What is Bitcoin’s architecture?

What you’ll learn

• The architecture of existing money
• The architecture of Bitcoin
• Bitcoin’s main functions
• Participants in the Bitcoin network

Bitcoin is the first successful example of a trustless monetary system – one that has no need for a central authority, like the Federal Reserve or the European Central Bank. By learning how Bitcoin’s technical architecture achieves this – the functions and specific roles – you can discover the wide range of opportunities available to build within that unique ecosystem or be inspired to create your own cryptocurrency.

To start, let’s look at the fundamental requirements of any monetary system, then compare that to Bitcoin’s unique architecture, and the functions that humans play alongside hardware and software.

FYI – Bitcoin as a peer-to-peer cashless monetary system is generally written with a big B, enabling the use of bitcoin (small ‘b’ ) as a currency of that system. 

Architecture of the existing monetary system

Existing monetary systems are known as fiat money. Fiat is a latin term that means ‘by decree‘ and it is used to describe how currencies such as the US Dollar, Euro and Yen are created and managed. 

Since 1971 global currencies have only had value because the governments that issue them say so. They are not backed by any asset, such as gold – which was previously the case – and work on a trust-based model.

Anyone using fiat money must trust a central authority to establish the rules of the monetary system and how they are enforced. This can broadly be broken down into:

1. A monetary framework & settlement system – Rules & policy; infrastructure to issue new money & achieve consensus on transaction settlement.
2. System hierarchy – Assigning different levels of privilege to different participants to implement the framework and settlement function – internally and externally.

At the top of the system hierarchy (2) is some kind of governing body that sets the rules of the overall framework (rules and policy) and oversees/delegates the settlement system  (1).

In the real world, this is the government who generally delegates that power to a central bank to enforce the policy, issue new money and manage a settlement system, while various regulators try to keep the system in check.  

Different privileges to interact with the monetary system cascade down a network hierarchy to banks, payment services, and on to individual users of money – merchants & consumers. 

Designing a digital monetary system that can reliably work without the need for a central mediator is hard because of something known as the Byzantine General’s Problem. 

This is an allegory of a Byzantine General who needs to make a decision in battle when he knows he cannot rely on the accuracy of everyone giving him information about the state of battle. So in relation to systems, this problem is agreeing on a course of action where information is incomplete or unreliable. 

In specific relation to a monetary system, the problem is what is known as a ‘Double Spend’ – the chance that a balance can be spent more than once. 

The Double Spend problem undermines trust in a financial system and therefore justifies the need for a central authority to have the final word – to be the general – but at the same time, that central authority creates a point of weakness because of the power they wield.

In the case of fiat money, that weakness has resulted in the abuse of the power that governments have over the money supply, creating more and more of it. This results in the real world problem of inflation; eroding purchasing power of your savings and wages.