Understanding the nature of Bitcoin

A summary of it’s architecture in 7 layers

4 min readJan 14, 2022

This summary is based on an essay written by Robert Pallas (https://robertpallas.github.io/boblog/includes/btc-7-layers.pdf).

Bitcoin uses the Elliptic Curve Digital Signature Algorithm, which is based on public-key cryptography. Three well-known hashing algorithms, SHA-256 and RIPEMD-160, are used to generate Bitcoin addresses and Merkle trees, which are used to connect and readily verify transactions. Every transaction is saved in a file called block. Every block contains a hash of the preceding block and links all of the files in the Bitcoin network to one another, forming a block chain.
Proof-of-work is another mechanism where a piece of data that is difficult to generate since it is a random process with a low probability of success. Every new block begins with someone locating a nonce to add to the previous block so that the hash of the previous block begins with a run of zeros. The discovered value becomes proof of labour, and the discoverer is rewarded. Mining is the process of searching for proof-of-work.

The Bitcoin network is completely peer-to-peer. All transaction messages are broadcast throughout the network, and nodes can leave and rejoin at any time. The nodes accept the longest proof-of-work chain as evidence of what occurred while they were gone.
One may also use eWallet services to avoid downloading the ever-expanding block chain with all transactions, but this results in giving up some control over their Bitcoins and perhaps paying higher transaction fees.
Users are not affected by faults with the corporation that administers the system since Bitcoin is peer-to-peer, unlike other payment systems such as paypal, cashapp, or credit cards, and they are not vulnerable to phishing efforts.
In most circumstances, network analysis and Bitcoin transaction history can help discover the true persons behind Bitcoin transactions, however employing TOR and Bitcoin washing services (E.g. bitcoin-laundry.net) drastically reduces the likelihood of a direct connection.

The Rights layer outlines a user’s authority over their assets. It will notify us as to who owns what and how they may use it, allowing us to ensure that payments can only be transmitted by their legitimate owners.
Each Bitcoin is linked to the public key of its owner. The public key can be computed from the private key but not the other way around, and the Bitcoin address, which represents the potential recipient of a Bitcoin payment, is transformed from the public key via a series of hashing techniques outlined in “Cryptography” earlier. Only the person who produced the secret portion of the key pair can transfer the Bitcoins linked with the public component of the key pair. The public key of the new owner is attached to the coins, and the message is signed with the private key upon transaction of coins.
This message is then broadcast over the network so that all nodes are aware of the new owner of the Bitcoins and can easily verify the transaction.

Bitcoin’s accounting technique, triple entry bookkeeping, may have the most impact on accounting. Triple entry accounting is a basic concept in which each transaction is digitally signed by numerous parties, including at least one independent organisation. Transactions are only verified after they are recognised in a centralised, timestamped list of all known transactions.

After ensuring that digital information can be securely transmitted across the internet and kept on nodes, we must broaden our scope to include risks beyond the technological area. The model includes a Governance layer to address the agency problem of how to control risks from parties that are trusted to administer the system, as well as additional dangers that cannot be addressed in lower tiers.
Bitcoin is not a trust-based system. As long as the majority of CPU power is held by nodes that are not colluding to attack the network, they will construct the longest chain and overtake attackers.

When a system has stability and security as a result of properly addressing issues in earlier layers, we must attribute value to the structure. It is critical to specify the unit of account, its definition, and the range of numbers that apply.
1 BTC is the Bitcoin system’s unit of measurement. Every four years, both the money supply and the reward for Bitcoin mining are halved.
There will be around 21 million Bitcoin. This is hard-coded into the original Bitcoin software and ensures a high level of supply assurance. Nobody can manufacture more money out of thin air; evidence of labour is required. Bitcoins are divisible to eight decimal places, therefore the range of numbers is enormous, making coping with potential deflation in the event of eventual mainstream adoption feasible.

Despite the fact that the entire number of on-chain bitcoins is dropping, the total number of enterprises eager to deal in Bitcoins is expanding. Bitcoin may be used to purchase music, apparel, gadgets, web hosting, professional services, lodging, and bar tabs. There are several alternatives, and taking Bitcoins has been made quite simple for retailers. Several organisations accept bitcoin donations.
El Salvador notably made Bitcoin legal money. Prominent bitcoin investor and podcast presenter Peter McCormack revealed that he has acquired professional English soccer team Bedford FC and intends to run as a “bitcoin club” that “operates on a bitcoin standard.”