What is Bitcoin and how does it work

Bitcoin is the very first working application of Blockchain technology. And being the first truly decentralized digital currency, Bitcoin started a revolution. So, in this tutorial, we will learn about What is Bitcoin and how does it work. Additionally, we will also cover the following topics.

  • Introduction to Bitcoin
  • Who created Bitcoin
  • History of Bitcoin
  • How does Bitcoin Works
  • Benefits of Bitcoin
  • Disadvantages of Bitcoin
  • Total Number of Bitcoins
  • What makes Bitcoin valuable?

Introduction to Bitcoin

What is Bitcoin and how does it work
What is Bitcoin and how does it work

There is a variety of ways to define Bitcoin. Bitcoin, in a nutshell, is a combination of ideas and technology that serves as the foundation for a digital currency. It is consists of a peer-to-peer network, protocols, and software that enables the use of digital money known as bitcoin.

In this entire system, bitcoin is a digital currency that helps to store and transport value amongst network participants. Moreover, Bitcoin users connect with one another, forming a bitcoin network over the internet.

However, this complete bitcoin protocol stack is open source. Also, we can operate it on a variety of devices, making the technology widely accessible.

Users can utilize bitcoin to do almost anything similar to traditional currencies. For example, users can buy, sell items using it and even send it to other users.

Moreover, Bitcoin is a distributed, peer-to-peer system where there is no central point of control. To process a bitcoin transaction, it uses a process called mining. In this mining, the network participants compete to solve a mathematical problem.

Also, any participant in the network can function as a miner and help in verifying and recording transactions using their computational power.

On average, a bitcoin transaction takes around 10 minutes for validation. And miners are rewarded with bitcoin for their contribution.

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Who created Bitcoin

Nobody, at least not convincingly, knows who invented Bitcoin. Satoshi Nakamoto is the pseudonym for the person or group of people that published the first white paper on Bitcoin in the year 2008. And Satoshi Nakamoto also developed the first Bitcoin software in the year 2009.

Since the introduction, many people were rumored to be the person behind the pseudonym. But, as of January 2022, Satoshi Nakamoto’s genuine identity (or identities) remains unknown.

The invention of Bitcoin didn’t come in one day but, there were many precursors to Bitcoin. For example, Hashcash, b-money, Reusable Proof of Work plays a major role in the creation of Bitcoin.

Several of the people behind the other projects described above were also involved in the invention of Bitcoin, which is surprising.

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History of Bitcoin

It all started in the year 2008 when a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” got published under the pseudonym, Satoshi Nakamoto. Nakamoto merged numerous previous ideas, including HashCash and b-money, to build a truly decentralized electronic cash system.

Moreover, one major innovation was to conduct a worldwide “election” every 10 minutes using a distributed computation mechanism known as a Proof-of-Work algorithm. This mechanism allows the decentralized network to agree on the final state of the transactions.

After the whitepaper, the bitcoin network began in the year 2009 based upon things described in the paper. The Proof-of-Work algorithm that ensures bitcoin’s security and durability has grown exponentially in power.

In April 2011, Satoshi Nakamoto vanished from the public eye, leaving the development of the code and network in the hands of a growing community. The identity of the individual or people who created bitcoin remains a mystery.

However, nobody has direct influence over the bitcoin system, not even Satoshi Nakamoto, which results in a completely transparent system.

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Benefits of Bitcoin

In this section, we will illustrate some of the key benefits of Bitcoin and how these benefits resulted in the Bitcoin evolution.

Benefits of Bitcoin
Benefits of Bitcoin

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1. Decentralized

  • Bitcoin is decentralized in nature. It simply means that there is no central authority controlling the system.
  • And it also implies that your bitcoins are unlikely to be frozen or demanded by authorities.
  • Moreover, the pricing of bitcoin isn’t associated with government policy, this theoretically provides users autonomy and control over their money.

2. Open Source & Transparent

  • Another key benefit of Bitcoin is its open-source and transparent nature. Open source implies that anyone with GitHub access can help in the development and improvement of the project. Here is the link to the Bitcoin GitHub repository.
  • Also, from a blockchain perspective, every one may see all information about the Bitcoin money supply. Moreover, we can utilize block explorer to view any bitcoin transaction.

3. Accessibility

  • Bitcoin is a very accessible and adaptable currency. And this is one of its biggest benefits.
  • Though sending bitcoins to another user takes only a few minutes, it can be utilized to buy goods and services from the large number of merchants who accept it.
  • Moreover, it also enables transferring crypto in another nation and exchanging currencies easily, with the added benefit of low to no fees. Bitcoins can also be bought and sold at any time.

4. Immutable

  • Bitcoin is based upon immutable Blockchain technology. This implies that once a transaction has been executed successfully, rolling it back is nearly impossible.
  • This immutable functionality also protects Bitcoin from various malicious attacks.

5. Low Transaction Cost

  • When it comes to fees, it’s also worth noting that Bitcoin transactions have relatively minimal transactional fees for transactions. However, most foreign purchases and traditional transactions come with currency fees and expenses.
  • Because Bitcoin transactions do not involve the intervention of the government or intermediary entities, the costs of transacting are often lower than those of bank transfers.

6. Mobility

  • Another key benefit of Bitcoin is mobility. Similar to any other online payment system, Bitcoin users can buy their coins from anywhere with an internet connection.
  • It also means that customers do not need to visit a business or a bank to purchase goods with the help of Bitcoin.

7. Anonymity

  • We can consider Bitcoin as an anonymous currency that is unaffected by government surveillance if utilized correctly.
  • Also, when making peer-to-peer Bitcoin transactions, we don’t have to give any email address, name, or any other identifying information.
  • Moreover, if Bitcoin is not handled properly, it can become pseudo-anonymous, giving users far more privacy than traditional money.

Also read, How to Setup Private Ethereum Blockchain on Windows

Disadvantages of Bitcoin

In the previous section, we have seen some of the key benefits of Bitcoin. But, with this large of benefits, there are some disadvantages as well. So, in this section, we will illustrate some of the main disadvantages of Bitcoin.

What is bitcoin and how does it work
Disadvantages of Bitcoin

1. No Regulation

  • Undoubtedly, the decentralized nature of Bitcoin is one of the advantages, but it can also be seen as a drawback of Bitcoin. And this is because it means that Bitcoin investments are unregulated.
  • Bitcoin transactions, unlike those using a regulated currency, are not protected by law and are often irreversible, making them vulnerable to fraud.

2. Volatile

  • Satoshi Nakamoto imposed a limit of 21 million bitcoins when he developed Bitcoin. Due to this, some people consider it to be extremely rare.
  • And this exclusivity is both what makes Bitcoin valuable and what causes its prices to fluctuate.
  • Other variables that affect Bitcoin’s volatility include bad news that makes the headlines, uncertainty about its future value and usage, and security vulnerabilities.

3. Irreversible

  • Due to the anonymous and unregulated nature of Bitcoin transactions, security can be considered as one major issue.
  • As Bitcoin transactions are irreversible and permanent, we cannot do much if something went wrong.
  • Moreover, many users utilize digital wallets to store their Bitcoin. And there is also the possibility of losing coins if we lose our private key.

4. Usability

  • Despite the fact that an increasing number of businesses, including Microsoft, Subway, accept Bitcoin.
  • Bitcoin as a currency is still not generally recognized. In contrast to using a credit or debit card, this restricts where we can spend our money.

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What makes Bitcoin valuable?

  • Bitcoin is the first operational application of blockchain. Also, it is the most widely used triple entry accounting system.
  • Everyone in the bitcoin ecosystem has constant access to the whole source code, which they can examine and alter.
  • Moreover, the sending entity’s digital signatures ensure that each transaction is legitimate, giving all users complete control over sending bitcoins.
  • The value of bitcoin is determined by widespread consensus, perception, and belief between the participants. The following points have been agreed upon by all members of this system:
    • The immutability and consistency of the system
    • The security and legitimacy of transactions
    • Certain system guidelines

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How does Bitcoin Works

Now that we understood what is Bitcoin, it is also important to understand the working of Bitcoin. So, in this section, we will discuss the overall working of Bitcoin.

Underlying Technology

  • Bitcoin works on a decentralized digital ledger technology, also known as Blockchain. Consider this technology as a record-keeping system where we can store data in the form of blocks.
  • For Bitcoin, blocks are individual units that may contain information about each transaction, such as the total amount, seller, date and time, and buyer and seller.
  • Every trade has its unique identifying code, and multiple blocks are connected in chronological order, forming a chain.

Adding Blocks

  • The majority of distinct BTC holders must verify a transaction block before it can be added to the Bitcoin main chain.
  • Also, the unique codes can aid in the identification of user transactions and wallets. Furthermore, the codes must match the correct encryption pattern.
  • The codes used to identify wallets and transactions are highly complex, with long and unpredictable digits. As a result, producing them falsely is exceedingly tough.

Bitcoin Mining 

Now, users of Bitcoin generally use a crypto wallet to store their BTC in a secure manner. Also, users with a cryptocurrency wallet or an online cryptocurrency exchange might make a transaction. And these transactions would be recorded in blocks. Here comes a role of mining that is done by minors.

The proof-of-work consensus technique is used to solve mathematical challenges in the Bitcoin mining process. All of the miners are essentially competing with one another to solve the problems and gain the right to validate transactions.

Moreover, miners should keep racing to answer the challenges and assist the network as a whole. And miners’ efforts are rewarded in the form of new Bitcoins, so their efforts are not useless.

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Total Number of Bitcoins

While developing Bitcoin, Satoshi Nakamoto imposed a limit of 21 million bitcoins. So, the total amount of bitcoins ever produced is 21 million. Moreover, by the end of 2021, almost 90% of bitcoin has been mined.

Furthermore, analysts believe that up to 20% of those bitcoins have been wasted as a result of someone forgetting their private key, dying without leaving access instructions, or transmitting bitcoins to invalid addresses.

So, in this tutorial, we have discussed what is Bitcoin, we also discussed how Bitcoin came into existence. Additionally, we have covered the following set of topics in this tutorial.

  • Introduction to Bitcoin
  • Who created Bitcoin
  • History of Bitcoin
  • How does Bitcoin Works
  • Benefits of Bitcoin
  • Disadvantages of Bitcoin
  • Total Number of Bitcoins
  • What makes Bitcoin valuable?