Module 1: Bitcoin
On October 31, 2008, an enigmatic individual or group using the pseudonym "Satoshi Nakamoto" released a white paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System”. This document presented a transformative concept: a decentralized digital currency operating on a blockchain, enabling secure and direct peer-to-peer transactions without intermediaries. Satoshi Nakamoto's true identity remains hidden, and their last known communication with bitcoin developers was in 2011. The creator of the bitcoin network understood the importance of avoiding central control by any individual, company, or government for a truly decentralised and robust financial system. Keeping their identity concealed aligns with the ideals outlined in the whitepaper, avoiding the creation of a figurehead, leader or central point of control or influence.
After the release of Satoshi’s whitepaper, a group of passionate libertarian computer technologists and programmers worked with Satoshi to create the bitcoin network on the blockchain. Some of the early computer technologists were Gavin Andresen and Hal Finney.
On January 3, 2009, the Bitcoin network officially launched when its first block, the "genesis block," was created. This momentous event marked the beginning of the bitcoin blockchain network. The genesis block featured a notable embedded message, which read:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
This statement emphasized bitcoin's role as an alternative vision for a decentralised financial system, particularly significant as it emerged just after the global financial crisis of 2008, during which the US government printed $800 billion to bail out some commercial banks. After a period in which the banks had been lending irresponsibly.
First Use Cases: Testing Bitcoin Worked – Silk Road
The validity of bitcoin as a means of settlement was demonstrated well when it was adopted as the currency of Silk Road, an anonymous online marketplace, which was used primarily to sell illicit goods from 2011-2013.
The problem the Silk Road had was that settlement of transactions couldn’t be made through the traditional banking system as they could be tracked. Accordingly, they could only be settled in cash when the goods were physically collected, posing a risk for transaction participants.
The owner of Silk Road quickly saw one of the key advantages of bitcoin, being the “person to person” transfer of value without the need for a centralised organisation and began using bitcoin as the native currency of the Silk Road marketplace to settle transactions.
At Silk Road’s peak, there were millions of dollars’ worth of bitcoin transacting each month. Although Silk Road was primarily a marketplace for illegal goods and services, it was also a thriving economy using bitcoin as its currency. It was an economy with characteristics just like any other. When the FBI shut down Silk Road, it confiscated over 50,000 bitcoin from the site operators and has subsequently sold these bitcoin through bitcoin exchanges for US dollars (USD).
Any perceived adverse reputation relates to what bitcoin was used for in its early days, and has no bearing on its legality per se. Bitcoin was used as the medium of exchange on Silk Road, bitcoin was and is not illegal. It is universally recognised that the most widely used medium of exchange for illegal activities is USD cash, but there is no adverse reputation associated with USD by association. Bitcoin should be equally viewed, and today the vast majority of bitcoin transactions are for legal purposes.
Bitcoin is a neutral tool, and the use of bitcoin on Silk Road tarnished bitcoin’s reputation, merely by association. However, perhaps more importantly, the use of bitcoin as a means of settlement demonstrated the robustness of the underlying blockchain technology, the bitcoin code, and bitcoin as a currency.
Congratulations, you have completed Module 1, Lesson 3