Bitcoin is the oldest and the most widely used blokchain platform and cryptocurrency in our history. Bitcoin is fully digital, decentralized and uses computer science, cryptography and economics. Bitcoin uses a blokchain ledger technology and any of the information inside can not be deleted.
In this article, we will only talk about the history of Bitcoin. We will explain the explanations of the basic concepts in separate articles.
Bitcoin’s cultural roots are rooted in libertarian thinking and the cyberpunk movement. Bitcoin does not depend on any government, central organization, or company. It was created by Satoshi Nakamoto in 2009. He invented a decentralized, pseudonymous and trustless transaction system. Bitcoin white paper was published in 2008. This nine-page document is an initial manifesto that explains the basics of Bitcoin. At the beginning of this document, Satoshi explains the new cryptocurrency as ” A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
How Bitcoin handles these transactions without a third party’s control?
A group of computers called “nodes” reach a consensus by communicating with the Bitcoin protocol. Satoshi Nakamoto calls this protocol “Proof of Work”. This protocol is Nakamoto’s most popular creation. It is not a central authority that decides to issue money, but in bitcoin, money is produced by the bitcoin mining mechanism.
Bitcoind validation of the transaction is done and recorded by the entire network.
It is necessary to create an identity in Bitcoins with integrity. The system here is provided with public and private keys, not the identities we use in banks. Public keys are used for receiving and private keys are used for paying. Public key is needed to get money. A private key is needed to access and spend this money.
Let’s give an example to determine the probability of collision of addresses chosen by users in bitcoin. The number of addresses in Bitcoin is as much as the number of sand grains in the world. (Blockchain at Berkeley)
How do you make transactions in Bitcoin?
First, we need to understand what makes a transaction valid. We need three things to understand this.
a) Proof of ownership b) available and sufficent funds to spend c) to guarantee that no other transaction uses the same fund. To ensure this Bitcoin uses UTXO model (Unspent Transaction Output)
To understand UTXO more simply, we can compare them to piggy banks. We put the money sent to us in the piggy bank. However, when we send money, we break the piggy bank and send as much money as we want to send it through and put the rest into another piggy bank.
Every piggy bank (UTXO) created is tracked by the system. How do we keep track of the transaction history?In a decentralized system, these recording dates are kept by all computers. Every update to the distributed database the Bitcoin ledger , is a batch of transactions grouped into what are called blok. Every block with connected with the previous block. They make all together chain of blocks “blockchain”. Each block contains thousands of transactions. We update these blocks instead of updating each transaction.Every block has an update and a chain of blocks has a history. Every block also contains the information of previous block. (Blockchain at Berkeley)
The new question will be, when the new block is created, how do we come to consensus that this new block is the valid block?
The network agrees on a single version of history (or transaction record/blockchain) through proof of work. Proof of work allows the network to reach consensus without relying on a central authority.
Proof-of-Work therefore aims to make votes expensive for everyone, so that the voting power one has is based on how much computational power one has, instead of based on the number of identities.
Is Bitcoin Safe?
Yes, we’re happy to say that Bitcoin is safe… mostly.
Reason #1: Bitcoin is encrypted and secure
And not just normal, run-of-the-mill encrypted. Bitcoin is encrypted and backed with a special system called blockchain. Blockchain uses volunteers — a whole lot of them — to work together to encrypt the transactions that happen on the Bitcoin system. And in doing so, they make sure that all personal information is kept hidden away from any spying eyes, and that even if hackers do manage to get into the system, there’s nothing of value to steal.
Reason #2: Bitcoin is public
“Wait, that doesn’t sound safer” you might be thinking, but by “public”, we mean all the transactions are transparent and available to the public even if the people involved are anonymous. That means no one can cheat, scam, or otherwise fraud the system. They’re also irreversible, so once you get your Bitcoins, or sell them, no one can go and demand their money back. With Bitcoin, it’s like having thousands of people watching your wallet to make sure no one tries to steal anything.
Reason #3: Bitcoin is decentralized
Bitcoin has servers all over the world, and over ten thousand nodes keeping track of all the transactions happening on the system. And that’s important, because it means if something was to happen to one of the servers or nodes, the others can pick up the slack. It also means trying to hack into one of the servers is pointless: there’s nothing there you could steal that the other nodes and servers couldn’t prevent, unless you happen to control 51% of the nodes. A not impossible but terribly unlikely situation.
Bitcoin isn’t anonymous?
Afraid not. While Bitcoin does disguise your personal information, it doesn’t disguise the address of your wallet. That means you’re not “anonymous”, you’re “pseudonymous”, and someone could, in theory, use clues and hints to track down your personal information.
Granted, this is not an easy thing to do, but it’s not impossible. Because all the ledgers are public, if someone knew how much you spent, when, and where you spent it, they could find your transaction on the ledger and trace it back to your wallet. Once they’ve done that, they could map your spending habits, gather data on your life, and maybe even blackmail you… if you spend your bitcoins on shady things, that is!
That’s why if you do want to stay private when using Bitcoin, you shouldn’t be forthcoming with information they could use to track your purchase.
But there’s another reason Bitcoins might not be “safe” for you…