What's happening?

You might have heard someone—on tv, on Twitter, in a bar—talking about Bitcoin.


As the market price of Bitcoin soared (and dipped, and rose, and dipped again, and rose again), general interest in cryptocurrency has done the same. General understanding of what Bitcoin is and how it works hasn't quite kept up.

Bitcoin (BTC) is a digital currency that can be used to exchange or store value—just like you can with U.S. dollars (USD). But to keep track of what each person owns or exchanges, there's no need for a central bank or administrator. Bitcoin uses a blockchain.

Why is it important?

The nitty gritty of blockchain technology is complicated. But conceptually, it's more simple than most people think. I spoke with Muneeb Ali, an expert with a PhD in distributed systems and a co-founder of Blockstack, for a definition. 


"If somebody asks, “Hey, what’s a blockchain?” I would say... it is a tamper-resistant log that helps you get consensus on data in a distributed way."


Here's what each piece of Muneeb's definition means, at a conceptual level:


"A tamper-resistant log... ": It’s a list of transactions. The list can record any exchange of anything of value—your money, property, work product, votes. Each bit of information is a "block." But it’s a list, not a central database, so you can't go back and change blocks. You can only add the next one. That’s part of what makes it "tamper-resistant."


"... that helps you get consensus on data...": There isn't just one blockchain, there are many. But they all share the goal of recording information and making sure everyone agrees that it's accurate.  


"... in a distributed way": In most traditional systems, a list of transactions of value would be held in a central server. Using our personal computers, we'd all check back with that server to make sure the information was accurate and up to date. There are a couple of serious problems with this. What happens if the central server collapses? What about when they take a cut of each transaction? What if the server is controlled by someone who's just not operating in our interest? 


So a blockchain does something very different. If you remember nothing else about blockchains, remember this: On a blockchain, there’s no central server at all. Instead, the list is copied and stored over and over again across a network of personal computers. Each computer becomes a node of the blockchain network and has a copy of the log. That makes a huge difference. It can solve some of the major questions we had about incentives and security in the traditional system.


So it's that feature of blockchain technology—the idea that it is a decentralized system—that earns most criticism and causes the most heated debate.

Debate it!

Is bitcoin truly decentralized?


Bitcoin was supposed to be decentralized. But that's not what happened. 


If you are mining Bitcoin today, you're not competing in that ideal world of hundreds of thousands of individual miners, all incentivized to validate what's really happening for each other. (Read the 'yes' argument before this one. It may be wrong but it explains this part well.)


Instead, you're operating in a system controlled by 5 businesses:, Antpool, Slushpool, BTCtop, and ViaBTC. Using a measure of power consumed to continuously mine Bitcoin ("hashrate"), we can estimate that these 5 groups already control 71.9% of the system


We're not even sure that these are separate entities or, if they are, that they are not currently colluding with each other to benefit from their shared control. Even assuming that these groups are operating in good faith, this is far from the decentralized system that Bitcoin promised. 


There's also a serious concern around the fact the majority of major miners are in China, which exposes them—and the community at large—to the risk that the government exerts control over the miners. The arguments that governments or other miners aren't incentivized to interrupt the system today don't change the underlying problem. A traditional bank isn't incentivized to deceive or collapse today either. Bitcoin is built on the promise that it never could. And that is simply not true.



To understand why bitcoin is truly decentralized, you need to understand how to get bitcoin in the first place. (I promise the least jargon possible, stick with me.)


The way you earn a bitcoin is that you have to solve a tough computational task. You're now a bitcoin "miner."


For the sake of this argument, let's say the miners' task is finding prime numbers (It's not! It's way more complicated than this! Please don't tweet angrily at me.) Your computer is great at finding prime numbers, but with each increasingly large number, the task gets a bit more challenging. In this example, each prime number is another "block." Let's say that when you find a prime number, you earn 10 bitcoin. Here's where consensus is important. When you mine the block, you need to tell everyone else you found it first. The miners around you provide consensus that you're right, and you all move along to the next block.


You want the rest of the miners not to be centralized because you don't want a majority of miners to collude against you and validate something that didn't happen. That's called a "Sybil attack". And that's why it's important to have decentralized system.


Unlike most traditional systems, there is no central controlling company or individual validating transactions or confirming ownership. We can talk about degrees of decentralization, but this system is decentralized. And—unless someone owns 51% of all the miners spread across the world—it always will be.

Learn more...

  1. The market price of Bitcoin since launch
    • That's one steep chart.
  2. A great paper from Cornell on vulnerabilities in Bitcoin mining
    • "The Bitcoin protocol requires a majority of the miners to be honest; that
      is, follow the Bitcoin protocol as prescribed. By construction, if a set of colluding miners comes to command a majority of the mining power in the network, the currency stops being decentralized and becomes controlled by the colluding group. Such a group can, for example, prohibit certain transactions, or all of them. It is, therefore, critical that the protocol be designed such that miners have no incentive to form such large colluding groups."
  3. Hashrate distribution among the largest Bitcoin mining pools

A quick note from me to you:
Debates around Bitcoin and blockchain technology don't need to be as intimidating as they're made to seem.

Like with anything else (labor law, foreign policy, you name it) there's a wealth of complexity best suited for experts. Here's one place for that, if you're curious. But there's no reason a conversation about Bitcoin over dinner should end at "... I don't get it." It's much too interesting to leave at that.

Love, Cleo

p.s. Thank you to Greg Rosen and Muneeb Ali for your expertise! It was invaluable for this Short Version.