RECOMMENDED Article: If you have not read our Blockchain 101 article yet, we recommend doing so before reading this article as it gives a brief background regarding the technology behind Bitcoin!
By now, near everyone has heard something about Bitcoin (BTC). The masses have seen the negative press it’s gotten in past months/years. We’ve all seen the constant headlines about Bitcoin prices rising to nearly $20,000 USD in December 2017, and then increasingly falling as 2018 progressed.
What is Bitcoin? Where does it come from? Can you actually use BTC? What’s all the hype about?
This article was written to give a Bitcoin beginner all he/she needs to know to get started with BTC.
An Intro to Bitcoin
Bitcoin is a decentralized digital currency in which encryption techniques are used to generate and regulate units of its currency (Bitcoins). These encryption techniques are carried out by the community. Called “miners,” miners work to solve the complex algorithms involved in validating transactions, and mining new blocks on the BTC Blockchain (see our Blockchain 101 article for more information on blockchain technology)
Bitcoin was first dreamed up by a person or group of people under the pseudonym Satoshi Nakamoto. Satoshi released his whitepaper, “Bitcoin: A Peer-to-Peer Electronic Cash System,” Late in 2008. Bitcoin was dreamed up as a peer to peer electronic cash system that allowed people to transact with each other without the factor of trust.
Peer to Peer Transactions in the Absence of Trust & Its Significance
In the financial world, central authorities such as banks play a major role in today’s society. The banking institution exists as a regulatory means to move money and validate transactions. Bank’s act as a place to store your money, a middleman for you to send money, a way to receive payments for services/goods provided, etc. Until Satoshi’s whitepaper, the banks (or other central authority) were the middleman who was establishing trust between two parties.
And then Bitcoin came along. . . A whitepaper that explains how peer to peer system without the need for the banking industry could exist. The technology explained in Satoshi’s vision, now called “blockchain,” is a way for people to transact without the need of a central authority.
What is the Significance of This?
An individual is now able to receive currency without having to trust that the person on the other end of the transaction can cover the cost. That same individual is now able to send money to another in a timely manner, without the receiver needing to worry about legitimacy.
Here is a couple of examples to argue BTC’s case.
1.) Jack is paying Thomas 80 dollars to mow his lawn. Thomas gets done mowing Jack’s lawn and requests payment for the service he provided. Jack grabs his checkbook and writes Thomas a check in the amount of $80. Thomas immediately goes to the bank and cashes his check.
The next business day, Thomas learns that Jack could not cover the check he wrote. The bank has taken $80 out of Thomas’s account to cover the check that bounced.
2.) Sarah’s rent is due promptly by the first of every month. Sarah is paid Friday on a weekly basis. Sarah grabs her check and leaves work at 5pm. She immediately deposits her check using her mobile phone. Sunday marks the 1st of the month, and rent is due, or she is assessed a late fee. Sarah can’t cover rent though, because her check will not clear until the next business day. Sarah is forced to pay a late fee since her money will not be processed and available in her bank account until Tuesday.
In example 1, Thomas provides a service and the assumption is made that since he has a check in-hand, he’s been paid. If this were a BTC payment, Thomas would know within minutes whether or not Jack could cover the service provided.
In Sarah’s case in example 2, Sarah has been paid on a Friday, yet can not cover rent on Sunday. She has the funds, its just that the bank has not cleared them. If Sarah was paid in Bitcoin (and able to pay rent in Bitcoin), she would have her money in a matter of minutes, and she could pay rent on time.
These are fictional examples, of course. But situations like this arise every day. There are thousands of reasons (far more important and urgent than Thomas and Sarah’s) and ways to argue the practical use of cryptocurrencies such as Bitcoin, we’ll leave that research to you though.
Bitcoin, how does it work?
To understand Bitcoin and how it works, we need to understand the Bitcoin Blockchain. The Bitcoin Blockchain is a public ledger full of Bitcoin transactions. Bitcoin transactions are validated by a community of miners. Miners, typically high-end pcs with boutique hardware, validate transactions on the blockchain, mine new blocks, and compete against each other doing so. The reason for the competition is that miners are incentivized with rewards. Validating transactions comes with the reward of the transaction fees, and mining a new block, as of 2018, comes with the reward of 12.5 newly generated bitcoins. Mining Bitcoin comes at a large price, the hardware needed is highly specialized, expensive to buy, and expensive to run. Mining BTC also uses a large amount of power. Bitcoin operates with a Proof of Work system* for miners.
How are Bitcoins Generated?
The Bitcoin Protocol was designed for the currency to be released at a fixed rate. For this reason, Bitcoin mining is highly competitive. There will only be 21 million total Bitcoins released, no more, no less. These are released during the mining of new blocks on the blockchain. The number of bitcoins released per mined block gets halved over time. Gradually increasing scarcity of Bitcoins until all coins have been mined. Once every bitcoin has been mined, new blocks will continue to be mined and transactions will continue to be validated, but transaction fees will be the sole incentive of the nodes on the network.
Thank you for reading Bitcoin 101 from BlockDelta.io. The key takeaway from this article should be that Bitcoin is a decentralized currency which enables its holders to conduct peer to peer transactions in the absence of trust.
*For more information on Proof of Work, Click Here