In 2008, a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” authored by Satoshi Nakamoto posted on the site “bitcoin.org”. He learned from previous digital currency, like B-money and Hash Cash, then created a decentralized electronic cash system, which is independent of the central bank. In other words, Bitcoin is a new kind of payment network and a digital currency/cryptocurrency. With Bitcoin, you can make instant payments to anyone, anywhere in the world without the control of the central authority.
Before taking a deep look at Bitcoin, let's go through some basic information about Bitcoin.
1. The amount of Bitcoin is limited to 21 million.
2. The only way to create a new BTC is by mining. Bitcoin mining is a process that solves a difficult maths problem with a high-equipped computer that has efficient computational power and calculations.
3. The miner who successfully discovers a block and added to the blockchain will get 12.5 newly created BTC as a reward. And the reward for adding a block to the blockchain will be halved every 210,000 blocks or every four years.
4. PoW (Proof-of-Work) is a consensus algorithm for Bitcoin. It is used to measure miners' contributed computing power on processing and verifying transactions, as well as block generation.
What is Bitcoin Mining?
Since Bitcoin is a decentralized and distributed ledger system without the control of the central bank, you may wonder how to issue and trade BTC.
Briefly speaking, Bitcoin mining is the process of verifying and confirming transactions within the Bitcoin network. Miners are presented with a complex cryptographic puzzle and the first one to work out the answer of the puzzle will get the right to pack the verified transaction into a block and add it to the blockchain.
To solve the complicated cryptographic puzzle, the miner is built-in advanced hardware (ASICS) and consumes a lot of computing power. Once the miner successfully created a new block of validated transactions and included it in the blockchain, it would receive a certain amount of BTC as a reward. This is also how new BTC generated.
What is Bitcoin Wallet?
If you have purchased or “dig out” some bitcoin, how can you store it? Similar to traditional currency, you can store it in your wallet.
A Bitcoin wallet is a program for you to store the BTC you hold. For every Bitcoin wallet, there is a private key and a public key (wallet address). There are 4 popular types of Bitcoin wallet: Desktop, Mobile, Paper, and Hardware wallet.
Desktop wallets allow users to create an address for sending and receiving BTC. Bitcoin holders can store their own private keys by downloading software to individual computers. The frequently-used desktop bitcoin wallets are Bitcoin Core and Exodus.
Mobile wallet (Android or iOS) allows users to transact on the go. Mobile wallet is designed to utilize only a small fraction of the blockchain and rely on other nodes within that network to access the remaining necessary information. A mobile wallet, storing the private key on the phone, is not secure enough, because your mobile phone tends to get stolen, lost or broken. Your private key as well as the BTC stored in the wallet might be lost as well.
Bitcoin paper wallet offers two QR codes, one links to the public key and another link to the private key and printed on the paper. The key generation is usually done in your browser, you should clear the history and cache of your browser after printing.
The hardware wallet is another form of cold storage that stored Bitcoin offline. USB flash drive is a common hardware wallet. Both private and public keys are stored in it. You can set a password to secure the USB drive wallet. However, since you need to insert the USB drive into any computer, it might be easily read and hacked by malicious software.
Differences between Fiat Currency and Bitcoin
As we introduced at the beginning of the article, the Bitcoin network is a peer-to-peer system, anyone can operate a bitcoin node with a Bitcoin client-side or mining software downloaded and installed on the well-equipped computer. The whole Bitcoin network is actually a ledger, recording the balance of BTC of each address. And this ledger is saved and maintained by all nodes within the Bitcoin network, which is also known as distributed ledger system.
Central banks can issue as many fiat currencies as they need according to the current economic situation. The total amount of Bitcoin is limited to 21 million and will not supply more in the future. The time and the number of new bitcoin generated are tightly controlled by the consensus algorithm.
Once you sent BTC to another address, the transaction is irreversible. Unlike fiat currencies transfer, there is no central bank to “adjudicator” that you can rely on for money return. Any transaction in the Bitcoin network is tamper-resistant.
To transfer fiat currency online means to transfer money from one bank account to another, which is real-name registered. But the process of Bitcoin transfer is to transfer BTC from one wallet address to another. A string of numeric code is the identity of your Bitcoin wallet address, and no need to identify yourselves with your personal information.
Bitcoin is considered the “gateway” cryptocurrency. Get to know and understand Bitcoin is the first step to enter the cryptocurrency world. No matter it's a bubble or future, Bitcoin has ushered in its first 10th anniversary. Whether will it be the future that drastically different from the fiat-based financial world today, let's wait and see!