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Bitcoin Review:

Introduction

Bitcoin (BTC) is a digital currency known as a crypto currency. It is unlike any money that you may have used before. You can send it to anyone on the network with relatively little fees and virtually no hindrance. It is controlled by yourself in a digital wallet on your PC. What made Bitcoin truly unique was its decentralized nature. Bitcoin is not controlled or overseen by any one body. It is completely distributed across a network of computers in a peer-to-peer fashion. Transactions can take place with anonymity between participants. There are no bank accounts linked to an individual’s name. This was indeed one of the guiding principles of the creator, Satoshi Nakamoto. Bitcoin has already revolutionized the way that people think about money and assets. What was once a nascent idea looked at as much of a hobby has transformed the global financial system. There are many people who say that Bitcoin will do to finance what the internet did to the information system. It may, however, seem relatively complicated to those who are new to the concept. We delve into the underlying principles of Bitcoin in the following post.

Background

Bitcoin first entered the public eye when Satoshi Nakamoto posted his whitepaper, titled “Bitcoin: A Peer-to-Peer Electronic Cash System,” to a cryptography mailing list on October 31st, 2008. Satoshi explained in the whitepaper the methods of using a peer-to-peer network to allow trustless electronic transactions via cryptographic hashing functions to secure the network. “Trustless” refers to the fact that there is no centralized entity like a bank or financial organization that acts as a middleman to facilitate the transaction, this is all handled by the network. On January 3rd, 2009, the Bitcoin network came into existence when Satoshi mined the first block of the network, named the “Genesis Block.” Satoshi Nakamoto is the pseudonym for the person or people who designed the original Bitcoin protocol as the identity of Satoshi Nakamoto remains shrouded in mystery even to this day. While Satoshi is no longer involved with the development of the Bitcoin network, his legacy lives on through the naming of the lowest denomination of BTC. A “Satoshi” is the smallest unit of account for Bitcoin and is equal to 0.00000001 BTC. The Bitcoin Network is alive and well today and has seen massive adoption in the retail markets as well as a growing interest from institutional markets. Bitcoin started a booming industry which has changed the way we think about money, the internet, and so much more. The growing popularity of both blockchain technology and cryptocurrencies has Bitcoin to thank for being a pioneer in this space.

Blockchain & Security

The Bitcoin blockchain is a decentralized ledger that contains all of the transactions on the Bitcoin network since the “Genesis Block” was created. Think of it as a large accounting book with numerous debits and credits. Every single transaction on the Bitcoin network can be traced on the blockchain. This blockchain is decentralized which means that it is not stored in one particular location. True to the nature of Bitcoin, the blockchain is maintained by all of the network nodes (computers) on the Bitcoin ecosystem. This means that the blockchain is public. Anyone can view transactions that took place on the network. You can view the latest Bitcoin the ledger at blockchain.info. This decentralized ledger is called a “chain” because all of the blocks are linked to the blocks before. Using advanced cryptographic principles, each block will contain data about the prior blocks. This allows these transactions to be immutable, a concept which eliminates the possibility of double spend which was a major issue for digital transaction networks that came before it.

One of the many concerns that new Bitcoin adopters have is how secure the network is. What is to stop someone from double spending their Bitcoins? What is to stop a hacker from changing a transaction in the blockchain and assigning themselves more money? Of course, security and trust go hand in hand. You cannot have a decentralized currency without all of the participants having 100% confidence in the network. Luckily, Bitcoin is secured through its consensus method, hashing functions and immutability. Immutability allows people to trust the network because no one can go back and alter previously produced blocks, plus the ledger is public so anyone can go in and audit the blockchain to ensure this fact is true. Hashing functions are a large part of security too, as they allow users private keys to remain safe when they transact on the network with their public key. The hashing function is functionally impossible to reverse engineer, which allows this trustless system to operate safely. The consensus method for bitcoin is another part of its security. Bitcoin uses a Proof of Work method where miners compete to solve complex cryptographic equations to earn the “right” to produce the next block on the bitcoin network. This competition secures the network to ensure that the correct blocks are added to the blockchain. Unless 51% of the network is controlled by one party the blockchain is essentially tamper proof. This “rule of 51” is central to the Bitcoin protocol and was addressed in the original whitepaper by Satoshi. In essence, if ever there is a disagreement of the structure of the blockchain, the network will override and choose the chain that is being presented by the majority of the miners on the network. With regards to a hacker being able to change a prior transaction and assign more Bitcoin to themselves, this is impossible due to the immutability of the blockchain. All blocks with transactions in them are linked to the blocks prior to them. This link is also through a similar hashing function as described for the private and public key. Even a minute change to a transaction in a prior block on the chain would result in a completely different blockchain than the established one. Hence, the miners would notice that this is an incorrect blockchain immediately and then revert to the one that the majority of them agree on.

Mining Bitcoin

Bitcoin is a digital gold. People view it as a “safe haven” asset that is limited in supply and hence will always be in demand. Like gold, Bitcoin has to be mined in order to be created. However, this mining is done by computers who solve complicated mathematical problems using brute force computing. Once a miner has solved this problem, it is rewarded in Bitcoin. This is where new Bitcoin enters the supply. It is also important to note that there is an upper limit to the amount of Bitcoin that can ever be created. This is capped at 21 million BTC. Hence, Bitcoin is naturally deflationary. The network can also regulate the amount of Bitcoin being mined by adjusting the computational difficulty of the problems. As it gets more difficult, it becomes more expensive to solve the problems and hence mine the Bitcoin. This is why it is quite comparable to mining for a natural resource. For example, when first mining gold it is at the surface and easy to pull up. As more gold is mined, they have to dig deeper which will cost more money. Eventually gold supplied to the market will begin to slow down. There is only a certain amount of finite gold on planet earth that can ever be mined. This mining consensus method is known as Proof of Work (PoW) and is used by popular cryptocurrencies like Litecoin (LTC), Ethereum (ETH) and Dogecoin (DOGE).

Conclusion

Bitcoin has challenged the way many people view money and its exchange amongst parties. The way in which a decentralized self-governing global currency can change the way we think about the world is truly fascinating. It offers an escape from banks which will charge exorbitant fees and give you little interest on the capital you store. It is global and thus less linked to central banks which can devalue someone’s money with inflation and quantitative easing. However, when it comes to disruption, it is the underlying blockchain technology that has the true potential to really change the world. There are already a number of companies that are attempting to use a decentralized ledger to manage supply chains, raise funds through crowd funding, improve security, the list goes on. There have also been a number of other crypto currencies that have been developed that have greatly improved upon the Bitcoin protocol to include increased privacy like Monero or smart contract technology like Ethereum.