Bitcoin (BTC), as a digital currency, is a defiance of the conventional system. In contrast to what we are accustomed to, Bitcoin is created, distributed, and transferred on an open-source protocol over the encrypted network called a Blockchain. The revolutionary Blockchain technology is considered as the technical wonder of the century. Blockchain was make known to the world by the introduction of the Bitcoin protocol in January of 2009.
The Bitcoin network is self-governing and resistant to any central control or human interference. Anyone can send or receive Bitcoin through without any intervention from third trusted parties such as banks and governments.
So, how does Bitcoin work? And What is Bitcoin mining? What makes it a hot topic nowadays? Let us try and answer all that below. Here is a comprehensive look at the most recognizable crypto to date – the Bitcoin.
What is Bitcoin?
Bitcoin is a form of currency built within the digital space. It was introduced to the world ten years ago – January 2009 – closely following the housing market crash that drove the global economy to fall to its knees. The conception of the revolutionary digital currency can be attributed to the ideas and principles presented within the whitepaper of the mysterious personality going by the name: Satoshi Nakamoto. Many have since claimed to be the one and only Satoshi Nakamoto, but none so far has been recognized to truly be the one.
Unlike government-issued fiat money, the actual physical currency that we use today, Bitcoin is operated through a decentralized authority. There are no physical Bitcoins; every single BTC is kept within a secured public ledger wherein all holders have transparent access to. The ledger and all the transactions made are set to be verified by a colossal amount of computer processing power distributed all over the world.
In order to fully comprehend how Bitcoin actually works, it is best that we recognize Bitcoin as a series of nodes, or computers, running its native code and storing blockchain. Blockchain, on the other hand, can be viewed as a collection of blocks, which is then a collection of individual transactions. Because all these different computers (nodes) possess the same list of transactions and blocks and can transparently see these particular blocks be filled with brand new BTC transactions, practically no one can cheat the system. On top of that, anyone can see or track these transactions live.
BTC holdings are kept using private and public keys, which are intricate strings of letters and numbers integrated through the mathematical encryption algorithm utilized to develop said keys. The private key works like that of a typical ATM PIN. It is meant to be a secured secret, and only those that have authorization can actually execute BTC transmissions. Public keys, on the other hand, resemble that of a bank account number. It serves as the available address for everyone to see, and others may deposit BTCs on. Although Bitcoin Wallets and keys may sound the same, they should not be mixed up with one another.
How does it work?
As we have briefly discussed above, Bitcoins are digital coins explicitly designed to be self-contained for their value. It does not require any third-party assistance, such as that of the banks, to be moved or stored. Bitcoin holdings behave like physical gold coins; they have a definite value and can be traded as the holder wishes. Even though Bitcoin payments for goods and services are not widely accepted yet, BTC has been used to purchase products and services worldwide.
Just like how we store our physical money in our banks account, Bitcoins are stored in blockchain. Just like we use online interface/website to view send our money. We use Bitcoin wallet on your PC or mobile to view, receive and send Bitcoin.
Anyone with computer or mobile device, can create bitcoin wallets. With a Bitcoin wallet, you can generate Bitcoin wallet addresses that can be used to send and receive Bitcoins anywhere in the world.
The process of Bitcoin Mining
The Bitcoin platform is a peer-to-peer network; it means that everyone connected in the system is helping the network by being part of the said network that Satoshi started back in 2009. Any computer – as long as it is connected to the network – can technically mine Bitcoins. The crypto is mined with the use of special software that solves mathematical problems. Bitcoin network automatically alters the difficulty of the problem, depending on how fast it is being addressed. As miners continue to run the software on their machines, what they receive in return is a certain number of Bitcoins. As more people join in mining, the network becomes more secure.
In the process’ early years, Bitcoin miners use regular computers or laptops to mine hundreds of Bitcoins. But now that new and more powerful hardware for mining is being introduced from year to year, it is now becoming harder for the regular desktops or laptops to make any reasonable amount of BTC.
Miners are paid or rewarded at the end of each block. A block contains all network transaction information, and a block is approximately created every ten minutes. Those Bitcoins are then distributed among miners according to the computing power they contributed. The total possible rewards for each block are 12.5 BTC currently. This reward per block drops to half every succeeding four years, up until the reward becomes zero (0) in the year 2140, wherein the maximum supply of 21 million BTC is expected to be reached. The next halving event will reduce the current block rewards of 12.5 to 6.26 per block. ETA for the halving is May 22, 2020.
What makes it polarizing?
It is not a secret that Bitcoin is currently, and most probably will always be, surrounded by several controversies. Despite that, many are still avidly supporting the polarizing cryptocurrency because of its many promising and appealing characteristics. Perhaps the three most significant traits of Bitcoin is its transaction’s nature to be completely irreversible, its ability to ultimately bypass banks, and its stance to step away from the regulation of any government or central banks. Let’s discuss each briefly.
- Bitcoin transactions are irreversible
Unlike conventional payment systems, such as credit card charges, personal checks, or wire transfers that are insured and made revocable by the banks involved, BTC transactions are completely irreversible. Whenever transacting via Bitcoins, everything is made final, and nothing is revocable. Because of that, there is no insurance protection for Bitcoin wallets. Once the wallet’s password is lost or compromised, its content will go with it as well.
- Banks cannot influence Bitcoins
As already established above, Bitcoins are transferred through a peer-to-peer network between individuals – there will be no third-party or middleman can interfere or waiting to take a slice. Bitcoin Wallets cannot be confiscated or audited by law enforcement or banks unless one voluntary gives up the private key. On top of that, Bitcoin Wallets will not have any spending or withdrawal limits. Only the holder or owner of the wallet can decide how his or her assets will be managed.
- Bitcoins are not regulated by any government and is not created by central banks
One of the most important characteristics of Bitcoin is its immutable nature of Bitcoin protocol. Unlike central banks around the world, no one can regulate, create or print more Bitcoin that what is programed to do.
As much as the crypto industry wants to deny it, Bitcoins have become a tool for some illicit trading and money laundering schemes. That being said, the Bitcoin network has made strides to combat such instances and has made steady progress in doing so.