I’ve watched Bitcoin develop over the past four years, and I aim to provide an accessible, beginners guide to the technical side of Bitcoin—the type of guide I wish I had read before engaging in my first investment.
Bitcoin was announced on October 31, 2008 by its alleged creator, Satoshi Nakamoto and implemented by January of 2009. Nakamoto’s creation was a peer-to-peer, quasi-anonymous, and secure, digital currency, which became known as the world’s first crypto currency. Unlike prior electronic transactions, Bitcoin implemented a new invention: block chain technology. The block chain is essentially a public, online ledger which can be viewed by all internet users. That is to say, when one initiates a Bitcoin transaction, that transaction is published online, to a cloud, which anyone can view.
This public ledger records transactions anonymously because Bitcoin transactions originate and end in online wallets, which are not tied to an individual’s name. A bitcoin wallet may be downloaded onto one’s personal computer and be used to hold, store, and send Bitcoin. Every individual wallet is given a unique address (a series of letters and numbers). When one transfers Bitcoin from one wallet to another, one’s wallet address, along with the amount of bitcoin transacted, is recorded on the block chain. Once one receives his/her Bitcoin, this too is recorded on the block chain—Bitcoin remains anonymous as long as one’s wallet or transaction address cannot be traced to a particular person or business.
This raises a question: how are Bitcoin transaction processed? Miners process Bitcoin transactions. A Bitcoin miner is an individual who links his or her computer (or today, ASIC—a computer dedicated toward Bitcoin mining), to the block chain. A miner’s computer repeatedly attempts to solve algorithms, given by the block chain. When a computer solves an algorithm, a Bitcoin transaction is verified. Once a sufficient number of verifications are achieved, a batch, or block of transactions are completed and recorded on the block chain. The miner who solved the transaction algorithm is awarded with a sum of Bitcoin.
Mining serves several other purposes: first, it facilitates the creation of Bitcoin. Bitcoin is created at a decreasing rate, until a net total of 21,000,000 are in circulation. Every time a miner verifies a block of transactions, his reward comes from two sources: transaction fees (a small sum of bitcoin paid by miners) and new Bitcoin. That is to say, when a miner is rewarded with Bitcoin for locating a block, a portion of what he receives is new Bitcoins, which are thereby brought into circulation. Second, mining secures Bitcoin in a technical capacity. The immense amount of computing power created by miners prevents the false use/creation of bitcoin—a phenomena called double spending. Third, mining secures Bitcoin in an accounting capacity: the raw power investing into mining allows every Bitcoin user to see the transaction of every other user. read more
Despite Bitcoin’s seemingly complex, underlying technology, making transactions is quite simple. To send Bitcoin, all one must do is type or copy a potential receiver’s wallet address into one’s own wallet, and click send. Similarly, most phone wallets have a function which allows you to scan a QR Code to send Bitcoin. Notably, the transaction speed of Bitcoin is dependent upon a transaction fee (the greater one pays for transaction, the faster miners can locate this transaction, increasing the transaction speed). Requesting Bitcoin functions similarly: there is a request function on most wallets which generates an address. One may then send this address to another Bitcoin user, who then repeats the above, sending process. Despite Bitcoin’s large price tag, it is more effective in issuing micro transactions than the US Dollar—one may send a sum as small as .00000001 BTC per transaction. From a technical and security standpoint, Bitcoin seems to outdo the US dollar and most electronic exchange systems; however, one still ought to be cautious before buying Bitcoin. The currency is still in its infant stages and may be subject to increased regulation, unforeseen security breaches, and unexpected price shocks. read more
Learn more about Bitcoin and what you can do with it here