What is Bitcoin (BTC)?
Bitcoin is a cryptocurrency and a worldwide payment system. It is the first decentralised digital currency, as the system works without a central bank or single administrator. The network is peer-to-peer and transactions take place between users directly through the use of cryptography, without an intermediary, such as banks. These transactions are verified by network nodes and recorded in a public distributed ledger called a blockchain. Bitcoin was invented by an unknown person or group of people under the name Satoshi Nakamoto and released as open-source software in 2009.
How are Bitcoins created?
Bitcoin is a digital currency that does not exist in a physical form and is not centrally controlled by a bank or any institution. Instead, Bitcoins are created digitally through a process called “mining”. Thus, Bitcoins are mined using computing power to solve difficult cryptographic puzzles. When the correct solution of the hashing algorithm has been found, a block is formed and brand new Bitcoins are released into the system as a reward for the miner. At the current time of writing, 4th of January 2018, the Bitcoin block reward is 12.5 Bitcoins per block.
So, as long as there are miners, new coins will be added?
There are only 21 million Bitcoins that will ever exist. As of January 2018, there are almost 17 million coins in circulation. The Bitcoin protocol was designed in such a way that every 210,000 blocks (or approximately every 4 years) the block reward will be halved. Eventually, this halving will decrease the block reward to 0 as the limit of 21 million Bitcoins is reached. Supposedly, then, miners will be incentified to keep the network safe and legitimate only with transaction fees.
So, how does Bitcoin work?
Bitcoin mining is a peer-to-peer computer process used to secure and verify Bitcoin transactions, in other words, to verify payments made by one user to another on the Bitcoin network. Mining is the tool used to add Bitcoin transactions data to Bitcoin’s public distributed ledger. Each set of transactions added to the ledger is called a “block”. The newly formed blocks are added onto the chain of previous blocks and thus extending the blockchain. The blockchain confirms transactions with the rest of the network as having taken place. Bitcoin nodes use the blockchain to verify transactions based on the previous blocks and to prevent users from double-spending their coins. The mining consensus used by Bitcoin is called “proof-of-work”.
What makes Bitcoin special? How is it different from conventional currencies?
Bitcoin has multiple features that set it apart from the conventional government-backed currencies. Let’s explore those in detail.
First and probably the most important Bitcoin feature is that it’s a decentralised peer-to-peer monetary system. In other words, the Bitcoin network is not controlled by one central authority. Every machine that mines Bitcoin and processes transactions makes up a part of the network and thus, makes it impossible for one central authority to choose or enact monetary policies. The decentralised nature of the Bitcoin blockchain makes it more robust than conventional monetary systems. If one part of the network goes offline, the rest will keep on running and supporting the system.
Second, Bitcoin makes it easier for everyone around the globe to set up an account and use their funds without going through the bureaucratic steps necessary for establishing and using a bank account. Anyone can set up a Bitcoin account within seconds, for free.
Third, the Bitcoin blockchain is completely transparent. All the transactions that have taken place in the Bitcoin network since the birth of Bitcoin in 2009, are publicly accessible. Moreover, if you have publicly used a Bitcoin address, anyone can check how many Bitcoins are stored in your wallet, however, your name and private data stays anonymous.
The fourth Bitcoin advantage over conventional currencies is that Bitcoin is transnational. There are no exchange rates and 1 Bitcoin is always worth 1 Bitcoin, regardless of the country it is spent in. Thus, Bitcoin and other cryptocurrencies have the potential to eliminate exchange rates and international transfer fees.
Is Bitcoin the perfect global currency?
Even though, Bitcoin has many advantages over conventional currencies, there are two key issues that the Bitcoin community is facing.
First, there are transaction fees. Bitcoin was initially envisioned as a peer-to-peer monetary system with close to instant, free transactions. At this particular time, January 2018, Bitcoin users are paying an average of $28 USD to make a transaction, according to data by BitInfoCharts. Thus, transaction fees are proving to be profitable for miners, at the same time, hurting the users and making Bitcoin unsuitable for micro-transactions and daily usage.
Second, the transaction times. Usually, it takes around 10 minutes for a block to be added to the blockchain. However, with the growing adoption of the Bitcoin network, more and more transactions have take place on the blockchain and thus, causing a congestion. For example, according to Blockchain.info, on the 3rd of January 2018, the average confirmation time was 70 minutes, whereas, on the 1st of January 2018, the Bitcoin network reached the record slow confirmation average of 3,327 minutes, the equivalent of 2 days, 7 hours and 27 minutes.
Bitcoin is not perfect, however, it’s advantages are numerous. Because of Bitcoin’s open-source algorithm, countless developers are constantly busy with trying to improve the system.
One of the most important projects that is going to be implemented on the Bitcoin Network soon is the Lightning Network. The Lightning Network will allow for instantaneous and almost free off-chain transactions. The Lightning Network would essentially allow users to send multiple transactions to and from, outside of the blockchain. It would work as a second layer on top of the existing distributed ledger network that underpins Bitcoin.
Many are hopeful about Bitcoin’s future, but only time will tell. Bitcoin and most alt-coins might not last forever, but one thing is for sure, blockchain and cryptographic currencies are here to stay.