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What is Bitcoin? A Beginner’s Guide by financemagnates.com

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The Story of Bitcoin

Bitcoin has a rich history in terms of where it originated and how it came about. Whilst the currency was officially founded in 2008 with the publication of its White Paper, its origins can be traced back far further than that.

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Firstly, there have been attempts at making other cryptocurrencies and ledgers way back in the past. B-Money and Bit Gold are two of Bitcoin’s precursors that never actually saw the light of day.

There were also certain e-protocols created by various individuals which served as the very basis of Bitcoin the currency and paved the way for what it can achieve.

However, throughout the 2000s, there was a different beast being developed. On the 18th of August,  2008, Bitcoin.org was registered as a domain name. By October of the same year, a document entitled “Bitcoin: A Peer to Peer Electronic System” was published by an entity using the name ‘Satoshi Nakamoto’. The network then came into being a reality on the 3rd of January,  2009, when Satoshi Nakamoto mined the “genesis block” which was rewarded at 50 bitcoin.

Who is Satoshi Nakamoto?

The identity of the enigmatic Satoshi Nakamoto has long been a mystery in the crypto circles and has caused much debate.

The name is obviously a pseudonym but no one seems to quite know who it is. For example, Craig Steven Wright has come out and stated that he is the inventor of the currency but there is quite a bit of scepticism in relation to that claim. Wright is an Australian computer scientist and entrepreneur who has shown a keen interest and history of developing cryptocurrencies. Nick Szabo and Dorian Nakamoto have also been named as potential creators of the currency.

While the true identity of Satoshi is unknown, the most likely theory seems to be that that the currency was created by more than one individual, that is was the work of a team of people.

So What is Bitcoin, Exactly?

Bitcoin was originally created to be a decentralised currency that would function as a form of ‘digital cash’–it could be used instantly and anonymously to transact online and in other digital contexts. A decentralised currency is one that does not have a central regulatory body monitoring it, and is instead independent, thus it doesn’t have a central authority.

Additionally, it is supposed to work in an alternative manner to other currencies and in effect cut out the ‘middleman’ and reduce reliance on major, centralized financial institutions and payment processors.

Essentially, Bitcoin was created to allow people to have a secure, digital way to store their funds, and to send and receive transactions without have to go through a third-party. In theory, this protects personal data and reduce costs (although the functionality of these features has been heavily questioned.)

Bitcoin bypasses all the conceptions of banks and credit and instead the currencies are securely processed in “blocks” of transactions, based upon the blockchain network to ensure the integrity of the coin is maintained. These transactions are more secure than others due to the fact, that Bitcoin transactions are signed off by the Elliptic Curve Digital Signature Algorithm (ECDA). This signature is not too dissimilar to signatures on cheques, but it is mathematically verifiable and cannot be forged, with the private keys of users acting as the means of signing this hypothetical cheque.

The only major flaw in the cryptocurrency’s code was spotted in 2010, which raised some concerns in terms of its security. A user was effectively able to create a Bitcoin transaction which let him generate as many bitcoins as possible, which occurred when someone generated 184 Bitcoins. This flaw was shortly fixed however, as the transaction was erased from the record of transactions which is maintained by the company.

Bitcoin

How Does Bitcoin’s Blockchain Work?

Bitcoin’s network runs on on Proof-of-Work algorithm. This algorithm is the means by which new Bitcoins are produced and transactions are confirmed, a process known as mining.

The blockchain is virtually impervious to cyber attacks that often affect centralized entities: denial of service, as well as spam and other potentially malicious attacks. It is also incredibly difficult to falsify transactions on the Bitcoin network.

A user needs to be able to understand what a hash function is in this context given its complexity. In essence this function makes it so any kind of data can be mapped in any amount for a specific type of reason. If secured properly, this function cannot be differentiated from a random function in a given situation.

In Proof of Work, the individual who is chosen to confirm a transaction is usually the individual with the most “hash power” (computing power.) They use their hash power to solve complex equations; once an answer is discovered, a ‘block’ (a small group) of transactions are confirmed. This typically happens at a rate of 3-4 transactions per second. In return for their work, miners are given rewards in the form of BTC tokens.

If this is done properly, and the correct cryptographical aspects are applied, then the solution should only be found by applying the “brute force” method, which entails looking to try every single possible combination until the correct answer is found.

This system has been effective until the present time, but one must also note that it does consume a vast quantity of energy in a given situation. To illustrate this point, the vast majority of individual countries in Africa use up less energy the the network for mining Bitcoin.

An alternative to Proof of Work, the Proof of Stake algorithm, limits the amount of currency one can utilise in a space of given time. This system is not used by Bitcoin, but is used for coins such as Blackcoin, This system allows an individual to bypass problems such as the vast energy consumption which comes with Proof of Work, and to create a more green and energy efficient method to mine Bitcoin. However, this algorithm is not quite as popular as Proof of Work.

Article first seen in https://www.financemagnates.com/cryptocurrency/education-centre/bitcoin-beginners-guide/

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