How precisely to label Bitcoin (BTC) is a topic of contention. Is it a kind of money, a store of value, a payment network, or an asset class? Fortunately, it’s easy to clarify what Bitcoin truly is. It’s software and a totally digital phenomenon—a collection of protocols and procedures.
It is also the most successful of hundreds of efforts to produce virtual money via the use of encryption. Bitcoin has spawned hundreds of imitators, but it remains the biggest cryptocurrency by market capitalization, a position it has kept throughout its decade-plus lifetime.
Like regular money, Bitcoin is generated and has systems and protections in place to avoid fraud and assure increase in its value. The primary building blocks of Bitcoin include blockchain, mining, hashes, halving, keys, and wallets. They are addressed in depth below.
(A general note: According to the Bitcoin Foundation, the term “Bitcoin” is capitalized when it refers to the cryptocurrency as an entity, and it is provided as “bitcoin” when it refers to a quantity of the currency or the units themselves. Bitcoin is sometimes shortened as BTC.
Bitcoin is a network that works on a system known as the blockchain. While it does not contain the term blockchain, a 2008 article by a person or individuals calling himself Satoshi Nakamoto originally suggested the use of a chain of blocks to authenticate transactions and foster confidence in a network.
The blockchain has subsequently grown into a different idea, and many of blockchains have been established using similar encryption approaches. This history might make the terminology complicated. Blockchain sometimes refers to the original Bitcoin blockchain. At other occasions, it refers to blockchain technology in general, or to any other particular blockchain, such as the one that runs Ethereum.
Any particular blockchain consists of a single chain of discrete blocks of information, organized chronologically. In theory, this information may contain emails, contracts, property titles, marriage certificates, or bond transactions. In principle, any sort of contract between two parties may be made on a blockchain as long as both sides agree on the contract.
This takes away any requirement for a third party to be engaged in any contract and opens up a universe of possibilities including peer-to-peer financial products, such as loans or decentralized savings and checking accounts, wherein banks or any middleman are irrelevant.
Blockchain’s adaptability has drawn the notice of governments and private organizations; fact, some experts predict that blockchain technology may eventually be the most important component of the bitcoin boom.
In Bitcoin’s instance, the information on the blockchain is largely transactions. Bitcoin is actually just a list. Person A gave X bitcoin to person B, who sent Y bitcoin to person C, etc. By summing these transactions together, everyone knows where individual users stand. It’s crucial to realize that these transactions do not necessarily need to take place between people.
Bitcoin’s blockchain network presents tremendous potential for the Internet of things. In the future, we may envision systems in which self-driving taxis or Uber cars have their own blockchain wallets. The passenger would transmit bitcoin straight to the automobile, which would not drive until the money were received. The car would be able to determine when it needs gasoline and utilize its wallet to arrange a refill.
Another moniker for a blockchain is a “distributed ledger,” which underlines the major distinction between this technology and a well-kept Word document. Bitcoin’s blockchain is distributed, meaning that it is public. Anyone may download it in its entirety or go to any number of sites that parse it.
This implies that the information is publicly viewable, but it also means that there are sophisticated processes in place for updating the blockchain ledger. There is no central authority to maintain tabs on all Bitcoin transactions, therefore the participants themselves do so by producing and confirming “blocks” of transaction data. See the section on mining below for further details.
You can check the status of blocks, and their related transactions, on sites. Such sites provide the address identification for the transacting parties, dates, the date on which the transaction took place, and the hour of the transaction. 3
The lengthy strings of numbers and letters are addresses, and if you were in law enforcement or simply really well educated, you could probably find out who controlled them. It is a fallacy that Bitcoin’s network is fully anonymous, however adopting specific safeguards might make it exceedingly impossible to trace people to transactions.
Trust | BTC
Despite being totally public, or rather because of that aspect, Bitcoin is extraordinarily resistant to alteration. A bitcoin has no physical existence, therefore you can’t secure it by keeping it in a safe or burying it in the woods. In principle, all a thief would need to do to steal it from you would be to write a line to the ledger that translates to “you paid me all you have.”
A similar problem is double-spending. If a bad actor could spend some bitcoin, then spend it again, faith in the currency’s worth would swiftly disappear. To accomplish a double-spend, the bad actor would need to make up 51 percent of the mining power of Bitcoin. The more the Bitcoin network develops, the less practicable this becomes since the computer power needed would be huge and highly costly.
To further prevent either from occurring, you need trust. In this scenario, the typical approach with conventional cash would be to deal via a central, impartial arbiter such as a bank. Bitcoin has made that unnecessary, though. (It is certainly no accident that Nakamoto’s initial explanation was released in October 2008, when faith in banks was at a historic low.) Rather of having a dependable authority to manage the ledger and rule over the network, the Bitcoin network is decentralized. Everyone keeps an eye on everyone else.
No one has to know or trust anybody in particular in order for the system to work successfully. Assuming everything is operating as expected, the cryptographic protocols guarantee that each block of transactions is fastened onto the last in a lengthy, transparent, and immutable chain.
The technique that maintains this trustless public ledger is called as mining. Undergirding the network of Bitcoin users who trade the cryptocurrency among themselves is a network of miners who record these transactions on the blockchain.
Recording a series of transactions is straightforward for a contemporary computer, but mining is complex because Bitcoin’s software makes the operation artificially time-consuming. Without the increased barrier, someone might fake transactions to profit themselves or bankrupt other people. They may register a fake transaction on the blockchain and layer so many insignificant transactions on top of it that untangling the scam would become difficult.
By the same token, it would be straightforward to introduce false transactions into prior blocks. The network would become a huge, spammy jumble of rival ledgers, and Bitcoin would be worthless.
Combining “proof of work” with additional cryptographic methods was Nakamoto’s innovation. Bitcoin’s software changes the difficulty miners confront in order to restrict the network to a new 1-megabyte block of transactions every 10 minutes. That way, the amount of transactions is digestible.
The network has time to evaluate the new block and the ledger that preceded it, and everyone can reach an agreement regarding the existing quo. Miners do not strive to verify transactions by adding blocks to the distributed ledger merely out of a desire to see the Bitcoin network function smoothly; they get rewarded for their effort as well. We’ll take a deeper look at mining compensation below.
As previously established, miners are compensated with Bitcoin for confirming blocks of transactions. This prize is halved in half every 210,000 blocks mined, or, around every four years. This occurrence is termed the halving or “the halvening.” The system is built-in as a deflationary one for the pace at which new Bitcoin is introduced into circulation.
This approach is designed such that incentives for Bitcoin mining will continue until roughly 2140. When all Bitcoin is mined from the code and all halvings are accomplished, the miners will stay encouraged by fees that they will charge network users. The goal is that strong competition would keep rates affordable.
This approach pushes up Bitcoin’s stock-to-flow ratio and decreases its inflation until it is finally zero. After the third halving that took place on May 11, 2020, the reward for each block mined became 6.25 bitcoins.
Here is a little more technical explanation of how mining works. The network of miners, who are distributed throughout the world and not linked to each other by personal or professional connections, gets the current batch of transaction data. They pass the data through a cryptographic procedure that creates a “hash”—a string of numbers and characters that validates the information’s correctness but does not expose the information itself. (In actuality, this ideal notion of decentralized mining is no longer true, with industrial-scale mining farms and large mining pools becoming an oligopoly. More about it below.