Bitcoin is the biggest cryptocurrency by market cap, and, for many, it is the only coin they think about when they hear the word “cryptocurrency.” Bitcoin has become shorthand for cryptocurrency in general because of its status, age, and commanding market presence.
This is our Bitcoin for dummies
Yet the details of the coin itself tend to get lost in generalities. Many people think of Bitcoin as “internet money,” and that’s good enough for the general public.
Bitcoin represents something far more important, however. To understand what that is, it’s helpful to understand what Bitcoin itself is.
Bitcoin is considered as the first cryptocurrency to go mainstream if cryptocurrency could ever be considered to be mainstream. Strictly speaking, however, it’s not the very first cryptocurrency.
Let’s start with what that word means. The “crypto” in cryptocurrency shares the same root with “cryptic” and “cryptography” – that is, it means coded or secret.
A cryptocurrency is created by a series of coded computer signatures, strung together to give each coin a unique identity. It’s helpful to think of them as serial numbers on U.S. dollar bills. We’ll talk more about the nuts and bolts of that process a little later.
Read more: How to Buy Bitcoin?
The original Blockchain
The first step of our Bitcoin for Dummies guide is understanding the blockchain. Bitcoin is the original blockchain, and the blockchain is a group of data blocks linked cryptographically that contain the transaction data. A new block is mined by miners roughly every 10 minutes, and blocks are usually 1 – 1.5 MB in size that can hold upwards of 3,000 transactions at capacity.
Transactions broadcast to the network are incorporated into blocks by miners in a process called Nakamoto PoW Consensus (outlined in the next section) which validates the transactions and secures them via computational work.
Before Bitcoin, there were lots of different internet currencies and credits. We won’t muddy the waters with them too much, but Nick Szabo’s bit-gold is worth mentioning. Szabo wrote in 1998 that digital currencies could be improved greatly by incorporating cryptographic signatures that would make each coin unique and prevent problems like copying coins, double-spending, or otherwise stealing coins.
Szabo concurrently developed the idea of a smart contract. A smart contract is a digital contract between two parties that can be executed with just the information contained in its code. You’re probably familiar with the analog version – a vending machine.
The vending machine contains all the information it needs in its cogs and gears to execute a deal between you and the vending machine stockist. If you input the correct amount of change and hit the right codes, the vending machine automatically dispenses the candy bar or bag of chips of your choosing. Smart contracts work much the same way.
Satoshi Nakamoyo enters the scene
It might surprise you to learn that the creator of Bitcoin is unknown. Even that is a tad misleading. A group of people or an individual calling itself Satoshi Nakamoto published a paper introducing the basics of Bitcoin in 2008. An internet domain name was registered for it, and shortly after, Nakamoto began producing Bitcoins.
What’s unclear is exactly who or what Nakamoto is, as the creator of the cryptocurrency has never made him-, her-, or itself public. Several individuals have been suspected of being Nakamoto – including Szabo – although it’s equally possible that Nakamoto was a group of individuals or even a corporate entity.
The important thing to remember is that Bitcoin was based on previous work in digital currencies and cryptography, but it combined them in an innovative and ultimately useful way.
Miners invest a huge amount of money into hardware equipment to mine Bitcoin, and their rewards for doing so are directly in Bitcoin. The game-theoretic of the system is designed so that attempting to attack the network is unsustainably costly.
To hack the network, one would require implementing a 51 percent attack on the network, where a malicious entity would retain 51 percent or more of the network’s hash power and could arbitrarily validate invalid transactions or double spend. However, the odds of sustaining a 51 percent are extremely low, and the net result is not worth the costs.
According to GoBitcoin.io, the hardware costs alone of conducting a 51 percent attack on Bitcoin are currently more than $8 billion, at the cheapest rate.
The mining process also plays a vital role in the issuance of the currency. Mining is the only way to produce Bitcoin. Due to the halving of the reward every 210,000 blocks, Bitcoin is a deflationary currency since there will only ever be 21 million BTC in existence. Because of this, the final Bitcoin will be mined in the year 2140.
One of the main keys into understanding what Bitcoin is and why it has any value at all has to do with how new Bitcoins are created. This process is called proof-of-work mining, and it’s done by computers.
Each Bitcoin carries a unique digital signature. That signature is created by a computer solving large, complex mathematical problems. When a computer solves one of these problems, in a so-called block, a number of new coins are created.
These Bitcoins are valuable because they represent a significant amount of computer work, time, and electricity spent solving a massive math problem. This is the main reason Bitcoins cannot simply be created by hitting “copy, paste” over and over again.
In the early days of Bitcoin, solving the math problems was relatively easy and could be done on standard computers. As time goes on, these problems are designed to get harder and harder, so nowadays, Bitcoin is primarily generated by immensely powerful computers made explicitly for the task.
These computers are known as application-specific integrated circuits or ASICs. This means that they were built with the express purpose of solving Bitcoin’s unique math problems. They are expensive – up to thousands of dollars apiece – and they consume a lot of electricity and generate a lot of heat.
Read more: Is Bitcoin a Good Investment?
Bitcoin makes it big
Bitcoin is a big deal; it does not rely on a trusted third party, like traditional fiat currencies. When you spend a U.S. dollar bill, the money itself is just paper and cloth. It doesn’t have any real value in and of itself. What makes it valuable is the U.S. government’s promise that it is worth whatever is printed on it.
Moreover, it is hard to spend money of any kind without involving a third party – usually a bank or a payment processor. This verifies that transactions are valid, holds money in reserve, and allows it to be stored securely.
Bitcoin by design transcended this system. It allowed people to exchange money without a third party involved. A Bitcoin is worth exactly one Bitcoin whether it was spent in the U.S. or Japan. It doesn’t require a bank or a government’s stamp of approval.
This brings up another vital facet of the cryptocurrency. It exists on a decentralized blockchain. All that means is that the record of every Bitcoin transaction ever done is stored in a long string. That string is open, transparent, and verifiable.
It is also decentralized, which means it’s stored on the computers and servers of many different users. What this practically means is that it’s hard to shut the Bitcoin network down. A bank failing or a government outlawing Bitcoin would not ruin the network since it’s spread out over so many different computers.
And here’s another thing – Bitcoin is anonymous. That is different than private. The transactions are open and available for viewing on the blockchain, but it is difficult to tie a particular Bitcoin owner to a specific transaction.
This directly led to one of the first and most significant uses for Bitcoin – the so-called Silk Road black market.
Silk road: Boom and Bust
Silk Road was an online marketplace for drugs, guns, and other illegal items. It was ultimately shut down by U.S. federal authorities. While this marketplace was in operation, Bitcoin was the currency of choice due to its relatively untraceable nature.
Each coin carries a secret code that is difficult to link back to its owner. The Bitcoin network is also decentralized, so it’s hard to stop the flow of Bitcoin altogether.
The Silk Road no longer exists, but it was a first – and successful – use case for digital currency. Namely, it proved that Bitcoin could be used outside the traditional boundaries of banks and governments, and it held its value well despite the somewhat unsavory company it kept.
The future of Bitcoin
This has been a brief introduction to Bitcoin. We have talked about its origins, how new coins are created, and its first prominent use case. The story is still unfolding, and it is a rich story so far. Armed with these basic facts, you are now ready to follow along.
Bitcoin is under constant development and adaptation. The future roadmap has some intriguing and sophisticated concepts that should prove vital to the sustainability of the network and its narrative direction.
The continued development of Bitcoin network is one of the major trends to watch closely over the coming months and years, as it could allow Bitcoin to function as a P2P payments system and high-value settlement layer concurrently.
Hope you’ve enjoyed our Bitcoin for Dummies guide.
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