The three inventions that made Bitcoin possible
For decades, computer scientists tried to create digital money. Every attempt failed. The problem wasn't technology. It was physics and game theory.
Remember the Prisoner's Dilemma from Stage 2? Any digital money system faces the same coordination problem: how do you prevent cheating when participants can't trust each other? How do you stop double-spending without a central authority?
In 2008, someone calling themselves Satoshi Nakamoto published a solution. Not by inventing new technology. By combining three existing inventions in a way nobody had seen before. The result: Bitcoin.
Bitcoin doesn't fight the problems from Stages 1-2. It uses them. It harnesses entropy through proof-of-work. It aligns incentives so cooperation is profitable. It enforces rules with code, not discretion. It eliminates the Cantillon Effect through fixed supply.
This module reveals the three building blocks that make this possible.
Traditional encryption requires sharing a secret key. But how do you share that key securely? Public-key cryptography solved this with a mathematical miracle: two keys that work together, but one can be shared publicly.
In Bitcoin, your private key controls your bitcoin. Your public key (hashed into an address) is where others send you bitcoin. Anyone can verify your signature, but only you can create it.
Bitcoin's Use: Every bitcoin transaction is signed with a private key. The network verifies the signature using the public key. No trust required; math proves ownership.
A hash function takes any input: a word, a book, an entire database, and produces a fixed-length "fingerprint" (hash). Change even one bit of the input, and the hash becomes completely different.
Bitcoin uses SHA-256 (Secure Hash Algorithm, 256-bit). Every block references the previous block's hash, creating an unbreakable chain. Change any past transaction, and all subsequent hashes break.
Bitcoin's Use: Blocks are chained together by hash. Each block's hash depends on all previous blocks, making history immutable. The "blockchain" is literally a chain of hashes.
Proof-of-work anchors digital information in physical reality. To add a block to Bitcoin's ledger, miners must find a hash below a target value; which requires trillions of guesses. This consumes real energy, making attacks prohibitively expensive.
Imagine finding a combination lock by trying every possibility. Easy for others to verify the correct combination, but you had to try billions of wrong answers first. Proof-of-work is similar: miners search for a "nonce" that produces a hash below the target.
Bitcoin's Use: To rewrite Bitcoin's history, an attacker would need to redo all the proof-of-work for every block since the change. This gets exponentially more expensive with each new block, making Bitcoin's past practically immutable.
See how these building blocks work in real-time
Try it: Change even one character and watch the entire hash change completely. This is the "avalanche effect": a fundamental property that makes blockchains tamper-proof.
Notice: Each block's hash includes the previous block's hash, creating an unbreakable chain. Change any block, and all future blocks become invalid.
These three building blocks existed independently for decades. Bitcoin's genius was combining them into a single system:
The Result: A monetary system with no central authority, no trusted third parties, and no way to change the past. Mathematical trust replaces institutional trust. This is why Bitcoin works and why it's revolutionary.
Answer at your own depth: quick thoughts or deep analysis. Get instant feedback on your grasp of the concepts.
Before Bitcoin, digital trust always required a trusted third party (banks, payment processors, etc.). How do these three building blocks eliminate that requirement?
Proof-of-work ties digital security to physical energy. Why is this important?
Beyond money, where else could these building blocks eliminate the need for trusted third parties?
Select scenarios where this applies: