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Bitcoin Basics 101

Creation, Privacy, Built-In Scarcity

GENESIS

It all started with Bitcoin. 

Bitcoin is a digital currency that is not controlled by a bank or institution (decentralized). Bitcoin is sent from one person to another on the Bitcoin network. Transactions are confirmed through cryptography and put in a public ledger called the blockchain. 

The origins of Bitcoin are shrouded in mystery. It was invented in 2008 during the height of the financial crisis by an unknown person or group going by the name Satoshi Nakamoto. Bitcoin began when its implementation (the code that runs Bitcoin) was released as open-source software in 2009.

Bitcoin is created as a reward for mining. It can be exchanged for other currencies, products, and services. 

 

BLOCKCHAIN

The blockchain is a public book or ledger that records Bitcoin transactions. It is, simply put, a chain of blocks. Each block has a hash of the previous block up to the original. The blockchain is maintained by a network of nodes that run Bitcoin software. Transactions are broadcast to this network using various applications.

In a network, nodes can validate transactions. These transactions are added to the node's ledger and then broadcast to other nodes. To make sure that each node has their own copy of the blockchain, every node stores it at different intervals of time. The average time is 10 minutes. When a new group of accepted transactions is created — a block — they are added to the chain, and quickly published to all nodes without any central oversight. This way, Bitcoin software can know when a particular bitcoin was spent and prevent double spending from occurring.

Blockchain explorer is a tool that looks at different blocks on the blockchain. You can look at individual blocks, public addresses, or transactions within blocks.

Transactions are defined by a Forth-like scripting language. They have one or more inputs and one or more outputs. If you send bitcoins, for example, you need to designate the address that will receive them and how much bitcoin is being sent there. The input must refer to an output that has not been used before. Transactions can have many outputs, which means that you can distribute your bitcoin among different people in one transaction.

The blocks in the blockchain originally had no size limitation. In 2010, Satoshi Nakamoto limited each block to one megabyte. Eventually, this limit caused problems for transactions and made it hard to process them quickly and cheaply. The solution to this was the Lightning Network. The Lightning Network is a second layer routing network for the Bitcoin blockchain. Much like the HOV lane on the highway, the Lightning Network uses smart contracts to create alternate networks to send bitcoin quickly and inexpensively. This allows Bitcoin to be used for its original purpose, which is digital cash. 

Bitcoin allows you to send money without middlemen or banks. All you need is an address and a private key. Computers generate these in seconds, but it is very hard to find the private key of an address. The number of possible addresses is so big that it is virtually impossible that anyone will guess your key.

If the private key is lost, then the Bitcoin network will not recognize any other evidence of ownership. The coins are then useless and effectively lost. For example, in 2013 one user claimed to have lost 7,500 bitcoins worth $7.5 million at that time when he accidentally discarded a hard drive containing his private key. About 20% of all bitcoins are believed to be lost — they currently have a market value of many billions of dollars.

If you want to keep your bitcoins safe, you need to keep the private key secret. If someone finds out your private key, they can steal bitcoins or other cryptocurrencies in your wallet. Billions of dollars worth of bitcoin have been stolen over the years.

 

MINING 

Mining is simply a way to keep records. And it uses a lot of computing power. Mining groups together new transactions and broadcasts them to the network so they can be verified by other computers on the network. Each block includes a cryptographic hash from the previous block, which links it with the previous one.

New blocks need to have a proof-of-work. The proof-of-work requires miners to find a number called a nonce. A miner can find the nonce by hashing the block and nonce with numbers that are smaller than the network's difficulty target. This is easy for any node in the network, but it takes time to generate it because they must try many different numbers before one works.

The proof-of-work system makes it hard for people to change the blockchain. They must change all of the blocks after it, too. And as new blocks are mined all the time, it becomes even harder to change a block.

Computing power is often combined by a mining pool. It can take a while for one person to get paid when they mine on their own. But when they are in the pool, every time someone solves the block, people in the pool get paid as well. The amount of money you get depends on how much work you did to solve the block.

The miner who finds the new block is allowed to collect for themselves all of the transaction fees for any transactions that they included in that block, as well as a reward. Right now, this reward is 6.25 bitcoin. It happens when someone finds the new block with transactions in it. A special kind of transaction called coinbase is included with the miner as recipient. A coinbase transaction is the first transaction in a new block.

 

HALVING

All bitcoins have been created through this type of transaction. 

The Bitcoin protocol specifies that the reward for adding a block will be reduced by half every 210,000 blocks (approximately every four years). Eventually, the reward will round down to zero. Once it does, people who keep track of Bitcoin will only get paid by transaction fees. There will effectively be no more bitcoins to mine.  

It’s estimated that the cap on total bitcoins that can ever be mined is 21 million.

 

DECENTRALIZATION

Bitcoin is decentralized. 

Bitcoin does not have a central authority. 

There is no central server — the Bitcoin network is peer-to-peer. 

There is no central storage — the Bitcoin ledger is distributed. 

The ledger of bitcoin transactions can be accessed by anyone with a computer anywhere in the world. 

Anyone can become a miner if they want to submit their own transactions without having any special permissions or credentials, and there are many miners working together to maintain this ledger of transactions that we call “bitcoin.” 

This is similar to how many people work at Walmart or Costco stores all over the world to keep them running and stocked up with inventory and ready for customers.

Bitcoin is not related to any person. It is just an address. All transactions are public, so while it may be possible to find who the owner of the address is, it’s exceedingly difficult. 

This privacy and programmed scarcity is what draws people to Bitcoin. 

It is also these qualities that make it an increasingly valuable commodity.



Chris Curl
Editor
,
Crypto Cycle