The Summary

“We have proposed a system for electronic transactions without relying on trust. We started with the usual framework of coins made from digital signatures, which provides strong control of ownership, but is incomplete without a way to prevent double-spending. To solve this, we proposed a peer-to-peer network using proof-of-work to record a public history of transactions that quickly becomes computationally impractical for an attacker to change if honest nodes control a majority of CPU power. The network is robust in its unstructured simplicity. Nodes work all at once with little coordination. They do not need to be identified, since messages are not routed to any particular place and only need to be delivered on a best effort basis. Nodes can leave and rejoin the network at will, accepting the proof-of-work chain as proof of what happened while they were gone. They vote with their CPU power, expressing their acceptance of valid blocks by working on extending them and rejecting invalid blocks by refusing to work on them. Any needed rules and incentives can be enforced with this consensus mechanism.”

(taken from the whitepaper)

The Problem

Money. 

The evolution of money seems to be the problem that bitcoin aims to solve. Exchange of value has evolved from barter to precious metals to early promissory notes to currency notes to credit cards to digital money.

While digital money eliminates most of the problems that ail money including unlimited supply, counterfeiting, non-fungibility among others, it still relies on a trust based system. In a trust based system, a bank or a business or a similar organization is always needed to eliminate fraud. The absence of a bank to check the balance of the sender will lead to a situation where an individual is sending money that they don’t hold or own. A sender may also spend the same money multiple times. 

The Solution

‘Peer-to-peer network using proof-of-work’

Whenever you send money from your bank account to another bank account, your bank first checks if you are authorized to send the money and it then checks if you have enough balance in your account to send the money. Finally, the transactions are recorded in a private ledger held by the bank.

This is exactly what bitcoin proposes to do using proof-of-work and a distributed public ledger system.

Whenever a bitcoin is spent, the following actions happen

1. A timestamp, with timestamp information from the previous spend, is attached to the spend. This creates a ‘chain’ in terms of the spend information
2. Whichever chain is accepted by the majority of the ‘nodes’ (computers with ‘bitcoin software’ and connected to the internet) becomes the history of the coin, thus , eliminating the chances of empty spend and multiple spend
3. New transactions are broadcast to all nodes. 
4. Each node collects new transactions into a block(a block is a 1MB data structure that holds the transaction details)
5. Each node works on finding a difficult proof-of-work(a complex ‘puzzle’ that a node needs to solve in order to have its block published to the Blockchain) for its block.
6. When a node finds a proof-of-work, it broadcasts the block to all nodes.
7. Nodes accept the block only if all transactions in it are valid and not already spent.
8. Nodes express their acceptance of the block by working on creating the next block in the chain

The node whose block was accepted into the chain gets what is known as ‘block reward’. Block reward was 50 BTC in 2009 and is 6.25 BTC in February 2022. This process of getting the ‘block reward’ is known as ‘mining’. This is the process that creates new bitcoin. 

The presence of every single transaction ever to have taken place on nodes across the world is what us the distributed public ledger.

The Timeline and the Economics

There are community driven technical milestones that need a deeper understanding of the technology involved and hence, are treated as separately. For the purpose of understanding the concept of bitcoin, ‘bitcoin halving’ or ‘reward halving’ is the most important milestone.

Since 2009, there have been 3 ‘bitcoin halvings’. It has been so coded that after every 2,10,000 blocks, the ‘block reward’ is halved. 

So, the reward for publishing a block from block 1 to block 2,10,000 was 50 BTC per block while it was 25 BTC per block from block 2,10,001 to 4,20,000 and it was 12.5 BTC per block from block 4,20,001 to block 6,30,000. As on February 2022, the 3rd halving cycle is in progress, where from block 6,30,001 to block 8,40,000 the reward will be 3.25 BTC per block. Theoretically, around the year 2,140 is when the block reward will tend to 0. By this time, 2,10,00,000 BTC would have been mined and that will remain the maximum supply of bitcoin.

The 1st halving happened on 28th November, 2012- block reward halved from 50 BTC to 25 BTC

The 2nd halving happened on 9th July, 2016- block reward halved from 25 BTC to 12.5 BTC

The 3rd halving happened on 11th May, 2020- block reward halved from 12.5 BTC to 6.25 BTC

The 4th halving is expected to happen in early 2024 when the block reward will be halved from 6.25 BTC to 3.125 BTC.

Every time a transaction is made, the sender is charged a small of amount of bitcoin that is paid to the ‘miners’ as an incentive for participating in the network. 

The Team

Bitcoin was envisioned by the enigmatic, pseudonymous Satoshi Nakomoto- an online entity that went radio silent after one final message on 12th December, 2010. 

Bitcoin does not have an organization that takes care of its development. It is truly decentralized in that sense. Just like any open source project, developers from across the world contribute to improve bitcoin. They cannot force any changes to the software as every individual is free to use the version they prefer. There is, however, an incentive for users to ‘agree’ on using a certain version as it is this agreement or ‘consensus’ among the participants that makes bitcoin work better.

Link to the whitepaper: Click here

Disclaimer: The above content is non-editorial, and BCCL hereby disclaims any and all warranties, expressed or implied, relating to it. Crypto/NFTs are unregulated, highly risky, and there may be no regulatory recourse for any loss from such transactions. Readers to exercise caution/due diligence, and comply with all applicable laws, including, but not limited to, taxation laws. Above content does not constitute investment advice nor promotes, suggests, or presents Crypto/NFTs to solve financial difficulties/achieve financial security/act as an alternative to employment/income opportunity.