---
# System prepended metadata

title: Inside Bitcoin
tags: [EN-TheSmith's-Collection]

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# Inside Bitcoin

![](https://hackmd.io/_uploads/H16PHV82t.png)


In mid-October 2008, the United States began its most serious financial crisis since the Great Depression of 1929. In analyzes made by Ray Dalio in his book [Big Debt Crises](https://www.bridgewater.com/big-debt-crises/principles-for-navigating-big-debt-crises-by-ray-dalio.pdf), the author noted that its main cause was a structural failure in the American financial market, both from financial institutions and from the American government. This was mainly due to the excessive supply of supposedly low-risk and collateralized assets, [which were actually made up by risk agencies.](https://www.researchgate.net/publication/306506317_The_Failures_of_Credit_Rating_Agencies_during_the_Global_Financial_Crisis_-_Causes_and_Possible_Solutions) In addition, as this market became profitable for many investors in the US, a lobby was built to maintain a sector with a low regulation. These were named CDO - Collateral Debt Obligation-1.
These assets represent debts incurred as a result of loans made and their offer on the market began in 1987 at the investment bank Drexel Burnham Lambert. The creators of CDOs considered these assets “junk” due to the high risk of default by borrowers. However, over the years the demand for acquiring CDOs has increased and all banks have started to offer this product to investors such as JP Morgan, Morgan Stanleys and Lehman Brothers. The high demand for student loans and the boom in the US housing market has led to an increase in the marketing of junk CDOs.
However, due to the high profits obtained with this asset, banks, risk agencies and the government itself weren’t concerned with the risk of a bubble in this market. While banks were collecting high-risk loans, rating agencies gave top marks to CDOs - known as triple A - and the government, taken over by the banking lobby, sought not to regulate this segment.
The consequences of these acts were seen and publicized by the media: the lack of criteria for granting loans aimed only at profits caused a high default in the payment of these, causing not only the insolvency of the banks responsible for the loan loop without criteria, but negatively affecting the economy globally.

![](https://hackmd.io/_uploads/SksTSVU2F.png)
Source: Exame

We recommend to those interested in studying the 2008 crisis the film [“The Big Short”](https://www.youtube.com/watch?v=4UKz8fyPIEE) and the HBO documentary [“Panic: Th[e Untold Story of the 2008 Financial Crisis”](](https://www.youtube.com/watch?v=QozGSS7QY_U).
In parallel with the subprime bubble in 2008, Bitcoin was taking its first steps, having registered its bitcoin.org domain in March 2008 and, on October 31 of this year, the launch of its white paper. Satoshi Nakamoto, its anonymous creator, clearly describes that the creation of Bitcoin is founded on the lack of trust in today’s financial and government institutions. As observed in reading the white paper:
What is needed is an electronic payment system based on proof of encryption rather than trust, allowing two parties to transact directly with each other without the need to trust an intermediary.
Thus, the main objective was to create a new currency used as a means of payment, so that transactions made using BTC could be verified without the need for an intermediary to guarantee the veracity of the information contained in them. 
To accomplish this, Satoshi developed what would be the first type of DLT ever created, the blockchain. We talk about its main concepts in [other articles](https://odysee.com/@ShapeShiftDAObr:a/blockchain-ptbr:a).
Blockchain can be defined as a distributed storage technology, where the information of transactions performed by users are stored in blocks, being organized in a concatenated chain. This logic is used to guarantee the veracity of the information introduced by users, since the blocks are linked through hashs.

Below is a graphical representation of all data contained within a block. It’s divided into two parts: the header and the transaction list.

![](https://hackmd.io/_uploads/rkN9I4U2K.png)
Information contained within a block in the Bitcoin blockchain. Source: [Marcsteiner](https://marcsteiner-consulting.ch/description-of-bitcoin-blocks-and-transactions)

However, to introduce new information in the blockchain it’s necessary a consensus between all responsible for validation and introduction of new information in the network.
This consensus, in the Bitcoin blockchain, is formed from the Proof of Work - PoW.
The proof of work was conceived by Cynthia Dwork and Moni Naor with the aim of combating junk mail or spam - a big problem at the time of the explosion in the use of e-mail. This concept was later adopted by Adam Back in his Hashcash project.
Hashcash applied the theory created by the researchers to a system that aimed to combat spammers, making the sending of emails in scale, economically unfeasible. This happened through the creation of the Proof of Work: the user who had the intention to send a message to another, needed to solve cryptographic puzzles.
These puzzles to be solved were created from the metadata - sender and receiver of the message, for example - present in the email, together with random numbers. From this combination, the system transformed them into binary numbers and, soon after, into a hash containing the same information. By creating it, the user’s machine needed to find this corresponding hash created by the email system, pointing at random until reaching the correct result. Due to the infinity of possible results, the user demanded expenditure of computational power to solve the problem created by the system, embedding difficulty in sending the email and making it difficult to send mass messages, as this obliges those who have the desire to send many Spam emails hold large computing power for such. This way of finding a result is called brute force.
With the use of this algorithm, the Proof of Work proved to be an effective mechanism for the formation of consensus in the Bitcoin network. The intention of its creator was the same as Adam Back's: to keep away malicious users, making its use unfeasible with intentions to defraud the network.
Applying Proof of Work to Bitcoin, Satoshi developed a way for fraudulent activity to be less profitable than the rewards obtained for making it safe.
This happens because the computational expense to change information on the network is extremely high, due to the large number of validators in activity on the network. On the contrary, if its data processing power is directed to include new information in blocks or to validate those entered by other nodes, it ends up having as a reward the network's native currency, BTC, added to the fees paid by users who carried out the transactions.
In addition to the security of the Bitcoin infrastructure, all information included in your network is public, immutable, and there is no central authority with control over blockchain participants.
All the intrinsic features of the Bitcoin blockchain are clearly a counterpoint to the traditional financial system. Its search for (1) does not identify users participating in the network; (2) keep all records stored ad eternum for anyone to see; (3) and even though the transactions are demonstrably related to illegal activities, there is no one who can change them demonstrates that Bitcoin is not just another tool to transact values ​​digitally, but rather a political manifesto as important as the [Cypherpunk Manifesto](https://nakamotoinstitute.org/static/docs/cypherpunk-manifesto.txt) written by Eric Hughes, calling for privacy in the early 90s.
Since its inception, Bitcoin has been recurrently associated with [money laundering, financial crime,](https://www.jdsupra.com/legalnews/bitcoin-and-money-laundering-2928902/#:~:text=Bitcoin%20Meets%20Money%20Laundering%3A%20Crypto%20Laundering&text=%22Decentralized%22%20here%20means%20that%20no,them%20look%20and%20appear%20legal.) [drug trafficking](https://www.cnbc.com/2018/04/13/how-bitcoin-and-cryptocurrencies-are-fueling-americas-opioid-crisis.html) and [even global warming](https://www.nature.com/articles/s41558-018-0321-8). Little by little, all the negative allegations are being empirically overturned, guided not only by the lack of belief in the State, but by the efficiency of the technology developed by Satoshi Nakamoto.


¹CDO or Collateralized Debt Obligation is a way found by financial institutions to securitize debt in their favor. In this way, a loan granted to a third party guaranteed by an asset - for example - can be converted into bonds that will be entitled to receive payment of the debt with interest.

###### tags: `EN-TheSmith's-Collection`