How Does Bitcoin Work? A Ledger With No Bank Behind It

A bitcoin is not a coin or a file. It is an entry in a ledger, a list of every transaction ever made, from which the balance of any address can be worked out by adding up what has been received and subtracting what has been sent. The ledger is the blockchain: transactions are gathered into blocks, each block carries a cryptographic fingerprint of the one before, and the chain runs back to the first block in 2009. Anyone can download the whole ledger, about half a terabyte, and check every transaction in it. To spend bitcoin, the owner signs a transaction with a private key, a secret number that only they hold, and anyone can verify the signature with the matching public address without learning the key. Lose the key and the coins are lost for ever; there is no one to ask.

The problem the paper solved was how strangers who do not trust each other can agree on which transactions are valid and in what order, without a referee. The answer is a race. Computers called miners gather pending transactions into a candidate block and search for a number which, added to the block, makes its fingerprint start with a required run of zeros; there is no shortcut, only trial and error at trillions of guesses a second, and the first to find one broadcasts the block and the others check it in an instant and build on it. The winner is paid in new bitcoin plus the fees on the transactions. Rewriting an old block would mean redoing its search and every search after it faster than the whole network is adding new blocks, which is why the record is called immutable in practice. The rules that make it hold together:

• •A new block about every ten minutes, with the difficulty of the search adjusted every two weeks to keep that rate as machines get faster
• •A reward that halves every four years, from 50 bitcoin in 2009 to 3.125 in 2024, so that the total will never exceed 21 million
• •The longest valid chain wins, so an attacker would need more computing power than everyone else combined
• •Every full node checks every block against the rules, so a miner cannot pay itself more than the rules allow

The search that secures the ledger is deliberately wasteful; that is the point, since it has to be expensive to rewrite. The network consumes on the order of 150 terawatt-hours a year, comparable to a mid-sized country, and the mining that began on hobbyists' laptops is now done in warehouses of specialised chips near cheap electricity. The system is also slow by the standards of payment networks: about seven transactions a second for the whole world, against tens of thousands for a card network, with a confirmation taking ten minutes to an hour, and fees that rise when the chain is busy. Layers built on top, which settle many small payments off the chain and record only the net result, exist to address that, and other cryptocurrencies have replaced the energy-hungry race with systems in which validators put up coins as a stake instead.

Bitcoin has most of the features of money and lacks the one that matters most for daily use, a stable value. Its price has risen from nothing to tens of thousands of dollars and fallen by more than half at least five times, which makes it a poor unit in which to price a coffee and a good subject for speculation. Its supporters compare it with gold: scarce, portable, held outside any government's control, and useful in countries whose currencies collapse or whose banks freeze accounts. Its critics note that gold has industrial and ornamental uses and bitcoin has only the expectation that someone else will want it, that it has been the payment method of choice for ransomware and dark-web markets, and that most people who hold it do so through exchanges, which are exactly the trusted institutions it was designed to remove and which have failed repeatedly, most spectacularly in 2022. Both are describing the same object.

Whatever bitcoin's price does, the design solved a problem that computer scientists had regarded as unsolved: how a network of untrusted parties can maintain a shared record without a central authority. That idea, the blockchain, has since been applied, mostly without success, to contracts, supply chains, voting and art, and with success to the several thousand other cryptocurrencies that copied it. The author, who wrote under the name Satoshi Nakamoto, exchanged emails with early developers until 2011 and then stopped, holds an estimated million coins that have never moved, and has never been identified, which is either a security nightmare or the final proof that the system needs no one.

Bitcoin is a public ledger of every transaction, copied across thousands of computers, in which ownership is proved by cryptographic signatures and new pages are added by miners competing to solve a costly puzzle, so that rewriting history would cost more than the whole network's computing power. It caps its supply at 21 million, consumes as much electricity as a country, handles few transactions slowly, and has a price too volatile for everyday money, while remaining the first working answer to the problem of keeping a shared record without anyone in charge.