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You might have heard this term thrown around in the bitcoin space: PoW.
PoW reminds me of this old superhero comic:

And it’s a good symbol, too. Proof of Work really is like a superhero since it allows Bitcoin to work without a centralized controller such as the government. It’s the key that unlocks the self-sovereign solution we’ve been looking for — a computer algorithm that just might fix our financial system.
Here’s what it means.

Working Selfishly for the Greater Good

Proof of Work is a consensus algorithm that requires its participants — the Bitcoin miners — to expend energy and computational power in order to lock-in batches of new transactions. In exchange, they are rewarded with bitcoin if they are the first to successfully calculate a difficult 64-character hexadecimal serial number (a hash) that identifies the past transaction history, the new transactions, and their own ID as the winning miner.
In other words, miners want this bitcoin reward for themselves, so they will work tirelessly to try and create a winning solution. The winner then sends their solution and the list of transactions it includes to the blockchain, thus securing those transactions publicly, forever. About every ten minutes, this process repeats itself to help decentralize, secure, and confirm all transactions on the blockchain while rewarding miners for their proof of work.

If very little of that made any sense to you, here’s an analogy to help you better understand.

Looking for Diamonds

Diamonds, like bitcoin, are rare. They can’t be faked, they’re hard to find, and everybody wants one. For the sake of this analogy, we’ll just pretend that lab-grown diamonds don’t exist.
Imagine that a client wants a diamond of at least a certain size. If you find a diamond that fits the requirement, then you get paid. The bigger the diamonds are, the harder they are to find. Now, because diamonds are so rare, you need to spend time gathering stones and spend effort breaking into them. It’s a luck of the draw — some stones you just throw out, while others can make a diamond ring.
Occasionally, you get lucky and the first ore you break into meets the size requirement. Other times, it takes you much longer to find just a small diamond. But even if you do find several small diamonds, it doesn’t matter to the client if none of them are the right size. This is an important point to make for bitcoin mining — that work doesn’t accumulate. Results are largely based on luck. But, the harder you work, the luckier you may get.

Mining Pools

Some miners realize that all this work might be better done as a group effort, so they collaborate and form groups. They decide that if someone in the group finds a diamond big enough for the client, then the entire group gets paid out depending on how much work they’ve done. They measure the work done by individually weighing the little diamonds that people were able to find against the total.
In Bitcoin, miners come together to form mining pools in a similar way. Bitcoin rewards are distributed within a mining pool depending on how much work the miners have done.

Adjusting for Difficulty

As more people realize that there is money to be made looking for diamonds, the overall number of participants increases, which thereby increases the likelihood of someone finding a diamond of the right size quickly.
Well, let’s say that every two weeks, the client takes note of how long it took to find a diamond of a certain size. If there are more people working and it takes less time on average to find the diamonds, then the size requirements for the diamonds get bigger for the next two weeks. Because larger diamonds are rarer, it becomes much harder for someone to find a diamond if the size requirements get bigger, and vice versa.

The Bitcoin protocol has a built-in difficulty adjustment. Every 2016 blocks (about two weeks), the difficulty to mine bitcoin adjusts as more miners either come online or go offline. If there is more computational power working to solve the hash, then it becomes more difficult to find a winning solution. If miners come offline for some reason (like after China banned miners), then it becomes easier for miners who are still online to mine bitcoin.
The goal is to ultimately find equilibrium and issue new bitcoin at a steady rate — an average of ten minutes per new block. You can track how difficulty adjusts here: https://btc.com/stats/diff
Tomorrow, we’ll go over more of what bitcoin mining looks like and how the network distributes new bitcoin over time.

Imagine central banking as this guy:

The Monopoly Man represents the central bank.

On the first few passes around the Monopoly board, you have the opportunity to buy real estate and other commodities. The market is open, prices are affordable, and competition is low. Sometimes, you get unlucky and have to pay a surprise fine or a hefty tax. But, such is life.
He allows you to collect $200 when you pass GO, just because he’s a nice guy. Perhaps you’ve now replenished some of your savings, so you return back to the board and take another pass around.
After a few rounds of properties purchased, rents paid out to owners, and collecting free money at GO, a certain dreadful doom starts to set in — you pray you don’t land on someone’s duplex, or even worse, their hotel. With each pass around the board, you’re still collecting your $200. Not to rain on your parade, but $200 doesn’t mean much when your savings is wiped out and rent seems to double each turn you take.
While this is an exaggerated version of the game of life, the basic principles remain: Those who have invested in assets (like real estate or stocks) see their net worth appreciate; those who owe debts and have little to no assets continue to see their savings wiped out. Their purchasing power weakens, commodities and assets become more expensive, and no amount of government handouts can save them.
In fact, the “free money” comes back to bite them even harder the next round. While the rich see their assets inflate in price because more money is introduced into the game, the poor see their savings debased because the necessities they could once afford (like rent) become unbearably expensive.
This is a result of inflation: where the government prints money on a whim to fuel the economy. But in the end, the rich only get richer and the price of goods become more expensive, thus trapping people in a cycle of poverty — even though they may collect $200 at GO.

The government is allowed to inflate the monetary supply whenever they want. They want you to think everything’s under control — and it is, literally. Therein lies the issue: They’ll stab you in the back while shaking your hand.
With Bitcoin, however, nobody is in control. Bitcoin’s supply is capped at 21 million, whereas fiat dollars can be boundlessly printed.
The result of bitcoin’s supply cap is scarcity. As demand for bitcoin rises, so will its price, and thus, its purchasing power as well.

The Magic Number

Nobody knows where the 21 million bitcoin cap comes from; this is likely just an arbitrarily chosen number. However, what’s important is that this number can’t be changed — ever. It’s baked into the code, and in order to change the software to increase this supply cap, everyone would have to agree. However, people don’t want the value of their bitcoin to decrease, so there’s no way we would reach the consensus required to increase this number.
Obviously, there are more than 21 million people in the world; this means that not everyone can own a whole bitcoin. In fact, there are twice as many current millionaires as there are bitcoin in the world; this should give you a sense of the future value of bitcoin as adoption continues to grow.
Even though bitcoin supply is capped, each bitcoin can be split into “satoshis,” kind of like how dollars can be split into cents. Each bitcoin contains 100 million satoshis, and so there are 2.1 quadrillion satoshis in total.

Supply and Demand

Currently, not all 21 million bitcoin are up for grabs yet — I’ll go over this later when I talk about how new bitcoin is mined. But as we slowly increase the supply until no more new bitcoin is available, demand and adoption will determine the price of bitcoin.
In your basic high school economics class, you probably learned about a microeconomic concept called the supply and demand curve. Although no economic model is perfectly representative of a real-world scenario, bitcoin’s curve is a little bit special.

Let’s take a look at this supply and demand chart comparing salmon and bitcoin:

While the supply of salmon is not necessarily fixed because we can farm fish and source fish from different areas of the world, the supply of bitcoin is capped strictly to 21 million — this is what we call a perfectly inelastic supply.
As a result, this means that only shifts in demand affect price; as demand continues to increase with institutional adoption and countries like El Salvador declaring bitcoin legal tender, there’s only one place bitcoin price is headed: the moon. Short term though, demand can dip and the price will fall with it.
Although we’re still far from using bitcoin in the way that we use dollars to purchase goods, what we can do is hold our wealth in bitcoin. As the purchasing power of the dollar weakens due to ever-inflating supply, bitcoin supply remains immutable, and so the purchasing power of bitcoin should continue to rise over time — forever.

What is money anyway?

Formally defined, money is something that is widely accepted for purchasing goods and services, or repaying debts and taxes. You might think that this is limited to paper bills and minted coins, but the reality is that anything can be money, so long as it fulfills these fundamental use cases: a unit of account, a medium of exchange, and a store of value.
Looking back in history, the items that our ancient ancestors once traded and bartered with were considered their forms of money. This included everything from shells and animals to silver and gold. In modern times, we see a reflection of this in places where government money is of little value, such as in prisons, where cigarettes and instant ramen are well-known units of account.
From the 14th century all the way to the 20th century, cowrie shells were used as currency to barter and trade across Africa and Asia. Durable, divisible, identifiable, and scarce, cowries were the perfect pre-coin era natural currency. Other items like glass beads, stones, and salt were used throughout different cultures as well. Imagine: you might be skipping rocks on the ocean today that were once regarded like the dollars in your bank account. Those ancient currencies are all worthless today because they eventually fell victim to the killer of value: hyperinflation.

Learning from the Rai Stones on Yap Island

One of the most interesting ancient monetary systems was the use of Rai stones on the Island of Yap (part of Micronesia).
The Yapese people used large, heavy stones—up to 12 feet in diameter— with a hole in the center as their currency because of their rarity and difficulty to procure from the neighboring islands. To ship the Rai stones to Yap via rafts and canoes, often hundreds of people were needed, meaning it was nearly impossible for anyone to quickly inflate the supply.
For centuries, the Rai stones were used as sound money. Placed in a central location where everyone had access, the Rai stones were only exchanged in recognition of ownership rather than possession (since they were impossible to carry around).

This monetary system worked well for centuries. But in 1871, an Irish American by the name of David O’Keefe washed ashore and saw a huge business opportunity in producing coconut oil procured by the island’s abundant coconuts. He realized that the Yapese people had no interest in foreign money, so he set sail to the nearby island Palau where he used modern tools and explosives to procure several large Rai stones to take back to Yap.
However, the value in the Rai stones was calculated based on a complex formula of size, history, quality, and the number of lives lost due to the labor of procuring these stones. Simply put, they had value because they were difficult to obtain; O’Keefe’s Rai stones were obtained easily, negligent of tradition, so many villagers were not keen on accepting the stones as valid. An ancient remnant of counterfeit currency, if you will.
Unfortunately, other Yapese did not understand the concepts of scarcity and sound money, so they gladly accepted these false stones, which eventually led to the demise of the Rai as the sound currency it once was.

Modern Hyperinflation

Taking a look at modern examples of exorbitant money printing in countries like Venezuela and Zimbabwe, we see a similar modern hyper-inflationary story playing out. If we are to learn from history, we must realize workable solutions to the vulnerabilities that previous currencies have fallen victim to. But rather than worrying so much about things we can’t change in fiat, we can look towards real solutions.
Before, we could only dream of such impossible things. Now, we have Bitcoin.
Bitcoin is a new form of money that solves the issues surrounding scarcity and currency debasement. Tomorrow, I’ll go over bitcoin’s fixed supply cap and the case for why bitcoin will never lose its purchasing power the way every other money before it has.

So, who is in charge of Bitcoin?

This is one  of the first questions bitcoin newbies often ask. Naturally, this question pops up as a concern over trust: Who is at the top of the Bitcoin ladder? Is someone pulling strings behind the curtain?

And here’s the simple answer: Bitcoin isn’t controlled by any one country, entity, or person. It’s decentralized, meaning it can’t be corrupted or controlled — and that’s a beautiful thing.

Why do we need decentralization?

Perhaps the most important aspect of Bitcoin is its decentralization; this is the principal difference that separates Bitcoin from the central banking system we’re currently used to. Inherently, our worldwide banking system is centralized because our money is controlled and distributed by the government. We call this money “fiat” — originating from the latin word meaning: “a determination by authority.”

When you have a centralized fiat currency like the US dollar (the current global reserve currency), you are coerced into a financial system that can change the rules at any time. You are subjected to the big banking system that charges you overdraft fees, requires minimum balances, and lends your money out to other people only to pay you less than 1% in annual interest.
And while big banks in the United States have healthy competition and therefore have incentives to offer better, freer services to consumers, many countries around the world don’t offer this privilege. In fact, many banks overseas actually charge their consumers to keep their money in the bank.

What is this highway robbery? You might as well keep all your cash under your mattress.

As much as we like to joke about this, the use of physical, insecure piggy banks are a reality for over a billion people around the world who remain unbanked.
Financial services create expensive barriers like fees, minimums, and identification requirements that don’t allow people to participate fairly in it. Additionally, not everyone has access to a competently secured and insured central banking system; they must participate in the one handed to them by their government, no matter how unstable or corrupt it is.

What fixes this?

There’s a saying in the Bitcoin community: Bitcoin fixes this.
Because nobody is in charge of Bitcoin, Bitcoin works for everyone. Rather than having someone at the top, the Bitcoin Network is based on the consensus of everyone who participates in it.
It doesn’t matter what country you’re in or how controlling your government is — your wealth is secured by the bitcoin blockchain all the same, and no one has the authority or power to change this. While it is technically possible for bitcoin to be “hacked” or controlled, I’ll go over why this won’t ever happen in a later email.
Bitcoin is an opportunity for the unbanked to store and grow their wealth in a secured way, where nobody can be locked out or denied — and it doesn’t care about your credit score.

Decentralization is privacy

In traditional banking, you are subjected to approvals based on credit scores and government identification. This makes everyone susceptible to fraud; if someone steals your identity, they can open up credit cards, generate debt in your name, and destroy your credit score.
With Bitcoin, your participation is not dependent on your identity. Anyone and everyone can participate anonymously, as names and personal data are not connected to transactions on the Bitcoin blockchain.
Although most cryptocurrency exchanges (places where you can buy bitcoin) require a Know Your Customer (KYC) process that requires you to verify your identity with a selfie and photo ID, once you take your bitcoin off of the exchange and into your own self-custodial wallets, all transactions from that point forward are pseudonymous.
Later on in this series, I’ll show you how you can secure your bitcoin by taking it off of exchanges and into your own self-custody solutions.
Ultimately, nobody controls Bitcoin at the top—but Bitcoin allows you to be your own bank and fully control your own wealth without the oversight of anyone else.

Magic. Internet. Money.

Otherwise known as Bitcoin.

Welcome to 21 Days of Bitcoin. Over the next three weeks, you’ll gain a deeper understanding of what exactly this mysterious, revolutionary new technology is. By the end of this course, you’ll finally figure out what millions of people around the world are already realizing: Bitcoin is hope.

A Brief History of Bitcoin

On January 3, 2009, a pseudonymous genius named Satoshi Nakamoto officially invented Bitcoin.
Whoever this mystery person or group is, they managed to create the world’s first cryptocurrency that would soon change everything as we know it. Formally defined, Bitcoin (capital “B”) is a global, borderless, decentralized protocol that enables the peer-to-peer exchange of the bitcoin currency (lowercase “b”), which has a fixed max supply and a known, decreasing issuance rate.
It allows us to send money to anyone, anywhere in the world, without the need for an intermediary.
Bitcoin doesn’t aim to do anything innovative — rather, it offers an improved alternative to the existing inequitable, inaccessible, and inflationary financial system. By decentralizing finance, we are progressively simplifying a system so complex that it locks out nearly two billion people worldwide, and turning it into a permission-less network that anyone can be a part of.

What Does Bitcoin Solve?

Centralization: Bitcoin alleviates the need for a centralized third-party system — like a credit card company or a central bank — to confirm and validate transactions. Rather than requiring the current base-layer financial system to broker our transfers and settlements, Bitcoin works purely peer-to-peer, ridding the need for trust in a centralized government controller.
Verifiability: Bitcoin enables unit-level currency validation that isn’t possible with fiat (government-backed money). For instance, there are plenty of fake dollar bills in circulation (the U.S. Treasury estimates that one in every 10,000 bills is counterfeit) that the average person fails to discover. However, nobody can create fake bitcoin because the Bitcoin network is secured cryptographically via a public blockchain that anybody can access and validate any amount of bitcoin as real.
Inflation: Bitcoin’s supply is capped at 21 million. There will never be any more bitcoin than that. No one can just “print more bitcoin” like we currently print dollars, inflating the money supply. Unlike fiat currencies, bitcoin doesn’t take away your purchasing power over time.

“I don’t understand anything you just said”

Don’t worry, if concepts like “blockchain” and “decentralization” might sound confusing right now, but I’ll be explaining everything in detail over the next 21 days. The truth is, we don’t need to dive too deeply into exactly how the technical aspects of Bitcoin function. However, you’re right to be skeptical if I just tell you to trust that it works. After all, bitcoin is all about getting rid of the need for trust.

“But…how can it be that I don’t need to trust anyone? How do I know that Bitcoin isn’t a scam? Will bitcoin make me rich? What is bitcoin’s intrinsic value? There must be someone managing Bitcoin, right?”

These are all valid questions that will soon be answered in a way that, hopefully, anyone can understand. For this introductory lecture, we’ll briefly cover the skeleton of how bitcoin operates. Over the next three weeks, you’ll learn everything from how to make your first bitcoin transaction to how bitcoin is already bringing global financial freedom to millions around the world.

The Bitcoin Blockchain

Ah, yes. The mystical, almighty blockchain that is supposedly revolutionizing the tech industry right now. While it may seem daunting to try and understand what a blockchain is and how it operates, you basically already know what it is — the name gives it away.

Yes, it is literally a chain of (digital) blocks that holds data as a publicly visible ledger. Its history and validity are verified by Bitcoin full nodes across the globe that each keep a full copy of the blockchain history.

Because transactions are secured by the public blockchain, there is no need for an intermediary source of trust in order to confirm that your coins are real or that your transactions aren’t fraudulent; the publicly verifiable, mathematically programmed, cryptographically sound Bitcoin blockchain is the only proof you need.

Bitcoin is Sound Money

It’s no secret that the current financial system is deeply broken. With rampant hyperinflation, global economic inequity, and dependence on the nation-states that hold global power, fiat isn’t truly backed by anything sound — it’s a product of power and control.
If we want to escape the control of the powers that be, we’ll need an alternative system. Bitcoin is a currency with no central authority. No government can control it, so it’s not going to suffer from endless rounds of quantitative easing or any other money printing schemes governments employ.

Might this be the money solution we’ve been looking for?

Congratulations on taking your first leap down the Bitcoin rabbit hole. By the end of these 21 days, you’ll have a basic understanding of how Bitcoin works, what Bitcoin represents, and how Bitcoin will fix the world.

Tomorrow, I’ll go over who is secretly in charge of bitcoin (just kidding, nobody is).

Excited to embark on your bitcoin journey? Tweet about it with the hashtag #21DaysofBitcoin!