August 09, 2020
The big, cast iron cauldron sits suspended over the roaring fire, its bubbling contents ever so often exploding up, out and into the flames below. Every night, members of the community gather to fill their bowls and satisfy their hunger with the soup.
The bitcoin blockchain is one big log of transactions that stores every bitcoin transaction ever executed by anyone. As of March 2020, the blockchain's size is roughly 300GB, or about the size of one modern computer's hard drive. With the right equipment, it is entirely possible to download the entire blockchain onto your computer. As of July 2020, there are 18.4 million bitcoins in existence, so with the price of a bitcoin roughly $10,000, the total market cap of bitcoin is approximately $168 billion.
Like adding salt to soup, once something is added to the blockchain, it cannot be modified or removed. The blockchain can only be modified by adding more to it. In this way, the blockchain is an append-only data format.
The soup is the community’s primary source of sustenance, and in fact, the first batch was made years ago, with ingredients added by a particularly eccentric community member. Each day, members bring new ingredients to be added, and fill their bowls to enjoy the delicious soup.
Bitcoin and the blockchain were conceived by an anonymous internet forum member using the name Satoshi Nakomoto. Satoshi released a whitepaper detailing its implementation in October of 2008. The first block on the blockchain, the genesis block, was "mined" by Satoshi on January 9th, 2009. The blockchain has grown in size from the transactions and contributions of an increasing number of people who transact bitcoins.
The community has adopted a peculiar set of rules to keep this cycle of soup going. And, like the contents of the soup itself, these rules are contributed and agreed upon by the members of the community.
Bitcoin and the blockchain are "decentralized", meaning that there is no single source of truth for the data or the transactions executed. The system is designed so that a consensus is required between different computers on the bitcoin network in order to continue transacting and growing the blockchain.
Discussing the merits of decentralized systems is a topic for another article, but, importantly, decentralization stands in stark contrast with the centralized authority of the Federal Reserve in the US's current financial system.
The first rule members have agreed on is that in order to receive soup, each member must also contribute ingredients to the soup. Any member can stop by the cauldron at any time of day or night to fill their bowl or drop off ingredients. At the cauldron, they encounter any number of volunteer chefs who are manning the soup operation at the time.
Bitcoin and the blockchain are available 24 hours a day, 7 days a week. There are no "business hours", which means bitcoin can be bought and sold at any time of day or night, any day of the week. Computers are running around the world, all hours of the day, mining bitcoin, and adding blocks (groups of bitcoin transactions) to the blockchain.
The chefs have a very important job–they ensure soup continues to be made for the community, and importantly, that it continues to taste good. As members show up with their offerings of vegetables, spices and meats, chefs use their judgment to determine whether the ingredients will be added to the soup.
But the chefs’ job is not without challenges. The chefs’ judgment on what is added to the soup is so important that the community has decided that each new ingredient needs to be agreed on by a minimum of three chefs before it can be added in. In exchange for their work, chefs earn soup for themselves.
Bitcoin miners are members of the community that contribute their own computing power to the network to do the work of verifying transactions as they happen. In exchange, miners earn new bitcoins, as well as transaction fees.
Computers verify a transaction by computing a complex mathematical calculation for the transaction and then sharing their answer with other computers on the network. The calculation's result is called a hash. Bitcoin's proof of work algorithm used to compute these hashes is based on a common hashing algorithm called called SHA-256.
Once enough computers on the network all show the same result, a consensus is reached and the transaction is deemed legitimate, and can be confirmed and added to a block.
A block is a collection of bitcoin transactions that will eventually be appended to the blockchain when the block is full (each block cannot be more than 1mb in size). When a block is completed and added to the blockchain, new bitcoins are also created and given to the miners who helped verify the transactions in the block.
The number of bitcoins created per block is 6.25 as of August 2020, but, importantly, this number decreases by half every 210,000 blocks mined (roughly every 4 years). The next halving will occur in May 2024, when the bitcoin reward per block added to the blockchain will drop to 3.125. This event is called a bitcoin halving. This halving mechanism also means that eventually no more bitcoins will be generated through mining, and the supply of new bitcoins into the system will end, capping the total number of bitcoins at 21 million.
Anyone can mine bitcoin, but without a specialized computer that is purpose-built to run these verification calculations, it is not a profitable or practical activity for individuals to partake in.
At times, the chefs receive a surplus of specific ingredients, for example a particular vegetable or spice that is having an abundant season. But, they always take their time to review each contribution. When these surges occur, the chefs use their judgment on which ingredients to evaluate first–it is not always the case that the first ingredients received are the first ingredients added to the soup. Chefs might see something particularly enticing–perhaps a rare spice, or a large quantity of something that is needed, and will choose to add this ingredient before other ingredients. The community has learned to anticipate these surges and often come prepared to increase or substitute their offering in the hopes of getting them added to the soup faster.
There are limits on the number of blocks and transactions that can be added to the blockchain within a certain period of time. This is by design, and equates to roughly one new block added to the blockchain every 10 minutes.
When a transaction is broadcast into the bitcoin network, it goes into the memory pool, or mempool. The mempool is an intermediate holding area from which miners can pick and choose which transactions to verify based on the amount of transaction fees sent with the transaction. Miners try to maximize their return on mining by working on transactions with higher transaction fees first. In this way, confirming transactions and adding them to the blockchain becomes an auction during times of high transaction volume.
We measure the total amount of computing power on the bitcoin network in terms of the hashrate, or the number of hashes being calculated per second on the network at any given time. As of August 2020, the hashrate is about 120 ExaHashes per second (120 EH/s). An ExaHash is one quintillion hashes.
Once a community member’s ingredients are added to the soup, they are then provided a receipt confirming their contribution. On these receipts is a detailed list of items contributed, along with the time and the signatures of the chefs that signed off on the contribution. This way, there is never any doubt who has contributed which ingredients to the soup, and if needed, the chefs can vouch for the authenticity of the exchange.
When you purchase any amount of bitcoin, you get a secret key which unlocks the specific address, or location, of the transaction on the blockchain. Only you have have this key, and the key is required to prove that you own the bitcoin at the address. In a sense, owning bitcoin is like owning a sales receipt that proves the transaction happened.
Keys are impossible to guess, and so there is a risk that keys get lost and become unrecoverable. Currently, it is estimated there are 4 million lost bitcoins that may never be recovered.
Bitcoin wallets were created to safely store bitcoin private keys and the addresses of your transactions. Wallets also have addresses which are used to identify the sending and receiving parties in a transaction. There are many commercially available wallet options for consumers, made with hardware or purely software.
Members’ receipts can then be exchanged for a bowl of soup whenever they want. Members show up at the cauldron and hand over their receipts to the chefs. And again, three chefs are required to sign these receipts before the community member is given their soup. By having chefs sign off on the redemption of receipts, the community is able to prevent members from collecting soup multiple times using the same receipt.
When bitcoin is transacted, it is sent from one wallet address to another. The origin wallet address, destination wallet address, amount of the transfer, amount of transaction fees, along with other metadata are all included in the transaction payload broadcast into the bitcoin network.
Once the transaction is broadcast, there is no way to reverse or return the transaction. This limitation, coupled with the consensus needed among miners to verify transaction authenticity, creates a system that prevents any user from double-spending their bitcoins (a critical property of any financial system).
And so, the soup continues to be made, chefs continue to perfect their craft, and the community continues to enjoy their community-lead food system.
What about you? You’ve just harvested some carrots you’ve grown at home. Do you choose to join the soup community and bring your carrots to the cauldron? If you do, you may not like how much soup you get in exchange for your carrots. Your carrot exchange rate will be determined in part by how many other community members bring carrots to the cauldron.
Perhaps you get some soup but don’t like the taste of it. Bitcoin is impractical to use in many cases we typically use money for, like paying for goods and services, due to the high volatility of its value. So most people are using it simply as a store of value.
Are you prepared to store your carrot receipts in a safe place? If you lose track of your receipts, you won’t be able to get the soup you’ve earned.
Or perhaps you join the soup community and later, in a majority vote, the community decides to change the rules in a way that you don’t like. In a consensus-driven, decentralized system, exceptions, exemptions, privelege and favors don’t exist. There is no customer service line you can call to ask for your carrots back, or get a copy of your receipt.
On the other hand, maybe you love the soup the chefs make, and you see the community-lead effort as an opportunity to feed more people better food. You recognize the opportunity to get involved and perhaps become a chef yourself. Getting involved early could open up all sorts of doors for you down the road if the experiment is successful and expands to other communities.
Bitcoin soup, August 2020.