What is Bitcoin and how does it work?
Bitcoin is becoming more and more popular and is gradually creeping into the mainstream. However, he is often still misunderstood and has therefore received an unfair condemnation from the media. As a result, many people are misinformed about what Bitcoin is, how Bitcoin is formed, or how Bitcoin works. Of course, there is nothing wrong with that. It is a new technology and you can only learn about it on your own initiative, because there are no schools to teach it. With that in mind, we're glad you found us, because we always try to educate people!
What is Bitcoin?
Bitcoin was created in 2008 by a mysterious person or organization under the pseudonym Satoshi Nakamoto. Their identity is still unknown and will probably remain so forever. The initial idea of ??the cryptocurrency Bitcoin was published by Satoshi in a scientific article called Bitcoin: A Peer-to-Peer Electronic Cash System.
A purely peer-to-peer version of electronic money would allow online payments to be sent directly from one side to the other without going through financial institutions. Digital signatures are part of the solution, but the main benefits are lost if a third trusted party is still needed to avoid double spending. We propose a solution to the problem of double spending using a peer-to-peer network. The network timestamps of a transaction form a record in that a hash is created in an ongoing string using "proof of execution," which cannot be changed without reworking the "proof of execution." The longest chain serves not only as evidence of monitored events, but also as proof that it comes from the largest source of processor performance. If most of the processor's performance is controlled by nodes that are unable to attack the network, they generate the longest strings and knock out attackers. The network itself requires a minimal structure. Messages are transmitted at best effort, and nodes can leave and return to the network at will and receive the longest evidence chain of work as evidence of what happened while they were away. The abstract above uses scientific terminology, so let's look at Bitcoin in a more understandable light. Bitcoin is a decentralized digital currency because the system works without a central bank or a single administrator. The value and supply of this digital currency is controlled by the users themselves. In a sense, it is a currency that really belongs to the people.
Bitcoin is cryptocurrency because it is a digital currency that acts as a medium of exchange and uses cryptography to secure financial transactions, control the creation of additional units (new coins) and verify the transfer of funds. Bitcoin is an open source system, so no one owns it and anyone can participate in its use and development.
Bitcoin thus eliminates at least one type of intermediary: banking institutions. Let's say you have to transfer 1000 EUR from Austria to your relatives in Germany. Money passing through a bank in Slovenia and fees are charged to process the transfer of funds. The German bank charges your relatives additional fees, and the whole process can take several days, especially if you are sending money to a country with a different national currency. There are no centralized fees-based institutions in Bitcoin's ecosystem, and transactions can be processed in minutes, even if you send funds to the other side of the world. In addition, it is a currency that is not limited by national borders.
We all know that banking institutions have high fees, are generally slow in their operations and have certain geographical constraints. But that's not all. For example, banks can freeze their clients' accounts at any time, sometimes for very strange reasons. For this reason, some people believe that banks have too much control. You may have noticed that Bitcoin was created shortly after the financial crisis in 2008. Some people even believe that the crisis helped to evoke the idea of ??a decentralized currency and was one of the main reasons for Bitcoin. This is not so out of the question, because Bitcoin represents one of the possible futures of our monetary system.
What is Bitcoin: The Basics
Bitcoin is a completely digital currency. It can be used for various types of transactions, online payments, cheap international payments, etc. In short, this is the first widespread adoption of a payment system that is not controlled by any world government.
Government organizations and banks practically still print or create new money (EUR, USD, GBP, etc.), while Bitcoin has built up a limited supply of 21 million coins. About 17.5 million coins have currently been created and the last Bitcoin is expected to be mined around 2140. A commonly accepted abbreviation for Bitcoin coins is BTC. One Bitcoin can be divided into 8 decimal places and the smallest unit is unofficially called satoshi. That's one hundred millionth of one Bitcoin, ie. 0.00000001 BTC.
What is a blockchain?
So how does Bitcoin work? In this chapter, we'll take a closer look at blockchain technology. Every transaction on the Bitcoin network is recorded on something called a blockchain. This is a public book (basically a list of all transactions) that is maintained and updated by thousands of miners around the world (more about mining below). All transactions are anonymous, but are publicly available for viewing.
What is Bitcoin Mining?
Bitcoin is made up of computers that are involved in managing this public book or database. Computers validate Bitcoin transactions and are rewarded with new Bitcoins when they successfully add a new block to a blockchain block. This process is called mining and computers are referred to as miners. Mining is a distributed consensus system. Used to validate transactions that are waiting to be included in the blockchain. In this way, a chronological arrangement of transactions is achieved and network neutrality is protected.
Strict encryption rules prevent any modifications, as each block contains a record of the most recent transactions and a special math function that references the previous block in the blockchain. Any fraudulent or malicious attempts to change the data in a block would invalidate all subsequent blocks. You could never add such a block to a block because there would be no match. Individuals cannot influence a blockchain, nor can they replace parts of a string when trying to manipulate transactions. This ensures that recorded transactions remain in the blockchain forever and cannot be subsequently modified.
How is Bitcoin Formed?
Now that we have a better understanding of blockchain technology, we can take a closer look at the process of creating new Bitcoins. A new block is added to the block every 10 minutes. The most successful miners are awarded newly created Bitcoins. You must understand that the price is never given to a single person, because no one in the world has enough computing power to solve the complex mathematical operations needed for a successful block. A higher number of miners results in a safer network.
As a result, miners work together and group their computing power into so-called "mining groups". The price is then distributed in the proportion in which the individual miners contributed to it (those with a larger contribution of computing power receive a higher price). The price is halved for every 210,000 blocks. Initially, the miners were rewarded with 50 Bitcoins, and in 2012 the price was halved for the first time (to 25 Bitcoins). The second half followed in 2016. Last halving was in May 2020. Currently, the reward is at 6.25 Bitcoins.
The price is halved approximately every four years. This time frame is obtained by multiplying ten minutes (average time for a new block) by 210,000 (the number of blocks needed to achieve halving). As a sports fan, I find it interesting that the halving takes place in the same year as the Summer Olympics. The bottom line is this: More miners provide a safer network, but it also causes higher mining difficulty. This is because the system ensures that the block is added every 10 minutes (not sooner or later).
What are the basic values of Bitcoin?
To help you understand the main benefits of Bitcoin, we can also take a look at the main values ??of Bitcoin, which can be summarized in the following three points.
Decentralization: solving the problem of double spending (transactions cannot be duplicated, which prevents the endless creation of new coins).
Limited supply: there can be no more than 21 million Bitcoins (which provides a predictable supply and increased demand).
Cryptography: it is not possible to know the details of the sender / recipient (transactions are anonymous).
To understand how Bitcoin works, it is essential to understand what a decentralized network is. The concept of decentralization has already been described above, but we can look at it from a different perspective. When you visit a web browser and type "www.google.com", your computer will start a conversation with Google's servers. The browser then displays various search results. If for any reason Google's servers were unavailable, you would not be able to see these results. This is because the data is stored in a centralized network. In a decentralized network, we can avoid these problems.
The main advantage of limited supply is the concept of supply and demand. People always attribute higher value to Bitcoin to rare items, which means that less supply usually leads to higher demand and thus higher prices. Imagine rare (old) cars or precious stones. Bitcoin is built on the same concept, as its supply is limited to 21 million coins - there will never be more coins in circulation.
Bitcoin uses cryptography (a technique for secure or encrypted communication) to transfer transaction data. One of the most famous historical devices for cryptographic communication is the Enigma, which was used during World War II. Unlike Enigma, in which the Allies managed to find a solution for decoding messages, decrypting Bitcoin is impossible. At least for the time being, although it is expected to stay that long unless there is an unpredictable leap in computing (quantum computers can be a threat, but they are far from becoming a reality in the foreseeable future).
The cryptographic algorithm used in Bitcoin is called elliptic curve cryptography. It could also be called public and private key cryptography. This technology allows you to prove ownership of your Bitcoin wallet with a pair of cryptographic keys: a private key and a public key. The combination of these keys creates a digital signature. The main purpose of using such cryptography is to create a secure digital link to the user's identity. The identity of the wallet is therefore based on holding a combination of private and public cryptographic keys. Digital signatures document ownership of your assets and allow you to control your assets.
A bitcoin wallet always consists of two parts: The first part is the public address (or public key). It's like an email address and you can freely share it with others. The second part is the private key. It's like a password and you can't reveal it publicly. A digital signature, like a handwritten signature, is used to verify identity to prove ownership of a wallet. In addition, your true identity remains anonymous, because other people only need your public key if they want to send you Bitcoins. In the case of Bitcoin, digital signatures are a mathematical function that corresponds to a given wallet. If you attach a digital signature to a transaction, no one can claim that the transaction actually came from your wallet. The private key is used to encrypt transactions, while the public key is used to decrypt transactions. Therefore, we must reiterate that the private key must always be secure. The public key is for sharing with third parties and ensures that you own an address that can receive funds. The sender encrypts the transaction with his private key, which can only be decrypted by the recipient with the sender's public key.
How to buy Bitcoin?
There are many different options for buying Bitcoin. The most convenient way for beginners is definitely to buy through an online exchange. If it is a licensed and regulated exchange, you will need to use your name, address and passport or national identity card. I recommend Kriptomat because it is easy to use, reliable and you can use different payment methods. Another option is to use a bitcoin ATM. It's an instant purchase method and you can stay more anonymous. At least as long as you stay with a smaller amount. You can use the ATM to buy Bitcoin directly in cash or by credit card. However, this is a slightly less convenient method because you need to find the physical location of the nearest ATM. However, depending on your current location, it may not necessarily be such an easy task.
What can you pay with Bitcoin?
You can use Bitcoin to buy and sell goods or services. For example, it should be easier to travel the world with Bitcoin because you only need one currency. Can you imagine not need physical money in your pocket? Or that you don't have to exchange money when you go to another country? You will be able to use Bitcoin from any device anywhere in the world and pay with Bitcoin wherever you want! Even if you lose your physical wallet, Bitcoin is always with you; securely stored in your virtual wallet. So Bitcoin is one of the most convenient ways to pay when you travel. You can use Bitcoin to buy tickets, rent a car and pay for the hotel; of course except pizza and real estate.