What is Bitcoin?
Bitcoin = Blockchain? Digital money? Decentralization?
If you step into 2022 without hearing the word "Bitcoin", well.. you're most probably living under a rock. 2021 has been a year for Bitcoin, with an impressive run up of almost 450% since the end of 2020 to an all-time high of $68,990.
Bitcoin is a cryptocurrency, a type of digital currency that uses cryptography to keep it secure. The emergence of it since the end of 2008 has spearheaded the blockchain technology space to greater heights. It is the most popular coin and thus has the highest market capitalization till now (887B as of writing this post). So, what is Bitcoin?
Created by a mysterious and pseudonymous Satoshi Nakamoto, Bitcoin offers a decentralized peer-to-peer electronic payment system. What this means is I am now able to send money over to my friend directly without the need of a centralized financial institution (eg. Banks).
How is this possible?
Unlike fiat currency, Bitcoin is created, distributed, traded, and stored with the use of a decentralized ledger system, known as a blockchain. With a digital wallet, I am able to send money via the Internet, authorised via a digital signature. Transactions are then verified by a network of miners, after which the confirmed transactions will be permanently stored on a public ledger. This public ledger is transparent and immutable, meaning everyone can view it and it can't be changed anymore.
If you understood till here, congrats. You have just learnt the basics of blockchain technology. So... what's so mindblowing about this?
Bitcoin's network consists of a collection of computers (aka "nodes" or "miners"). These computers can come from anywhere within the world, achieving a form of decentralisation as there is no centralised authority in control of the network. Each miner within the network has similar blocks and transactions, and each transaction is transparent as they fill up each verified transaction.
In order for a malicious entity to tamper with the network, it requires the perpetrator to have immense amounts of computing resources and power, as it requires the perpetrator to take over 51% of the network (known as the 51% Attack), which is frankly not incentivising to do so (or at least for Bitcoin's large network base)
Before Bitcoin, trust is necessary. Trust within the government, trust within the banks. The accustomed solution with traditional currency would be to transact through a central, neutral arbiter (eg. banks). However, it is evident from the 2008 Financial Crisis that sometimes banks are not as trustworthy as they seem. Bitcoin eliminates the need for trust, as the network is decentralized, with no central authority keeping the ledger and controlling the network. Everyone keeps an eye on everyone else.
Mining? Yes you read that right, it is as though you are mining for gold. The process of maintaining this trustless public ledger is known as mining. Within the Bitcoin network, miners (aka "verifiers" or "validators") verify the transactions and at the same time, ensure the security of the network.
Miners do not work to verify transactions by adding blocks to the distributed ledger purely out of a desire to see the Bitcoin network run smoothly, they are actually compensated for doing it.
Miners are rewarded with more Bitcoins for verifying blocks of transactions. However, the reward is halved approximately every four years. This event is known as "Halving". But what does "mining" really mean?
Mining refers to the process of creating new Bitcoin by solving a computational puzzle. By solving computational math problems, the miners also secure the network by verifying its transaction information.
For example, I wish to send 1BTC to Mark. I initiate this transaction and miners within the network will rush to verify this transaction, through the consensus mechanism known as "Proof of Work".
Proof of Work
Proof of Work is a consensus model in which miners come to an agreement that a transaction is valid when appended onto the blockchain. It is referenced to the computational work expended by miners to mine Bitcoin.
The miners in Bitcoin's network try to come up with a 64-digit hexadecimal number, called a hash, that is less than or equal to a target hash in SHA-256, Bitcoin's PoW algorithm. Given the miners' processing power, it uses brute force to spit out different hashes at different rates depending on the processing unit, guessing all possible 64-digit combinations until they arrive at a solution. The systems that guess a number less than or equal to the hash are rewarded with Bitcoin.
Mining and the Environment
Throughout Bitcoin's history, the energy required to mine Bitcoins is extremely intensive. Consider this: The process of creating Bitcoin to spend or trade consumes around 91 terawatt-hours of electricity annually, more than is used by Finland, a nation of about 5.5 million. Bitcoin mining uses more than seven times as much electricity as all of Google’s global operations.
Elon Musk, a strong proponent of Bitcoin, has also released news on May 13 2021 that Tesla will suspend vehicle purchases using Bitcoin. This is due to concerns about the rapid use of fossil fuels for Bitcoin mining and transactions, which is detrimental to the environment. See it here.
Overall, Bitcoin proponents have released studies that claim that the cryptocurrency is powered largely by renewable energy sources. It is true that the world is moving towards renewable energy, Bitcoin mining could very well be the same too, and generate most of their power from renewable energy sources.
This is by no means a comprehensive representation of what Bitcoin is, but rather a short introduction for newcomers who just wish to dabble into the world of blockchain. For more detailed and technical information regarding Bitcoin, please read below for other useful resources and links.
What is Bitcoin?
Bitcoin's electricity usage.
What is Proof of Work?
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