The first blockchain bearing the name Genesis was brought to life by Satoshi Nakamoto in the year 2008. Soon after, this technology was incorporated as the main component of a cryptocurrency currency that was known as Bitcoin where its value was in the blockchain serving as the public ledger for all bitcoin transactions. This new advancement in technology achieved maintenance of a public ledger of transactions without the use of a central authority that was characteristic of all fiat currencies in today’s world as we know it. This simple application of the blockchain technology for bitcoin was about to disrupt the currencies world like nothing that we had seen before.
The maintenance of the blockchain was conducted by a peer to peer network of nodes running bitcoin software. Transactions of party A sending bitcoins to party B to be received by party C are shared and broadcasted publicly to the blockchain network using available software. In turn, the nodes interconnected in the network work to validate these transactions where upon successful completion, they include them to their duplicated version of the ledger and in the same fashion, broadcasts them to the network of other nodes. Each node on the network stores its own duplicate of the distributed database that is the blockchain, and this helps in achieving and independent verification of every bitcoin produced with its chain of ownership.
Approximately every 10 minutes, a block is created and added to the blockchain and quickly published to all nodes. This, in turn, gives way for the Bitcoin software to determine where these bitcoins have been spent which is instrumental in preventing double spending in this environment without a central authority regulating the use of the currency. This is contrary to what we have experienced with our conventional banking system wherein the attempt to pay for two services with the same amount of money, the bank would accept the first transaction but deny the second one due to the insufficient balance.
In the use of the bitcoin as payment, it is imperative for valid transactions to have one or more inputs which should be the unspent output of a transaction that happened previously. However, every transaction conducted must bear the signature of the inputted owner. It is also possible to make multiples payments for goods and services at one go where the transaction may possess multiple outputs. As it would happen in cash transactions, if the Bitcoins used to pay for a transaction exceed the amount to be paid an additional output is used in returning balance back to the entity making the payments.
During the early years of bitcoin use, early adopters were fortunate enough to collect thousands of bitcoins that were given as rewards for verifying transactions on the blockchain network in a process called mining. It was clearly a niche category with a bitcoin being valued under a dollar for each. This, however, changed drastically with increased mainstream usage and media coverage of the coin. In its nature, it was designed as an asset since its supply was limited to a little under 21 million with its increased use driving its value sky high to peak at slightly under $3000 per bitcoin in June of 2017, doubling gold in value as a store of wealth.
In every transaction with bitcoin, the transactions once verified are added to the blockchain. Due to its nature, transactions cannot be reversed but new transactions recorded to the chain. These bitcoins, which in essence are lines of code, are secured using digital wallets with the help of encryption technology. These wallets work with the use of two keys, a private and a public one. The private key is for the owner of the wallet to access his wallet and make payments from it, but the public one is what he would use to receive payments from other people.
In the formative years of bitcoin, a regular household computer would have been sufficient in verifying Bitcoin transactions to be rewarded with new ones being produced in a process called mining, but that does not suffice today. This is because the cryptocurrency automatically adjusts the complexity of the mathematical problem in direct proportion to the number of people on the blockchain mining for bitcoins. This means that the more the number of people mining for bitcoin, the higher the complexity of solving the mathematical problem in verifying the transaction. Similarly, the fewer the number of miners, the lower the difficulty of the mathematical problem.
Bitcoins are released at a rate designed to mimic the rate at which gold and other precious minerals are extracted from the earth. Therefore, the number of bitcoins released as rewards every 10 minutes also adjusts halving itself every four years since their creation. With the creation of specialized computers solely to be used for mining, the difficulty of obtaining a bitcoin have exponentially increased. These new machines run round the clock every day making computations at a hundred fold the rate at which a normal household computer would have made. This makes mining an expensive venture to get into solo as the rewards might not suffice for the cost of power. However, it’s not all gloom as one can join mining pools increasing the chances of one receiving rewards for correct transactions from the blockchain.
You must be now asking yourself on how you can get your hands on these bitcoins either as a store of wealth or for making transactions. Bitcoins and other cryptocurrencies just like foreign currencies can be purchased from currency exchanges. This is the unfortunate possibility that you are unable to mine for them. These currency exchanges will sell bitcoins to you in exchange for fiat currency.
The bitcoin currency market is all things but stable as it has experienced episodes of booms and bursts. Its volatility in the market signifies that the cryptocurrency is still in a bubble with its exchange prices fluctuating to a high degree every day. Bitcoins have also drawn the attention of hackers where they would target popular bitcoin exchanges’ websites having them down temporarily. These would lead to a sale of bitcoins by their owners in panic resulting in these hackers and opportunists buying them at a lower value and gaining profit when the prices stabilize again. Since transactions are irreversible and tracing them is improbable, bitcoin has been used to conduct business in black markets, but this is not to mean that the currency is only to be used for illegal transactions. Numerous businesses and mainstream websites have started accepting bitcoin as a form of payment. Despite its market volatility, increased acceptance and use of bitcoin as a currency in today’s world may spell a bright future for the currency but due diligence is required in making the decision on whether to invest in the cryptocurrency or not.