How Bitcoin is ranked is controversial.
Is Bitcoin a type of currency, a store of value, a payment network, or a class of financial assets? It is easier to define and say that Bitcoin is a program, with no physical existence, and that the imaginary images that are published on the Internet that depict Bitcoin like all other currencies carry the letter B in large are just illustrations.
Bitcoin is one of the hundreds of successful attempts to create virtual currencies using the science of cryptography and tokens. Bitcoin has inspired hundreds of copycats, but it remains the largest cryptocurrency by market value, a distinction it has maintained throughout its more than a decade's history.
According to the Bitcoin Foundation, the word "Bitcoin" is enlarged when referring to a cryptocurrency, and is drawn in lowercase "bitcoin" when it refers to the same amount of currency or units.
Bitcoin is abbreviated as “BTC”.
In this article, we will explain how Bitcoin works in detail:
Blockchain:
Bitcoin is a network that operates on a protocol known as a blockchain. A 2008 paper by someone or people calling themselves "Satoshi Nakamoto" first described both blockchain and bitcoin. For a period of time the two terms represented almost the same thing, so blockchain technology evolved and took a separate concept, and thousands of other blockchain networks were created using similar cryptographic techniques.
The blockchain sometimes refers to the original Bitcoin blockchain. Other times, the name refers to blockchain technology in general, or to any other specific blockchain, such as the one with which the Ethereum project operates.
The basics of blockchain technology are simple.
Any given blockchain consists of one chain of discrete blocks of information, arranged in chronological order. In principle, this information can be any series of 1s and 0s, which means it can include emails, contracts, land titles, marriage certificates or a bond trade.
This diversity resulted in a diversity of private institutions and companies. Some analysts believe that blockchain technology will ultimately be the most influential aspect of the cryptocurrency craze.
In the case of Bitcoin, the information on the blockchain is mostly transactional.
It carries information, for example:
“Muhammad” sent Bitcoin to “Bilal”, and Bilal in turn sent Bitcoin to Jamal, and so on.
By calculating and showing these transactions, everyone knows where the currencies have gone and who is holding them without revealing the names of the coin holders.
Another name for the blockchain is "distributed ledger," which emphasizes the main difference between this technology and a well-maintained Word document. The Bitcoin blockchain is publicly distributed.
Anyone can download the entire blockchain or go to any number of websites that analyze it. This means that the registry is available to the general public, but it also means that there are complex measures in place to update the ledger. There is no central authority to keep track of all Bitcoin transactions, so the participants themselves do this by creating 'blocks' that carry and verify transaction data.
It can be seen, for example, that the address:
15N3yGu3UFHeyUNdzQ5sS3aRFRzu5Ae7EZ Sent 0.01718427 Bitcoin to 1JHG2qjdk5Khiq7X5xQrr1wfigepJEK3t on August 14, 2017, between 11:10 and 11:20 a.m.
Maybe you can see who has these coins last. In other words, the Bitcoin network is not completely anonymous, and by taking some precautions and methods that may seem very difficult, individuals can be linked to transactions.
Trust factor:
Although it is completely public, Bitcoin is extremely difficult to tamper with. Bitcoin does not have a physical presence, so you cannot protect it by locking it in a locker or burying it in the garden of your home. In theory, all that a thief must do to take it from you is access your keys to access your bitcoin and then transfer it to him.
Another concern is dual spending, meaning if someone can spend some bitcoins and then spend them again, confidence in the currency's value evaporates quickly.
To prevent either, the confidence factor must be in place. In this case, the usual solution in conventional currency would be to deal through a neutral central arbitrator such as a bank.
But the way Bitcoin works has made it all unnecessary.
Perhaps it was no coincidence that Bitcoin was released by Satoshi Nakamoto in October 2008, when confidence in banks was at a critically low level.
Instead of having a trusted authority that maintains the ledger and presides over the network, the Bitcoin network is decentralized.
Everyone is watching everyone.
A person does not need to know or trust anyone in particular for the system to function properly.
Assuming everything works as intended, cryptographic protocols ensure that each block of transactions is pinned to the latter in a long and immutable chain.
Mining:
The process that maintains an unreliable general ledger is known as mining.
Undermining the network of Bitcoin users who trade cryptocurrency among themselves is a network of miners, who record these transactions on the blockchain.
Recording a chain of transactions is trivial to a modern computer, but mining is difficult because the Bitcoin program makes the process artificially false.
Without the added difficulty, people can simulate transactions to enrich themselves or bankrupt other people.
They can record a fraudulent transaction in the blockchain and a stack of fake transactions on top of it to the point that untangling the fraud becomes impossible.
Along the same lines, it would be easy to list fraudulent transactions in previous blocks.
The network would become an unwanted sprawling mess of competing ledgers, and Bitcoin would be worthless.
The combination of "Proof of Work" and other encryption technologies was a breakthrough for Satoshi.
Bitcoin software adjusts the difficulty miners face in limiting the network to a new 1MB block of transactions every 10 minutes.
In this way, the volume of transactions is capable of reliable transactions.
The network has time to examine the new block and the ledger that precedes it, and everyone can come to a consensus about the status quo.
Miners do not work to verify transactions by adding blocks to the distributed ledger out of a desire to see the Bitcoin network running smoothly, rather they are compensated for their work by giving them some bitcoin units.
Retail:
Here's a little more technical description of how the mining works.
Miners scattered all over the world who are not connected to each other through personal relationships or the like receive one thing in common - they get some bitcoin after authenticating the most recent set of transaction data.
Miners run the data through a cryptographic algorithm that generates a "hash", which is a series of numbers and letters to validate the information but not reveal the information itself.
An example of the following code line segmentation:
000000000000000000c2c4d562265f272bd55d64f1a7c22ffeb66e15e826ca30
You cannot know the parameters that the related block contains (# 480504).
However, you can take a bunch of alleged data to block number 480504 and make sure not to mess with it.
If a single digit was in place, however insignificant it was, the data would generate a completely different hash.
Meaning that changing one letter or number will result in a complete change in the next line, and thus the transactions will become erratic and correct, which results in corrupt and falsified transactions.
Bitcoin network hashing technology allows to instantly verify a block's viability.
It will take a very long time to comb through the entire ledger to ensure that the person mining the most recent batch of transactions has not experienced anything fake.
Instead, the hash of the previous block appears within the new block.
If the most subtle detail in the previous block is modified, this hash will change.
Even if the change is 20,000 blocks in the chain, fragmentation of this block will lead to a chain of new hashes and deviate from the main network.
With that said, creating a hash doesn't really work.
This process is so quick and easy that some bad parties can still send spam into the network, but given enough computing power, the fraudulent transactions pass through and stay out of the main blockchain blocks.
Therefore, the Bitcoin protocol requires relying on a proof of work mechanism, or what is known as mining.
Whereas, if a bad party broadcasts a bombed block to the network to receive confirmations, it takes another hour or so, albeit much longer, to process.
(Note: This description above is simplified to explain the method only, as the blocks are not completely fragmented, but rather broken down into more efficient structures called Merkel trees.)
Depending on the type of traffic the network receives, the Bitcoin protocol will require a longer or shorter chain of ciphers, adjusting the difficulty of reaching a new block rate every 10 minutes.
As of October 2019, the current difficulty is around 6.379 trillion, up from 1 in 2009.
This indicates that it has become very difficult to mine Bitcoin since the cryptocurrency was launched a decade ago.
The mining process is becoming expensive, and it requires large and expensive mining equipment and a lot of electricity to operate it competitively.
Early on, miners realized that they could improve their chances of success by integrating into mining pools, sharing computing power and splitting the rewards among themselves.
Even when many miners split these bonuses, there is still a huge incentive to pursue them.
Every time a new block is mined, a successful miner receives a batch of the newly created bitcoin.
Initially, the bonus was 50 BTC, but it has decreased to 25, now it is 12.5 (around $ 119,000 in October 2019) and it will drop further next May to 6.25 BTC.
The bonus will continue to be halved every 210,000 blocks, or roughly every four years, until it reaches zero in the year 2140.
In that era, all 21 million Bitcoins would be mined, and miners after that would rely on fees to maintain the network.
When Bitcoin was launched, the total supply of the cryptocurrency was planned to be 21 million.
The fact that miners organized themselves into mining groups has become a source of concern for some.
If the group exceeds 50% of the network's mining capacity, its members can spend cryptocurrencies in double-digit and reverse and spend transactions again.
They can also block other people's transactions.
Simply put, this group of miners will have the ability to overcome the distributed nature of the system, and verify fraudulent transactions under the power of the majority they will hold.
This could mark the end of Bitcoin.
But even the so-called 51% attack won't enable bad actors to reverse old transactions, because proof of business requirements makes this process very expensive and countries' budget is needed to overcome it.
To go back and change the blockchain, the cluster would need to control the vast majority of the potentially useless network. When you control the entire currency, who do you trade with?
The 51% attack is a financial suicide show from a miners' perspective.
When Ghash.io, a mining pool, reached 51% of the network's computing power in 2014, he voluntarily promised not to exceed 39.99% of the bitcoin hash rate in order to maintain confidence in the cryptocurrency's value.
Other actors, such as governments, may find the idea of such an attack intriguing, though.
Another source of concern related to miners is the pragmatic tendency to focus the mining process in parts of the world where electricity is cheap, such as China, or after a Chinese crackdown in early 2018.
How Bitcoin transactions work:
For most individuals involved in the Bitcoin network, the ins and outs of the blockchain, hash rates, and mining are not particularly relevant to them.
Outside of the mining community, bitcoin owners usually purchase their supply of cryptocurrency through exchange platforms.
These distributed online platforms facilitate transactions of Bitcoin, and often other digital currencies.
Combines exchange Alpetkoan platforms such as " Queen Pais " market participants from around the world to buy and sell currencies encrypted.
These exchange platforms were getting increasingly popular
Bitcoin itself has grown in popularity in recent years, becoming fraught with regulatory, legal and security challenges.
With governments around the world displaying cryptocurrencies in various ways and viewing them as a currency, asset class, or any number of other classifications.
The regulations governing the buying and selling of Bitcoin are complex and constantly changing.
Perhaps most important for participants in bitcoin exchange platforms is the threat of regulatory oversight change, theft and exposure to other criminal activities.
While the Bitcoin network itself has been largely secure throughout its history, the trading platforms are not necessarily the same.
Numerous thefts targeted high-profile cryptocurrency exchange platforms, often resulting in the loss of millions of dollars in tokens.
The theft of the exchange platform Mt. Gox is the most popular one to dominate the Bitcoin transaction space in 2014.
Early that year, the platform announced the theft of 850,000 BTC, worth nearly $ 450 million at the time.
Then I encountered the Mt. Gox filed for bankruptcy and closed to the present day.
Most of those stolen coins, which now total around $ 8 billion, have not been recovered.
Keys and wallets:
It is for these reasons and for them that bitcoin traders and owners want to take any possible security measures to protect their holdings.
To do this, they use private keys and encrypt them in digital wallets.
Bitcoin ownership basically boils down to two keys:
Public key and private key.
An approximate analogy with which we can compare these switches is:
The public key is the username
The private key is the password.
The hash of the public key, or what is known as an address, is what appears on the blockchain. Using hash provides an additional piece of security.
To receive bitcoin, it suffices that the sender knows your address.
The public key is derived from the private key, which you need to send bitcoin to another address.
The system makes it easy to receive money but requires identity verification to send it.
To access Bitcoin, you use a wallet, which is a set of keys.
This wallet can take various forms from third-party web apps offering insurance and debit cards, to QR codes printed on pieces of paper.
The most important distinction that can be made between hot and cold wallets is that hot wallets are connected to the Internet and thus vulnerable to hacking
The “cold” wallets are offline.
In the case of the Mt. Gox above, it is believed that most of the stolen bitcoin was taken from a hot wallet.
Many users still entrust their private keys to cryptocurrency exchange platforms, although the user can easily deal with them, but they carry the risk of piracy and thus users losing their currencies.
This was an introductory tour of how Bitcoin works, how transactions are done on it, how it is approved, and how it is saved and stored.