Fintech specialist and thought-leader with extensive industry experience and academic background.
Bitcoin was the discovery of either an individual or a group of people with the pseudonym “Satoshi Nakamoto”. Satoshi wrote the whitepaper (a paper that presents a problem and provides a solution) in 2008 called “Bitcoin: A Peer-to-Peer Electronic Cash System”.
Satoshi’s vision was to build a globally accessible digital currency (cryptocurrency, i.e. cryptographically encrypted currency) that was not backed up by any government.
The decentralisation allows this new currency not to be impacted by monetary policies (actions by central banks to manage the money supply), limits any exposure to third parties (such as banks where we hold cash), the payments are immune to inflation/deflation and payments can be borderless i.e. all you need is a mobile device.
In summary, your information is safe and cannot be tampered (censorship-resistant), you own and control your assets (self-sovereign) and you can get value from contributions (open ecosystems).
Today there are a lot of different cryptocurrencies/coins such as Ethereum, Monero, etc. and each one of them is trying to solve a problem, but the most dominant one is still the Bitcoin (BTC) itself (almost 70% market capitalisation of the crypto market). There is a total maximum of 21 million bitcoins that can ever be mined of which 85%+ has been currently mined as of the 24.08.2019.
A Web of Blocks
Similarly to the world wide web (www) and to sending an email, a bitcoin transaction can travel from one peer to another, but this time through blocks i.e. ledger entries. These blocks allow data to be stored and recorded (ledger) and when linked together they form what is called a chain of blocks i.e. a blockchain.
Data is encrypted through hash codes which can be defined as cryptographic verification functions with a fixed length whilst their ID is linked with the previous block that can be called or referenced.
Caption: Simply Explained
Therefore, a user can send a bitcoin or a fraction of a bitcoin to another user by knowing his or her public key. The transaction will then travel through blocks (hash discovery) until it reaches the receiver. All the transactions will be recorded in the series of block transfers, i.e. through the blockchain, which can be defined as a transparent database or a shared public ledger.
In this way adjustments can be verified, and the spendable balances can be adjusted for each wallet (receiving addresses), therefore the rightful known owners can know their balances.
Every bitcoin account has the following elements:
A Public key 256bits long, to ensure that the owner of this address can receive funds;
A Private key or seed used to sign transactions, i.e. a secret piece of data (similar to a password — never to be relieved);
Ability to process transactions through a process called Mining.
Private keys provide a mathematical proof that they come from the owner of a wallet.
Mining uses a consensus mechanism that confirms all pending transactions and allocates them into the blockchain. In this way the transactions are in a chronological order, neutral and allow various computers to agree on the state of the system.
The rules prevent previous blocks from being modified and also create a competitive lottery that prevents any individual from easily adding new blocks consecutively to the Blockchain.
Mining in Detail
To mine bitcoins, you need a software program. This specialised software programme searches for a solution to a difficult math problem. This solution is also referred as PoW or proof-of-work, a solution that is hard to be found but easy to verify.
The difficulty of the mathematical problem is automatically adjusted every time a solution is found. The solution is broadcasted, and everyone knows about this newly found solution that exists, and with this new information packaged the result is a new “block” every 10 minutes.
The miner is then rewarded with a block compensation, i.e. bitcoin fractions of 12.5BTC gets distributed among the peers depending on their hash rate contribution to the process.
The reward can also be impacted due to the level of complexity i.e. in a process called halving, whereas through a programmed bitcoin feature the block reward is cut in half, and it occurs every four years (210,000 blocks) once that number is crossed. Each block contains a block hash that represents the work that has been done by the miner; in other words, this is the proof-of-work.
How to buy your first Bitcoin?
In order to purchase your first Bitcoin someone needs to be able to sell you one, or you can decide to mine your own one if you have the right software and computer hardware.