What is Bitcoin?
What is Bitcoin?
Bitcoin is the first decentralized digital currency, no government, institution, or individual can influence it. Digital currencies are virtual currencies existing solely on the blockchain. Learn more about the blockchain here.
Bitcoin was developed by a fictitious developer known as Satoshi Nakamoto. Satoshi Nakamoto’s true identity is still a mystery despite many individuals claiming the identity. Satoshi Nakamoto arguably decided to remain anonymous in order to preserve its core values. Bitcoin, a decentralized network shouldn’t have a centralized identity as that would inevitably lead to centralized and influence based decisions within the Bitcoin network. In 2010, Nakamoto mysteriously left development, three years after he started work on the project.
The network began with the Genesis block (first block recorded on the blockchain). Mined and added on January 3rd, 2009 the Genesis block activated the Bitcoin blockchain. New blocks are added to the blockchain at an interval of 10 minutes. At the time of writing, there are over 600,000 blocks on the blockchain.
How Does a BTC Transaction Work?
Brief overview:
Sender inputs BTC payment address and amount of BTC to send to recipient. Transactions are broadcast to the network and shorty after included in a mined Bitcoin block. Once the block is added, the transaction is confirmed and the recipient receives the Bitcoin.
What actually happens:
Unlike physical wallets, Bitcoin wallets don’t actually hold any coins. Bitcoin wallets consist of a private and public key. Owning a wallet means you are in control of the private key and public key. The public key is the wallet address, a string of 34 letters and numbers. Public keys are viewable by anyone via a network explorer, hence the term “public key”. These keys are view-able only. Public keys have corresponding private keys. A string of 64 letters and numbers, private keys “control” their corresponding public keys. Private keys can sign transitions with the corresponding public key, therefore it is crucial to keep it secret.
All transactions must be “signed” by the sender’s private key in order to be “validated”. Once the transaction is signed a digital signature is outputted to the network. The network validates that the signature corresponds to the private/public key pair.
After the transaction is validated, the transaction is added to a queue of unconfirmed transactions. A transaction’s priority is determined by the Bitcoin fee selected when initiating the transaction. Higher fees result in higher priority, and thus faster transaction confirmation times.
High priority transactions are included in the next Bitcoin block. Cryptocurrency miners solve puzzles to “mine” the next block. Blocks hold and record transactions on the immutable blockchain. We covered how Bitcoin mining works here. Every block mined after the block including the transaction is an additional transaction confirmation. A confirmed transaction signifies the funds are available to spend by the recipient. Transactions may require multiple confirmations depending on the recipient.
Why Should You Use Bitcoin?
Decentralization – Bitcoin’s values and principles are based on the concept of decentralization. Decentralization is the process in which assets and power are distributed evenly, not consolidated within a single entity or power. The Bitcoin network is decentralized with over 9,000 nodes working in unison to strengthen the network. No single entity can influence or alter the Bitcoin blockchain.
Security – Bitcoin payments offer a higher level of anonymity than traditional payment methods. Transactions aren’t tied up with the sender and recipient’s personal information. Thus, mitigating the possibility of identity theft when compared to traditional credit card payments.
Flexibility – Unaffiliated with any government or institution, funds can be transferred across borders seamlessly.
Store of Value – “Digital gold”, a term many use to describe Bitcoin as a good store of value. If you bought $100 of Bitcoin five years ago (October 24th), you would have over $2000 today, a gain of over 2000%. Many investors see Bitcoin as a potential investment and a good store of value.
Blockchain Immutability – The blockchain is censorship resistant. All transactions recorded on the blockchain are visible to anyone through a blockchain explorer. This means transactions are tamper-proof and transaprent.
Disadvantages
Volatility – Bitcoin’s stellar gains come with a downside. Bitcoin is volatile compared to other payment methods such as the US Dollar. Although this may be attractive to investors, consumers prefer “stable” currencies such as the US Dollar.
Responsibility – The freedom that comes with decentralized networks, comes with substantial responsibility. Since the wallet owner has sole control over the Bitcoin inside the wallet they are responsible for it. If the private key is stolen or leaked the funds inside the wallet can be stolen. This means you are responsible for the security of your private key.
Mainstream adoption – Many businesses only accept traditional payment methods. Businesses may accept cryptocurrency payments through special gateways. These gateways convert accepted Bitcoin into fiat (USD), which merchants can withdraw. Mainstream adoption is yet to come, meanwhile consumers still have to rely on special gateways for crypto purchases.
Final Thoughts
Cryptocurrency and blockchain technology are still relatively young, and yet to achieve mainstream adoption. Bitcoin provides an alternative future where fiat run markets are replaced by cryptocurrencies. This change is both exciting and very different from the world we observe today. Learning and seeking out information will help spread awareness and build important foundations.
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