The Blockchain Academy: Bitcoin Origins PlatoBlockchain Data Intelligence. Vertical Search. Ai.

The Blockchain Academy: Bitcoin Origins

The Blockchain Academy: Bitcoin Origins PlatoBlockchain Data Intelligence. Vertical Search. Ai.

What is Bitcoin? That’s a very good question. There are multiple ways to respond to this question. The first thing we need to know is that Bitcoin does not rely on financial intermediaries.

They are completely digital and decentralized. It’s a currency built on principles of computer science, cryptography, and economics. Also, the data structure stores a permanent history of all transactions ever occurred in the history of Bitcoin.

Any information added to the ledger cannot be deleted.

A cypherpunk is a group of individuals who advocate for the protection of privacy using cryptography. They do not trust governments or banks. As a consequence in 2019, Bitcoin was created by Satoshi Nakamoto.

Satoshi Nakamoto, it’s a pseudonym of an individual or a group of individuals.

In Bitcoins users do not need to use their real-world identities; instead, they’re represented by addresses. Strings of random letters and numbers.

Bitcoin network validates transactions and stores the entire transaction history. The Bitcoin network is a group of users communicating with each other as part of the Bitcoin protocol. It’s the substitute of the central bank and must have certain properties.

Of course, it could be several problems with this protocol. For example, inconsistent transaction records held by different nodes and malicious pseudonymous actors might broadcast false messages and divide the network.

So… how this problem could be solved? By the Blockchain and proof of work.

The creation of money is decided not by a central authority, but through the process of mining proof of work.

It’s a little bit early to answer that question. But meanwhile, let’s see some differences between Bitcoin and Banks.

Source: Notes from the author

Bitcoin was born to be the money of the Internet, however, its technology is not capable of supporting the number of transactions per second (TPS) necessary. For example, Visa can process up to 20,000 TPS, while Bitcoin can only reach 7 TPS. Therefore, Bitcoin has remained as a store of value asset and not as a currency to buy in the supermarket.

Bitcoin is a network that works with a protocol known as the blockchain. A 2008 document by a person or persons calling themselves Satoshi Nakamoto first described the blockchain and Bitcoin.

This means that the idea of the blockchain was born from Bitcoin, but since then, the blockchain has evolved into a concept independent of Bitcoin, and thousands of blockchains have been created using similar cryptographic techniques.

Another name for a blockchain is “distributed ledger,” which underlines the key difference between this technology and a well-kept Word document. The Bitcoin blockchain is distributed, which means that it is public. Anyone can download it in its entirety or go to any number of sites that analyze it. This means that the record is publicly available, but it also means that there are complicated steps to update the blockchain ledger. There is no central authority that controls all bitcoin transactions, so the participants themselves do so by creating and verifying “blocks” of transaction data.

What we are going to explain here is why things are the way they are. The objective is to have a high-level understanding of how Bitcoin works. Let’s talk about three important things about Bitcoin. The identity, the transactions, and the wallets. A Bitcoin’s identity it’s divided into two parts. The authentication and the integrity. And a transaction it’s valid when there is proof of ownership (signature), available funds, and no other transactions are made by the same funds. Finally, about wallets, there are two kinds the public ones (for receiving) and the private ones (for redeeming).

  • The authentication is required to ensure that no one else acts on your behalf. Claiming, receiving, and spending money on your behalf are things that only you should be able to do. And blame in case anyone else tries to withdraw your funds.
  • Integrity means that all our authentications methods cannot be replicated by anyone else. It’s like your signature.

So… what makes it valid? As we mentioned before a transaction is valid if there is proof of ownership, available funds, and no other transactions making the same funds.

Bitcoin uses Unspent Transaction Output [UTXO].

A UTXO is like a piggy bank. When we want to spend money, we break a piggy bank. Then spend whatever we want, and then we put the rest into another piggy bank. That’s basically how it works.

The amount of bitcoin you own is calculated by summing up the value of each of your piggy banks.

So for transactions, we need to ask. “This single piggy bank has enough founds?” If the answer is yes, the transaction is valid. If the answer is no, then we cannot do the transaction.

Ownership of Bitcoin essentially boils down to two numbers, a public key and a private key. A rough analogy is a username (public key) and password (private key). A hash of the public key, called the address of the purse or wallet, is the one that appears on the blockchain.

The public key is derived from the private key needed to send bitcoin to another address.
To receive bitcoin, it is enough that the sender knows our address.

To access bitcoin, a purse or wallet is used, which is a set of keys. They can take different forms, from third-party web applications offering insurance and debit cards, to QR codes printed on pieces of paper. The most important distinction is between “hot” wallets, which are connected to the Internet and therefore vulnerable to hacking, and “cold” wallets, which are not connected to the Internet.

Many users entrust their private keys to cryptocurrency exchanges, which is essentially a bet that those exchanges have a stronger defense against the possibility of theft than the computer itself.

In this regard, there is a very popular saying in the world of cryptocurrencies that says, “if they are not your keys, they are not your bitcoins”. Referring to the fact that the true owner of the bitcoins is the one who owns the private key.

Despite being absolutely public, or rather because of that fact, Bitcoin is extremely difficult to manipulate. A bitcoin has no physical presence, so it cannot be protected by locking it in a safe or burying it in the forest.

In theory, all a thief would have to do to get it off you would be to add a line to the ledger that would translate to “you paid me for everything you have.”

A related concern is double-spending. If a bad actor could spend some bitcoin and then spend it again, confidence in the value of the currency would quickly evaporate. To double spend, the evil actor would have to get 51% of Bitcoin’s mining power. The larger the Bitcoin network, the less realistic this will be, as the computing power required would be astronomical and extremely expensive.

To further prevent this from happening, you need trust. In this case, the usual solution with traditional currency would be to transact through a central and neutral arbitrator, such as a bank. However, Bitcoin has made that unnecessary. Instead of a trusted authority keeping the ledgers and presiding over the network, the bitcoin network is decentralized. Everyone watches over others.

No one needs to know or trust anyone in particular for the system to work properly. Assuming everything works properly, cryptographic protocols ensure that each block of transactions is bolted to the previous one in a long, transparent, and immutable chain.

The process that maintains this public ledger (blockchain) is known as mining. The network of Bitcoin users who trade the cryptocurrency with each other is backed by a network of miners who record these transactions on the blockchain.

Recording a chain of transactions is trivial for a modern computer, but mining is difficult because Bitcoin software makes the process artificially long. Without this added difficulty, people could falsify transactions to get rich or bankrupt other people. They could record a fraudulent transaction on the blockchain and pile so many trivial transactions on top of it that it would be impossible to unravel the fraud.

Similarly, it would be easy to insert fraudulent transactions in previous blocks. The network would become a mess of competing ledgers, and bitcoin would be worthless.

The combination of “proof of work” (Proof-of-Work or PoW) with other cryptographic techniques was Satoshi’s breakthrough. Bitcoin software adjusts the difficulty miners face in limiting the network to a new 1-megabyte block of transactions every 10 minutes. In this way, the volume of transactions is digestible. The network has time to examine the new block and the ledger that precedes it, and everyone can come to a consensus on the status quo. Miners don’t work to verify transactions by adding blocks to the distributed ledger out of the mere desire to keep the Bitcoin network running smoothly; they are also compensated for their work.

As mentioned above, miners are rewarded with bitcoins for verifying blocks of transactions. This reward is halved every 210,000 blocks mined, or every four years or so. This event is called “halving” or “halving.” The system is incorporated as a deflationary system, in which the rate at which the new Bitcoin is released into circulation.

This means that fewer and fewer bitcoins are created and, as demand continues to increase, the halving process directly influences the price of Bitcoin.
This process is designed so that the rewards for Bitcoin mining continue until about the year 2140. Once all the Bitcoin is mined from the code and all halvings are finished, miners will continue to be incentivized by the fees they will charge users. of the network. The hope is that healthy competition will keep rates low.

This system raises Bitcoin’s stock-flow ratio and reduces its inflation until it is finally zero.

Source: https://medium.com/modern-life-millionaires/the-blockchain-academy-bitcoin-origins-142d95e3be4f?source=rss——-8—————–cryptocurrency

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