What Problems Did Bitcoin Solve?

Bitcoin addresses fundamental challenges in digital currency and distributed systems that had prevented previous attempts at decentralized money.

The Core Challenges

Before Bitcoin, decentralized digital currency faced seemingly insurmountable problems:

No central authority: Traditional systems rely on banks/servers to coordinate
Network unreliability: Nodes fail, messages get lost, partitions occur
Byzantine failures: Some participants may be malicious or send conflicting information
Timing: No synchronized clocks or central time source to order events (see Bitcoin as Timechain for how this is solved)

The Double-Spending Problem

Double-spending occurs when the same digital currency unit is spent more than once. Unlike physical cash, digital information can be perfectly copied; without protection, the same coin could be sent to multiple recipients simultaneously, destroying the currency's value.

Traditional solution: A central authority (bank) maintains the ledger and verifies each transaction. Problem: requires trust in that authority.

Bitcoin's solution: A public blockchain where all transactions are visible, ordered into blocks, and secured by proof-of-work. Nodes independently verify that inputs haven't been spent. The longest chain determines valid transactions, so only the first spend succeeds.

Alice has 1 BTC, attempts to send it to both Bob and Charlie:
→ Network includes first transaction in block N
→ Second transaction rejected (input already spent)
→ Result: Only one transaction succeeds

The Two Generals Problem

A classic distributed systems problem that demonstrates the impossibility of achieving perfect agreement over an unreliable communication channel.

The Scenario

Two armies, led by two generals, are positioned on opposite sides of an enemy city. They must coordinate a simultaneous attack to succeed. The only way to communicate is by sending messengers through enemy territory, where they may be captured or killed.

The dilemma:

General A sends a message: "Attack at dawn"
General B receives it and sends back: "Acknowledged, attacking at dawn"
General A receives the acknowledgment, but thinks: "How do I know General B received my acknowledgment of their acknowledgment?"
This creates infinite regress: each confirmation requires its own confirmation

Why It's Theoretically Unsolvable

In a system with unreliable communication, perfect certainty is mathematically impossible. No matter how many confirmations are exchanged, there's always a non-zero probability that the last message was lost, leaving one general uncertain about whether coordination was achieved.

Bitcoin's Solution

Bitcoin sidesteps the impossibility by accepting probabilistic finality instead of perfect certainty:

Proof-of-work creates objective ordering: Blocks are ordered by computational work, not by message acknowledgments
The longest chain rule: The network naturally converges on a single history through economic incentives
Increasing certainty over time: Each block added makes the previous blocks exponentially harder to reverse
Practical finality: While theoretically reversible, 6 confirmations (about 1 hour) is considered effectively irreversible due to the enormous computational cost required

This is fundamentally different from trying to achieve perfect certainty through message acknowledgments; Bitcoin uses economic and cryptographic mechanisms to create convergence without requiring perfect communication.

Two Generals vs. Byzantine Generals

These are often confused but address different problems:

Aspect	Two Generals Problem	Byzantine Generals Problem
Core Issue	Unreliable communication (messages may be lost)	Malicious actors (messages may be corrupted or conflicting)
Assumption	All parties are honest but communication is unreliable	Some parties may be malicious and send false information
Focus	Achieving agreement despite message loss	Achieving agreement despite malicious behavior
Bitcoin's Approach	Probabilistic finality through proof-of-work	Economic security (assumes <50% malicious hash rate)

In summary: The Two Generals Problem is about unreliable channels, while the Byzantine Generals Problem is about unreliable participants. Bitcoin addresses both: proof-of-work handles unreliable communication through probabilistic finality, while the longest-chain rule and economic incentives handle potentially malicious miners.

Problem	Traditional Issue	Bitcoin's Solution
Byzantine Generals	Malicious nodes send conflicting information	Proof-of-work makes attacks expensive; assumes <50% malicious hash rate
Trust in Third Parties	Must trust banks, payment processors, governments	Cryptographic proof replaces institutional trust; no intermediaries
Inflation	Central banks can print unlimited money	Fixed 21M supply; predictable issuance; no authority can inflate
Cross-Border Payments	Slow (days), expensive, requires intermediaries	Minutes to hours, lower fees, works 24/7, same currency globally
Financial Inclusion	Billions unbanked, high barriers, geographic restrictions	Anyone with internet access can participate; no account required

The Innovation

Bitcoin didn't invent new primitives; it combined existing techniques in a novel way:

Cryptography: Digital signatures, hash functions
Distributed systems: Peer-to-peer network
Economics: Incentive alignment
Game theory: Nash equilibrium makes honest behavior profitable

Previous digital currency attempts required central authority and couldn't prevent double-spending. Bitcoin achieves decentralized consensus through this combination, proving that trustless digital money is possible.

The Philosophical Foundation

The problems Bitcoin solved were precisely the problems that cypherpunk philosophy had been trying to address for decades. Cypherpunks believed that cryptography could enable individual freedom by eliminating the need to trust institutions. Bitcoin was the first system to successfully implement these cypherpunk ideals, creating a practical solution to problems that had been identified but not solved for over 20 years.