Bitcoin is a “cryptocurrency” in which “crypto” stands for cryptography. It’s purpose is to keep the “currency” secure and prevent any frauds and hacking. A link to Satoshi Nakamoto’s (Real identity unknown) paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was posted to a cryptography mailing list in November of 2008 which was preceded by registering of the domain name “bitcoin.org” on 18 August 2008. In January 2009, the bitcoin network was created, when Nakamoto mined the first block of chain aka the genesis block.
The blockchain is a chain of blocks of the transaction of bitcoins. When you are sending a bitcoin, it virtually means adding your transaction onto the blockchain, and the blockchain is around 107 GB of data (2016).
The reason bitcoin has value and credibility is that it is finite. Every bitcoin out there is a reward given to a miner for updating the blockchain. Bitcoin has no central authority but works by a peer-to-peer network. People take up the responsibility to update the blockchain after every transaction. There are virtually thousands of people to keep track of the same “blockchain”, so credibility is maintained. Why will people take up this responsibility you may ask, it is no charity.
- For every transaction, you send your account number, the account number of the receiver, and the number of bitcoins you wish to send.
- When you make a bitcoin wallet, you get a private and public key of your own. Every time you make a transaction, it is signed with your private key. The person to whom the bitcoins are transferred to checks it with your public key. If the public key works, it is proof that it was signed by this user’s private key (public and private keys are generated in that way). This confirms you sent it. This is cryptography in a nutshell, but a lot more complicated things go on behind the scenes to maintain integrity.
- Another issue with integrity is, how do we make sure multiple volunteers are not updating the “blockchain” at the same time, or some user is not using the same bitcoin to pay two different users at the same time, here’s where the “mining” part comes in. To update the blockchain, a volunteer needs to solve a cryptographic hash function problem(Bitcoin uses SHA256 algorithm for hash). Hash functions work in a way so that they can get a random number of random sized input, but they give a fixed output. The catch is reversing a hash function with brute force(trial and error). This requires a lot of computing power and is the reason why people need good hardware to make profits on bitcoin mining. Every hash function solved is added on to the blockchain making new hash problems for the rest of the miners.
- As of today, for every block added to the blockchain, you’ll get rewarded with 12.5 bitcoins to your account. Every bitcoin ever is a reward given to a miner to maintain the blockchain transactions. This amount was 25 bitcoins a few years ago.
- After every 210,000 blocks in the blockchain, the number of bitcoins rewarded is reduced by half. The amount 12.5 will be reduced to 6.25 per block and eventually, all the bitcoins will be mined because there are no more bitcoins to be rewarded to the miners. This is how bitcoins are finite.
- The last bitcoin to be mined is predicted to be around 2140.
Though many people find Bitcoin valuable, there are fair shares that criticize the cryptocurrency.