Bitcoin was first introduced in a 2008 white paper written by Satoshi Nakamoto (this is a pseudonym for one or multiple individuals.) It was then introduced as an open source software in 2009. Since then Bitcoin has gained a life of its own and remains a contentious issue in the financial technology world. Here are some of the basics (Disclaimer- I do not claim to be a bitcoin expert, programmer, or investor):
Blockchain: In simplest terms, a blockchain is a ledger replicated in a large number of identical databases, each hosted and maintained by an interested party (node). When changes are entered in one copy, all the other nodes’ copies are simultaneously updated. So as transactions occur, records of the value and assets exchanged are entered in all ledgers. There is no need for third-party intermediaries to verify or transfer ownership.
Blockchain=Distributed consensus algorithm
Bitcoin: Bitcoin is a type of cryptocurrency that runs off the bitcoin blockchain. Bitcoins are created as a reward in a competition in which users offer their computing power to verify and record bitcoin transactions into the blockchain.
How a Regular Person Uses Bitcoin:
1. Stephanie would like to send some bitcoins to Kelly, that transaction will have four pieces of information:
An input: This is a record of which bitcoin address was used to send the bitcoins. A bitcoin address is generated randomly, and is simply a sequence of letters and numbers
An amount: This is the amount of bitcoins that Stephanie is sending to Kelly
An output: This is Kelly’s bitcoin address
Private key: This is another sequence of letters and numbers, but unlike a bitcoin address, this is kept secret
2. Stephanie sends the bitcoins from her bitcoin wallet out to the wider bitcoin network. Bitcoin miners will verify the transaction, putting it into a transaction block and eventually solving it. If its proven that Stephanie’s transaction is valid and she has enough funds- the block is added to the blockchain and recorded. Each block includes a hash of the previous block- This combination helps connect blocks in the chain.
3. Bitcoins are then transferred to Kelly.
How Bitcoin Mining Works:
• Because your transaction must be verified by miners, you are sometimes forced to wait until they have finished mining. In the bitcoin protocol each block takes roughly 10 minutes to mine
• Bitcoin mining requires a computer and a special software program. Miners will use this program and a lot of computing power to compete with other miners in solving the complicated mathematical problems. Initially, bitcoin miners were just cryptography enthusiasts but as the value of bitcoin has gone up, more people have been mining as a potential business, investing in warehouses and hardware in order to mine as many bitcoins as possible
• Whoever wins the block will get a reward of 12.5 bitcoins (This amount may have changed since I last did bitcoin research)
• If any single miner or collective group of miners (known as a pool) were ever able to account for 51% of the total power on the network, those miners would be able to take control over the entire blockchain.
• There are multiple types of blockchains
• Different blockchains have their own type of currency, some don’t have any currencies and instead serve as smart contracts that self-execute a particular business logic
• There are a lot of regulatory concerns around bitcoin (particularly bitcoin exchanges)
• The current price of a bitcoin is: $1,012. It is highly volatile and has experienced extreme fluctuations
• A good bitcoin wallet for beginners is Gemini
For a more thorough overview check out Antony Lewis’ blog here.