Bitcoin is a subject that is often misunderstood. This misunderstanding is rooted in the fact that bitcoin is a multifaceted new technology at the intersection of computer science and monetary economic theory. Therefore, in order to fully grasp bitcoin’s fundamental value proposition, one must acquire a solid understanding of how bitcoin functions at a technical level, as well as become knowledgeable about monetary history and Austrian monetary economic theory. Failure to understand both of these dimensions will inevitably lead to a fundamental misunderstanding of bitcoin’s true purpose and antifragility, as evidenced by the inability of many mainstream Keynesian economists to explain bitcoin’s enormous growth in just 10 years time and the many market participants who have attempted haphazardly to emulate bitcoin’s success by launching alternative cryptocurrencies.
The book Mastering Bitcoin from author Andreas M. Antonopoulos lays out in-depth how bitcoin works from a technical computer science perspective. This book is an essential read to understand the inner workings of the bitcoin blockchain and why bitcoin can be considered as a scarce digital good with a fixed supply. To this end, the book dives into the actual source code of the bitcoin protocol and goes to great lengths to explain many important concepts relating to public-key cryptography which are essential for bitcoin. Even though Mastering Bitcoin is mostly intended for coders, the book is written in a way that it can be read and understood by anyone (i.e. even if you don’t have any knowledge about writing code). As such, I highly recommend reading this book to both coders and non-coders alike, in order to gain a deep understanding bout bitcoin.
Non-exhaustive overview of elements that are covered in the book Mastering Bitcoin:
- The book starts out with a glossary of the most common used terms in relation to bitcoin, followed by an introduction to what bitcoin is and how you can send and receive bitcoin.
- Chapter 2 of the book sets forth how bitcoin works from a high level perspective. More in particular, it discusses (1) what are ‘bitcoin transactions’ and how they are constructed and (2) the concept of bitcoin mining and its purpose.
- The following chapters of the book go in-depth and provide a technical explanation of the inner workings of bitcoin’s critical parts, more in particular (1) the bitcoin client, (2) keys, addresses, wallets, (3) transactions, (4) the bitcoin network, (5) the blockchain, (6) mining and consensus.
- Chapter 9 discusses alternative cryptocurrencies and potential different applications of bitcoin technology.
- The final chapter of the book discusses bitcoin’s security principles and user security best practices.
Elements that are not covered in the book Mastering Bitcoin:
Mastering Bitcoin is meant to provide the reader with a technical explanation of the inner workings of bitcoin. After reading the book, the reader will understand how all the critical parts of bitcoin work together, such as, how bitcoin transactions are constructed, how key pairs and bitcoin adresses are generated, how the various members of the bitcoin network interact with each other, how bitcoin mining works, how the bitcoin blockchain is built, why bitcoin is a scarce digital good, etc.
What is not discussed in Mastering Bitcoin is bitcoin’s value proposition from a monetary economic perspective. The book does not explain to the reader why bitcoin can be considered an incredible robust store of value, similar to physical gold. Indeed, this would require an analysis of monetary history and Austrian school of economics, which falls outside the scope of this book.
Therefore, in addition to the book Mastering Bitcoin, I would recommend to anyone who’s looking to gain a fundamental understanding of bitcoin to read the book The Bitcoin Standard from author Saifedean Ammous. The Bitcoin Standard analyses bitcoin from a monetary economic perspective. I have reviewed said book here.
Major takeaways from the book Mastering Bitcoin (non-exhaustive):
- The term bitcoin consists of: (1) a decentralized peer-to-peer network (the bitcoin protocol), (2) a public transaction ledger (the blockchain), (3) a decentralized mathematical and deterministic currency issuance (distributed mining) and (4) a decentralized transaction verification system (transaction script).
- Bitcoin in a sense is the perfect form of money for the internet because it is fast, secure, borderless and entirely virtual.
- Bitcoin is an open permissionless distributed, peer-to-peer system, meaning that anyone can join and leave the network at anytime and there is no central server or point of control.
- The purpose of the bitcoin network is to propagate all transactions and blocks to all participants in the network.
- A transaction transmitted across the network is not verified until it becomes part of the global distributed ledger, i.e. the bitcoin blockchain. Every 10 minutes on average, miners generate a new bitcoin block that contains all the transactions since the last block.
- Bitcoin transactions move value from transaction inputs to transaction outputs. An input is where the coin value is coming from, usually a previous unspent transaction output. A transaction output assigns a new owner to the value, by associating that value with a new private key. Outputs from one transaction can be used as inputs in a new transaction.
- The key innovation of bitcoin was to use a distributed computation system (called a “proof-of-work” algorithm) to conduct a global “election” every 10 minutes, allowing the decentralized network to arrive at consensus about the state of transactions.
- The concept of proof-of-work to achieve consensus without a central trusted authority is a practical solution to a previously unsolved problem in distributed computing, known as the “Byzantine General’s problem“.
- Bitcoin’s main innovation is the decentralized mechanism for emergent consensus. Bitcoin’s decentralized consensus emerges from the interplay of 4 processes: (1) independent verification of each transaction by every full node, (2) independent aggregation of transactions into new blocks by mining nodes, coupled with a proof-of-work algorithm, (3) independent verification of the new blocks by every node and assembly into a bitcoin blockchain, and (4) independent selection, by every full node, of the chain with the most cumulative computation demonstrated through proof of work.
- He who knows the private key is able to spend the value associated with that private key, i.e. is able to spend the bitcoins. In other terms, the person who knows the private key is the “owner” of the bitcoins associated with that private key.
- Not your keys, not your bitcoin. Bitcoin keys should be stored offline at all times.
- A private key is a 256 bit number picked at random. A public key is derived from a private key using one-way elliptic curve multiplication. A bitcoin address is derived from a public key through the use of one-way cryptographic hashing functions.
- Public key cryptography used in bitcoin is what allows any third party to verify that a bitcoin transaction was signed by the correct private key, without the private key ever being revealed to that verifying third party.
- Bitcoin mining serves 2 purposes: (1) creating new bitcoin each time a new bitcoin block is mined, and (2) creating trust by ensuring that transactions are only confirmed if enough computational power was devoted to the block that contains them, through the use of a proof-of-work algorithm.
Who is the book Mastering Bitcoin for?
According to the author, Mastering Bitcoin is primarily intended for coders who want to get started with bitcoin.
However, I myself have been able to read and understand the book without any technical knowledge (I haven’t got the slightest idea of how to write code :-)). In this regard, the author has gone to great lengths to explain all critical technical concepts in easy to understand language. In addition, many examples are provided throughout the book, allowing the reader to empirically verify the concepts that are discussed.
In conclusion, Mastering Bitcoin is an essential read for both coders and non-coders alike. Without learning the inner workings of bitcoin from a technical point of view, you will never be able to truly understand why bitcoin is a scarce digital good, and by consequence, why bitcoin is valuable. Mastering Bitcoin provides the reader with just the right amount of technical knowledge to truly understand how bitcoin functions at its core.
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