Bitcoin is a digital, decentralized currency. It is considered a cryptocurrency as it utilizes cryptography for safety. Bitcoin is the largest cryptocurrency in the world owing to its market capitalization. It is created, traded, stored, and distributed using a decentralized ledger system that is also known as Blockchain.
Bitcoin is private, superfast, cheap (transaction fees are minimal), and entirely decentralized. The structure of a Bitcoin block header consists of:
- The reference to a previous block hash
- The difficulty, timestamp, and nonce
- The Merkle root
||Version number to track software or protocol upgrades
||Previous Hash block
||Reference to the hash of the previous block in the Blockchain
||Binary hash of the root of this block
||Approximate time it took to create the block.
||Contains the proof-of-work algorithm.
||Counterpart of proof-of-work
How Does Bitcoin Work?
Bitcoin uses peer-to-peer (P2P) technology to ease instant payments. The Bitcoin system consists of a group of computers. These computers are responsible for running the Bitcoin code and its blockchain. A blockchain is a chain of blocks, with each block containing information about transactions. All the computers that are a part of the system, can see all these blocks. Due to the transparency in the system, it is really hard to cheat.
The individuals or companies that operate these computers are called miners. They are responsible for processing the transactions on the blockchain. New bitcoins are released as a process of mining. Only a total of 21 million bitcoins can be mined in total. This makes bitcoin and other cryptocurrencies different from flat currencies. This system here is based on stabilizing the price.
Terms Associated with Bitcoin
The following are some terms associated with bitcoin that you must know:
- Blockchain: While talking about Blockchain Technology, Blockchain is a chain of blocks that acts as a public ledger for bitcoin. Blockchain has the details of all the transactions ever made on Bitcoin.
- Block: A block is part of the blockchain. The most recent transactions are recorded on a block. These transactions are verified every 10 minutes by mining.
- Cryptography: Cryptography is the art of deciphering or generating codes. It was the foundation of bitcoin and hence, the term cryptocurrency. All Bitcoin blockchain transactions are anonymous due to cryptography.
- Decentralization: Decentralization means that bitcoin is not owned by any country or government. It works on a peer-to-peer protocol with people, who own bitcoin, actually managing the entire system.
- Change: A change in bitcoin works as a change in a normal currency. When the amount you give is higher than the amount that is needed, you get back change.
- Private Key: Your private key is your Bitcoin password that you can use to carry out transactions. Just like a password, you should never reveal your private key to anyone.
- Cold Storage: Your Bitcoin private key helps you store your bitcoin in a safe offline environment. This is called cold storage. It can be in the form of a USB, drive, etc.
- Double Spending: Double spending just means spending the same amount twice.
Get ready for a Blockchain developer job by going through these Top Blockchain Interview Questions and Answers!
What is Bitcoin Mining?
Bitcoin mining is adding transactions happening in the blockchain to Bitcoin’s public ledger of past transactions. The ledger that holds the past transactions is called the blockchains or it is a chain of blocks. The blockchain serves to confirm transactions to the rest of the network as having taken place. The Bitcoin consensus algorithm allows for the creation of new bitcoins by the process of mining.
It involves four steps:
- Autonomous Check of Every Transaction: Autonomous check of every transaction, by each full node, in light of an extensive rundown of criteria. In this process, Person A initiates 5BTC to B in the network. Confirmation happens, followed by valid transactions.
- Proof-of-work Algorithm: Independent aggregation of those transactions into new blocks by mining nodes combined with exhibited calculation through a proof-of-work algorithm. By autonomously confirming each transaction, as it is received and before transmitting it, each node maintains a pool of valid, however unconfirmed, transactions known as the transaction pool, memory pool, or mempool. Mining happens in this stage either by solo mining or group mining.
- Confirmation: Independent confirmation of the new blocks by each node, and get it together into a chain. Validation of the added new block after mining.
- Independent Aggregation: Independent selection, by every node, of the chain with the most cumulative computation demonstrated through proof-of-work.
New blocks are added in blockchains as a string of long chains.
A wallet is basically the Bitcoin equivalent of a bank account. It allows you to receive bitcoins, store them, and then send them to others. Once a bitcoin wallet is installed on your computer or mobile device, it will generate your first Bitcoin address. Each address has its own balance of bitcoins. There are few types of wallet such as:
- Software Wallet: Bitcoin Armory
- Web Wallet: More convenient than a software wallet
- Cold Wallet: Not connected to the internet
- Paper Wallet: USB drive
- Brain Wallet: Like a computer that makes passphrase of random words
- Hardware Wallet: More like a physical wallet
Best Bitcoin Wallet
Electrum is one of the most popular crypto wallets out there. As it turns out, it is also the best Bitcoin wallet available. It is an open-source and secure blockchain wallet that offers a lot of advanced features to users. It is really easy to set up as well. The transaction fee can be customized and the wallet does not go through downtime owing to its server configurations.
Electrum only deals with Bitcoin and that just means that it is well equipped to deal with bitcoin transactions. It has various security features as well. The more money users pay, the quicker their transactions are done.
We still do not really know who invented Bitcoin. The only name that comes up is Satoshi Nakamoto. Someone with that name, a person or a group of people, released Bitcoin in 2008. They also made the original Bitcoin software, which was released in 2009. A lot of people have been rumored to be Satoshi Nakamoto, but so far their identity is still unknown.
A lot of people have wondered why they keep their identities secret. Well, there can be a lot of reasons for it. The most important one has to be privacy. We are all aware of how popular Bitcoin is. As Bitcoin gains popularity, so will Satoshi Nakamoto.
Another major reason can be the influence of Bitcoin. If Bitcoin is adopted by the masses, it will take over flat currencies. This can put the creator(s) in legal trouble.
Why is Bitcoin Going Up?
Bitcoin was at $1 in 2011 and it stands at $38,681 in February 2022. Bitcoin has had an exponential growth in the last decade. This is owing to various things. One of them is the fact that only a limited number of bitcoins are going to be mined in total. The other reasons are market demand and minimal production cost. Even though bitcoin is a digital currency, its market cap today is valued at $665 million.
How Risky is Bitcoin?
Bitcoin’s cryptography is based on the SHA-256 algorithm, which was designed by the US National Security Agency. This is impossible to crack as the number of possible keys to be tested is around 2256. This is more than the number of atoms in the universe.
There has been news of bitcoins being stolen but the blockchain network has never been hacked. One of the things that can be a problem is that Bitcoin does not have any centralized authority, so if anybody makes any errors in their transactions, there is no going back. If you send bitcoins to the wrong address, you cannot get them back.
Bitcoin has created a rage in the world even since it was invented. The last decade has been its golden era and it does not seem like it will stop anytime soon. The technology behind Bitcoin is just as exciting as its market cap. Even though investing in Bitcoin involves some risks, the same is true for a lot of other traditional forms of investment.