The article shows some facts about bitcoin technology and How bitcoin is special among all other cryptocurrencies.
Everyone nowadays talking about Bitcoin, cryptocurrency, NFT, and all. But even 99% of them don’t know the technology behind Bitcoin as well as the functionality of transactions on Blockchain.
Once you clear the concept of Bitcoin technology and functionality, you’ll be able to know the technology of another cryptocurrency too. All came after bitcoin and have a core foundation of blockchain technology.
Suppose someone doesn’t want to start their own bank but wants to provide some services the bank already gives…that person can start NBFC.
So what does it mean? Here for some time, Understand Bank as Blockchain Technology. So whatever new projects are coming nowadays, not all have their own blockchain, but they are built on the blockchain of Others( Like Bitcoin or Ethereum, etc.) and they’re having their own coin in their infrastructure/spaces for services/projects.
History of Bitcoin
Before Bitcoin was invented, governments have their own money known as FIAT Currency. FIAT means “Let it be done”.
It means the government can print more money if they want and if any critical situation happens in the country, no matter they have to put GOLD as a reserve to print money but they have complete control over how much money to print, and because of that value of money started decreasing since years.
What does it mean by decreasing value of money?
20-30 years ago, the average salary of a person is around 6000-10000, and they are able to survive easily on that salary as well as also doing savings too. But today min. 50k-100k is required to survive.
Why?
It’s because inflation decreases the value of money year by year.
Means the things you’re able to bought 20-30 years ago at 100Rs, can’t able to buy in 100 today, you should minimum spend 300-500 for same things.
The value of money is decreasing that’s why we have to spend more on the same things we spent on years ago.
To tackle this issue, Bitcoin comes into existence.
On 31st October 2008, Whitepaper for bitcoin is released by an anonymous person named “Satoshi Nakamoto”.
Purpose of Invention - Bitcoin
To transfer the value over the internet electronically in peer to peer manner.
Provide an alternative financial system that can operate without 3rd party financial institutions.
The purpose of the invention was never to replace fiat money.
How does it work? - Bitcoin Technology
Before we start, let’s understand a few basic terms necessary to understand the technology.
1. Block
Block Header
> It’s like a Summary or Table of content of the entire Block.
> It contains Hash of the previous block header, a hash of all transactions of the current block
> Time of Block Mined
> Bitcoin current software version
> Nonce – Counter used by miners to generate a correct hash
> Block Difficulty Target
Block Body
> Contains record of all transaction ( All transaction in hashed format to keep it rivate and secure )
2. Hash
As the computer converts Data into Binary(0,1) format, the same way before data is input in the Block, it’s converted into Alpha-Numeric to secure the transaction data.
These Hashes are made through the SHA-256 Algorithm which is used by Government to protect sensitive information.
Bitcoin uses this algorithm to protect transaction data.
When Output comes, data is again converted to Alpha-numeric to its original version through the same SHA-256 Mechanism.
3. Miners
Miners are individuals/groups of people having a system of Computers to effectively provide security to the bitcoin network and verify transactions using computers to perform mathematical calculations.
Why miners are interested in participating in the mining process is because they are rewarded with Bitcoin for each successful block they mine.
4. Nodes
Nodes are the computers in the Bitcoin network that validate the Block that attach to the blockchain via the mining process.
A node is a computer connected to a network, and a phone or a laptop can function as a node.
A wireless IP camera and a router can also be a node.
5. BlockChain
Once the Block is mined successfully, new transactions are added to the next generated block and it makes the chain of blocks. That’s why it’s called BlockChain.
6. Nonce
To mine the block successfully, miners need to guess the correct hash that fulfills a very specific condition which is a number of leading Zeros.
The nonce is the value that gives a correct output of the hash with specific numbers of leading zeros.
Hash Output contains combination of hash of previous block header, merkley root hash and nonce. It is ultimatley the hash details for current block header being mined.
7. Block Difficulty Target
Bitcoin network itself maintains 10 min block time( Time required to solve a puzzle or mathematical calculation) by maintaining the difficulty level.
The difficulty level is adjusted every 2 weeks based on the time required to solve the puzzle.
If the difficulty is very high then it’ll be adjusted after 2 weeks.
So by default, difficult make sure that bitcoin blocks are mined on average every 10 minutes.
How transaction happens in Bitcoin?
Bitcoin ledger that contains all the data of a transaction including in and out data.
Once the Transaction happens, SHA-256 Algorithm converts that transaction data into the hash and added into the block.
Output data is generated into hash format but once it reaches to end person/entity, it converts to the original format.
So data inside the block is kept in hash format to maintain security and privacy.
eg. Robert has 50 BTC in your wallet and Robert wants to send 5 BTC to David, the transaction would look like this:
So this input data of 50 BTC and Output of 5 BTC and 45 BTC is converted into a hash and stored in Block as a complete transaction.
Superiority of Bitcoin
1. Well Defined Monitory Policy :
Bitcoin is a decentralized currency, no centralized authority can control it.
The total supply of Bitcoin is limited to 21 Million, neither you can reduce it nor you can mine more.
This is the highest amount of supply that can ever circulate in the market.
Due to limited supply, it differs from traditional fiat currency where the government prints any amount of money they want.
By today, around 19 million bitcoins have already been mined.
2. Permissionless, Peer to peer system
Lets’ take an example to understand this,Suppose you want to send money to your abroad friend 1000$
So as per the traditional system, you’ll go to the bank to deposit that money, but some intermediatory and third-party financial system helps the bank to settle that transaction to your friend’s bank account.
So at every step, this intermediatory charges some amount of fees to you. So transactions become expensive.
But in the Bitcoin payment network, you can send money to your friend’s a wallet/account in just one click without any third-party intermediary.
You have full control of your asset.
Wherever you go in the world, you can carry your entire wealth with you in just 1 hard wallet, you just need to remember the private key to your wallet. You can spend it anywhere in the world while traveling.
3. Open Source , transperent and distributed ledger
Bitcoin code is open source, It is open for everyone to inspect, copy and propose improvements.
Bitcoin Protocol is a set of codes that powers the bitcoin network.
Bitcoin ledger is distributed globally so if anyone tries to cheat their ledger can change but others’ ledger doesn’t match with him so the node invalidates that entry.
That’s why No entity – not even government can destroy bitcoin’s existence.
4.Highly Fungible, durable , portable and divisable
Fungible means anything that can be interchangeable with the same or another asset. Like You can exchange 500Rs notes with five notes of 100 Rs, Same way Bitcoin is fungible, you can exchange easily with other bitcoin.
It is durable because it can’t be destroyed like paper money. It’s digital money, as long as you have the key to your wallet, you have access to your bitcoin.
Bitcoin is divisible to the 8th decimal place. The smallest bitcoin is 0.00000001 BTC, which is known as Satoshi.
5. Digital Money
Fungible means anything that can be interchangeable with the same or another asset. Like You can exchange 500Rs notes with five notes of 100 Rs, Same way Bitcoin is fungible, you can exchange easily with other bitcoin.
It is durable because it can’t be destroyed like paper money. It’s digital money, as long as you have the key to your wallet, you have access to your bitcoin.
Bitcoin is divisible to the 8th decimal place. The smallest bitcoin is 0.00000001 BTC, which is known as Satoshi.
Digital currency means that money can be easily programmed. With Bitcoin, there is the bitcoin ledger where programmers can set rules to program escrow, notaries, design payouts, and dividends.
So we have tried our best to simplify bitcoin functionality and technology with example. We hope you guys enjoyed that.
Now After knowing this many lucrative features, some of you might think,
Why did one big fund manager/bank can’t able to buy the entire 21 million supply of Bitcoin?
So the answer to this question is very interesting. Bitcoin is designed by Satoshi Nakamoto in a way that,
Every four years bitcoin rewards reduce to half. It started with 50 BTC when bitcoins’ first genesis block was mined. then after at every four years it reduces to half of previous.
So in 2008, it was a 50 BTC Block reward, in 2012, it is 25 BTC, in 2016 – it was 12.5 and in 2020 it reduced to 6.25.
The next halving will be in 2024 and so on…
so mining of BTC happens in this way so no one can mine the full supply of BTC at once.
So that’s enough for now.
If you want to know more about Bitcoin Technical, download the bitcoin whitepaper here.
Also, don’t forget to check our financial-related articles to enhance your knowledge.
