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A Summary of

How the bitcoin protocol actually works

by
Michael Nielsen
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How to build Bitcoin

Bitcoin is hard to comprehend. But, by separating it into its constituent parts, we can begin to understand and assemble the coin. Using a coin called “Infocoin” as a proxy, we can set the stage for the eventual evolution of Bitcoin.

The steps for creating a cryptocurrency (which ultimately develops into Bitcoin):

  1. A signed letter of intent.
    1. To create a cryptocurrency a unique code specific to a single person that demonstrates intent is needed to begin transactions. 
  2. Serial numbers.
    1. In addition to the letter (or code, depending on how you look at it) of intent, coins need to be uniquely identifiable.
  3. We need a bank.
    1. To assign serial numbers and specific letters of intent, as well as a place to have all the info coalesce, there needs to be a bank. But the main theme in crypto is its decentralized system, so everyone is the bank. 
  4. This collective bank is called the blockchain.
    1. The blockchain is a public ledger and is used to confirm transactions. Transactions only happen when enough people in the blockchain agree for them to happen.
    2. The blockchain is a chain of blocks, with each block representing one transaction. The chain of blocks signifies the pathway through which the currency travels. 
    3. The blockchain and the way in which it stores sequential events (i.e. capabilities to analyze who had the Bitcoin at one point) makes it less anonymous than most other currencies.
  5. What happens if one person owns too many of the computers on the blockchain?
    1. This is discouraged by making it computationally costly to validate transactions while rewarding them for completing it.
    2. To validate transactions computers are required to solve a puzzle which is designed to take exactly ten minutes. 
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