Bitcoin and Blockchain are considered evolving technologies which came into the public domain after Satoshi Nakamoto released the White Paper for Bitcoin. The White Paper described it as a decentralized peer-to-peer financial network. itcoin makes use of cryptography and distributed networks to fuel a self-sustaining financial ecosystem. This blog would act as a comprehensive guide to understand Bitcoin and Blockchain.
The History of Money
If we trace back the history of money, people started with barter system where they exchanged one commodity they had in exchange for another commodity they need. As the world started to move towards civilizations with organized living, the rulers of the kingdom started to issue their own coins minted out of gold, silver or any other commodity valued during the time.
This form of money continued for centuries and was working quite well since the value of the minted coin was derived from the intrinsic value of the commodity it was derived from. This form of money made its way into the modern world as well, where the value of the currency was derived from the reserves which comprised of precious metals and especially gold. What it meant was, for every one dollar bill that the government issued, its value was backed by the government reserves.
However, in 1971 the US president Richard Nixon announced a new standard of issuing money called Fiat where the value of the money was backed by trust in the government. The value of the currency is determined by the supply-demand gap and inflation. There are several disadvantages to this system and there are many failing points which played a key role in the financial recession that started in December 2007 and continued till 2009.
With no reserve backing the value of the currency, governments around the globe were tempted to print money whenever the need arrived but printing more money than the supply-demand leads to hyperinflation which has brought down a rich and prosperous country like Venezuela. At present Venzulean fiat is not even worth the paper it is printed on, which is a shining example of how fiat monetary system combined with the corrupt government can bring an entire nation down.
Bitcoin and Blockchain
In the original White Paper for Bitcoin, there is no mention of the term blockchain, and the term was only coined later on a public forum. Bitcoin transactions are recorded on data blocks of 1 MB each connected to each other in the form of a chain, thus the term Block + Chain was coined and was referred to the ledger which recorded the transactions. Thus, instead of saying Bitcoin Ledger, people started calling it Bitcoin blockchain.
The technology used to power Bitcoin is not new either, it is an amalgam of distributed networks combined with cryptography. Each transaction on the Bitcoin network comes encrypted with SHA-256 encryption, which has a predetermined output and any changes made into the input changes the output completely which made the network tamper-proof.
Bitcoin: A transition to financial independence
In 2008, when the whole world was dealing with one of the worst financial crisis in decades, a pseudo-anonymous person called Satoshi Nakamoto released a White Paper for a decentralized monetary system independent of any centralized power. The Bitcoin white paper described it as a decentralized peer-to-peer currency which will be governed by computer codes and algorithms.
In 2009, the Bitcoin network was launched with open-source software so that others can also create similar decentralized currencies. Satoshi Nakamoto mined the genesis block (first block) and as they say, the rest is history. Bitcoin remained relatively unknown for the most part of its existence and shot to fame in 2017 when its value which started out at $0 reached near $20k towards the end of 2017. So, what led to the success of Bitcoin and what is this blockchain technology.
The onus of validating a transaction on the Bitcoin network also falls on the peers called miners who receive a mining reward for validating transactions on the network. In order to validate the transaction miners are required to verify the encryption using computational power measured in hashes. The more powerful the computer, the better are the chances of mining the next block.
Nakamoto intended to make mining possible using a simple CPU based home PC but in order to maintain the fixed block time of 10 minutes the mining difficulty is increased or decreased accordingly. As of today the mining difficulty has been increased exponentially given a boom in the Bitcoin mining industry after it started to gain value on the trade market. The mining difficulty has increased to a level where we need specialized mining rigs to mine Bitcoin.
We are currently in the third generation of mining rigs which started with a simple CPU based computers, then came GPU based mining rigs while the latest one to hit the markets is ASIC chip based mining rigs.
The value of money for sure is determined by the government but the real factor is acceptance, the more widely a currency is accepted, the greater its value or importance. This is the reason Bitcoin has managed to start from a value of zero and reach as high as $20k since with every passing year more and more number of people are realizing how the flawed fiat monetary system has crippled us, brought us over hundreds of trillions of dollars worth of debt and the financial recession.
Important Terms and Definitions
- Cryptocurrency: After the success of Bitcoin, many other people also started using Bitcoin open-source software to create new digital currencies, and all these digital currencies were referred to as cryptocurrency in general.
- Altcoin: Every other cryptocurrency apart from Bitcoin is referred to as altcoins.
- Mining: The process of validating transactions on the ledger and adding those validated transactions to the network.
- Mining Reward/Block Reward & Block Reward Halving: Miners receive a reward for validating transactions and finding new blocks called mining reward or block reward. For Bitcoin, the block reward is halved every 21,000 blocks or approx 4 years. Bitcoin started with 25 Bitcoin block reward, which was halved to 12.5 in 2016 and now it will be halved again to 6.25 in the first quarter of 2020.
- Mining consensus: The algorithm used to mine the next block on the blockchain is called consensus and there are mainly two forms of these consensus namely Proof-Of-Work (PoW) and Proof-of-stake (PoS).
- Proof-Of-Work: Proof-of-Work is a mining consensus used by Bitcoin to mine blocks on the network. In PoW consensus, everyone is allowed to mine the next block and the only limitation is the hash power. Each miner gets a portion of the block reward depending on their contribution in mining the block.
- Proof-of-Stake: Proof-Of-Stake mining consensus is used by the likes of Ethereum, Tezos and many other altcoins. Blockchain networks using PoS determines the miner of the next block based on the miner’s on-chain activity and a number of coins they have in their possession.
Bitcoin and Blockchain are co-independent where blockchain is the technology fueling the Bitcoin network.