Insights

What is Bitcoin?

By   Christopher Bendiksen


Photo by André François McKenzie on Unsplash

If you’re new to Bitcoin the first mental hurdle confronting you is probably figuring out what Bitcoin actually is.

This is not as straightforward as you might first think, because the answer is that Bitcoin is a lot of things and the word “Bitcoin” is used to describe several different aspects of Bitcoin.

Our goal here is to save you unnecessary time spent trawling the internet in search of any answers to the above by simply cutting right to the chase and explaining Bitcoin in simple terms. This will not be a deep-dive by any stretch of the imagination, but when you come out on the other end, you’ll be able to differentiate between different uses of the word “Bitcoin” and know the contexts in which they are appropriate.


Bitcoin is a Set of Rules––a Protocol

A ‘protocol’ is simply a set of rules governing how two or more computers interact. At its most fundamental level, this is exactly what Bitcoin is.

In this sense, it is similar to the Internet protocol, which is another set of rules governing how two or more computers interact.

The main difference lies in the goals of the protocols, that is, what they are designed to achieve: Whereas the internet protocol is a method for transmitting information in general, Bitcoin concerns itself chiefly with the transfer of value.

Like the internet protocol, the rules set forth in the Bitcoin protocol are encoded in software. And also just like the internet protocol, there are multiple software packages implementing the protocol (e.g. Linux server vs. Windows server vs. Mac Server).

Different users can choose different software implementations to access either the Internet or Bitcoin, but the rules of interactions––the protocols––are the same in all. This ensures that no matter what implementation individual computers are using, they all still follow the same rules.

By broader analogy, you could consider Bitcoin a recipe. This recipe can be printed in a book, written in morse code on a piece of paper, or presented in comic sans on a goofy website. But if you follow the instructions in the recipe, the end result is the same.


The Bitcoin Protocol Creates a Network

When multiple users run software implementations of the Bitcoin protocol, their computers connect to each other and form a network. This network often uses the same physical infrastructure as the implementation of the Internet protocol (that is, the cables, switches, routers etc.), but it doesn’t strictly have to. Bitcoin can function without the Internet and without the physical infrastructure the Internet relies on, but there’s no denying that it functions a whole lot better when it can use it.

Photo by NASA on Unsplash

Inside of their network, computers running Bitcoin software (referred to as nodes) communicate with each other according to the rules of the Bitcoin protocol. This network is technically separate from the Internet network, although they work seamlessly together, each adding value to the other.


The Bitcoin Protocol and Network Creates an Independent Monetary System

As soon as users began running the first Bitcoin software implementation, it instructed their computers to start creating a set of data structures prescribed by the protocol rules. Three particularly important structures in this set are the blockchain (the full transaction history), the UTXO database (the list of Bitcoin ‘balances’, calculated from the blockchain) and the mempool (the waiting-room of pending transactions not yet added to the blockchain).

From these structures, a wholly digital, independent monetary system emerges. The computers running Bitcoin software can transfer value between each other without the permission, interference or even knowledge of anyone outside of the Bitcoin network.

And internal to this system is its own unit of account: bitcoin (written with a lower-case b to distinguish the monetary unit bitcoin from the Bitcoin protocol and network). These units have no existence outside of the Bitcoin data structures and completely rely on the Bitcoin protocol for proper transfer––they are native to and dependent on the Bitcoin monetary system.


Bitcoin is a Protocol, a Network and a Monetary System––bitcoins are its Internal Unit of Account

When people respond to the question of “what is Bitcoin?” with the answer that “it’s complicated”, they are right. Bitcoin is both a protocol, a network and a monetary system, but bitcoin is also the unit of account internal to the Bitcoin monetary system.

In order to properly classify Bitcoin, or bitcoins, according to your own systems of classification, the best place to start is to be certain which part of the system you are attempting to classify––the rules, the network, the monetary system, or the monetary unit.




Disclosure

This material has been prepared by CoinShares and its affiliates for educational and informational purposes only and it is not intended to be relied upon as an offer or a recommendation, offer or solicitation to buy or sell a security nor is it to be construed as investment advice. Predictions, opinions and other information are expressed at the date of publication and are subject to change as circumstances vary. This information has been developed internally and/or obtained from third party sources believed to be reliable; however, no representation or warranty, express or implied, is made as to the accuracy, reliability, or completeness of such information. To the extent permitted by law, we do not accept or assume any liability, responsibility or duty of care for any use of or reliance on this information. Past performance is not a reliable indicator of future performance.

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