Bitcoin Part 1

Bitcoin is a digital currency that came in existence in 2008. Although other digital currencies existed prior to bitcoin, it was the first currency to become success. Since then, the digital currency market is flooded with a lot of variations of cryptocurrencies. At the time of writing this article, there are roughly 3000 cryptocurrencies in the market.

In October 2008, a researcher/group of researchers with a pseudo-name “Satoshi Nakomoto” released a white paper called ” Bitcoin: A Peer-to-Peer Electronic Cash System“. It contained the protocol that supervise the bitcoin cryptocurrency. The paper briefs about the structure of bitcoin and the functioning of the currency. It was so revolutionary document which started an era of digital currencies. The document came at the time of great recession of 2008. At that time people had lost trust in banks and central authorities handling their money. Bitcoin provided a promising alternative to this problem. It introduced a peer to peer electronic currency without a central authority to govern, authorize, validate and regulate the flow of currency. It was like a true democratic currency which was created by the users and for the users. Bitcoin shook the financial market in coming years and rapidly gained its popularity.

What made bitcoin a success?

Three words- Blockchain and Proof-of-Work. Bitcoin is a true decentralized peer to peer digital currency. It is built on top of blockchain which is a used to store, organize and retrieve data in the network. Blockchain is basically an immutable ledger to store information and works like a linked list data structure. A blockchain as the name indicates, is a chain of block and each block will hold some data. Each block is connected to it’s previous block using cryptographic hashes. The cryptographic is a function of the data inside the block, address of the block and hash of previous block.

All transactions in bitcoin network is timestamped and broadcasted on best effort basis. These transactions are hashed on to the chain by using Proof of Work (PoW). PoW is a computational puzzle that needs to be solved for appending a block (that contains transactions) on to blockchain. The hash of generated block must have set number of zeros at the beginning. To achieve this, a field in the block called “nonce” is incremented every time until it meets the condition and append the newly created block to the blockchain.

Nodes compete each other to solve this puzzle. You might think, why do nodes compete each other to solve thee puzzle. This is where the incentive comes in play. Whenever a new block is created, new bitcoins are generated. The whole process is called as mining and the nodes that compete each other are called as miners. Miner that solves the puzzle not only gets to add the block to the chain, but get bitcoins as reward.

Mining process

The next question that rise would be, how much bitcoins can be mined at a time? Who decides it? The network itself decides the incentive. It takes around 10 minutes to create a block. At its inception, bitcoin network rewarded 50 newly mined bitcoins per block created. And for every 210,000 blocks added to the blockchain, the incentive gets half. Currently 12.5 bitcoins are generated per block and 86% of the bitcoins are already mined. This is because, the network can produce only 21 million bitcoins. This regulates the supply of bitcoin. The bitcoin network uses decreasing-supply algorithm which approximates the rate to which gold and other commodities are mined. The thought behind this calculation is to make an advantage that has a characteristic rarity. Like valuable metals it is getting progressively hard to mine it until arriving at this supreme cutoff.


Bitcoin uses blockchain in which blocks can only be appended to the chain. We cannot edit or delete blocks from the chain. If a malicious node somehow edit information in a block in the blockchain, the hash of the block will change. The PoW needs to be recalculated for the block and for all other blocks succeeding the edited block. This is computationally heavy task.

Bitcoins operate on a distributed peer to peer network. Every node is connected to all other nodes and will have the same copy of the blockchain in bitcoin network. When a block is added to the blockchain, it is updated on every node as the nodes are synchronized with each other. When a malicious node tries to change blockchain in one node, it will not match the copies on other nodes. Because of this, the network discards the edited blockchain. If a malicious attacker needs to edit the chain, then it should have at least 51% of the computational power of the bitcoin network. This makes bitcoin immutable ledger.

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