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Blockchains 101: Bitcoin

By TradingBull | TradingBull_articles | 2 Feb 2021


Bitcoin is the first successful application of the blockchain / distributed ledger concept (immutable, distributed, and decentralized Database / Network). The Bitcoin's network provides a "peer-to-peer electronic cash system," powered by the Bitcoin cryptocurrency (Ticker: BTC). On Oct. 31, 2008 a person (or group) under the pseudonym "Satoshi Nakamoto" published the  Bitcoin whitepaper which laid the foundation for a new financial ecosystem and introduced cryptographic exchanges of value to the world. Bitcoin's network launched on Jan 3, 2009.

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Description:

Bitcoin operates as a peer-to-peer network, allowing anyone in the world to send and receive the cryptocurrency, without third party validation from traditional actors such as banks, broker, governments, or payment processor.

Bitcoin works by sharing account balances and transaction histories with each user across the globe in a pseudonymous form through a decentralized (non-centrally validated) and distributed (maintained by all users) database called a blockchain /distributed ledger. Anyone can download and run the free and open-source software required to participate in the maintenance of the Bitcoin protocol.

Mining (Proof of Work):

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Mining” refers to the mathematical process of verifying transactions, maintaining all updates to the database, and ensuring the validity of new blocks before adding them to the blockchain. Bitcoin mining machines (powerful and specialized ASIC computers) utilize significant amounts of computing power to solve a complex cryptographic problem.

Every 10 minutes, miners have to start computing a new block which contains all transactions that took place within the network during that timeframe. Meanwhile, the hash of the previous block of transactions (which has already been validated by the network) is included as a piece of of the next block, forming a chain of data.

The first miner to solve the current block’s cryptographic problem (hashing) then broadcast the results (hash value) to other miners through the P2P network for them to verify and decide on including in their current copy of the ledger.

Once 51% of the network agrees on its validity (consensus), the block’s hash value is included in the current block, and the successful machine (miner) receives a “block reward”, which is an allocation of a predetermined number of Bitcoin.

(Mining) Difficulty:

The Bitcoin network is programmed to increase the difficulty of solving the block’s cryptographic problem when more computing power is added to the network.

This adjustment is made automatically by an algorithm in order to ensure that the blocktime (= transaction time) is always stable at 10 minutes.

Halving and Supply Model:

https://coincentral.com/what-is-the-bitcoin-halvening/

Bitcoin operates within a predetermined supply model where the reward given to miners for mining each block is cut by half every 210,000 blocks (~4 years).

The initial reward at launch was 50 BTC per block.

Previous halvings since inception:

  • 2012: Block reward reduced to 25 BTC per block
  • 2016: Block reward reduced to 12.5 BTC per block
  • 2020: Block reward reduced to 6.25 BTC per block

As adoption progressively increases (demand) and outstanding supply decreases with each halving, the price of Bitcoin has periodically jumped up after network and mining adjustments.

Bitcoin’s remaining supply will progressively tend to zero until the 23th halving (2132), after which the bitcoin network will exclusively rely on transaction fees, creating scarcity and potentially increasing the stored value of the asset over time.

Storage and wallets:

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There are a variety of ways to store Bitcoin. The safest methods are to store it in a cold wallet (offline wallets such as paper wallet or hardware wallets), hot wallet (such as mobile or desktop wallets) or by using a custody service that will store it on a centrally monitored cold wallet/vault (but thereby limiting the benefit of decentralization).

Keeping cryptocurrencies on centralized exchanges is considered to be the riskiest option as the large volumes of bitcoin stored in these centralized locations have attract hackers’ interest.

Technical specification:

  • Type: Native Coin
  • Total Supply: 21,000,000
  • Subunit: 10–9 (Sats)
  • Consensus: Proof of Work (PoW)
  • Encryption: SHA-256
  • Privacy: Pseudonymous (Low)
  • Blocktime: 10 minutes
  • Coding languages: C++ / Go (Java, Python)
  • Open source: Yes
  • Current version: Core 0.20.1 (01/08/20)
  • Previous versions: Core 0.20. 0 (03/06/20)

Documentation:

 

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