Introduction
On 31st October, 2008, a revolutionizing document saw the light of day when a Satoshi Nakamoto authored “Bitcoin: A Peer-to-Peer Electronic Cash System.” At first the world dismissed it as any other paper that keeps appearing every other day. However, little did anyone know what lay in store for the first digital currency. It was not long before analysts started referring to the cryptocurrency as the digital gold. This became possible due to its deflationary nature.
What the Whitepaper Said
Bitcoin white paper sounded alarm for banking system. Just as the advent of artificial intelligence initially threatened so many employment areas, Bitcoin promised something that would have been a fanciful idea to many if discussed in public. Nakamoto stated that people could send value across the internet as conveniently as an email or any other correspondence. Such transaction would not need any intermediary like banks. The value was to be generated through solving complex mathematical puzzles on computers. The system would reward the addition and generation of new blocks with $BTC coins.
Why Bitcoin Stole the March
The traditional finance system was replete with problems such as being slow, costly, and vulnerable to censorship or manipulation. The delays resulted from the required authentication from third party agents i.e. banks. Banks charged money for their services. The system needed blind trust from account holders. The banks have the authority to reverse any transaction or lock you out of your account. As bad actors, they can leak your information to others.
By eliminating the dependence on banks, Bitcoin laid foundations of decentralized finance (DeFi). Transactions were registered on the blockchain, which was accessible to every user. Information like time stamp and wallet address is something that no one can counterfeit.
The Double Spending Issue
Since Bitcoin is digital money, theoretically anyone can copy and paste transaction data set to spend the same coin twice or many times. In banking systems, you cannot do it as the intermediary catch the error and prevent it from happening. Just like sending one email to many friends, can a person send one coin to many recipients?
Bitcoin white paper clearly stipulate that once you send a coin to someone, the transaction is recorded on a public ledger, which was termed as blockchain. As soon as a user tries to double spend, they are caught by miners, who confirm only valid transaction. One of the many rules on the blockchain is that “the coin must be unspent”. Any attempt to double spend is countered by the miners who reject it straightway.
What is a Digital Coin?
Bitcoin Whitepaper defines a coin as a chain of digital signatures. The sender needs to enter their private keys and the receiver’s public wallet address to carry out the transaction. The signed message is added to the end of the chain of transactions. The transaction is thus added to the blockchain permanently. Every transaction has not only the information of itself, but also data about the previous transaction. A chain is formed in this way. The information is stored in the form of blocks. The system is so efficient that travelling from one block to another, you can go the very first block added to the chain. We refer to this block as zero block or genesis block.
What is $BTC Mining?
You might have heard that $BTC is mined. But his mining is not like gold or silver mining, which requires sifting rocks and sand. Bitcoin mining requires certain computational power to solve mathematical puzzles. You can call one such computer a “node”. Thousands of nodes are active across the globe. The required computational power was so small in the beginning that mobile phones could be sufficient for the work.
As the competition grew fiercer, the required power also rose. Today, we need industrial-level equipment, subsidized electricity, and Application-Specific Integrated Circuits (ASICS) computers such as Antminer S21 or Whatsminer M60 to mine $BTC. These computers are 150 to 200 times more powerful than the most powerful gaming PCs!
Why Miners Spend Time and Energy
Miners add new blocks to the blockchain to get two kinds of rewards. First, they get new $BTC, each of which costs over $106,000 currently. Then they get transaction fees from the network. This incentive keeps miners motivated more and more of whom keep joining the network to keep it secure and active. Since entire network runs on a consensus mechanism, we use the term Proof-of-work mechanism for it.
Simultaneous Blocks and Forks
It may happen that two nodes add blocks at the same time. Since every block has a time stamp, only one of the two can be added. This phenomenon is called a fork. Simply speaking, a fork means that two versions of the same thing now exist on the blockchain. Again, one cannot help but admire the system when it keeps only one of the two and deletes the other. The deleted copy is the one the node of which fails to add one more block on the trot. The other node that successfully adds another block is endorsed by the network.
Light Clients
Not every node needs or wants to download and keep the entire record of all transactions from genesis block to the most recent one. This requires so much space unnecessarily. Bitcoin network solves this issue by allowing nodes to download a summary of the past transactions and then continue mining work onwards. A tool called Merkle Tree is used to check whether the proposed transaction follows the rule and whether a transaction exists on the blockchain. The idea of this tool is not new either. Bitcoin whitepaper foresaw the problem and mentioned Merkle tree which would allow keeping only the essential data for verification purposes.
Bottom Line
In a nutshell, Bitcoin has proved to be an enormous change in the modern finance world mainly by removing the intermediary form between the sender and receive of money. Due to its futuristic outlook and deflationary nature, it has rightly come to be called the digital gold.
Frequently Asked Questions
What is the main idea behind Bitcoin’s creation?
Bitcoin was created to let people send money directly to each other without banks or intermediaries. It uses blockchain technology to ensure secure and transparent transactions.
How does Bitcoin prevent double spending?
Bitcoin prevents double spending through its blockchain network, where miners verify and record each transaction. Once confirmed, a coin cannot be reused.
Why is Bitcoin called digital gold?
Bitcoin is known as digital gold because of its limited supply and deflationary nature, making it a store of value similar to gold in the digital world.
