A Brief Overview of Bitcoin
Satoshi Nakamoto (which is widely regarded as a pseudonym)posted a paper on the internet in 2008 titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” This paper outlines the creation of Bitcoin and blocks of transactions linked in chains. Although this paper never directly used the words “Blockchain” when referring to this method, we can’t talk about Bitcoin without mentioning the Blockchain responsible for its operations.
Blockchain is a system in which a record of transactions made in Bitcoin or other cryptocurrencies is maintained across several computers linked in a peer-to-peer network.
Throughout history, value has taken many forms, and people use different materials to represent money. Wheat, shells, gold have all been used as a medium of exchange.
For something to represent value, people have to trust that it is valuable and will stay valuable for them to redeem their money and spend it.
However, paper money such as dollar bills was invented because of the bulkiness of these commodities used as a value exchange. People begin to use Paper money as a medium of exchange because of its practicability and the convenience to carry it about.
After the world switched to paper money, which can also be called fiat, the move to digital money was not difficult to understand. Today, we mostly use credit cards, wire transfers, PayPal, and other forms of digital money. Due to digital money being used as a value exchange, printed paper money has been reduced to the bare minimum.
Centralized authorities keep a ledger on their computer to track the ownership of money digitally. Everyone has an account, and this ledger keeps a tally for each account and their transactions for accountability purposes.
According to Bitcoin’s official website, www.bitcoin.org, Bitcoin was described as an innovative payment network and a new kind of money.
About Bitcoin’s official paper, which is known today in general cryptocurrency terminology as the whitepaper, the set instructions that guide Bitcoin’s operation as a cryptocurrency is discussed briefly:
- Peer-to-peer electronic payment
Thanks to Blockchain, Bitcoin allows payment to be sent from one person to another without going through a centralized authority to regulate the transaction. This peer-to-peer ability of Bitcoin made people interested in this technology which brought about its widespread adoption.
- Elimination of the double-spending problem using a peer-to-to-peer network
“We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.”
– Bitcoin whitepaper
Several papers were published during the 80s and 90s, theorizing the use of cryptography combined with secure data chains and the creation of digital currency.
In an academic paper, Bitcoin became more than just an idea when Satoshi Nakamoto created the Bitcoin network and the first Blockchain. Hash functions are used to generate fixed-length bits of data. This first Blockchain was a core feature of Blockchain preventing double-spending and acting as a distributed public ledger for all transactions on the Bitcoin network.
- Proof of work
A proof of work is a way to deter DDOS attacks and is used for Bitcoin network protection. A Distributed Denial of Service Attack is usually a ploy for bad actors to get into an internet-based financial system and record false activity on its ledger. The Bitcoin consensus mechanism, which is the proof of work, is used by the blockchain protocol to maintain its security.
This involves miners solving puzzles and adding valid blocks of ledger ( recorded transactions carried out on the Bitcoin blockchain) to the network. These miners are rewarded for contributing computing power, electricity, and resources to the network, which helps keep the network running.
The proof of work is a mathematical puzzle that is very difficult to solve but easy to verify once it has been solved.
Think of it as a combination lock. To add a new block to the Blockchain and receive a reward, you must solve the combination to the lock. The person who solves it first gets a reward in Bitcoin and can add a block to the Blockchain.
This solved puzzle proves that computing power and other methods can be used when running a blockchain.
Why do people trade Bitcoin?
Bitcoin can optimize global infrastructure and deal with global issues more efficiently than the traditional financial system. Because of this, more people are trading in Bitcoin day-in- day out. Some uses cases and ills that can be achieved with Bitcoin’s adoption are discussed below:
Bitcoin’s blockchain systems offer improvements in transparency compared to existing recordkeeping and ledgers. Changes to the ledger are visible to everyone on the network, and transactions are immutable- they can’t be altered or deleted once entered into the Blockchain. With financial transactions, you can now monitor the status of your transfer on the Blockchain in real-time instead of not knowing the status of a transaction until it is completed, which is often the case in today’s systems.
- Elimination of Intermediary
As we mentioned earlier, the Blockchain operates on a peer-to-peer system that eliminates intermediaries in the network. This is of great advantage, especially in countries where a third-party transactional body cannot be trusted due to corrupt governments, high crime rates, poor audits of companies, manual recordkeeping, and limited legal options to pursue claims.
The blockchain-based system can run on a decentralized network of computers, reducing the risk of hacking, server downtime, and data loss.
- As an instrument of Money Laundering
Due to bitcoin’s overt privacy and lack of a centralized authority, bad actors take advantage of this to launder money and remain in business. This has been one of the main reasons some governments have been fighting to bring bitcoin under their scrutiny.
Data stored on the Blockchain are immutable, preventing fraud through manipulating transactions and data history. Transactions entered on the Blockchain provide a clear trail to the very start of the Blockchain allowing any transaction to be easily investigated and audited.
Since the adoption of Bitcoin, there has been a lot of technology in cryptocurrencies that have been created to replicate Bitcoin’s success. An example is litecoin, which is a fork of Bitcoin.
Of these, the major competitor of Bitcoin is Ethereum which is a decentralized open-source blockchain with smart contract functionality.
Ethereum, which is second in market capitalization to Bitcoin, was created by Vitalik Buterin. Due to its adoption of smart contracts, Ethereum has had a lot of success which threatens to overshadow Bitcoin’s.