{"id":106270,"date":"2018-02-19T12:00:21","date_gmt":"2018-02-19T12:00:21","guid":{"rendered":"https:\/\/www.transcend.org\/tms\/?p=106270"},"modified":"2018-02-10T15:05:17","modified_gmt":"2018-02-10T15:05:17","slug":"what-is-bitcoin-everything-you-need-to-know-about-bitcoin-explained","status":"publish","type":"post","link":"https:\/\/www.transcend.org\/tms\/2018\/02\/what-is-bitcoin-everything-you-need-to-know-about-bitcoin-explained\/","title":{"rendered":"What Is Bitcoin? Everything You Need to Know about Bitcoin, Explained"},"content":{"rendered":"

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17 Jan 2018 – <\/em>If you\u2019re new to cryptocurrency, your first question is probably \u201cwhat is Bitcoin?\u201d. The short answer is that Bitcoin is a cryptocurrency or digital asset made secure by cryptography. Bitcoin and most (but not all) other cryptocurrencies use blockchain technology.<\/p>\n

This article will answer the common questions that newcomers have when first learning about Bitcoin. How do blockchains work? What makes Bitcoin valuable? What is decentralization? \u00a0What is mining? How do you buy Bitcoin? How do you safely store it? How do you send or receive Bitcoin from somebody else?<\/p>\n

But we won\u2019t just stop there. Once you get the basics down, we\u2019ll also explain how hard forks work, like the one that created Bitcoin Cash. Finally, we\u2019ll wrap up with a look towards the future of Bitcoin and how the network can potentially scale up to handle a transaction volume that\u2019s orders of magnitude larger than it does today.<\/p>\n

There may be blockchain-related terms in this article that you are unfamiliar with. If you come across some, don\u2019t worry about understanding immediately. Keep reading and see if the context helps clear things up. If you want to make sure you understand everything more thoroughly, you can also refer our guides to essential blockchain<\/strong><\/a> and cryptocurrency<\/strong><\/a> terms.<\/p>\n

A Brief Explanation of Cryptocurrency<\/strong><\/p>\n

There are many different cryptocurrencies<\/strong><\/a> out there that serve different purposes. Bitcoin is the first and most well-known cryptocurrency, but not all cryptocurrencies necessarily resemble Bitcoin.<\/p>\n

At its most fundamental level, a cryptocurrency is simply a peer-to-peer digital payment system. Another way to say peer-to-peer is that there is no middleman \u2013 specifically banks or financial institutions \u2013 that facilitate transactions.<\/p>\n

Now, on to Bitcoin! Let\u2019s start from the beginning: Satoshi Nakamoto and the genesis block.<\/p>\n

The History of Bitcoin<\/strong><\/p>\n

The Bitcoin whitepaper<\/strong><\/a> was published in 2008 by a pseudo-anonymous author named Satoshi Nakamoto<\/strong><\/a>. It was the first time ever that somebody put together the ideas of a digital currency and blockchain technology.<\/p>\n

People have been speculating about the true identity of Nakamoto ever since. As the original Bitcoin miner, he is known to have amassed approximately 980,000 bitcoins. Those coins have remained untouched for years, and it seems likely that they will forever stay out of circulation.<\/p>\n

Satoshi Nakamoto was last heard from way back in early 2011. Many have tried to find him since, but to no avail thus far. Even while Nakamoto\u2019s real identity remains a mystery, his creation lives on.<\/p>\n

Why Was Bitcoin Created?<\/strong><\/p>\n

Notably, the first block Nakamoto mined \u2013 called the genesis block \u2013 contained a message. It said, \u201cThe Times, 3 January 2009, Chancellor on brink of second bailout for bank\u201d.<\/p>\n

This references a news article about the government bailouts of banks during the 2008 economic recession. It is widely accepted to be a political statement by Nakamoto about the reason Bitcoin was created \u2013 to disrupt the financial institutions that have long controlled our economies and livelihoods.<\/p>\n

\"\"<\/a>How Did Bitcoin Grow?<\/strong><\/p>\n

Bitcoin first began gaining some significant adoption in 2011. Wikileaks<\/strong><\/a> and other organizations began accepting Bitcoin donations, and it was mentioned occasionally in pop culture. By 2012, there were over 1,000 merchants accepting Bitcoin.<\/p>\n

2013 saw Bitcoin starting to gain its first real mainstream attention and its price crossed the $1,000 threshold for the first time. Then, in February 2014, Mt Gox<\/strong><\/a>, the largest cryptocurrency exchange at the time, filed for bankruptcy after having 744,000 bitcoins stolen. Still, more and more businesses began accepting Bitcoin, including tech giants Microsoft and Dell.<\/p>\n

By the end of 2016, there were hundreds of thousands of merchants accepting Bitcoin and the currency\u2019s price was picking up momentum again. As you probably know, that momentum carried it to unprecedented heights, nearly reaching US$20,000 in December 2017.<\/p>\n

What Makes Bitcoin Different From Fiat Currencies?<\/strong><\/p>\n

Fiat currencies have been used as humanity\u2019s primary medium of exchange for hundreds of years. For most of that time, currencies were backed by gold. However, that slowly changed during the 20th century, with many countries being forced off the gold standard as a result of the Great Depression.<\/p>\n

That leaves the question: what are fiat currencies backed by now, if not gold?<\/p>\n

The answer,\u00a0essentially, is that currencies are backed by trust in the institutions governing them. Nowhere is this stated more clearly than with the US Dollar, which is said to be backed by the \u201cfull faith and credit\u201d of the US Government.<\/p>\n

Alright, let\u2019s get back to Bitcoin. As Bitcoin isn\u2019t backed by any other commodities, its value \u2013 like that of fiat currencies \u2013 is based on trust.<\/p>\n

What makes Bitcoin different from fiat currencies is simply a matter of where<\/em> that trust is placed. For fiat, the trust is placed in people-run institutions. For Bitcoin, the trust<\/strong><\/a> is placed in technology \u2013 the blockchain.<\/p>\n

What is a Blockchain?<\/strong><\/p>\n

The innovation that makes Bitcoin possible is blockchain technology<\/strong><\/a>.<\/p>\n

A blockchain is a digital ledger of information that can be easily distributed across a network. It is what makes Bitcoin accessible to anybody with internet access, anywhere in the world.<\/p>\n

Each block in a blockchain contains data. In the case of Bitcoin\u2019s blockchain, that data has to do with transactions. Once a block is added to the blockchain, it can never be removed or otherwise altered in any way. Bitcoin transactions, once validated, are permanent.<\/p>\n

New transactions are processed and validated by miners. More on how mining works later.<\/p>\n

For now, let\u2019s focus on the benefits of blockchain that help separate cryptocurrencies from fiat currencies.<\/p>\n

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Decentralization and Trustlessness<\/strong><\/p>\n

Most systems that govern human society are centralized. Governments, banks, and corporations are typically structured such that the majority of the decision-making power is concentrated at the top. Large databases are typically stored and maintained in data centers at only one or two locations.<\/p>\n

Blockchains enable us to run systems without concentrating power over those systems in the hands of a small fraction of the populations that use them. They enable us to store databases simultaneously in hundreds or even thousands of different locations. This is called decentralization.<\/p>\n

Why is decentralization such a big deal?<\/p>\n

In database terms, decentralized systems have improved security because they do not have a single point of failure. In other words, if a handful of the locations storing a blockchain suddenly go offline for some reason, there are still hundreds of others doing the work. The system continues on without so much as a hiccup.<\/p>\n

Of course, many centralized systems still have good security. Is there more to decentralization than just distributing databases?<\/p>\n

Yes, there is. With centralized systems, we are all forced to trust other human beings to \u2018do the right thing.\u2019 But what if the right thing for them isn\u2019t the right thing for you? Sure, we can hope that the people in power have integrity, but that isn\u2019t always going to be the case. The most rational expectation to have of others is that they will act in their own best self-interest, as that\u2019s what human beings do.<\/p>\n

Decentralized systems are designed so that every participant can act in their own best self-interest within the system without harming other participants. The corruption, greed and incompetence that pervade our ancient centralized systems simply don\u2019t have as strong a place in decentralized ones.<\/p>\n

It is not necessary to trust anybody else to \u2018do the right thing\u2019 \u2013 this is called trustlessness. No individual has power or control over the system. This is what makes blockchain technology truly revolutionary.<\/p>\n

Who or What Operates the Bitcoin Network?<\/strong><\/p>\n

Bitcoin may just be a bunch of computer code, but it still takes humans to run that code. More accurately, it takes humans to build and maintain the machines that run the code. These machines and the people who operate them are called miners.<\/p>\n

Perhaps the most critical obstacle that Satoshi Nakamoto needed to navigate when designing Bitcoin was figuring out how to get miners to run the network without giving them additional power to control it. With game theory in mind, Nakamoto devised a brilliant solution.<\/p>\n

Aligning Incentives<\/strong><\/p>\n

True decentralization isn\u2019t possible unless the system is designed with the right incentive mechanisms for participation. A blockchain minus the incentives is just a distributed digital ledger, minus the trustless security.<\/p>\n

Let\u2019s say a corporation wants to use a blockchain to improve their supply-chain management. A distributed digital ledger would be helpful to efficiently connect various manufacturers, warehouses, and stores. But each computer that stores the corporation\u2019s blockchain would be owned by the corporation. They don\u2019t have to worry about malicious actors in their network. Therefore, they don\u2019t need to incentivize all the participants to behave in the best interest of the system.<\/p>\n

For real decentralization, that\u2019s not the case. Miners that process transactions need incentives to do so honestly. Otherwise, they could add invalid transactions to the blockchain, giving themselves more money.<\/p>\n

Let\u2019s go deeper into Bitcoin\u2019s powerful incentive mechanisms for miners.<\/p>\n

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How Bitcoin Mining Works<\/strong><\/p>\n

Blockchain miners have the role of processing new transactions and minting new digital coins. They do this by periodically adding new blocks containing transactional data to the blockchain.<\/p>\n

Individual miners compete to find the solution to a difficult cryptographic puzzle. Once the solution is found, the miner is able to propose a new block to add to the end of the blockchain.<\/p>\n

When a block is proposed, other miners check whether it is valid or invalid. If invalid transactions are found, the other miners won\u2019t accept the block as part of the blockchain. If the block is valid, the other miners will add it to the blockchain and begin competing to propose the next block.<\/p>\n

It\u2019s possible for blockchains to fork into multiple sections during this process. Two valid blocks might be proposed almost simultaneously, or perhaps some percentage of the miners will purposely accept an invalid block to benefit themselves. However, there is only one valid blockchain \u2013 the longest chain with the most blocks.<\/p>\n

For example, let\u2019s say that a group of 250 miners teamed together, representing 25% of the overall mining power on the network. Now imagine that those miners decide to try to benefit themselves dishonestly by posting invalid transactions. One of the 250 who solves the cryptographic puzzle first would propose a block with the invalid transactions, and the other 249 would accept it and begin adding more blocks to it.<\/p>\n

Meanwhile, the remaining 75% of miners would not accept the block. Instead, they would be adding to a chain of valid blocks. Having three times the mining power of the dishonest group, the 750 would add new blocks to their branch of the blockchain three times as fast. That would give them the longest chain, accepted by all users. The other chain would become worthless and no users would accept it.<\/p>\n

In order to successfully propose an invalid block and have it added to the longest blockchain, one would need to control 51% of the mining power. Anything short of that, and the malicious activity will be unsuccessful.<\/p>\n

Let\u2019s recap all of that really quickly.<\/p>\n

For a blockchain to be trustless, two things must be true about its miners:<\/p>\n