A primer on bitcoin and its rise

A primer on bitcoin and its rise

I tried to share everything we’ve been learning about this space, but unfortunately time coinstraints prevented us from doing a deep dive. The first thing Brad taught me when I joined Union Square Ventures is that one of the greatest things about working in the Venture Capital business is that you a primer on bitcoin and its rise to look at markets from a very different vantage point. Every day, we have the privilege to learn what the future is going to look like from the companies and entrepreneurs who are building it.

It’s thrilling, especially if you’re a technology geek like we are. We spend a lot of time looking at everything that’s going on with Bitcoin and the Blockchain. This involves e-mailing, tweeting, texting, calling, skyping and meeting with teams all over the world who are building next-generation technologies and applications that leverage the blockchain to undo many of the paradigms that dominate the software business today. Some are just ideas, some are products already in the market. This is what I think the architecture of internet applications is going to look like in 10 years.

This is just a simple illustration and it leaves a lot of important insights and issues out. I’ll try my best to explain the thinking behind it below. To keep things short, we’ll run through every part of the stack from the bottom up, and do a deep dive on each in the posts that will follow. The basic idea is that everything inside the gray rectangles is decentralized and open source. For now I’m calling these the Shared Data and Protocol Layers.

Nobody controls these parts of the system, and they’re accessible by any person or company. If we use Bitcoin as an example, the Blockchain is the shared data layer and the Bitcoin protocol is a Decentralized Protocol that’s part of the Shared Protocol Layer. You’ll notice that each layer gets thinner the higher up you go. If you know a little about how Bitcoin works, you know what miners are. In a nutshell, miners are the nodes in a network of computers who, together, verify all Bitcoin transactions.

In exchange, the algorithm rewards them with Bitcoin. Because Bitcoin has real-world value, the operators of these machines are incentivized to keep them running. The Blockchain is the public ledger that holds a permanent record of all Bitcoin transactions, and is maintained by the miners. It’s not controlled by a single entity and it’s accessible by everyone. This is where things start to get interesting. Developers are starting to build networks that work in parallel to the Bitcoin blockchain to perform tasks that the Bitcoin network can’t, but that make use of the Bitcoin blockchain to, for instance, timestamp or validate their work.