What is Bitcoin?
- Bitcoin is an electronic payment system based on cryptographic evidence rather than trust, which allows any two willing parties to interact directly with each other without the requirement for a trusted third party.
- The blockchain, which is a distributed digital ledger, is the foundation of Bitcoin. Blockchain is a networked database made up of units called blocks that hold information about each transaction, such as the buyer and seller, time and date, total amount, and a unique identifying code for each trade. Entries are linked in chronological order to build a digital chain of blocks.
- The one of many problems bitcoin solves is that the payee cannot verify that one of the coin’s owners did not double-spend it. A frequent option is to establish a trustworthy central authority, or mint, that verifies every transaction for double spending. The coin must be returned to the mint after each transaction in order for a new coin to be created, and only coins issued directly from the mint can be guaranteed not to be double-spent. The issue with this arrangement is that the fate of the entire monetary system is dependent on the firm that runs the mint, with every transaction needing to go through them, much like a bank. The Solution bitcoin offers is that each hash contains the preceding timestamp, producing a chain, with each successive timestamp confirming the ones before it.
- The use of Proof-of-Work (PoW): A block cannot be modified without repeating the work after a CPU effort has been invested to meet the PoW requirement. Because subsequent blocks are connected after it, changing it would need reworking all subsequent blocks. The PoW entails looking for a value that, when hashed, begins with a number of zero bits, such as SHA-256. The average amount of work required is proportional to the number of zero bits required, and can be verified by executing a single hash.
- The Benefits of PoW is defense against denial-of-service (DoS) attacks. PoW imposes some restrictions on network activity. An Attacker will need a significant amount of effort to complete. A successful assault needs a significant amount of processing power as well as a significant amount of time to complete the computations. As a result, the attack is doable but somewhat pointless due to the enormous expenses. Another benefit is that it makes no difference how much Bitcoin you have in your wallet. It’s important to have a lot of computing power to solve the riddles and make new blocks. As a result, the owners of vast sums of money/bitcoin are not in command of the entire network’s actions. Furthermore, to compensate for increasing hardware speed and varying interest in running nodes over time, the PoW difficulty is determined by a moving average targeting an average number of blocks per hour. If they’re generated too fast, the difficulty increases and vice versa.
- Understanding the Bitcoin Network as laid out in it’s whitepaper (https://bitcoin.org/bitcoin.pdf): A) New transactions are broadcast to all nodes. B) Each node collects new transactions into a block. C) Each node works on finding a difficult PoW for its block. D) When a node finds a PoW, it broadcasts the block to all nodes. E) Nodes accept the block only if all transactions in it are valid and not already spent. F) Nodes express their acceptance of the block by working on creating the next block in the chain, using the hash of the accepted block as the previous hash.
- PoW is consensus mechanism and all consensus algorithms have the same goal: to secure a decentralised database by correctly motivating network participants. This entails financially rewarding (i.e. Bitcoin) individuals who help the network achieve its goals and making attackers squander money when attacking the network. The expense of which is CPU time and electricity that is expended.
- As explained in the bitcoin whitepaper, the incentive can also be funded with transaction fees which will be case once all the bitcoin has been mined. This way the incentive is switched to transaction fees, thereby eliminating inflation.
- This incentive may also encourage nodes to maintain their integrity. If a greedy attacker gathers more CPU power than all the honest nodes, he must decide whether to use it to cheat people by taking back their payments or to produce new currencies/validate the ongoing system and also their own wealth. Another issue is if a miner attempts to attack the network, they still have to consume lots of electricity, but they will have no way to pay that electricity off. According to some estimations, the bitcoin network’s energy usage is comparable to that of a small country.
