The Bitcoin network is often talked about but never really broken down into it’s smaller parts. The network itself is a stage with multiple pieces working in tandem that make up the larger network as a whole. This article will give the reader a cursory overview of these individual pieces, as well as how they interact together.

Bitcoin Network – Layer 1

The base layer 1 of the bitcoin network refers to nodes, miners, clients, wallets, and the blockchain. This is a settlement layer for payments and are permanently etched into the blockchain for all eternity. Anyone can interact with layer 1 by broadcasting their p2p payments to each other, but you must wait for confirmations to ensure there won’t be a double-spend on the transfer.

Nodes

Bitcoin nodes are the backbone of the bitcoin network, which hold and maintain the entire blockchain. They communicate with one another about new blocks that are to be added to the end of the chain, and are the enforcers based on predefined rules as to whether the block is valid or not.

Miners

Bitcoin miners – while also bitcoin nodes – perform the actual mathematical calculations of attempting to find a new block. You read about these the most in the news, as they use a lot of electricity, and are the actual pieces of the network that can “make you money”. The use of electricity is a trade-off and ensures the security of the blockchain. Proof of work is utilized in that it took 10 minutes worth of expending electricity to discover a new block.

The block consists of selected transactions from a pool of transactions that people have broadcast to the bitcoin network. Miners choose which transactions to include in their discovered block based on the fees associated with the broadcasted payment.

Clients and Wallets

Individual users of bitcoin have software that allows them to receive and send bitcoin payments. This software manages their wallet, which is just a collection of private keys. Some wallets require the entire bitcoin blockchain to be downloaded in order to send bitcoin, while others like SPV or light wallets do not. Here’s a list of some of them and what they are:

• Bitcoin Core – this is a client maintained by the core bitcoin team, and requires the full blockchain to send payments
• Electrum – this is an SPV wallet that relies on seed words to backup your wallet. This does not require the full blockchain to send payments.
• Ledger Nano S and Trezor – these are hardware wallets that create a very secure environment for your keys. You use the device to sign transactions that will be broadcast to the bitcoin network, and the private key never touches the computer. You can use this on public computers or on compromised machines housing keyloggers with no fear that your coins will be stolen.

Blockchain

The bitcoin blockchain consists of every single transaction since Bitcoin’s inception in 2009. Each individual block consists of either 0 kb in size or 1024 kb (1 megabyte) in size. The number of transactions that can be stored in a block depends on the type of transaction sent and miner’s desire to include a transaction in the block. Since each transaction includes some fees, miners are incentivized to include as many transactions as possible that will fit.

Bitcoin Network – Layer 2

A recent development in the bitcoin space is the Lightning Network. This is a layer on top of layer 1, much like PayPal or Visa is a layer on top of the banking system. Layer 2’s goal is to increase the transactions per second between two parties transferring value while still keeping security, anti-censorship, and decentralization as cornerstones of the protocol.

Since the base layer’s blockchain is 1 megabyte maximum in size for every block, there’s an obvious limit as to the number of transactions per second that can be processed by the bitcoin network. To get around this without increasing the blocksize to infinity (which would be impossible for people to download large blocks before the next block would be found, thereby leading to network congestion), layer 2 was built. Read more about what the lightning network is and how it relates to solving the blocksize problem in this article.

Introduction

What is Bitcoin? Wikipedia defines bitcoin as:

[Bitcoin is] a form of electronic cash. It is a decentralized digital currency without a central bank or single administrator.

It’s a very simple statement. You might read this quickly and not really grasp what it means in a larger sense. The important stuff is in the last sentence. Bitcoin is distributed to users without the use of a central bank which might leave you with a lot of questions about how that is possible from a technical and more importantly an economic standpoint. If bitcoin isn’t issued by a central authority then who controls the production of the coins?

The following articles go over all of these questions:

• How does bitcoin work?
• What does the bitcoin network look like?
• What is bitcoin mining?
• What are bitcoin nodes?
• What is a bitcoin address?
• How many coins are there?

In order to answer “What is bitcoin?” we need to first understand what money is. There’s quite a few things that are never taught in school growing up, at least in the United States, and money is one of them. You were taught how to count it, and that there’s an entity called the Federal Reserve, but you weren’t exactly taught the history of it. A vast majority of individuals assume that every paper dollar is “backed” by an equivalent amount of gold. This is 100% false and hasn’t been the case since 1971.

So what is money then? There’s a plethora of youtube videos and articles out there describing the history of the US dollar, so I won’t get into that here. A list of videos on the history of money can be found here. Money, in it’s truest form, is a medium of exchange which allows individuals to conduct public and private business with each other. The fact that it is not backed by anything makes no difference. If the public trusts the currency, it will be used with no friction.

Sound Money

money [that is] not liable to sudden appreciation or depreciation in value : stable money; specifically : a currency based on or redeemable in gold
Webster’s Dictionary

The move away from the gold standard has caused an inflation in the price of goods and services in the United States. The value of the US dollar has dropped considerably since the 1900s due to quantitative easing.

Inflation is fought by hedging against the US dollar. Strategies include diversifying your portfolio by investing in companies outside of the United States, putting some fiat money into precious metals, jewelry, and more recently bitcoin. By hedging your bets you protect yourself from some inflation. If the national inflation rate is 2.9% per year and you’ve invested 10% of your cash into other currencies/commodities – if those did well you offset that inflation by a little bit.

What is Bitcoin?

Bitcoin can be seen as an addition to your portfolio for longer term holders. Bitcoin can also be seen as a peer-to-peer currency which cuts out the middleman (banks). It is a new emerging asset class that was born in 2009 and has seen remarkable price growth. Bitcoin is more than that though, and it’s price is just the tip of the iceberg. Much like the US dollar of today, which is backed by nothing but trusting that the government won’t destroy it, bitcoin is also only backed by the trust that the system is open for everyone to see and the fact that it can’t be changed on a whim from it’s 21 million coin cap by any central authority thereby diluting and growing the coin pool. The mathematical model which secures bitcoin ensures that it can never be hacked (and has not been hacked to this day) – only exchanges which house bitcoin have been hacked due to exchange’s poor security models.

To learn more about Bitcoin’s other use cases, check out this article.