Cryptopedia
Bitcoin
Ranking the first in market capitalization, Bitcoin is a decentralized cryptocurrency based on cryptography and blockchain technology.
The Birth of Bitcoin:
In 2008, a global economic crisis was triggered by the U.S subprime mortgage crisis. In this crisis, mortgage mismanagement led to a liquidity crisis. To stabilize the financial , a variety of government bailouts were implemented. This further showed the critical deficiency of a centralized financial : due to a lack of trust, both parties of trade need a centralized institution as a guarantee to work efficiently. However, given that guarantee, defaults still exist and a centralized institution may not work.
On November 1st, 2008, the Bitcoin White Paper, “Bitcoin: A Peer-to-Peer Electronic Cash ”, was published by Satoshi Nakamoto. In this white paper, the operation mechanism of Bitcoin was explained. Based on blockchain and encryption technologies, Bitcoin is a decentralized payment , which is a solution to the problem of a lack of trust. In this , through the Proof of Work mechanism, all transaction data is recorded by a peer-to-peer network. Therefore, Bitcoin can be traded without a third-party institution.
On January 3rd, 2009, the Genesis Block containing 50 Bitcoins was mined by Satoshi Nakamoto, which marked the birth of Bitcoin.
On January 12th, 2009, Hal Finney received the first bitcoin transaction, which was 10 Bitcoins, from Satoshi Nakamoto.
The Operation Mechanism of Bitcoin:
In order to enhance trust between traders, every Bitcoin transaction is recorded by the nodes of the blockchain network, which can protect the interests of both parties. However, with network latency, the transaction data may be different if the data should be recorded by all nodes. As a result, it is possible that the data can be altered by a node.
To solve the above-mentioned problems, Bitcoin adopts Proof of Work, a consensus mechanism in which all nodes compete against each other to solve a complicated mathematical puzzle to find the correct hash. The node with the correct hash can bundle transactions into a new block and propagate the block to all nodes. Receiving nodes will synchronize the block in order to maintain the same transaction data. This process is called mining and the nodes involved in the process are called miners. After mining a new block, the miner can receive the Block Reward, initially 50 bitcoins, and transaction fees. Incentivized by rewards, miners will take an active part in mining and validating transaction data.
The Block Reward is the only way of issuing Bitcoin. In other words, Bitcoin is generated by mining. Nevertheless, there is a limited amount of Bitcoin as the total supply of Bitcoin is 21 million and it is expected that they will be mined by 2140. Based on the algorithm of Bitcoin, the halving of the Block Reward will occur every 210,000 blocks (approximately 4 years); it cuts the number of Bitcoin created every block in half. In this way, Bitcoin will not experience high inflation and its value will be maintained.
The Connection Between Bitcoin and the Blockchain Technology
Bitcoin and the blockchain technology are interconnected since the operation mechanism of Bitcoin is based on the technology. Bitcoin is an asset while the blockchain technology is an underlying technology that enables its operation so that transactions can be done smoothly. Their connection is similar to the relationship between a video and its player: the underlying technology of the player is the prerequisite for playing the video.
Three Features of Bitcoin:
1. Decentralized
Traditionally, in an economy, money is issued by government institutions. For traders, their personal information, transaction records, and other information are stored and managed in the database of banks or third-party institutions. With complete information, these institutions can perform credit ratings for traders and resolve their disputes in a fair manner. Therefore, both parties will start to trade with the involvement of these institutions as a guarantee. Parties can only access their own information. This is centralization.
However, since Bitcoin is a decentralized asset, institutions have no right to issue Bitcoin or to document and manage users’ information. As a distributed ledger, the Bitcoin network allows every transaction to be recorded publicly and synchronized on the blockchain. Thus, transaction data is accessible to all. Meanwhile, based on a unique data structure and proof-of-work consensus algorithm, transaction data in the block is irreversible. So no involvement of third-party institutions is needed as public trust can be created by decentralization.
2. Pseudonymous
In the Bitcoin network, personal information can be confirmed and assets can be protected through cryptography. With a private key, Bitcoins in an address can be traded without uploading personal identifying information. All transactions are done pseudonymously, which means the identity of both traders will not be exposed to others as only the amount of Bitcoins and addresses are unveiled. Moreover, Bitcoin can be traded anywhere at any time, compared with fiat currency.
3. Monetary Autonomy
Users can control their Bitcoins with the private key and the key can be stored anywhere in isolation. Thus, no one can impose a fee on storage. Keeping the private key as a secret gives the user absolute control over his assets.
In conclusion, the birth of Bitcoin is epoch-making, which transforms the traditional trade mode and witnesses the wide application of the blockchain technology. Inspired by Bitcoin, other cryptocurrencies emerge, creating a new investment market.
The Birth of Bitcoin:
In 2008, a global economic crisis was triggered by the U.S subprime mortgage crisis. In this crisis, mortgage mismanagement led to a liquidity crisis. To stabilize the financial , a variety of government bailouts were implemented. This further showed the critical deficiency of a centralized financial : due to a lack of trust, both parties of trade need a centralized institution as a guarantee to work efficiently. However, given that guarantee, defaults still exist and a centralized institution may not work.
On November 1st, 2008, the Bitcoin White Paper, “Bitcoin: A Peer-to-Peer Electronic Cash ”, was published by Satoshi Nakamoto. In this white paper, the operation mechanism of Bitcoin was explained. Based on blockchain and encryption technologies, Bitcoin is a decentralized payment , which is a solution to the problem of a lack of trust. In this , through the Proof of Work mechanism, all transaction data is recorded by a peer-to-peer network. Therefore, Bitcoin can be traded without a third-party institution.
On January 3rd, 2009, the Genesis Block containing 50 Bitcoins was mined by Satoshi Nakamoto, which marked the birth of Bitcoin.
On January 12th, 2009, Hal Finney received the first bitcoin transaction, which was 10 Bitcoins, from Satoshi Nakamoto.
The Operation Mechanism of Bitcoin:
In order to enhance trust between traders, every Bitcoin transaction is recorded by the nodes of the blockchain network, which can protect the interests of both parties. However, with network latency, the transaction data may be different if the data should be recorded by all nodes. As a result, it is possible that the data can be altered by a node.
To solve the above-mentioned problems, Bitcoin adopts Proof of Work, a consensus mechanism in which all nodes compete against each other to solve a complicated mathematical puzzle to find the correct hash. The node with the correct hash can bundle transactions into a new block and propagate the block to all nodes. Receiving nodes will synchronize the block in order to maintain the same transaction data. This process is called mining and the nodes involved in the process are called miners. After mining a new block, the miner can receive the Block Reward, initially 50 bitcoins, and transaction fees. Incentivized by rewards, miners will take an active part in mining and validating transaction data.
The Block Reward is the only way of issuing Bitcoin. In other words, Bitcoin is generated by mining. Nevertheless, there is a limited amount of Bitcoin as the total supply of Bitcoin is 21 million and it is expected that they will be mined by 2140. Based on the algorithm of Bitcoin, the halving of the Block Reward will occur every 210,000 blocks (approximately 4 years); it cuts the number of Bitcoin created every block in half. In this way, Bitcoin will not experience high inflation and its value will be maintained.
The Connection Between Bitcoin and the Blockchain Technology
Bitcoin and the blockchain technology are interconnected since the operation mechanism of Bitcoin is based on the technology. Bitcoin is an asset while the blockchain technology is an underlying technology that enables its operation so that transactions can be done smoothly. Their connection is similar to the relationship between a video and its player: the underlying technology of the player is the prerequisite for playing the video.
Three Features of Bitcoin:
1. Decentralized
Traditionally, in an economy, money is issued by government institutions. For traders, their personal information, transaction records, and other information are stored and managed in the database of banks or third-party institutions. With complete information, these institutions can perform credit ratings for traders and resolve their disputes in a fair manner. Therefore, both parties will start to trade with the involvement of these institutions as a guarantee. Parties can only access their own information. This is centralization.
However, since Bitcoin is a decentralized asset, institutions have no right to issue Bitcoin or to document and manage users’ information. As a distributed ledger, the Bitcoin network allows every transaction to be recorded publicly and synchronized on the blockchain. Thus, transaction data is accessible to all. Meanwhile, based on a unique data structure and proof-of-work consensus algorithm, transaction data in the block is irreversible. So no involvement of third-party institutions is needed as public trust can be created by decentralization.
2. Pseudonymous
In the Bitcoin network, personal information can be confirmed and assets can be protected through cryptography. With a private key, Bitcoins in an address can be traded without uploading personal identifying information. All transactions are done pseudonymously, which means the identity of both traders will not be exposed to others as only the amount of Bitcoins and addresses are unveiled. Moreover, Bitcoin can be traded anywhere at any time, compared with fiat currency.
3. Monetary Autonomy
Users can control their Bitcoins with the private key and the key can be stored anywhere in isolation. Thus, no one can impose a fee on storage. Keeping the private key as a secret gives the user absolute control over his assets.
In conclusion, the birth of Bitcoin is epoch-making, which transforms the traditional trade mode and witnesses the wide application of the blockchain technology. Inspired by Bitcoin, other cryptocurrencies emerge, creating a new investment market.
