What are Bitcoin and Blockchain?
Blockchain, as the name suggests, is a chain of blocks. It is similar to the linked list data structure where blocks are linked together. A blockchain is often compared to a ledger and for a very good reason. Blockchain stores all of the transactions in blocks. For comparison, Blockchain can be compared to the ledger book where all the pages inside the ledger are like blocks linked together. Other than transaction details, a block also carries the hash value of the previous block record and the hash value of the next block thereby making it truly a chain of blocks.We’re going to look at the bitcoin blockchain for example here as to why it brings us something so unique.
So What makes it different from a normal ledger book?
It is distributed and decentralized. There is no central authority to control the bitcoin currency. there’s no way it can be destroyed, unlike a centralized database which may be completely destroyed in case of natural disasters for example. Imagine a lot of computers all over the world storing the same data and the chance of all of them getting destroyed is very very little.
It is immutable. As we have already seen, if we have a lot of people having the same data, it is nearly impossible to tamper the data since the blockchain will keep on growing with new blocks and one person just cannot change the data of majority of the people in the world.
It cannot be counterfeited. There cannot be fake bitcoins, unlike the physical currency which suffers from this problem very often. Each bitcoin is produced by cryptographic and calculations and this eliminates the problem of the fake coin and it also eliminates double spending the money through timestamps and verification (also known as confirmation) of the transaction by the nodes.As the confirmations get higher the more irreversible it becomes.
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Mining and Proof-of-Work
Mining is the only process of creation of bitcoins. It is basically a cryptographic calculation done to guess the particular correct value needed to add the block to the bitcoin blockchain. Miners are the people who use their mining hardware to guess the value. What they literally do is get the hash value of the previous block, along with the block of the new transactions, and add it with a random number called Nonce( THis is what they have to guess every time) then they perform a SHA256 hash function over it and if the hash matches the right pattern they will be rewarded with bitcoins. This algorithm is called the proof of work. The reward of bitcoins will also include the transaction fees in the block. The reward excluding the transaction fees will be same for a period of time. We will discuss this more in the next section.
Controlled Supply
The mining reward started with 50 bitcoins when it began and it will be reduced by half every four years. In this way, only a limited amount of bitcoins will ever be created. A Block is created averagely every 10 minutes by miners. and how bitcoin achieves this despite so much of computing power guessing billions of hashes every second is that the difficulty of the proof-of-work will change approximately every 2 weeks or every 2016 blocks. if the average time for the creation of blocks in 2016 blocks is lesser than 10 minutes, then the difficulty will increase accordingly. And by this way, a block getting created in ten minutes will make it 2016 blocks in two weeks.
Also, the reward will decrease every 210,000 blocks or approximately every four years. The rewards are currently 12.5 BTC. It used to be 50BTC originally in 2008. The current block height is 515855 at the time of writing this pointing to us that it had already halved twice at 420,000 blocks and will get halved again during 2020 to 6.25 BTC. and as it goes on like this, the maximum amount of bitcoins mined will ever be approximately 21 million and will be created by the year 2140. After that year, mining reward will solely be from transaction fees.
