Bitcoin. Everything you need to know about the first crypto

Conditions for the development of a decentralized digital currency

Representatives of progressive humanity have never tolerated any attempts to usurp power under the guise of a monarch's or feudal lord's sole “right” at all times and in all places. This holds true for both the “monopoly on violence” and the collection of taxes and the emission of money. Having the sole authority to mint coins, tsars, kings, and sultans appeared to compete with one another during the Middle Ages by ruthlessly forging their emission.   Treasurers, paymasters, and monarch’s mints, at the request of their lords, systematically reduced the value of silver or gold while keeping the same weight.

Later, the issue of money shifted to governments and central banks. The majority of fiat currencies were pegged to gold until the middle of the 20th century; this policy, known as the “gold standard,” balanced the interests of all parties. Banknotes were regarded as having real gold backing at the time because their owner could exchange them for a specific amount of the precious metal at their discretion. But after 1957, all countries de facto stopped supporting the gold standard, and fiat currencies effectively became “paper,” monopolized by governments as “money” with no backing. The fragile equilibrium between the monopolistic issuers' interests and those of money owners was totally destroyed. 

Many people on the planet did not like that situation. They started to band together in specific clubs, movements, communities, and even political parties in search of a new type of “fair money” that would not belong solely to governments, mints, and minting facilities, where corruption has always thrived. This movement gained the most popularity in the 80s and 90s of the 20th century with the introduction of personal computers and the Internet. Communities of like-minded people calling themselves cypherpunks, crypto-anarchists, libertarians, and anarcho-capitalists began experimenting with new versions of programmed money after adopting programming languages and cryptographic algorithms.

The emergence of Bitcoin

Unfortunately, the initial experiments failed. The 1980s saw the creation of DigiCash, the 1990s saw the creation of E-gold and Bit Gold, and the 2000s saw the creation of Liberty Reserve. However, these and other projects from that era were either unable to launch fully, failed to catch on, or were forcibly shut down by law enforcement for fanciful reasons.

Late 2008 marked the turning point. A developer going by the alias Satoshi Nakamoto announced to the public the creation of a new digital currency that would never be owned by mints or governments. He stated that while this “cryptocurrency” has a limited supply, anyone can participate in its development. Yes, anyone could create a new decentralized currency called “Bitcoin”—and it was revolutionary! Bitcoin became the ideal solution for millions of people who did not want to be held captive by government monopolies and untrustworthy paper money.

Bitcoin creator

Nobody is certain of the identity of the person who went by the alias Satoshi Nakamoto. Despite our efforts, we were unable to identify the most likely candidate. It turns out that many people consider themselves the creators of Bitcoin for a variety of reasons. It also may be a group of like-minded cypherpunks rather than just one person. “Bitcoin: a peer-to-peer electronic cash system,” which is actually a “white paper” of the cryptocurrency, was published by Satoshi Nakamoto on October 31, 2008. In early January 2009, they publicly released the wallet software and nodes and launched the Bitcoin network on GitHub.

Section of the “Bitcoin” project at GitHub, which houses open-source cryptocurrency software.

Bitcoin became a form of digital currency on January 12, 2009, when the first transfer between wallets in the amount of 50 BTC was made, after the network's first block was created on January 3, 2009. The identity of the true creator of Bitcoin (or a group of people) has remained a mystery ever since Satoshi Nakamoto started to show less and less activity over time, eventually vanishing from the information space in mid-2010. 

Blockchain

All Bitcoin network transactions are recorded in a distributed data ledger known as a blockchain, the full version of which is stored by all full nodes deployed by their owners to ensure the global Bitcoin network's operation. A blockchain is made up of a series of blocks that are linked together in a chain. The Proof-of-Work (PoW) consensus algorithm ensures the fairness of the emission, the distribution of rewards to miners, and the network's security.

Block

The Bitcoin network generates a new block once every ten minutes. The new block contains all the information about the previous one, so data synchronization in blocks is supported. Each block is limited to 1 MB in size. The Bitcoin network can handle 7–10 transactions per second under these circumstances.

Nodes

Nodes are responsible for validating transactions and verifying blocks, and they work round-the-clock to keep the network running smoothly. They protect the security and integrity of the network by rejecting suspicious transactions without allowing them to enter the block if any violation or attempt at unauthorized data change is discovered.

Mining

Mining is necessary for the emission of coins. Mining requires the use of specialized equipment that is connected to the node. It ensures the calculation of complex SHA-256 hash functions to create a block using the PoW algorithm. The more powerful the hardware is, the higher the chance to create a block and thus receive a reward of 6.25 BTC (at press time), as well as commissions from all transactions that get there. The process of reducing the miner's reward in half is called halving. It takes place approximately once every four years, after every 210,000 mined blocks. The next halving will occur in 2024, and the reward will already be 3.125 BTC per mined block. 

Home computer mining is a thing of the past; ASIC is the specialized equipment that is currently used for Bitcoin mining. Previously, The Coinomist wrote about the most productive ASIC devices in the market. Mining can be done both solo and in a mining pool. The first option entails a protracted waiting period before having the chance to receive a sizable reward, while the second entails the regular receipt of a modest reward. 

The maximum number of bitcoins that can be issued (mined) is 21 million. Over 92%, or 19.2+ million BTC, have been issued so far. The established algorithm predicts that the final Bitcoin will be mined in 2140.

Low scalability and network bandwidth issues

The blockchain trilemma, also known as the scalability trilemma, is a theorem that expresses the primary scaling issue of any decentralized distributed network as a specific formula. It is the belief that blockchain can only accomplish two out of the following three goals—security, scalability, and decentralization—at a time. Bitcoin maximalists reject all alternatives to the idea that decentralization is a blockchain's most crucial feature, and hold it to be so in all cases.

As a result, over 14 years, numerous solutions that were intended to mitigate the effects of the blockchain trilemma have emerged. Among these solutions were SegWit (block optimization), Lighting Network (instant transactions with low fees), and various sidechains (a separate, more productive L2 blockchain that collaborated with the parent blockchain L1, offering new services or certain improvements in terms of transaction speed or fee cost).

Wallets, exchanges, exchange points, OTCs, and global Bitcoin support

Bitcoin is supported by 99.9% of wallets. Finding a solution without such support is challenging, except for native wallets that serve the crypto assets of a particular ecosystem. Every single exchange, centralized (CEX) and decentralized (DEX), supports Bitcoin in all conceivable currency pairs and offers the option to buy or sell it. All exchange points support Bitcoin. Because it is the most popular cryptocurrency, you can buy and sell it almost anywhere. The over-the-counter (OTC) market also works with Bitcoin.

Bitcoin explained in simple words

In fact, among all existing electronic payment systems, the Bitcoin cryptocurrency has emerged as the best decentralized solution. It has been able to provide an investment tool and cross-border transfer service without any intermediaries (leaving greedy banks and corrupt government officials with nothing) and at low commissions, particularly through the use of the Lightning Network.

It should be noted that Bitcoin emerged as a result of the evolution of several generations of “free people's money” and incorporated the flaws of previous solutions that were never successful or widely adopted.  

Bitcoin was able to solve a number of significant issues and provide the following:

• the opportunity for everyone to participate in the emission of coins with a reward;
• transaction security;
• execution of financial transactions with some level of anonymity;
• no need to trust in intermediaries or third parties, including corrupt government officials, banks, or states;
• a single global financial ecosystem independent of borders and states.