Bitcoin is a digital currency that can be used as a means of payment. Bitcoin is a decentralized network in which transactions take place between people without the help of a bank or third party. In effect, you transfer money directly to another person within the network. This transaction is then verified by thousands of other participants in the network, and is not approved until it is certain that the transaction has not been tampered with. Some see it as the new and safer way to pay, while others see Bitcoin as digital gold. Bitcoin is open source. This means its source code may be used to create other coins.
It is the oldest and most well-known cryptocurrency on earth. A lot has happened in the crypto world since its creation in 2009, but one thing has never changed: Bitcoin ranks No. 1 as the most valuable coin in total market value. Satoshi Nakamoto is a person or group behind the creation of this cryptocurrency. The name cryptocurrency consists of a contraction of crypto and currency. Crypto is often thought of as small, but the abbreviation also stands for cryptographic. Currency stands for currency or means of payment.
Bitcoin is generally the market maker. When Bitcoin rises, almost all other coins rise as well. This is called the bull market. When it goes down, so do the other coins. This is called the bear market. This always makes me involuntarily think of Lord of the rings: one coin to rule them all. Whether that will always be the case remains to be seen. With Ethereum doing so well, there may come a time when that cryptocurrency becomes the leader where all other coins lag behind. The market leader is setting the direction so far. This also has to do with cryptocurrency selling in pairs. If Bitcoin is on sale for 10 Ethereum, Ethereum must drop when Bitcoin drops, otherwise you can suddenly buy more Bitcoin with Ethereum.
The concept of a blockchain was described in 1998 by Wei Dai on the cypherpunks mailing list. A blockchain is a chain of blocks written together in an endless sequence. All the blocks together then form the connected chain, which is always expanded with new blocks, say squares with a connecting dash in between, always moving forward in time as new ones are added.
Bitcoin's genesis block (the very first block of a blockchain is called the genesis block) was generated on January 3, 2009 at 18:15:05 GMT and contained the text:
“The Times 03/JAN/2009 Chancellor on brink of second bailout for banks”.
Therein lies a clue as to why Bitcoin was developed. Bitcoin was to become an alternative to the financial system.
Hal Finney received the first Bitcoin transaction from Satoshi Nakamoto. He was one of the best-known cryptographers in the cypherpunk community. He was the second person to connect his computer to the Bitcoin network, so then that choice was quickly made. Finney was important in the early days of Bitcoin. For some time, the entire Bitcoin network even ran on his computer! Because of this, people therefore speculated that Hal Finney and Satoshi Nakamoto were one person. When Finney was diagnosed with ALS, Satoshi Nakamoto completely disappeared from view. So this line of thinking is not surprising. Hal has always denied this.
The most famous Bitcoin transaction is in the name of Laszlo Hanyecz. He bought two pizzas for 10,000 BTC in 2010. He just wanted to know how the cryptocurrency worked.
Block 0, the genesis block, dates from 3 January 2009. Since then, a new Bitcoin block has been mined every 10 minutes. The first blocks only consisted of generating the reward, which at the time was 50 Bitcoin. In April 2011, Bitcoin was worth a dollar for the first time. That same year in June, it stood at $10. After the halving, when miners receive only half as a reward for their proof of work, the price still shoots up every time. In 2013, Bitcoin's price reached $1000, $20,000 in 2017 and as high as around $65,000 in 2021. The next Bitcoin halving will take place in 2024. After 2017, governments in Asia began to tighten legislation around Bitcoin. China's People's Bank began cracking down on illegal activities paid for with cryptocurrency. Meanwhile, surveillance in other parts of the world also began to increase. The illegal cloud hanging over cryptocurrency will continue to rise I have a feeling, until owning and spending crypto has become the most common thing in the world. In 2021, Bitcoin reached a market capitalisation of $1,000 billion for the first time.
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Easy mobile payments. You can pay in two steps. You display the QR code in your Bitcoin wallet app and let the other party scan your mobile phone to pay.
Bitcoin transactions are secured with military-grade cryptography. To be completely sure, you can still use 2FA. It is also advisable not to keep your entire fortune in your wallet for payments, just like with a regular purse.
As long as there are two people with a Bitcoin address, you can trade at any time. The cashier is never on holiday.
Fast international payments with no cap or extra fees.
When receiving Bitcoins, you don't have to pay anything. If you pay with Bitcoin, you can set your own transaction fees. The faster the confirmation of payment, the more transaction fees, unless you pay via the Lightning Network.
You can always protect your identity by using each Bitcoin address only once. If you use the same address multiple times, Bitcoin's public public ledger ensures that your address can eventually be linked to you, even if it does not include your name.
There are no fees to receive Bitcoin. The faster you want confirmation of payments, the higher the fee, so you decide.
Bitcoin payments are irreversible and secure. The chargeback fraud that other payment networks like credit cards or Paypal have are a thing of the past with Bitcoin.
Bitcoins can be sent instantaneously to any location in the world with no extra fees or waiting time.
No PCI DSS (Payment Card Industry Data Security Standard) required. This is a system that is required if you accept credit cards.
Free publicity as you get new customers eager to pay with Bitcoin.
With multiple signing, Bitcoins can only be spent if a certain part of a group approves the transaction. So you can spend shared funds for a general purpose, e.g. corporate spending, if enough people have given permission.
Since the blockchain ledger is publicly viewable, an organisation can provide information allowing anyone to see what transactions and balances there are at an address. This allows charities to show how much they receive in donations.
A hard fork is a breakdown of a blockchain. At the time it is created, there are two blockchains that previously belonged to the same network. In this process, a new cryptocurrency is born and continues on its own blockchain. The owner of in this case Bitcoin then gets a proportionate amount of the new coin in his possession. There have been three hard forks in the history of Bitcoin, namely Bitcoin Cash, Bitcoin Gold and Bitcoin SV (Satoshi Vision).
The "Bitcoin Cash hard fork of Bitcoin" took place on 1 August 2017 at block # 478559 of the Bitcoin blockchain. It was then also known as Bitcoin ABC (Adjustable Blocksize Cap, then 8 MB) and as Bitcoin UAHC (User Activated Hard Fork). Some companies see BCH as the real Bitcoin and even use the symbol BTC for it. Both networks use the same proof of work concept, allowing miners to easily switch from mining BCH to BTC and vice versa if they get more reward for doing so. In 2017, Bitcoin dominance went down sharply from 90% to around 40%, according to CoinGecko. Bitcoin was becoming increasingly expensive and unreliable, so the maximum block size had to be increased. Part of the Bitcoin community still believed in Satoshi Nakamoto's original vision of "low fees and a peer-to-peer electronic cash system that could be used by anyone". (from Bitcoin's white paper, see below) The reason for the split-off was to increase the block size from 1MB to 8MB. With a larger block, more transactions fit in and more transactions can be done at once. With larger blocks, it is also easier to enable smart contract functionality on the Bitcoin blockchain. At one of the high points of the Bitcoin craze in 2017, there were 10 million transactions to be handled per month. With a block size of 1 MB, you have a maximum number of transactions in the network of 7 per second. This, of course, didn't work. Miners, who had to approve transactions, decided to let only transactions for which they could charge high fees go through. As a result, huge numbers of transactions were not even approved at all and people could wait endlessly. Expensive and impractical and certainly not "usable by everyone", which is what Nakamoto wanted. Those in favour of introducing Bitcoin Cash were not satisfied with proposed solutions from Bitcoin developers such as SegWit and the Lightning Network. On 1 August 2017, the knot was tied: Bitcoin Cash was born.
The "Bitcoin Gold hard fork of Bitcoin" was created on 24 October 2017 on block # 491407 of the Bitcoin blockchain. Bitcoin Gold is a lesser known one in the crypto world. That's why I won't say too much about it here. It was created to counter centralisation, as you saw then and now with Bitcoin. Bitcoin is mined by miners with very expensive equipment. For ordinary people, this is no longer an option. Bitcoin Gold can still be mined with graphics cards, GPUs. This is still affordable and so Bitcoin Gold is a more decentralised network, where people who are not rich can still join the network.
The "Bitcoin SV hard fork of Bitcoin Cash" was created in 2018. So it is not a real hard fork of Bitcoin, but a derivative fork. The creator of Bitcoin SV (Satoshi Vision) is Craig Wright, a rather controversial person. He says he is Satoshi Nakamoto. He has had quite a few problems with people from the Bitcoin Cash network and more often threatens to attack their network. There is also a saying going around the world about him: "Doing the Wright thing". This is when one is sued by Dr Craig because of the next disagreement he has with someone. Incidentally, his own network is not working quite as it should, as there have been multiple 51% attacks on Bitcoin SV. At one point, after an update, there were even three separate blockchains (forks) running, all called Bitcoin SV. The blocks had grown so large that miners could no longer cope.
Bitcoin's Segregated Witness update, also known as SegWit, was implemented on 21 July 2017 and fully activated on 24 August 2017. It is a soft fork, meaning an upgrade of the network with multiple compatible versions without a segregation following. Initially, Bitcoin had no block size limit. This resulted in DDoS (distributed denial of service) attacks on the network, with the network crashing. Therefore, Nakamoto decided to limit the block size to 1 MB. As Bitcoin became increasingly popular, 1 MB was no longer enough to house all the information. This made the network slow, expensive and no longer scalable. When you carry out a Bitcoin transaction, it contains three components: the public address of the sender, that of the receiver and the signature (verifies that you have enough Bitcoin to carry out this transaction). The signature took up too much space in a transaction and so it was separated. With SegWit, the signature data (such as private key) is moved to a separate database and Bitcoin becomes more scalable and secure. Every transaction in Bitcoin has an identifier (TXID), a string of characters. This is the most important thing in a Bitcoin transaction. The SegWit upgrade allows multiple transactions to be included in a single block, greatly increasing the speed of the network and greatly reducing transaction costs. The SegWit upgrade also increased the block size, which had an unintended effect. Mining larger blocks became more difficult, leading to an increasing concentration of rich miners who mine by far the most Bitcoins because they can afford the expensive equipment needed to find and validate such large blocks.
14 January 2016, Joseph Poon and Thaddeus Dryja already wrote The Bitcoin Lightning Network white paper. In late 2017, it became clear that Bitcoin needed an upgrade. Due to the popularity of the coin and the number of transactions being done, the entire network was crashing. Indeed, the original Bitcoin network could only handle about 7 transactions per second. Bitcoin became slow and expensive. To vastly improve Bitcoin's scalability, the Lightning Network upgrade was proposed. It allows you to make payments in Bitcoin without using the blockchain. The number of possible transactions is increased to thousands per second. To take advantage of this, you need a Lightning wallet. You create a payment channel between two or more parties for as long as necessary. Say you want to pay for a cup of coffee with Bitcoin. Then you pay instant with this wallet to the recipient through this channel with very low transaction fees. In a test in 2021, two pizzas were ordered through the Lightning Network and two through the blockchain. The first transaction cost 0, but the second cost 23 euros. As long as the payment channel is still open, new payments can be made all the time. Once the channel is closed, the new balances of both parties will only be processed on the blockchain. This saves an awful lot of processing power on the Bitcoin network and ensures that you can pay with Bitcoin quickly and cheaply, just as Nakamoto wanted. In practical terms, it works like this: you open an account at a business, a café for example. You have a drink and at the end of the evening you pay your bill in one go. At that point, you close the account. While this last operation is processed on the blockchain, it drastically reduces the number of times the Bitcoin network is taxed. Many companies that accept payments in Bitcoin create a channel on their own node for this purpose. This gives them control over payment conditions and privacy. With the Lightning Network, Bitcoin has put itself back on the map for making payments.
Bitcoin works with proof of work. This means you have to prove that you have performed labor in the sense of providing computing power to the Bitcoin network. Every ten minutes a new block is found and mined. In the beginning, it was possible to mine Bitcoin even with a PC. As this cryptocurrency became more popular and more valuable, the arithmetic you had to do began to get more and more difficult. Until at some point you needed special equipment to successfully mine new blocks. As time went by, the competition made the calculations you had to do so complicated that you needed very expensive and energy-consuming machines to mine Bitcoin. This made it impossible for ordinary people to do this unless you were rich. In countries where electricity is expensive, you can already no longer mine Bitcoin profitably because the costs exceed the benefits. There is some criticism of the proof of work concept. The amount of electricity used to mine Bitcoin is equivalent to the consumption of a country like Sweden. Because equipment ages so quickly, many old miners end up on the scrap heap. Rewards are halved every four years. Whereas in the early days you got 50 Bitcoin per block found, this has already dropped to 6.25 in 2022. This is called the halving, and it is usually followed by a sharp increase in the price of Bitcoin. It makes sense, because otherwise miners would only get half the reward, while the price of mining would remain the same. Many miners would then drop out. The last block will be mined in the year 2140.
To know why Bitcoin was actually created we will look at Satoshi Nakamoto's own views in an excerpt from his original white paper dated 31 October 2008. The English title reads:
(full text can be read on Bitcoin's page)
An exclusively peer-to-peer version of electronic cash would allow online payments from one party to another without interference from a financial institution. Digital signatures are part of the solution. For the double-spending problem, we use a peer-to-peer network. This network assigns a timestamp (date and time) to transactions and hashes (encoding that can be checked in a database) them into a continuous chain of hash-based proof of work (mines). This creates a file that cannot be changed without redoing proof of work. The longest chain proves how the sequence of events on the blockchain (of the Bitcoin network) was. As long as miners do not work together to attack the network (the 51% attack), the longest chain will be generated by the largest amount of CPU power and this will be the correct one. The network needs only minimal structure. If you want to start mining then you can easily join by accepting the longest chain as proof of what happened, i.e. what Bitcoin's blockchain looks like.
Internet commerce has become almost exclusively dependent on financial institutions as a trusted party for payments. It works quite well, but has a number of weaknesses. For instance, non-reversible transactions are impossible because of the possibility of a dispute over payment, which increases costs. Once a payment is not final, sellers will start asking the buyer for more and more information to cover themselves, with a small amount of fraud considered acceptable.We need an electronic payment system based on cryptographic evidence rather than trust.
An electric coin is defined as a chain of digital signatures. Each owner transfers the coin to the new owner by digitally signing and adding a hash of the previous transaction and the next owner's public key to the end of the coin. The next owner cannot know if the coin has been issued twice. Common practice then is to create an intermediary to handle the coinage of new coins. With Bitcoin, the recipient must prove that at the time (timestamp) he received the coin, he was the first according to a majority of the nodes (miners). This is how this blockchain is built.
A timestamp server works by taking a hash of a block of items, getting a timestamp and then publishing this hash widely. This timestamp proves that the data existed at that time and includes the previous timestamp in its hash, forming a chain (chain). From this comes the name blockchain.
A lot is known about this and you can easily look this up if you want to know exactly. Nakamoto has set up the system so that it becomes increasingly difficult to attack the network as time passes, because everything has to be redone and it eventually becomes almost impossible. As the number of blocks mined per hour increases, the difficulty will also increase, so there won't be too many.
The steps for running the network:
New transactions are broadcast to all nodes.
Each node collects new transactions in a block.
Each node is working on finding a difficult proof-of-work block.
When a node finds a block, it sends the block to all nodes.
Nodes accept the block only if all transactions in it are valid and have not yet been spent.
Nodes show that they accept a block by working to create the next block in the chain using the accepted block's hash as the previous hash.
For this, the longest chain is always considered the correct one.
The first transaction in a block creates a new coin owned by the creator of the block. This encourages miners to support the network and is a way to bring new coins into circulation, as there is no central authority to issue them. Transaction fees are acquired by the miners as payment for their services.
Of course, this sounds absurd at the moment with our large hard drives, but old blocks can be deleted, saving 4.2 MB of hard disk space per year. At any time, you only need the latest version of the blockchain to have the right one on your disk.
Although it is possible to verify payments without using a full node, companies that are often paid in Bitcoin are encouraged to use their own nodes for more independent security and faster verification. Indeed, in the case of a 51% attack, which is virtually out of the question these days due to its difficulty and cost, this simplified method could be misguided.
Although it is possible to process each value in a transaction separately in the general ledger, this is impractical. Therefore, several small values can be handled in one transaction.
The upper part deals with, for example, banks and stock exchanges. The identity of the person doing the transaction is shielded from the public by keeping the public key anonymous. This allows the public to see that a transaction took place and with what amounts, but not who carried it out. Bitcoin's new privacy model does not require a trusted third party such as banks, nor does it provide information about the counterparty. It purely displays the transactions, keeping the identity of all parties secret.
It is going too far to fully explain these calculations here. Therefore, I will suffice with representing what Nakamoto has come up with regarding an attack on the network. If someone wants to attack the Bitcoin network, he will be able to achieve a maximum of double spending. He must then refund a payment he recently made to his account before the other nodes in the network. The name for this is a "binomial random walk". The attacker always tries to be 1 step ahead of the honest nodes. An analogy for this is the "gambler's ruin" problem. We all probably know this in the form of doubling a bet. You put in a certain amount and want to double. The probability is 50%. If you don't double, you put in double that, and so on, until you double the original amount. Or until you no longer have enough money to put in double. Then you are ruined. I'll spare you the technical story with formulas. The bottom line is that with each subsequent step in attacking the network, it becomes exponentially more difficult and therefore more costly, until the moment the blockchain is so large that the cost of an attack is greater than the gains from double spending. At that point, the network is secure.
We (is he saying here that Satoshi Nakamoto is a group?) have proposed a system for electronic payments that is not based on trust. We started with the usual setup of coins made of digital signatures that give strong control over ownership. But this is not complete without a way to prevent double spending. To solve this, we proposed a peer-to-peer network that uses proof of work to record a public history of transactions that quickly becomes impractical to attack. This network is robust in its unstructured simplicity. Nodes (miners) all operate simultaneously without coordination. They need not be identified because messages are not sent to a special place and only need to be transmitted on a best-effort basis. Nodes can leave the network and rejoin whenever they want. They only have to accept the proof of work chain as proof of what happened when they were disconnected. They vote with their CPU power, accepting valid blocks and building them out and rejecting faulty blocks and refusing to continue working on them. Through this consensus mechanism, necessary rules and incentives can be enforced automatically.
Talking about a Bitcoin's smallest unit of account, the satoshi, is a tribute to its father. A satoshi is 1/100,000,000th of a Bitcoin. Satoshi is also used for all other cryptocurrencies as the smallest component. A cryptocurrency can be divided into extremely small instances and issued. Such satoshis make a cryptocurrency much more useful. As the value increases, satoshis become much more important. The alternative would be to coin more and more coins to still meet demand. But we already have that system in place. This causes depreciation of the coins (fiat money) that are already there (inflation). So you could also buy Bitcoin for a euro, if you wanted to. The divisibility into satoshis makes Bitcoin ready for the future, where it can become worth much more without becoming untradeable.