Bitcoin Basics

sudo-anon*This name chosen is a not particularly clever or unique pun based on the Linux command “sudo”, that allows you to elevate your privileges to run any command, and the word “Pseudonymous”, which is not doing something under your own name. This is written under a pseudonym, not to hide who I am but rather because it shouldn’t matter.
September 2024†Minor edit to fix broken hyperlinks December 2024 and a few small typos fixed February 2025. Small formatting changes, including changing the dual file css+html variant to single xhtml file, were done in June 2025 with a couple of paragraphs added to the main text in July 2025.

Thesis statement

“The current monetary system does not work for a significant portion of people, maybe the majority in some parts of the world
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For example, the figure given by human rights activist Alex Gladstein in 2021 is that 1.2 billion people were living with double or triple digit yearly inflation, mostly in countries with developing economies. Many of these are currencies that are in the process of failing. Currency failure can be seen by people in other countries as something that happens to other people “over there” so it must be something wrong with “their system” that needs a local solution. In contrast, my opinion is that there are systemic issues with the current monetary system but they are affecting some people and countries more than others. Essentially, I think that all fiat currencies are on the road to failure, it’s just some aren’t noticed as it takes a long time when compared to a human lifespan. For example, hardly anyone who uses the New Zealand dollar seems to be concerned that it has experienced around 1000% inflation over approximately half a lifetime (based on CPI data from Stats NZ, a New Zealand government department).
, and bitcoin may be a less bad solution - but it will be a generational journey to find out.”

1 Who is this for?

There is a well known cognitive bias called the Dunning–Kruger effect
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See Wikipedia article "Dunning–Kruger effect".
that, in practical terms, I see as saying that your ignorance of a subject gets in the way of asking intelligent questions and learning more about it. Just to give a round number to this I use the rule of thumb that most people can probably get to the point of asking intelligent questions after 100 hours of high quality study of a given topic
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This 100 hours is just 1% of the rule of thumb that it takes 10,000 hours to become an expert in a subject. There is no particular rationale for this exact number but it seems to be about right.
. This document can be used to start you on your 100 hour journey to get yourself to the point of being able to ask intelligent questions about bitcoin, and, most importantly, about how to bring about a world that is better for having bitcoin in it. Alternatively, it can be seen as a set of interconnected “Quick Guides to Bitcoin” viewing it from different angles that can be read individually by someone interested in a specific aspect of bitcoin.
This document starts with Section 2 that includes a small number of links to high quality resources to bitcoin related topics. Section 3 then introduces some fundamental parts of bitcoin that are unlikely to change to give a core knowledge to build upon. This section can be skipped if you are just mildly interested in bitcoin. In this case though, it is probably more important to read Section 4 about some of the common misunderstandings of bitcoin. There is also Section 5 that includes a definition of what it means in my opinion for bitcoin to “succeed”. As one of my main concerns is the way in which bitcoin will scale, there is also a short section, Section 6, on the history of scaling bitcoin and some possible problems on the horizon. Finally, Section 7 has a couple of links for keeping up to date with innovations in bitcoin.
You will see that there is extensive use of footnotes. Some have links to further resources but some are just digressions. These do not need to be read by the casual reader. This document is available as both pdf and xhtml versions
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. If you do not want to be distracted by the footnotes, the xhtml version may be easier for you to read as the footnotes are hidden unless you mouse-over the footnote symbol, in which case they appear in a box within the main text and you can click the footnote symbol to have the footnote stay visible until your mouse moves out of the footnote in order to be able to click links within the footnote. However, the pdf version is better if you want a printed version with the footnotes at the bottom of each page.

2 Resources for research

This is a short list of resources that are a good place to start your journey. Some of the following sections refer to these so you may want to read the rest of this document before deciding where you want to start.

3 Introduction to bitcoin

Understanding bitcoin is complicated by the fact that the very word “bitcoin” is used to mean many things. Some ways that it can be used are:

What problem is bitcoin solving?

The concept of bitcoin is relatively simple to understand when you think about the problem it is trying to solve and how it does it.
Question: How can people scattered around the world come to agreement on who has money, how much, and the order in which it is transferred between parties without having to trust a central authority?
Answer: Everyone runs their own software to check the rules they think are important and share out the transactions they think are valid and just drop those they think aren’t. This goes even further than not trusting a central authority, it means we don’t have to trust any particular entity, we have an adversarial approach and assume that anyone could be lying to us - this leads naturally to the conclusion that more bitcoin nodes is better than fewer i.e. decentralisation is part of the way we achieve security.
The complexities come with the subtle interactions of implementation details; for example, a bitcoin node can’t really assert the trustworthiness of anything that is not a bitcoin transaction. Therefore the rules we follow must include how new satoshi units of bitcoin come into existence as a special kind of transaction.

The basics of bitcoin transactions and blocks

Note that you do not actually need to know the details in this section to “use bitcoin” or make a bitcoin transactions. The software you use to do so will hide most, if not all, of these details. These details are design decisions that were implemented in the initial bitcoin software, publicly released in January 2009, if not also described in the white-paper, released October 31st 2008. They have consequences that have shaped the evolution of bitcoin in the past, and are likely to do so into the future, so are good to know about if you want to explore interesting “what if...” scenarios about bitcoin’s future.

Bitcoin transactions

A bitcoin transaction consists of a list of inputs and a list of outputs. Each of the outputs is assigned a number of satoshi units in value and can have conditions that need to be met to spend it. These conditions can be quite complicated and use a constrained computer language, called bitcoin script, to describe them
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The bitcoin script computer language is explicitly designed to be Turing incomplete, with no loops or recursion and a maximum length of the script. The main reason for this is so that for any transaction it is known that it will halt and give a result of whether or not the conditions are met after a specific maximum number of calculations. Even given that, there were theoretical concerns where a “pathological” transaction could have been constructed that would have taken orders of magnitudes of time longer than the typical transaction to validate and caused significant slowdowns in the bitcoin network. This was called the Quadratic Sighash Problem and is described in a fjahr.com blog post titled “How SegWit solved the quadratic sighash problem”. This is in the context of it being one of the the things the SegWit soft fork solved during “The Fork Wars”, see the section in this document “Section 6”.
. These transactions are shared between bitcoin nodes and each checks it’s own list of validity rules that they care about. The inputs for a transaction are the outputs of other transactions and may include any additional information needed in order to meet any conditions limiting them being spent. In order for things to be kept simple, each input is wholly consumed in the transaction and if the total of the inputs is more than the sum of the specified values of the outputs then the remainder is used as a transaction fee. If the total of the inputs is less than the total of the outputs it is not considered a valid transaction.

Bitcoin addresses

Because the outputs of one transaction are used as inputs in another, a way was needed to address previous transactions but the way this is done in the actual transactions is not easy for people to use. Quickly an abstraction of “addresses” was created based on the standard spending conditions that were put on transactions. It encoded them in such a way as to include a prefix
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For a list of prefixes, see this Bitcoin wiki article “List of address prefixes”
and checksum. The prefix can be used by people to easily differentiate one address format from another (with the checksum helping to detect and fix typos).
Not all transactions are standardised enough that they fit into this bitcoin addressing scheme but all can be referred to by a hash of the transaction to give them a relatively unique transaction id for the purposes of sharing them between bitcoin nodes so they can quickly identify which transactions they already have and which they have not seen before. A hashing algorithm is a one way computational process to produce the same output for a particular input each time it is run. In this context, one important point is that the hash is a fixed size and will be generally smaller than the size of the whole transaction.

Blocks

Transactions shared between bitcoin nodes like this, once they pass validity checks, are still initially considered “unconfirmed”. For the transactions to be confirmed they first have to be gathered together at intervals and put into a data structure called a “block” which has a some additional details in a “block header” and a special transaction that is the first in the block called the coinbase transaction
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This is not be confused with the large cryptocurrency exchange Coinbase that presumably named themselves after this transaction
. Bitcoin nodes also share information about which blocks they know about and validate all new blocks they are told about before passing them on to other bitcoin nodes.
The coinbase transaction has one “dummy” input in a specific format and has one or more outputs as normal and is not spendable for 100 blocks. The maximum value of the outputs of this coinbase transaction are the sum of the transaction fees for the other transactions in the block and a calculated value called the “block subsidy”.

Block subsidy

This block subsidy is how new bitcoin come into existence and was initially 5,000,000,000 satoshi (or 50 bitcoin) but is split into epochs when it is cut in half (and rounded down to the nearest satoshi)
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An interesting consequence of the exact number chosen for the initial block subsidy is that the number of bitcoin in the block subsidy corresponds to the percentage of bitcoin still to be “created” at the end of that block subsidy epoch i.e. 50% of the bitcoin were still to be created at the end of the first epoch, 25% at the end of the second, 12.5% at the end of the third, 6.25% at the end of the fourth. The fifth epoch, which began on the 20th April 2024, therefore began with 93.5% of all the bitcoin that will ever exist.
every 210,000 blocks. The block subsidy will eventually be zero after the 33rd such halving. Note that each bitcoin node keeps track of the current block subsidy itself and will simply reject a block with a subsidy it considers too large. The eventual maximum supply can be easily added up and is a little under 2.1 quadrillion satoshi, or 21 million bitcoin
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Note that the theoretical maximum is 2,099,999,997,690,000 satoshi but the coinbase transaction does not have to have outputs that add up to the maximum allowable amount and it has already happened, likely accidentally, a couple of times that less than the maximum block subsidy was assigned to a coinbase output in a valid block so the actual maximum supply will end up being a little less than this.
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Difficulty target

Bitcoin blocks can be put together by any computer on the bitcoin network running the appropriate software. Such a subset of bitcoin nodes are called “miners” due to the emphasis in the early epochs on bitcoin creation over fees collection with the block subsidy in the coinbase transaction going to the one who mined the block. In order to make it a “lottery”, and so not have any particular miner be preferred over any other, the block header contains a section that the miner can change and then run a hashing algorithm on the candidate block. The output of the hashing algorithm is just a list of ones and zeros that in this case is interpreted as a number. The number must be lower than a specific “difficulty target” number.
There is no known way to know beforehand what the output will be from a given input. Therefore, to try and get a block with a hash value that is lower than the difficulty target, there is no better way known than to just set the miner adjustable values randomly, run the hash calculation, and see if the number it gives is lower than the target number i.e. a simple “guess and check” strategy. This is called “Proof of Work” as it takes real world energy to do these calculations.

Blockchain

Each candidate block header must also contain the hash of the previous block it is building on top of. This links the blocks together in what has come to be a called a “blockchain”. The importance of this is that if an entry in a previous block is changed, this will change the value of the hash of that block and break the chain and it’s link to future blocks. It will also likely make the block invalid as the calculated hash is no longer under the difficulty target. So, to create a valid previous block, the “guess and check” step will have to be rerun and then when the new valid block hash has been produced, it will need to be used to replace the old one in the next block to relink the chain. This next block will then have a different hash and the process will have to be continued up to the chaintip. The more buried the original change, the more work that would have to be done to recreate a valid chain of blocks.
For a given difficulty target, others can give an estimate for the level of work put in for the block. Remembering that the whole point is to have a process to come to agreement on which transactions are valid, and in what order they occurred, then we can just say that the chain with the most accumulated work is the one we consider the correct one. If there are multiple competing chains with the same amount of work, we keep them all until we hear about a next block built on top of one of them. We then discard the other chain and it’s orphaned blocks after taking any valid transactions and incorporating them back into our pool of valid transactions to share out. Depending on the time to propagate information around the network, the difficulty target, and the total number of competing miner computations, we will be less certain about the permanence of transactions in newer blocks but more certain about transactions in older blocks. We can follow the history of transactions from the first “genesis block” that comes as part of our node software all the way to the current chain tip. At every step of the way we can make sure we agree that every transaction and every block is valid according to the rules we have implemented on our node.

Difficulty Adjustment

The final piece of the puzzle is that the difficulty target is not a specific number but instead is calculated independently by each bitcoin node, including miners, and is recalculated every 2016 blocks based on the time it took to produce blocks in the last difficulty period. As with the block subsidy, each bitcoin node calculates this value independently and will reject a block that has a hash value higher than it’s own calculated target, independently of what other bitcoin nodes decide
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To allow all nodes to validate blocks, including those blocks that were created before the node was part of the bitcoin network, the difficulty target is included as part of the block header in a compact format meaning that the difficulty target used is actually the calculated difficulty target to 4-6 hexadecimal significant digits.
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The calculation adjusts the difficulty target to try and have one valid block produced every 10 minutes on average. So, the difficulty automatically adjusts roughly every 2 weeks, based on the last 2 weeks difficulty, to try and have 2016 blocks created in the next 2 weeks
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The highest difficulty target allowed is the one chosen by Satoshi for the first difficulty period at the initial creation of the software but initially blocks were created at less than 2016 every 2 weeks. This meant that the target could not actually be adjusted downwards until the bitcoin network had been running for nearly a year with December 30th 2009 being the first time the difficulty target was adjusted. There is also a know “off-by-one” error in the current code that means it has a small bias toward lowering the difficulty target more than necessary with a theoretical exploit called the Timewarp attack that uses this and an interaction with another time based rule in bitcoin. See the bitcoin stack exchange question “What is time warp attack and how does it work in general?”, or the Bitcoin Explained podcast episode 5 “Time-Warp Attacks (And Bitcoin Cash’s Difficulty Adjustment Drama)”.
. Extrapolating out this means the block subsidy halving events every 210,000 blocks should take place roughly every 4 years with the block subsidy ending around the year 2140.

Concluding remarks

All the numbers referred to in this section were set in the original software implementation by Satoshi Nakamoto with no stated rationale but it is thought that it is a balance designed to make things practical for a world wide network to bootstrap itself on a human timescale and take real world constraints into account. For example, the fact that the difficulty adjustment is targeting 10 minutes means that it gives enough time for blocks to propagate around the network but not too much chance of having multiple valid blocks at the tip of the block chain. These occasionally happen but are simply solved by just having miners build on top of the first one they see and everyone else just keeping a copy of all valid chain tips they see until there is one that is a clear winner in the sense that it has the most proof of work. This means there are occasional chain reorganisations but they normally only affect the latest couple of blocks so there is a rule of thumb that if your transaction is a high value one you should wait for an hour or so (6 blocks) before you consider it final
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Another consequence of the choice of the different numbers are with the ones that combine to make the issuance schedule of new bitcoin. There is an obvious measurement of bitcoin issuance, the annual bitcoin inflation rate. During the fourth halving epoch, starting mid May 2020, this annual inflation rate was less than the standard 2% inflation of government backed currencies that central banks targets in most developed economies. During the fifth epoch, starting at the end of April 2024, the annual bitcoin inflation rate is less than the lower end long-term estimate of 1% for the above ground annual increase in the gold supply. It seems to me these are natural comparisons to make so it may be that the numbers that make up the issuance schedule were chosen, at least in part, to combine so that the epochs in which these comparisons can be made were in a time when Satoshi would likely still be around to see if the project had started to be taken seriously.
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For more detailed information on some of these topics, see the Learn Me a Bitcoin website sections such as transactions, blocks, mining, and difficulty. For the detail oriented there are also more technical details on digital signatures, the coinbase transaction, and chain reorganisations.

4 What bitcoin is not

There are a number of misconceptions and misunderstandings about bitcoin, and, as the majority of these are about fundamentals, it is good to clear these up as quickly as possible before moving on to the less clear areas. For example, although most news articles that deal with bitcoin have pictures of physical coins, bitcoin is not physical. This is probably at the root of most misconceptions about bitcoin because people describe bitcoin with analogies that relate to the physical world but all analogies break down at some point and if you’re not careful, you can take an analogy too far and end up with a flawed understanding without meaning to. So, here is a quick list of common misunderstandings that people have:

5 Bitcoin in the future

A common saying is that “all it takes for bitcoin to succeed, is for it to not die” and this is a true, but not very useful, statement. In the short term, “tick tock, next block” is an easy way to dismiss news articles that people push on to you with irrelevant information that it is not worth the effort to try and debunk. However, for a more in-depth conversation, you need to define your terms and most importantly what it means to you for bitcoin to “succeed” or “fail”
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A number of “bitcoin is going to die” stories focus on the near term volatility of the price of bitcoin on exchanges when it has taken a significant downturn. In the short-term, this is largely irrelevant but some failure scenarios can be stated in terms of negative price trends over the longer term as it is a proxy for the continuing interest and usefulness people feel bitcoin has.
. I want to emphasise that this is inherently a subjective value judgement so these terms are quoted. Below is a short exploration of what I personally mean for bitcoin to “succeed” or “fail” as well as links to different arguments for how or why bitcoin might “fail” that you may want to read through while trying to come to your own conclusions about what these terms mean to you.

What it means to me for bitcoin to “succeed” or “fail”

There are a number of one line slogans that are used as shorthand for what values people ascribe to bitcoin. The one I most closely identify with in the context of the long term “success” of bitcoin is “the separation of Money and State”
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This was likely coined by a flag waving American as a nod to the phrase “separation of Church and State” that is an interpretation of the first amendment to their constitution, and seemingly a phrase popularised by Thomas Jefferson.
. The minimal condition for this to be the case is that bitcoin is seen as a viable alternative to government backed fiat currency in most parts of the world and that it can be used in trade as money on par with the best such fiat currencies. Ranking currencies by how many people hold them, bitcoin will probably be in the top handful of currencies as the network effects of a successful money drop off sharply as less people hold it
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As the number of people in a network doubles, the number of possible transactions between two people in the network quadruples. Or, if you increase the number of people 10x, the possible transaction pairs increases 100x. You could argue about how much value each potential transaction brings to the network but just the potential of the interaction makes the network more useful.
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Money has three main properties that we need to keep an eye on for bitcoin’s acceptance as such: a store of value over time, a commonly accepted medium of exchange across space, and a unit of account that people naturally think of valuing goods and services in
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Another property for money is that it be a “standard of deferred payment” but I would argue that a commonly accepted medium of exchange that is also a widely recognised store of value would likely be a natural fit as a standard of deferred payment so we don’t need to really mention it when talking about such relationships between individuals. However, this is generally an activity that involves the legal system when it goes wrong so for this standard to be met would generally mean the legal systems around the world would need to be modified. You could also argue that payment of income taxes are a form of “deferred payment” which would mean there would need to be a whole other set of legal modifications if a government wants to directly collect taxes in bitcoin and fulfil this monetary property in it’s widest interpretation.
. I would argue that these will slowly come to be seen as true of bitcoin in approximately this order and that it is already widely accepted as at least potentially being a store of value by those who have used their local currency to purchase some. Acknowledged properties for money to be a good medium of exchange include that it be portable, durable, divisible, recognizable, fungible, scarce, and hard to counterfeit - all of which it can be argued bitcoin has
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The fungible nature of sats, i.e. one sat is the same as any other, is the most controversial of these properties given the radically transparent nature of bitcoin blockchain transactions. The possibility exists that unspent outputs may be censored or otherwise treated differently due to the inputs that make them up. Some see this as disqualifying sats from being fungible, at the base layer anyway. It would be best going forward to follow the example of the Lightning Network protocol and have additional privacy options available in layers built on top of bitcoin to make them more fungible at the higher layers at least.
. This is just not commonly accepted for bitcoin yet. As for it being a “unit of account”, even in the long-term, people may only price things in sats for international transactions when different government backed fiat currencies are in use by the buyer and seller. I would still consider this “success” if it is widespread enough.
Along with this is the idea that the current monetary system is broken and would be better if bitcoin were widely adopted. One of the underlying points of Lyn Alden’s Broken Money book is that money started to become different when the speed of information transfer started to outpace the speed of physical goods transfer with the invention of the telegraph. Money originally had a physical form that needed to be increasingly abstracted to be of use in such a world. These abstractions lead to a number of weaknesses, the most obvious being that money increasingly became something that could have units created without effort by those in power without the knowledge or consent of those they governed and so one of the primary properties of what make a good money is destroyed. Bitcoin is money that is designed from the first to be transferred over information channels and has a built in issuance schedule with the important property that this would need the consent of all parties to increase the issuance rate. This does not necessarily make it the best money but (like is said of democracy), it seems to me to be the least bad one we’ve yet come up with for an internet connected world. For bitcoin to “succeed” it will likely take a significant number of people around the world to come to the conclusion that their government backed currency is flawed and/or that bitcoin is better long-term. One obvious way for bitcoin to “fail” therefore is for governments to actually have good fiscal policy and for their people to believe this will continue into the future. I don’t see this as likely
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See, for example, the list of 56 known hyperinflation events, mostly in the 20th Century, compiled into a 3 page table on pages 12-14 of the Cato Institute working paper titled "World Hyperinflations", published 2012
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A more subtle point is that I would like to see bitcoin do all this while keeping the important properties that I see that it has currently, what I will call “the spirit of bitcoin” for lack of a better term. These are obviously subjective but most of these properties are a direct consequence of the decentralisation of bitcoin at different levels so continuous pushing back against centralisation pressure will be needed for this definition of “success”. Centralisation generally makes things more efficient so, as bitcoin runs into more issues around scaling, there will always be a push to have the solution to a scaling issue be more centralisation in some way. Hence why I see the largest long-term threat to bitcoin as being the ongoing debate about how bitcoin should scale and the compromises made to allow it to do so.

Important properties of bitcoin I value i.e. “the spirit of bitcoin”

There are a number of people in bitcoin that have put out a lot of opinions and content over the years. The one that I would align with more than most is Andreas Antonopoulos
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A 2024 interview available on YouTube, “Block & Key Podcast Episode 1: Is Blockchain Living Up to the Hype? Featuring Andreas Antonopoulos” seeks to summarises his views. If I wanted people to reach the same conclusions as I have, I would suggest that they start by watching one of his talks on YouTube titled “The stories we tell about money”. It was given in 2017 in front of an Indian audience in Mumbai and references the 2016 Indian banknote demonetisation that happened a few months earlier.
who has said that bitcoin is “for the other 6 billion”
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See the talk on YouTube from 2019 “Universal Access to Basic Finance”
. By this he means that bitcoin should be for those that are not being served by the current financial and banking systems. This could be people that live in a country with an authoritarian, corrupt, or just incompetent government that is destroying an individual’s life savings through policies that lead to high inflation. The people may not have banking infrastructure that serves the individual in the community, implicitly, or even explicitly, excluding certain types of people from participating in the banking system. Whatever the reason, these people should be able to use bitcoin as an alternative way to transact value within their community, country, and around the world.
So, the desirable properties for bitcoin that Andreas frequently lists
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See the talk on YouTube titled “The Five Pillars of Open Blockchains” where he expands on the first 5 somewhat. In some talks, the last three properties are not mentioned or are described as a natural outflow of one of the first five. This list also has some overlap with the properties listed on the bitcoin wiki as the properties that make bitcoin desirable as a low trust medium of exchange.
are:
In addition, some other properties I believe it is important to explicitly state:

Nuanced reason for bitcoin to “fail”

One argument that has more nuance than a lot of people think is “bitcoin is digital and needs computers and the internet to run. What about when there is no internet or the electricity grid fails?”. For bitcoin to fail as a “store of value over time” due to lack of electricity or internet, you’re basically talking about an apocalypse scenario and all fiat currencies are worthless at that point anyway. A lot of replies to this argument stop there but, more generously, you could say this would refer to bitcoin being used as a “medium of exchange” in a more narrow sense in a particular time and place where there is patchy internet/power or a local problem that takes away internet access. One difference with bitcoin base layer transactions and transactions on the Lightning Network is that the Lightning Network needs both parties to be online at the time of the transaction. Therefore the option of paying via the Lightning Network is not possible in this scenario. As a comparison with a common electronic payment method in use in the developed world, this would also be an issue with paying using EFTPOS, unless it went to an offline mode called “Electronic Offline Voucher” (EOV) mode. Paying via a standard bitcoin transaction would work in a similar, but potentially more reliable way, to this EOV mode.
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There is nothing inherent in a bitcoin transaction that means it must be transmitted between customer and vendor via the internet and, people being people, there have been bitcoin transactions passed via carrier pigeon, just to say that it had been done. Any way of transmitting information can be used to pass a bitcoin transaction between customer and vendor. In the scenario where both the customer and vendor were face to face this could be done via QR codes for example.
. If the vendor had their own bitcoin node, that “offline” bitcoin node would still be able to reject an invalid transaction based on it’s view of the bitcoin blockchain up until the point in time it went offline.
However, remember the problem we are trying to solve: deciding who owns what, based on an ordering of transactions in an adversarial environment. What if the customer can’t be trusted? They may have modified their mobile wallet software to attempt “double spends”. In this case, they can buy goods with multiple “offline” vendors by spending the same bitcoin multiple times. Once everyone reconnects to the internet, because the transactions are “valid” in the sense that they do in fact meet the conditions to spend the bitcoin, all the transactions will be broadcast, one will be put into a block and accepted as valid but the others will not. However, if the vendors had internet access in this scenario, the first vendor would broadcast the transaction, and a few seconds later the other vendors would know about it. If the customer tried to spend the same bitcoin with them they would be able to detect this and reject the transaction.
This is potentially better than current EFTPOS systems rolled out for fiat currencies in developed economies in emergency situations but that does not mean it is a good solution. As such it is not viable to use for such transactions in parts of the world where internet access is not common. Building more reliable, fault tolerant, and wider reaching internet and electricity infrastructure is going to need to happen before bitcoin can be successful in a number of places in the world where this is currently lacking
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Obviously physical cash is the current solution to this problem but it is slowly being displaced by electronic representations where it can be in countries with good infrastructure e.g. where EFTPOS can be rolled out. If you live in such a country, there are probably less banknotes representing your money than you think. There are a number of different measurements of money supply , see linked Wikipedia article, that can vary slightly between countries, and different countries report different ones, but the standard M0 is generally physical banknotes with the M1, M2, and M3 definitions becoming more abstract and including more things, but all are a form of nonphysical money, see the appropriate list on the https://tradingeconomics.com/indicators webpage. Note that the figures on the linked website were collected from official sources all over the internet but they are not necessarily checked by a human as I found an obvious error with a 35x spike in the amount of NZ M0 supply in February 2017, compared to other values for that year.
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Other arguments for why bitcoin will “fail”


6 Additional information about bitcoin scaling

Originally, the software for running the bitcoin network was written by one person, Satoshi, and presumably only run by them as well. When it was made available to others, they started using it with Hal Finney being the next person known to be running the software
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In order to prove that the first public version of the software, and the blockchain based on it, was not created before a certain date, the initial genesis block that is built into the software references a headline from a UK newspaper: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” The genesis block hash value that is needed to link it to the next block in the chain would have needed to be recalculated if this message was added in later so this proves that no blocks of the bitcoin blockchain could have been created before this date. Hal Finney publicly posted that he was running the bitcoin software on the 11th of January 2009.
. As more people used the software, they found bugs that they wanted to fix, or features they wanted added, and originally sent patches to Satoshi via email. Eventually, multiple people were given access to make changes to the code of this software project. As more people became involved, they started to specialise in what they wanted to do with the software and eventually terminology was created to describe different parts of the software and these pieces of the software were sometimes spun off into their own projects, most of which centralised something initially as it made things easier. The successor to the original Satoshi client, Bitcoin Core, has come to be called the “reference implementation” in recognition of this.

Mining and Wallets - creation of whole new products

One of the first distinct groups to be recognised were people doing mining and the software they needed to do so. It was of benefit to the individuals that they had the best software with which to do the mining and to take the mining code from the Satoshi client and tweak it so it worked faster on their hardware. Eventually the bitcoin mining competition got large enough that it switched from running on general purpose CPUs, to GPUs, and then purpose built ASIC machines. The CPU mining functionality was finally turned off in Bitcoin Core in the 2016 release in recognition of the fact that CPU based mining had not been viable for a long time and this part of the software ecosystem was mature enough and had enough competition that the Bitcoin Core version was not needed. As the number of miners increased, the profits for an individual miner became less regular so mining pools were formed and software to coordinate them was also developed. Initially, as it was easier, the software was developed such that the mining pool coordinator would create the block template and give it to the participants. Lately, new protocols have been developed
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that give some power back to the miners to pick the block template.
Another piece of the software identified as being useful to have multiple implementations of came to be called “wallets”. Originally, the user would have to create and record the public key and private key for every new output they sent bitcoin to so they could later spend it. However, in approximately 2013, there was the growth of standalone wallet software that needed a better way to do this. As the number of software wallet projects grew, there also grew a need for importing and exporting sets of keys between them. A number of standards were proposed and the concept of the hierarchical deterministic (HD) wallet
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For technical details, see the Learn Me a Bitcoin webpage on HD Wallets.
was created where there was effectively infinite sets of public and/or private keys generated from an initial seed, which could be recorded as a set of words
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The downside to this is that the standard was in flux and so different software defaulted to different derivation paths so you may want to note down the software you use and/or the derivation path along with your seed words so you can restore to a different wallet. One resource for trying to figure this out after the fact is https://walletsrecovery.org/. One benefit to the HD Wallet model is that you can have a “watch only wallet” where it can derive public keys but not the matching private keys so you can monitor your bitcoin without the ability to spend it.
. Note that standalone wallet software, and later hardware wallets, needed to know about the blockchain from a trusted source. The easiest way to do this initially was to have the software talk back to a node, or network of nodes, maintained by the people providing the software. An option to nominate your own bitcoin node may have then been added later but the default was normally left as those maintained by the provider.
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There has also been a concerted effort to refactor the Bitcoin Core code so that the code referring specifically to consensus rules was all in one library which would mean others could take this core code and make additional “node” implementations in a similar way to the way mining and wallets have been spun off. This is currently called the libbitcoinkernel project. For a high level view of where the different parts of the consensus code are within the Bitcoin Core code base, as at the end of 2023, see the list under the Consensus Mechanism section in the BitPublica Bitcoin Mining Newsletter article “Understanding the Bitcoin Source Code”. There are other node implementations out there, such as BTCD, that have rewritten everything from scratch but it would have been easier, and there would likely be more, if the core consensus code was in a single place within the reference implementation for them to refer to or build on.
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The Fork Wars - increasing transaction throughput

During the time period approximately 2015-2017, there was a “civil war” amongst the bitcoin community that I will call “The Fork Wars”, rather than the more common name of “The Blocksize Wars”. This is to highlight that I think the core philosophical differences were about how to change the bitcoin protocol in general, not so much about the specific issue of increasing the blocksize, as described below
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It doesn’t help that one of the most recommended books on that time (that I would also recommend reading) is “The Blocksize War” by Jonathan Bier. It was put up on the Bitmex blog one chapter at a time, between March 22, 2021 and August 8, 2021. However the chapters did not link to each other so here is a full set of links to all 21 chapters: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21. The book itself recognises the complicated issues at play but it unfortunately calls the sides “small blockers” and “big blockers” even though both sides were agreed a block size increase was needed. From the first chapter of the book: “This war over the blocksize would shatter and split the ecosystem over the next two years. As the war progressed, it emerged that the struggle was perhaps more complex than just the maximum size of blocks; the battle went right to the core of Bitcoin’s DNA. The contention was essentially about four somewhat interrelated issues:
  1. The level of blockspace available in each Bitcoin block – Essentially, whether the eventual state should consist of surplus capacity available in the blocks, or consistently full blocks.
  2. How to modify the rules of the Bitcoin protocol – Whether the rules on the validity of Bitcoin blocks should change relatively easily, or whether they should be more robust and only change in exceptional circumstances, with broad support from all interested parties.
  3. The significance of the nodes of ordinary users – The extent to which, if any, validating nodes of the ordinary end users had a say in enforcing Bitcoin’s protocol rules.
  4. Time preferences – Whether Bitcoin was like a tech startup which should prioritise gaining market share in the short term; or if it was a long-term project, a new global money, and one should think decades ahead when making decisions.”
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The original Satoshi client had no explicit block size limit but did have an implicit 32MB one i.e. things would crash if a block that was bigger than 32MB were created and transmitted around the network. Satoshi implemented a 1MB block size limit without much explanation early on but it is generally agreed that this was in part to stop a denial of service attack from a hostile actor
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One of the interesting things that happened during the period of the “Fork Wars” was that both sides tried to use quotes from Satoshi’s public comments to bolster their case in an “appeal to authority”. Maybe because of this, in arguments that happened after this, the perceived original vision of what Satoshi wanted was given less credence.
. By 2015 it was generally agreed that 1MB blocks were or would soon be full with transactions from the “good” participants of the bitcoin network, even without taking into account any attackers who would want to create spurious transactions for their own ends
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I have not mentioned in the main text the OP_RETURN Wars which were the debates that raged when it was discovered that transactions could be created that could be used to store arbitrary data in the blockchain. A compromise was reached where the code OP_RETURN was used at the start of the bitcoin script condition for spending an output and then data could be added after this. The transaction output this was attached to was known to not be spendable so could be ignored and not stored by a node if they wished. As it was not spendable, the value associated with the output would normally also be set to 0. Data put into the blockchain this way includes the bitcoin white-paper pdf itself and the script used to do so. To see how to extract this, see the answers to the bitcoin stack exchange question “How is the whitepaper decoded from the blockchain (Tx with ~1000x m of n multisig outputs)”.
. The general consensus was that an increase of the block limit to at least 2MB (and the subsequent doubling of the number of transactions able to be stored in a block) was needed. The question that people had was how to do this. Nominally this was about a block size increase but I consider that it was fundamentally about how bitcoin should be changed. In today’s terms, should it be a soft fork or a hard fork? The big problem is that, while these terms existed at the time, some of the subtleties were not so well defined and there was a lot of miscommunication during this time, in part because of this
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One side would say “everyone should be able to run a node” and the other side would push back with “hardly anyone needs to run a node”. These two statements can both be true. The latter however is underpinned with the assumption “everyone is like me” while the former is more inclusive. Given that the argument was generally between people in relatively privileged circumstances, I came down on the side of those that by default did not exclude the underdogs of the world.
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A hard fork is a change to the bitcoin rules that is not backwardly compatible as it is a loosening of the rules and, when a block following this changed rule is created, if everyone checking the rules is not upgraded, it guarantees there will be a chain split. A block size increase seems to obviously need a hard fork. A soft fork, on the other hand, is a change to the bitcoin rules that is backwardly compatible as it is a tightening of the rules and, when a block with this changed rule is created, a chain split is not guaranteed to happen if not everyone has upgraded. With a hard fork, you have to have a set of people who are “in charge” and coordinating that everyone is upgrading. With a soft fork, you need to have a minimal set of nodes that are checking the new rules to avoid a chain split
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There were previous chain splits in bitcoin’s history due to accidental hard and soft forks that could be referenced in these discussions, but normally they were not described as such. For example, see the approximately 12 minute digression in the talk “Consensus Algorithms, Blockchain Technology and Bitcoin” by Andreas Antonopoulos starting at around the 54 minute mark. He first describes an accidental hard fork based chain split that happened in March 2013. It required an emergency online meeting of bitcoin node operators in order to coordinate how to fix it. It was severe enough that it is sometimes considered the last time the bitcoin network as a whole was “offline”. He then describes an accidental soft fork based chain split that was happening at the time of the talk, in July 2015, due to the BIP66 soft fork upgrade. It did not require any coordination to fix and only caused minor “instability” in the network for a week or so. This meant that in some cases when doing a high value transaction, it would be recommended to wait for 2 hours before considering it final, rather than the more normal 1 hour. It ended up being such a nonevent that it is hard to find many details on it.
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In this particular set of circumstances, the hard fork was driven by the businesses who thought they would lose money if the block size was not increased, and they obviously thought they should be in charge of the upgrade. Initially, there was no soft fork proposal, just a push back that this was a dangerous thing to do. So the hard fork side got by default all those with less conservative views on the block size increase and had people who wanted a one off increase to 2MB, those who wanted a forever doubling of the block size limit on a schedule, and all those in between.
When a soft fork proposal was put together, called Segregated Witness, or “SegWit”, it was a complicated but elegant hack
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There are a lot of descriptive words used to describe the SegWit proposal but I chose the ones I did because by “hack” I mean it is probably not the way that you would go about designing a protocol from first principles. However, I also call it “elegant” because each design decision solves multiple problems. For a technical overview of some of these design decisions, listen to the first half of the Bitcoin.Review podcast Episode 29 “SegWit, Taproot, Schnoor, Inscriptions & Witness Discount ft. Andrew Poelstra & Adam Gibson”, available multiple places, including on Youtube.
that needed to have the miners implement it first
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One of the possible sources of confusion during this time is that both hard and soft forks needed the miners to implement their ideas before anything could happen.
in order to not cause a chain split. It also fixed the final obstacle that would allow the Lightning Network to be built on top of bitcoin to take the smallest transactions off the blockchain
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It took a few years for the Lightning Network to grow after initial software was released for it at the end of the Fork Wars. Initially there were only a few nodes, and then it was difficult to find a path to route payments around the network because the nodes that were available were not connected or did not have the appropriate capacity to do so. It has now got to the point where routing failures are rare and the Lightning Network can reliably route most small to mid size payments. Due to the privacy offered by the nature of the Lightning Network, there is no good way to get an accurate count of how many transactions are conducted over it. However, one of the companies that run some of the largest publicly known Lightning Network nodes, River, produced a report in 2023 that included a lower estimate. The title of the report is “The Lightning Network Grew by 1212% in 2 Years - Why It’s Time to Pay Attention” with the executive summary including the statement “we estimate a lower bound of 6.6 million routed Lightning transactions in August 2023.”
. The people who started the discussion wanted an increase to a 2MB block size limit and SegWit would effectively do it without the need for a hard fork
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A SegWit transaction stores the conditions for spending the transaction in a new part of the block that would not be seen by non-SegWit nodes. This means that a node that was not upgraded will see it as an “anyone can spend” transaction. A block full of “typical” SegWit transactions was calculated to have 1MB used in the normal part of the block and another 1MB in the other part of the block for a total of 2MB (although the actual new maximum block size limit was 4MB).
. By this time though there was so much miscommunication and mistrust between the two sides, and the more radical block size increase contingent had dug their heels in about wanting a hard fork, that this was not an acceptable solution.
After a long series of events, the network finally forked in August 2017, doing both a hard fork and a soft fork. The bitcoin network split with a hard fork on August 1st 2017, and the fork using the original rule set was upgraded via the SegWit soft fork on 24 August 2017. The hard fork was given the name Bitcoin Cash and has become an “also ran” in the larger cryptocurrency world
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From Chapter 21 of “The Blocksize War”: “...in spite of these efforts, the coin never really gained traction compared to Bitcoin. Over the next few years, Bitcoin Cash underperformed Bitcoin with respect to price. Not only that, but Bitcoin Cash even had lower on-chain transaction volume than Bitcoin, when on-chain throughput and a blocksize limit increase was said to be the primary driver behind the coin. Even worse, by March 2018 it emerged that Bitcoin Cash on-chain volume was even lower than SegWit volume on Bitcoin. SegWit had increased on-chain transaction volume faster than Bitcoin Cash...In part due to the difficulties of conducting a hardfork in Bitcoin, the Bitcoin Cash community opted for a different approach. They conducted a hardfork every six months, in May and November of each year. In November 2018, just over one year since Bitcoin Cash had launched, there were tensions in the Bitcoin Cash community... Exploiting the scheduled hardfork date of November 15, Bitcoin Cash split into two coins... As a result of the split and the resulting uncertainty, the value of Bitcoin Cash compared to Bitcoin continued to decline. Just as the small blockers had expected, some of the large blockers began to slowly see merit in the idea that, in the event of a dispute over the rules, the original rule set is a key schelling point [see the Wikipedia article “Focal point (game theory)”]. If one diverts from this philosophy, the risk is that the coin continues to split into smaller and smaller factions. The large blockers were painfully experiencing this first-hand. ”
An alternate version of this time of bitcoin history is told by one of the players who ultimately ended up on the Bitcoin Cash side of things in the book “Hijacking Bitcoin” by Roger Ver.
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Taproot - increasing transaction complexity

One type of transaction that bitcoin can do is a multiple signature, or “multi-sig”, transaction where a threshold number of private keys must sign a transaction in order to spend the bitcoin. Due to the way this was initially implemented there were a maximum number of 15 signatures and the larger the number of signatures, the larger the transaction. Another waste of space in bitcoin transactions was that if you had multiple sets of conditions that could be fulfilled to spend an output, they all had to be revealed when it was spent, not just the condition that was met. Enhancements to these were proposed under the name of the “Taproot” soft fork. A new signature scheme was created so that no matter how many signatures were used, they took up the same number of bytes, and could be processed faster than the older method
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Depending on how you build the transaction there are different limits on the number of signatures you can have, but they are much larger than the previous limit of 15. The most obvious limit being only 999 signatures can be combined and checked in a “simplistic threshold number of signatures” transaction due to a stack size limit of 1000.
. More complicated sets of spending conditions could also be created with a new Tapscript variant of the bitcoin scripting language. Only the single condition that was actually used would need to be revealed with the others being summarised by the appropriate set of hashes. There was also a transaction size limit that was relaxed so that a single transaction could in theory be as large as the new 4MB SegWit block limit
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This was done to make it feasible to do automatic formal verification and optimisation of Tapscript scripts but there ended up being an unintended consequence of this. Previously, if someone wanted to store a large amount of data in the blockchain, they would have to do it in a number of transactions and there was no guarantee the transactions would be ordered they way they wanted, unless it was done by a miner themselves. With the transaction size limit removed, it meant that now arbitrary data up to 4MB could be stored in a block just by paying a competitive fee.
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This was a relatively uncontested proposal and implementation, due in part to one of the features of the SegWit upgrade being that it made other large soft forks easy with the use of a version number
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The original SegWit soft fork was SegWit version 0. At the time, a transaction output with a SegWit version that was anything other than 0 was deemed to be “anyone can spend” but if it was version 0 a stricter set of rules were checked. Taproot was implemented as SegWit version 1 and the rule amended to anything that had a SegWit version that wasn’t 0 or 1 was deemed to be “anyone can spend” but stricter rules were applied to version 0 and 1.
. There was a soft fork coordination method that had been developed during the Fork Wars called “Speedy Trial” that allowed it to be relatively quickly activated at the end of 2021
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There were many articles discussing the Taproot soft fork at the time but one of the most comprehensive is the Cointelegraph article “A Beginners Guide to the Taproot Upgrade”. For a technical overview, listen to the second half of the Bitcoin.Review podcast episode 29 “SegWit, Taproot, Schnoor, Inscriptions & Witness Discount ft. Andrew Poelstra & Adam Gibson”.
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A future store of value due to scaling to more users, not just scaling transactions

There has recently been a number of “spot ETFs” approved. The ones that made the most news were the 11 approved at once in the US at the start of 2024 but there have been others, both before and after these highly reported ones. Roughly speaking, buying and selling of shares in these Exchange Traded Funds
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See Wikipedia article titled “Exchange-traded fund”
(ETFs) result in a nominated custodian buying and selling bitcoin on your behalf. This allows those for whom the current financial system is already working to have some ability to be exposed to the risks and rewards of the changes in price of bitcoin. This can be seen as a way of scaling bitcoin to more people and exposing them to the idea that bitcoin is a “store of value”. However, this is both custodial and not something the “other 6 billion” can do. So, in my value system, it is not one of the more important uses of bitcoin. Each custodial service is a point where a hostile government (or criminal organisation) can attack and confiscate (or outright steal) the bitcoin under the control of the service. This is likely to be of more concern for the “other 6 billion” rather than those who currently have access to these ETFs. Having said that, it is interesting to think about why people would want to invest in these ETFs
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It can be argued that ETFs and the large amount of money that can easily flow through them may potentially be a stabilising influence on the price volatility of bitcoin over the short and medium term which is likely a net good.
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You can see the “store of value” monetary property of bitcoin as being a circular reference i.e. people think bitcoin will have value in the future because people think bitcoin has value in the present and that will continue into the future. This is likely how most investing in the ETFs see things. However, I don’t think this is the whole story. The value of bitcoin had to start somewhere and it is not so far in the past that we can’t have a good guess as to what it was. In my view, the first people to think bitcoin had value, thought it did so based on it’s use in a possible future as a medium of exchange that could happen over the internet. This continues and some of the value as a “store of value” property is still based on the perceived “medium of exchange” property of bitcoin. This is, in turn, based on the size of the network of users and the variety of transactions they can potentially engage in.
As more people saw potential use for bitcoin, it gained value due to it having a large enough network of users that it could actually function as a medium of exchange over the internet in some niche markets. As it became used enough that transactions had fees, this functioning as a medium of exchange was restricted, as there was now a lower limit on the value of a transaction that it was viable to do at some points in time. The creation of the Lightning Network and the subsequent migration of very low value transactions on to this network put this problem off for a while, possibly as much as a decade, but it is likely that we have now passed the point where there will be blocks that will regularly have transactions at less than the nominal fee of 1 sat/vbyte level
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According to a long running mempool.space graph, the last time the mempool had cleared of all pending transactions at or above 1 sat/vbyte was at the start of 2023.
. During this time, the number of users of bitcoin has increased so the network effects have also increased and the price of bitcoin has increased, at least in part, to reflect the increased potential transaction partners.
The Lightning Network requires the participant to have bitcoin on the base chain and they need to make a base chain transaction to enter or exit the Lightning Network. As the price of bitcoin increases in fiat currency terms, and the transaction fees increase in bitcoin terms, there will come a time when new people cannot participate in the Lightning Network. In the short term there are compromises that can be made with custodial services. These are not solutions I see as being in the “spirit of bitcoin” that I want to support, and so I see the need for better solutions. In short, there is an obvious need for a new way to scale the number of people who can self-custody their own bitcoin and transact with it in smaller amounts without compromising the best aspects of the current bitcoin network.
If this is not solved, then the “medium of exchange” property of bitcoin is lessened and it becomes a less attractive “store of value” and more likely to stay a niche product. In this case bitcoin will not reach it’s ultimate potential as a world wide medium of exchange of value of almost any amount. On the other hand, each successful round of scaling will eventually just lead to another round of scaling being needed as the bitcoin network becomes more useful to more people for more transactions.
As more people are involved with bitcoin, it becomes harder to come to agreement on any changes that are needed, or even the value of some of core principles I have labelled the “spirit of bitcoin”. In the short term this means that nothing changes until and unless there is seen to be overwhelming agreement. I consider this to be generally a good thing. However, in the long term, this may mean that any changes that are needed are delayed or that the “easy” path is chosen that leads to more centralisation or trade offs that go against what I see as the “spirit of bitcoin”. Hence why I think that the major risks to bitcoin over the long term will come from the rounds of arguments, discussions, and decisions needed in order to enable another round of scaling.
For example, how many people value the ability to self-custody their bitcoin? I suspect that the people who value this are more likely to be part of the “other 6 billion” who do not currently have access to custodial banking services anyway and are more likely to live in a precarious situation where they would value the ability to take their bitcoin with them if they need to flee for their lives. Their view is also unlikely to be heard because of this very situation. In contrast, I suspect the people who are more likely to have a platform to broadcast their views about bitcoin are more likely to be in a privileged position where they have a bank account and are less likely to see the need for self-custody of bitcoin. It is likely they would even be nervous about taking the responsibility for self-custody and would prefer to rely on a some trusted institutions instead with the understanding that they have recourse to a functional legal system if the institution fails in it’s responsibilities.

7 Resources for keeping up to date with new developments

A large number of sources of bitcoin news start up one year and stop the next. Therefore, these are a couple that have existed for multiple years and so it can be assumed they will continue to exist.