Core message: Bitcoin is the original and most successful open, permissionless, decentralized, peer-to-peer transaction network. It combines technologies that solve the double spend problem and enable censorship resistance and immutability.
Our 2-Cents: Bitcoin is a gamechanger and its influence is readily seen on all cryptocurrencies and digital currencies that have been developed since its introduction. “Proof of Work”, while energy intensive, plays an integral role in how the network achieves secure, decentralized consensus.
Let's break it down...
“Bitcoin” is a decentralized peer-to-peer network that enables transaction consensus without the need for a central authority.
“bitcoin” (with a small b) is the currency that is issued as the reward for successful validators in the “proof of work” consensus mechanism (aka mining).
There is a known and finite amount of bitcoin that can be minted: 21 million bitcoin and each bitcoin is divisible into 100,000,000 Satoshis.
Open, Public, Permissionless, Peer-to-Peer
Anyone can join the Bitcoin network. No bureaucracy. No borders. No holidays.
Everyone is able to fulfill any/all role(s) within the network:
The rules of participation are transparent.
The source code is available to all.
Transactions can be made without reliance on a third party.
All transactions are visible.
Changes to the network/protocol are voted upon by its users.
Secure, Decentralized, Distributed Network
The minimum requirement of any transaction network is that it is secure.
Decentralized/distributed systems offer a better opportunity for security than centralized systems as every user of the network can independently verify the validity of any transaction rather than simply trusting the data provided
by a third party.
The more users that actively validate/confirm transactions, the more secure the system.
It is estimated that bitcoin has over 15,000 full nodes validating/confirming transactions, which makes it highly decentralized. See: https://bitnodes.io/
Bitcoin has proven itself to be the most secure digital system in the world. Bitcoin has never been hacked, and zero counterfeit currency is in circulation.
The main technologies at work to maintain the integrity of the Bitcoin network are:
Asymmetric Encryption/Digital Signatures
How a participant (sender) proves that the bitcoin they are looking to send exist and they own them (using public key, private key and digital signature).
Hashing is a way of creating a unique identifier for a dataset - like a fingerprint for data. It is used extensively in bitcoin to link blocks to each other and to store proof of data (a major part in securing data/transaction history).
3. Blockchain/Proof of Work
A full history of all transactions resides in the blockchain. The proof of work consensus algorithm governs how blocks – containing new transactions - are validated and added to the network (another major part in securing the data/transaction history in the blockchain to ensure coins can be only spent once).
To understand Bitcoin, it helps to understand the process involved in a transaction:
Transaction is signed and transmitted to the Network.
Nodes verify transaction and distribute to other Nodes on the Network.
Transaction received by recipient after c.15 seconds.
Miners add transaction to block and carry out Proof of Work.
A successful miner adds a block with transaction to the Blockchain and the block propogates around the Network. This represents confirmation of the transaction.
Without Confirmation, in effect, no transaction has taken place. Each block that is subsequently added to the Blockchain is an additional confirmation and makes the transaction more secure.
A transaction can be considered “fully confirmed” after 6 Confirmations, i.e., there are 5 blocks after the block containing the transaction. As new blocks are created on average once every 10 minutes, full confirmation of a transaction takes approximately one hour.
Understanding the significance of confirmation – Due to the nature of the “Proof of Work” competition, you can have competing chains until the chain with the greatest computational effort wins:
If two miners produce a valid block at around the same time,
the winner will be decided by which one gets found by the rest
of the network first and has another valid block produced and
added onto it, becoming the longer (and thus official) blockchain.
If those second blocks are also close, then it will come down to
who wins the third valid block, or fourth valid block. Eventually
a longer chain wins, as a greater share of the network is finding
it and building on top of it.
Challenges for Bitcoin
Bitcoin is slower and less efficient than more centralized solutions due to the time requirements involved in ensuring the integrity of the Network through consensus.
Similarly, it can be (comparatively) slow to incorporate changes to the Network because of the requirement of reaching consensus.
Data on all transactions is available to everyone so it may be difficult to maintain privacy.
The Proof of Work consensus mechanism is energy intensive.
High fees and price volatility create uncertainty (at least in the short term) around bitcoin’s utility as a means of payment for low-cost items.
Due to the learning curve and cost involved in setting up Nodes, many people are dependent on Crypto Exchanges for buying and selling bitcoin. These exchanges are most often centralized which provides convenience but considerably dilutes the benefits of holding bitcoin (not your keys, not your bitcoin).
Introduction to Bitcoin and Open Blockchains
Learn the basics of Bitcoin and Open Blockchains from industry expert Andreas M. Antonopoulos:
- The Bitcoin Timeline
- What are RIPCORD Blockchains
- How to Get and Use Bitcoin
- How the Bitcoin Price is Derived
YOUR ROUTE TO UNDERSTANDING DEFI
01. Take the Tour
02. Hear the Experts
03. Join the Event