensive guide has everything from basics to advanced knowledge, making it easy for beginners to get started.
As I begin my first Bitcoin post, my goal is to provide a comprehensive overview of this complex subject in the shortest amount of time practical. To truly understand Bitcoin, we must challenge our assumptions about money, human incentives, and value systems. I know that is a monumental challenge in itself. Grasping the intricacies of Bitcoin is no easy feat, as it demands overcoming a learning curve that might sometimes feel steep. But with dedication and the right resources, I believe anyone can navigate this fascinating world and appreciate its transformative potential.
As Bitcoin challenges the traditional fiat system, misconceptions and negative framing from its opponents can make understanding it difficult. To truly grasp Bitcoin's mechanics and potential societal impacts, we must deconstruct and reconstruct our understanding of money, human incentives, and value systems. While this may seem daunting, it is essential to fully appreciate Bitcoin's transformative nature and potential to revolutionize our world.
As a writer, I am committed to examining Bitcoin through a humanist lens that prioritizes human rights and beliefs rather than solely focusing on its use as an investment vehicle or popular "moon boy" narratives. By emphasizing Bitcoin's transformative potential and its ability to reshape human incentives through game theory modelling, selection pressures for adoption, and ongoing incentives for adoption, I aim to educate my readers with care, patience, and humility.
Bitcoin's invention can be considered consequential to the human species, akin to pivotal moments such as discovering fire, the agricultural revolution, the iron age, the invention of the printing press, the industrial revolution and even the internet itself. The ongoing evolution of human rights values and narratives is shaped by historical events and broader currents that drive human progress. Bitcoin's future potential is part of this unfolding story.
With this framework in mind, I invite readers to explore the intriguing world of Bitcoin with me, delving into its technology, applications, and potential impacts on human rights, ethics, and society.
So let’s get into it!
Companion Essays
This is the first essay in a series introducing Bitcoin to Humanist Activists. The other essays in the series are available here.
Bitcoin is a technological innovation that has received widespread attention for both good and bad reasons. On the one hand, Bitcoin has been hailed as a revolutionary system that could disrupt payment networks, make digital transactions more efficient, reduce fees, and give people more control over their money. However, Bitcoin has also been accused of enabling illicit activity due to its pseudonymity and decentralization, and its volatile price fluctuations and its energy consumption have also drawn criticism.
Given these conflicting perspectives, it can be challenging to determine what to make of Bitcoin and whether it has value or purpose. Rather than accepting extreme or misleading positions, it is vital to understand the nuances of how Bitcoin works, and its potential positive and negative consequences. By learning about the technology and applications of Bitcoin with an open and objective mindset, we can explore its possibilities for empowering human rights and promoting human flourishing while still acknowledging and addressing its risks and downsides.
As an aspiring Humanist educator seeking to share knowledge with the patience and care it deserves, I have found the Khan Academy videos on Bitcoin to be an excellent resource to begin learning about this topic in a clear and engaging yet comprehensive way. The series of nine short videos explain how Bitcoin works on a technical level with analogies and simplified terms, as well as how it can be used in practice and its potential impacts on society. By summarizing and reflecting on these videos, my article aims to equip readers with a solid understanding of Bitcoin and critical perspectives on its promises and perils so that everyone can participate in informed discussions about this crucial and fascinating technology.
Before we dive into the videos, their summaries and reflections on each Khan Academy video, it is essential to note that these videos were created in 2013, which means they are a decade old. By acknowledging the dated nature of the videos, I aim to maintain the accuracy and relevance of the information presented in this article. While the fundamental concepts and mechanics of Bitcoin remain largely the same, some specifics, such as prices, prominent players, and new technological developments, may have evolved since the videos were produced. As we go through the videos, I will also address these changes and provide updates where necessary to ensure a comprehensive understanding of Bitcoin's current landscape.
The world of Bitcoin can seem intimidating when bombarded with unfamiliar jargon like "decentralized digital cryptocurrency" and "blockchain consensus mechanisms." However, the Khan Academy videos break down these complex concepts into easily understandable components. So, let us explore together how Bitcoin works on a technical level, its possible applications, and what impacts it may have—positive and negative—on human rights, ethics, and society. With this foundation of understanding, we can assess the technology of Bitcoin and its role in the future with open-mindedness and nuance.
Lesson 1: What is it?
In the first video of the Khan Academy series on Bitcoin, the main focus is on providing a general understanding of what Bitcoin is and its unique characteristics compared to other forms of electronic payment systems. The video explains that Bitcoin is an electronic payment system that enables two parties to transact over the internet using a series of numbers with specific mathematical properties that make it difficult to defraud the system. The video also highlights some of the reasons why people use Bitcoin, such as privacy, openness, and decentralization.
The main takeaways discussed in the video are:
Bitcoin transactions can be conducted without revealing one's real-world identity, offering a degree of privacy.
The system is open to anyone with an internet connection, making it accessible to a wide range of users.
Bitcoin is decentralized, meaning no central authority or bank can directly control the money supply or see your assets.
This decentralization aspect allows transactions to occur without going through a third party, resulting in certain benefits:
No one entity can reverse a transaction.
No one entity can control the money supply.
It's important to note that since the video's creation in 2013, the Bitcoin landscape has considerably evolved. Over this time, the value of Bitcoin has significantly fluctuated and today sits at $27,000 of this writing, and more merchants and services now accept Bitcoin as a form of payment. Mt. Gox, the exchange mentioned in the video, is no longer an operational bitcoin exchange. Mt. Gox was a Tokyo-based bitcoin exchange that was once the biggest in the world. However, Mt. Gox declared bankruptcy in February 2014 after losing approximately 850,000 bitcoins, valued at roughly $450 million at the time, in a cyber attack. The exchange eventually failed, leaving many users unable to access their money. While efforts have been made to retrieve the lost bitcoins, the vast majority are still missing.Â
Also, developments in the Bitcoin space have led to more awareness and understanding of the technology. Despite these changes, the fundamental concepts and mechanics discussed in the first video remain relevant for understanding Bitcoin today. The subsequent videos in the series aim to walk viewers through the underlying mechanics of Bitcoin transactions and how they're validated, despite the decentralized nature of the system.
Lesson 2: Overview
In the second video of the Khan Academy series on Bitcoin, Sal Khan delves into the fundamental concepts and components of Bitcoin. This digital monetary network operates independently of central banks or governments. The video provides an accessible explanation of the decentralized nature, limited supply, and technological underpinnings of Bitcoin.
The key points discussed in the video include the following:
Bitcoin is a decentralized, peer-to-peer cryptocurrency that operates independently of central banks or governments, making it resistant to censorship and fraud. The word cryptocurrency comes from Bitcoin's use of cryptographic techniques in its implementation.
The blockchain technology that underlies Bitcoin serves as a public ledger of all transactions.
Bitcoin addresses the issue of double spending, a potential problem in digital currencies, by confirming transactions through a consensus mechanism involving miners.
The mining process, which involves miners competing to solve complex mathematical problems to add transaction blocks to the blockchain and receive rewards in newly created Bitcoins and transaction fees.
The pseudonymous nature of Bitcoin transactions offers a degree of privacy while still allowing for tracking transaction patterns and user identification.
Digital wallets are used for storing and managing Bitcoin, with public and private keys for Bitcoin addresses and transaction signing, respectively.
The example provided in the video features two characters, Alice and Bob, illustrating a Bitcoin transaction where Alice wants to send 30 of her 50 Bitcoins to Bob with a transaction fee of 2 Bitcoins. It's worth noting that the value of Bitcoin has risen significantly since the video was produced, and the amounts mentioned are now considered very expensive. On that note, I would like to highlight that Bitcoin is highly divisible, with 8 decimal places, allowing for fractions in transactions. The smallest unit of Bitcoin is a "Satoshi," equal to 0.00000001 Bitcoin. The limited supply of Bitcoin is capped at 21 million coins, which programmatically enforces scarcity and contributes to its value. Over time, smaller and smaller amounts of Bitcoin are needed for purchases and fees as Bitcoin's price appreciates over time. As a function of this dynamics, things get cheaper and cheaper while your purchasing power increases proportionally.Â
In this video, the focus is on understanding the basic functioning of the Bitcoin network and its potential to facilitate transactions worldwide. As an alternative to traditional banking systems, Bitcoin offers a level of freedom, privacy, and accessibility that can empower individuals and communities, especially those in regions with limited financial services or facing censorship. By learning about Bitcoin's fundamental mechanisms, one can better appreciate how this digital currency can promote financial inclusion and uphold human rights across the globe.
Lesson 3: Cryptographic hash functions
The third video covers cryptographic hash functions, which are essential building blocks for many cryptographic algorithms and protocols. They are used in digital signatures, message authentication, pseudorandom number generation, and password security applications. The video touches on some of the more common cryptographic hash functions to create a context for Bitcoin's hash function of SHA-256.
Cryptographic hash functions take an input message of arbitrary length and apply mathematical transformations to produce a fixed-length output called a digest. These functions should have specific properties to be suitable for cryptographic applications:
Computationally efficient: Fast to compute the output from a given input.
Collision resistance: It should be difficult to locate two distinct inputs that produce the same output.
Hiding information about inputs: It should be difficult to glean any useful information about the input from the output.
Well-distributed output: The output should look random and unrelated to the input.
The video aims to provide an understanding of cryptographic hash functions without delving into the mathematical details. It is essential to note that these properties are interrelated and cannot be mathematically guaranteed. Cryptographers rely on these functions' long-standing use and continued analysis to ensure their security. A decade on, the video remains as relevant today as when it was made.
Lesson 4: Digital signatures
This video from Khan Academy focuses on digital signatures and their role in securing digital transactions, particularly in the context of Bitcoin. The narrator explains the concept of digital signatures, comparing them to traditional handwritten signatures, and outlines how digital signature schemes like RSA and DSS work.
This video discusses several vital concepts surrounding digital signatures and their importance in securing digital transactions. The main takeaways outlined below provide a clear overview of how digital signatures work, their various components, and their crucial role in Bitcoin:
Digital signatures are mathematical mechanisms that combine a public sequence of numbers with a digital message, serving as the electronic equivalent of a physical signature.
Well-known digital signature schemes include RSA (Rivest-Shamir-Adleman) and DSS (Digital Signature Standard).
In a digital signature scheme, a user generates two keys: a private signing key (SK) and a public verification key (VK).
Signing a message involves applying a mathematical transformation to the message and the private signing key, producing a unique signature.
Verifying a signature requires the original message, the signature, and the public verification key, but not the private signing key.
Digital signatures differ from handwritten signatures because they change depending on the message being signed.
Cryptographic hash functions are often used in digital signature schemes to simplify the process and improve security.
Digital signatures play a crucial role in securing digital transactions, particularly in cryptocurrencies like Bitcoin. They provide a secure way to verify the authenticity and integrity of digital messages, ensuring that only the intended sender can generate a valid signature. One of Bitcoin's value propositions is its resistance to change, which creates reliability that the network will work as expected into the future. This makes it a more viable mechanism for humans to carry value over space and time, unlike other forms of money, such as fiat currencies.
Since the creation of this video, digital signatures have become even more critical as more financial transactions and communications move to digital platforms. Bitcoin primarily uses the Elliptic Curve Digital Signature Algorithm (ECDSA) for securing transactions, and this has remained relatively unchanged since its inception. However, it's important to note that there has been a development in Bitcoin's signature scheme called Schnorr signatures, which can provide various improvements in terms of efficiency and privacy. Schnorr signatures are a landmark feature recently introduced to the Bitcoin Network through the Taproot upgrade of 2021. They offer increased security, improved scalability, and faster transaction processing. Schnorr signatures are also more space-efficient than the previous signature scheme and can aggregate multiple signatures into a single signature.
The likelihood of Bitcoin adopting new signature schemes in the future depends on the consensus of the community and the need for improvements in security or performance as time goes on. While the growing reliance on digital signatures in the broader context highlights their importance, any changes to Bitcoin's protocol will be implemented carefully and gradually to maintain the stability and security of the network. As technology continues to advance, it's possible that new digital signature schemes could be proposed and adopted if they offer significant benefits for Bitcoin's ecosystem, reinforcing the importance of digital signatures in our evolving digital world.
Lesson 5: Transaction records
In this next video, Sal Khan explains the concept of Bitcoin transactions as a series of digital signatures that reflect a coin's path through the Bitcoin ecosystem. Rather than being physical coins, Bitcoin transactions are better considered as collective entries into a ledger. To illustrate the mechanics of a Bitcoin transaction, Sal Khan provides an engaging example featuring Alice, who intends to transfer 50 Bitcoins to Bob, showcasing the process of using digital signatures, inputs, and outputs within the Bitcoin ecosystem.
Before delving into the key points from the video, it's important to note these takeaways centred around Bitcoin transactions, particularly the example provided by Sal Khan:
Bitcoin transactions are a chain of digital signatures reflecting a coin's journey through the ecosystem.
Transactions are collective ledger entries, not physical coins.
A transaction is a digitally-signed declaration by one party of its intent to transfer bitcoins to another party.
A transaction consists of inputs, outputs, and the use of a cryptographic hash function. Inputs represent previous transactions in which the sender received bitcoins. Outputs specify the recipient(s) and the amount of bitcoins to be transferred.
The transaction record includes digests of previous transactions created by applying a cryptographic hash function.
Users are identified by public verification keys (pseudonyms) in the Bitcoin ecosystem and not by their real names.
A transaction fee is awarded to a Bitcoin miner for assisting with transaction validation.
The core principles of Bitcoin transactions, as explained in this video, have remained relatively consistent since its creation. However, technological advancements and protocol updates have addressed some of Bitcoin's challenges, such as transaction speed, scalability, and energy consumption.
For example, the 2017 introduction of Segregated Witness (SegWit) aimed to increase the capacity of individual blocks, enabling more transactions to be processed within a given time frame. This upgrade enabled the Lightning Network, which was first introduced in 2015, to create off-chain payment channels that facilitate faster and more efficient transactions.
Despite these enhancements, the foundational concepts of Bitcoin transactions, as detailed in this video, continue to be vital for understanding the inner workings of Bitcoin and the potential applications of blockchain technology.
Lesson 6: Proof of Work
This insightful video thoroughly examines the fundamental concept of Proof of Work (PoW), highlighting its pivotal role in securing the Bitcoin network and supporting the blockchain. This video offers a comprehensive introduction to Proof of Work (PoW), the consensus mechanism underpinning the Bitcoin network. It explains the role of PoW in validating transactions, maintaining the network's security, and preventing double-spending.Â
Diving into the highlights from this comprehensive video on Proof of Work, the essential points are:
Proof of Work is a consensus mechanism requiring miners to solve complicated mathematical problems to validate and add new transactions to the blockchain.
The PoW process encourages miners to actively participate in the network by offering incentives, such as block rewards and transaction fees.
The PoW mechanism enhances network security by making it computationally expensive and time-consuming for malicious actors to alter the blockchain's transaction history.
In return for their efforts, miners receive newly minted bitcoins and transaction fees as rewards.
To maintain a consistent rate of block generation and ensure network security, the difficulty of the problems adjusts over time.
PoW is integral to the decentralization and security of the Bitcoin network, as it prevents any single actor from manipulating or controlling the system.
Bitcoin's superior security has been attributed to the proof of work mechanism and the substantial decentralization of nodes it enables. The PoW consensus mechanism of Bitcoin has proven to be very effective at securing Bitcoin so far. The PoW consensus mechanism secures the distributed Bitcoin ledger and protects the network from double-spend attacks, all the while adding new blocks of transactions to the chain and generating BTC rewards for miners. Miners must contribute computing power and electricity to mine what remains of the 21 million bitcoins. Bitcoin mining involves processing transactions for the network, work for which miners are compensated with newly minted coins (the block reward). Proof of Work, metaphorically speaking, transforms energy into money when new coins are minted, effectively linking Bitcoin's value to the tangible resource of energy. Critics of PoW argue that its considerable energy consumption is environmentally unsustainable, prompting the proposal of alternative consensus mechanisms, such as Proof of Stake (PoS).
Attempts to change Bitcoin's Proof of Work consensus mechanism are largely considered a bad-faith argument and an attack on one of the most important innovations of the protocol. Bitcoiners believe Proof of Work is deeply linked to Bitcoin's value. Advocates of PoS maintain that it reduces energy consumption while preserving network security and decentralization. However, Bitcoiners reject PoS, equating it to a fiat system that is merely automated on the blockchain. It allows wealthy individuals to wield disproportionate influence over the protocol, giving us more of the same broken incentives systems of the current financial system that Bitcoin aims to replace. The prevailing consensus among Bitcoiners is that PoW is crucial to Bitcoin's value proposition and is necessary for upholding the network's trustless, decentralized nature. But continuing to run the network, the consensus among Bitcoiners is that PoW's energy consumption is justifiable, as it guarantees the system's security and integrity, ultimately providing a more robust and dependable financial infrastructure.
Lesson 7: Transaction blockchains
This video focuses on the fundamentals of Bitcoin transactions, providing a comprehensive explanation of how they work within the Bitcoin network. It delves into the process of creating, validating, and confirming transactions, as well as the underlying mechanisms that ensure the security and integrity of the system.
Some important concepts and insights covered in this video that will help you better understand how Bitcoin transactions work and the underlying mechanics of the Bitcoin network are:
Transactions are created when a user wants to send Bitcoin to another user.
A transaction consists of inputs (previous unspent outputs) and outputs (new recipient addresses and amounts).
Digital signatures and public key cryptography are used to verify the authenticity of transactions.
Miners validate transactions by including them in new blocks that are added to the blockchain.
The mining process involves solving complex cryptographic puzzles, which helps secure the network.
Although not explicitly named, the video describes "block time" as the average time it takes to mine a block (approximately 10 minutes).
The video also touches on "block rewards," which are the incentives miners receive for validating transactions and adding new blocks to the blockchain.
Since the video's creation, the terminology and understanding of certain aspects of Bitcoin transactions have evolved. For instance, the video does not explicitly mention the "mempool," which is an essential part of the transaction process. The mempool is a collection of unconfirmed transactions waiting to be included in a new block by miners. The concept of the mempool is relevant to the mechanics discussed in this video. It is crucial to prioritize and selecting transactions based on factors such as fees and age.
With these added contexts and terminologies, viewers can better understand the intricacies of Bitcoin transactions and appreciate the innovation behind the decentralized digital currency.
Lesson 8: The money supply
In the 8th video of the series, Sal Khan delves into the topic of the Bitcoin money supply. Sal explains how Bitcoin transactions are recorded on the publicly accessible blockchain ledger and how Bitcoin miners are responsible for verifying and adding transactions to the blockchain. Sal describes how miners are rewarded with Bitcoins for their effort, effectively generating new Bitcoins during the process. He also discusses the maximum limit of 21 million Bitcoins that can ever be created and how the Bitcoin system is designed to enforce this limit. Once that limit is reached, no more new Bitcoins can ever be made. Nodes will no longer receive a reward for augmenting the blockchain.Â
The video also explores the role of transaction fees in incentivizing Bitcoin miners to continue their work after the maximum number of Bitcoins has been reached. He explains how the reward provided to Bitcoin miners decreases over time and how the difficulty of solving the proof-of-work protocol is calibrated globally to limit the generation of Bitcoins.Â
In the video, Sal also introduces the concept of fractional coins and explains that the smallest possible unit of Bitcoin is known as a Satoshi. He notes that while he has mainly talked about Bitcoin in terms of whole coins, it is possible to have fractional coins. The smallest possible unit in Bitcoin is 0.00000001 Bitcoins or one-hundred-millionth of a Bitcoin, known as a Satoshi. This unit is named after Satoshi Nakamoto, the pseudonym of the inventor of Bitcoin, although it is uncertain whether Satoshi Nakamoto is an individual or a group.
The main takeaways from this video include the following:
Bitcoin transactions are recorded on a publicly accessible ledger called the blockchain.
Bitcoin miners are responsible for verifying and adding transactions to the blockchain.
Bitcoin miners are rewarded with Bitcoins for their effort, generating new Bitcoins during the process.
The maximum limit of 21 million Bitcoins can ever be generated, and the Bitcoin system is designed to enforce this limit.
Halving events occur every 210,000 blocks and reduce the block reward by half, which affects the rate at which new bitcoins are created.
The reward provided to Bitcoin miners decreases over time.
Transaction fees are expected to incentivize Bitcoin miners to continue their work after reaching the maximum number of Bitcoins.
The difficulty of solving the proof-of-work protocol is calibrated at a global level to limit the generation of Bitcoins.
Bitcoin allows for fractional coins, with the smallest possible unit being a Satoshi.
For further context, it is important to note that since the video's creation in 2013, certain aspects of the information presented have become dated. For instance, the block reward amount, the reward is given to miners for processing transactions on the blockchain, has decreased since the video's release. In 2013, the block reward was 25 bitcoins per mining operation, whereas currently, it is 6.25 bitcoins per block. Another glaring omission in the video is the lack of mention of the term "halving cycles," even though the concept is described.
Additionally, on the maximum limit of 21 million bitcoins that the Bitcoin network can generate, it is worth noting that as of March 2023, approximately 18.8 million bitcoins have already been created, leaving less than 2.2 million available to be mined. This programmatic scarcity of bitcoin has implications for its value and use.
Despite these updates, the core concepts and principles covered in the video remain relevant and significant to understanding Bitcoin.  Â
Lesson 9: The security of transaction blockchains
In the last video of the series, Sal Khan provides an overview of some of the advanced topics in Bitcoin and the blockchain. The video examines the security features of the Bitcoin blockchain, including the difficulty adjustment for mining and the concept of a 51% attack. The video emphasizes fundamental ideas and concepts that viewers may apply to understand the Bitcoin technology better.
Key takeaways from the video include:
The importance of decentralization in the Bitcoin network and how it helps to prevent attacks and maintain the integrity of the blockchain.
How the consensus mechanism works in the Bitcoin network, and why it is important to verify transactions.
The concept of a "51% attack," where an attacker gains control of the majority of the network's computing power and can potentially manipulate the blockchain.
The role of miners in the Bitcoin network and how they are incentivized to verify transactions and maintain the blockchain.
The difficulty adjustment system, which regulates the rate at which new blocks are added to the blockchain and ensures that the network remains secure.
As with the other videos so far, the age of the video shows, which I would like to touch on. For example, the block reward for miners has since decreased, and the network's difficulty adjustment system has undergone several changes. Nonetheless, the video provides a solid foundation for understanding the underlying principles of Bitcoin and the blockchain and is still relevant today.
Overall, the series of videos provides a comprehensive introduction to Bitcoin and the blockchain, covering everything from the basics to more advanced topics. While there is still much to learn about this rapidly evolving technology, the Khan Academy videos are an excellent starting point for anyone looking to deepen their understanding of Bitcoin.
Conclusion
As you begin to explore Bitcoin and its impacts, I hope this introduction serves as a valuable starting point. The Khan Academy's video series is both concise and comprehensive, making the complex world of Bitcoin accessible to anyone. By delving into Bitcoin's technical and practical aspects, as well as its potential positive and negative consequences for society, we can gain a holistic understanding of this fascinating technology. With this foundational knowledge, we can engage in informed discussions and assess Bitcoin's role in promoting human rights or enabling harm, as well as its potential for fostering a more equitable and just world or creating new challenges. The future of Bitcoin is filled with both promises and perils that we must navigate together. As you continue to explore this invention, stay informed and engaged with the Bitcoin community. Let us stay curious and engaged in exploring its potential, and remember that our collective actions will shape its impact on the world.
In the words of Satoshi Nakamoto, the anonymous creator of Bitcoin, "The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust." Bitcoin has the potential to transform the way we think about trust, money, and power. Let's embrace this opportunity and work towards a brighter future for all.
Happy learning! May your exploration of Bitcoin be insightful and enlightening. Together, let's work towards using technology to empower human flourishing. Until next time, stay curious, my friends.