Bitcoin Technology - Made for Everyone
Bitcoin, the first cryptocurrency, is a type of digital money that allows person-to-person transactions to be transferred via a peer-to-peer network that is independent of the banking system and with minimal fees.
When capitalized, Bitcoin refers to the entire network and the underlying protocol governing how assets are moved on the blockchain technology platform. Without capitalization, bitcoin refers to the cryptocurrency as a unit of account (BTC). Understanding bitcoin as money requires a grasp of the underlying technology, as the two complement each other. It also provides insight on how other cryptocurrencies operate, as well as a metric for assessing crypto projects and their value proposition.
Bitcoin is by far the most popular cryptocurrency in use today, with a market worth of $385 billion at the time of writing, down 70% from its all-time high of $1.27 trillion. The "Bitcoin Dominance" ratio of its market valuation to that of all other cryptocurrencies is close to 38%. There are presently 19.2 million BTC in circulation out of a total supply of 21,000,000. A protocol governs the money supply of Bitcoin. These are issued on a diminishing basis, with supply typically halving every four years. Currently, 6.25 BTC are issued every 10 minutes, which will decrease to 3.125 BTC after the next halving in March 2024.
A person or group of persons named Satoshi Nakamoto is credited with creating blockchain technology, yet their identity remains unknown. Nakamoto detailed how Bitcoin will operate in a white paper which was published in 2008 and distributed to a cryptography email list. They "mined" and sent the first bitcoin, which was included in the "genesis block," in 2009.
The Bitcoin protocol is open source; everyone can examine and verify it. Users choose to agree on a proposed set of rules or propose their own. Recreate own network, independent from original. Examples of this include the Bitcoin hard fork, Bitcoin Cash (BCH)
Bitcoin is not issued by an official state authority, but rather through a process called "mining." In contrast to the literal meaning of mining, which refers to the extraction of precious metals are extracted, Bitcoin mining is a system in which participants (nodes) must agree on validating Bitcoin transactions and including them on the next block of the ledger known as the blockchain. This is also known as a "distributed consensus system." Bitcoin mining employs a technique known as proof of work (PoW), in which miners must demonstrate that they expended the energy-intensive computational resources required for transaction processing in order to receive their reward.
Blockchain is the technology that powers Bitcoin. It is a publicly viewable ledger containing verified records of every Bitcoin transaction. The blockchain does not have a single trusted operator. Instead, it stores information in batches called blocks, which are chronologically linked together to form a continuous line.
If you make a modification to the information recorded in a certain block, the update is saved in a new block along with the time it occurred, much like in a ledger. Unlike traditional ledgers or databases, the blockchain was designed to be decentralized and spread across a broad network of computers. This decreases the possibility of data manipulation and, as a result, builds trust in the data.
A series of actions must occur before a block may be added to a chain. To create the block, a computer must first "work" by solving a cryptographic challenge. Following that, the computer that solves the puzzle distributes the solution to all other computers on the network, so providing "proof." Finally, the network verifies the PoW and adds the block to the chain if it is correct.
The combination of complex arithmetic challenges and computer verification means that we can trust every block on the chain. Because the network now builds trust, time-consuming and costly intermediaries (such as banks or lawyers) are no longer required, and users can now engage with information in real-time. This peer-to-peer interaction with our data transforms how we access data and conduct transactions. Because all blocks have been verified to be true, data kept on the blockchain does not require middlemen for verification.
To preserve its neutrality and security, the network verifies transactions using strict cryptographic standards. Each time a miner discovers a new block, they are rewarded with BTC. Every 210,000 blocks, the prize for locating blocks is reduced by half. As of 2022, the reward for finding a block is 6.25 BTC. It is expected to fall to 3.125 in March 2024. When all 21 million Bitcoins are mined, the supply of bitcoin will end.
Although the mining incentive may appear unreasonably huge at first glance, keep in mind that manufacturing bitcoins comes at a hefty cost to the miners. The cost of producing one bitcoin is determined by the price of electricity (kWh), as well as the mining difficulty, block reward, and miners' energy efficiency. There are times when a drop in the price of BTC makes it unprofitable for miners to operate, and as a result, they shut down until conditions are favorable. In fact, large mining companies have resorted to selling large quantities of BTC that they have mined in order to fund their operational expenses, causing more pressure on the price of BTC. Despite the high expenses of mining bitcoin, many believe it's worth the investment because of its limited supply and favorable future price projections, as only 1.8 million remain to be produced.
The blockchain draws another very essential trait from its decentralized and permissionless characteristics: resilience to censorship. Transactions are assured to be completed as long as the aforementioned criteria are met. No government or organization, no matter how powerful, can influence or alter blockchain transactions, or freeze or take the assets of someone they believe to have conflicting views.
Key Takeaways
Now that you know the basics behind the technology that powers Bitcoin, discover how it meets the criteria to be considered as sound money.
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