ShwetaShweta, posted on on 19th Jan, 2018, 41 Views

Basic Concepts of Bitcoin That You Must Know

Bitcoin is a decentralized cryptocurrency invented by Satoshi Nakamoto. As the identity of this person is not known, people do not know whether Satoshi Nakamoto is a single person or a group of persons.


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What is Cryptocurrency?

Cryptocurrency is a digital currency that uses encryption to regulate the generation of currency units and transfer of funds. It is not regulated by any bank or government financial governing body.

Bitcoin was released as an open source software in 2009.

Why Digital Currency?

To understand the need for digital currencies, we need to go back a couple of thousand years, when people were looking at standardizing barter system. Gold was the first currency used by mankind. So one gold coin could buy you X amount of Y, Z amount of A and B amount of C.

With time, gold came to be replaced by paper money because it was easier to print, carry and store. However, like gold had its limitations (limited amount of gold available, bulky, etc.), paper money has its limitations too.

  • For one, the value of paper money depends much on government regulations. If a government decided to phase out some denominations, you are literally left holding a useless piece of paper. Until you exchange it for the new legal notes.
  • Two, a government may decide to print new notes at will, like the US government did a few years back, decreasing the actual value of your money.
  • Three, the money could easily get destroyed.
  • Four, all monetary transactions are monitored by the bank and government financial institutions; there is no privacy in transactions between two parties.

Every currency is created to overcome problems faced by previous currencies. Digital currencies solve these problems to a great extent. Let us understand a bit more about how they work.

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What is Decentralization?

Decentralization means that there is a no central authority who must authorize the creation of a Bitcoin user (called a node) or validate a transaction for its success. Bitcoin miners are responsible for verifying the correctness of the transactions and put them on the blockchain. Typically each transaction takes 7-10 minutes to get verified currently.

Anyone can download the Bitcoin software on his or her computer system, create an identity by randomly generating public key-private key combination, and start using Bitcoins.

There are so many combinations of public key-private key combinations available that the chances of two users generating the same pair is negligible.

Bitcoin network does not need anyone to register their true identities corresponding to their bitcoin node. However, in future, as the popularity and use of bitcoin grows and it comes under the purview of government regulatory authorities, it may be required to reveal your true identity in order to create a bitcoin node.

What are Blockchains?

Blockchains are publicly distributed ledger on the bitcoin network, which keeps a record of all bitcoin transactions ever done on the network. Now, bitcoin was the first cryptocurrency to become so popular, but many digital cryptocurrencies have been created and launched since then. Every digital currency has its own blockchain that keeps a record of all transactions ever done using that currency.

Each node on the peer-to-peer Bitcoin network has a copy of the blockchain for reference.

Each new block contains records of new transactions and a record of previous transactions as a hash value. The record of the previous block is stored as a hash of block value because block value would be very large whereas hash values are comparatively smaller. This is how each block would look, if you want to “see” the virtual block.

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The question that comes to the mind is, who creates these blocks? If there is no centralized authority, who validates that the creator has not tampered with transaction data in the block.

Bitcoin miners create these transaction blocks and Bitcoin network ensures security of transaction data.

Why do Bitcoin Miners Do What They Do?

By design, the bitcoin network lacks a central authority for authorizing creation of nodes or validating transactions. But this needs to be done to ensure that no one is trying to double-spend, i.e. spend the same Bitcoins twice.

When a transaction happens, it is broadcast to the whole bitcoin network, so that each node knows about it. To validate the transaction, the node needs to simply generate a hash of the last block hash value and transactions to be validated, and put it inside a new block together with the Bitcoin transactions to be validated. When such a block is created, the data miners get Bitcoins as mining fees.

This is the way new bitcoins are generated.

In 2009 miners got 50 Bitcoins for mining each block. Every four years it gets halved, so currently, coin mining rate is 12.5 Bitcoins.

Solving Hash Puzzles

Computers can easily generate new hash value from the hash value of the last block and transactions to be validated. This could lead to lots of coins being mined very quickly, which is undesirable for the Bitcoin network.

To counter this, Bitcoin software requires the miners to come up with a hash that meets some criteria. This criteria is stated as the hash should be less than a given number. This ensures that the coins are mined at fixed intervals. The difficulty level is adjusted according to the network performance.

Coming up with a hash value that that is less than a given target value is called solving the Bitcoin hash puzzle.

Race for the Nonce

A hash value is obtained as output by giving one of more numbers as input to the hash function. The old hash value and transaction values are fixed; they cannot be modified. So each client node tries to find a number call the nonce, which when combined with the old hash value and the transaction values gives a new hash value that is less than a target number.

Creating New Block for the Blockchain

The miners compete with each other to find the nonce that will enable them to create the new block and add it to the existing blockchain. When a miner does that, the new blockchain is broadcast to all the nodes, who keep a copy of it for their reference.

Is Bitcoin Legal

Bitcoins are created as a result of mining but they can be exchanged for other Fiat currencies like dollar, Euro, Yen, etc. which actually makes it dangerous. If someone is mining the Bitcoins for spending, that is perfectly legal. However if someone is mining the coins so that they may sell it for profit, that looks like speculation and speculation in illegal in most of the countries.

Bitcoin Exchanges

You can buy or sell Bitcoins using Fiat currencies on Bitcoin exchanges. Bitcoin exchanges are digital marketplaces for trading in no just Bitcoins but other cryptocurrencies as well. Some of the most popular Bitcoin exchanges are Coinbase, Kraken, ShapeShift, Poloniex, etc. In January 2018, Bitcoin is around 10,000 USD.

Some Bitcoin Facts and Figures

Website – bitcoin.org

Ticker Symbol – BTC, XBT

1 millibitcoin = 1/1000 BTC

1 bit = 1/1000000 BTC

1 Satoshi = 1/100000000 BTC

Ledger Start Date – January 3, 2009

Current Supply of Bitcoins – 16,809,150 as of January 17, 2018

Maximum Supply – 21 Million

Latest Software Release – 0.15.1 on November 11, 2017

Whether you are interested in trading in Bitcoin, mining the coins, using them as investments, or a straightforward observer of the new ways of the world, you must know about Bitcoins because they are changing the way we perceive money.

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