Digital Currency is not made of gold, or platinum, or any precious metal, which means it only exists electronically. In fact, it’s not the kind of coin you can hold in your hand or stick in a piggy bank. Basically, this writing describes about Bitcoin as the world’s first crypto currency. The Bitcoin doesn’t work like most money. It isn’t attached to a state or government, so it doesn’t have a central issuing authority or regulatory body. Basically, that means there’s no organization deciding when to make more bitcoins, figuring out how many to produce, keeping track of where they are or investigating fraud. The Bitcoin exists with a whole network of people and a little thing called cryptography.
The Bitcoin is the fully digital currency and you can exchange bitcoins between computers in a worldwide peer-to-peer network. The whole point of most peer-to-peer networks is sharing stuffs but the Bitcoin isn’t a string of data that can be duplicated. The Bitcoin is actually an entry on a huge, global ledger called the Blockchain. The blockchain records every bitcoin transaction that has ever happened. And, at the late February 2018, the complete ledger is about 158 gigabytes of data. So, when you send someone bitcoins, it’s not like you’re sending them a bunch of files. Instead, you’re basically writing the exchange down on that big ledger.
Even though the blockchain is a central record, there’s no official group of people who update the ledger and keep track of everybody’s money like a bank does, hence it is decentralized also. Anybody can volunteer to keep the blockchain uptodate with all the new transactions. Thousands of people keeping track of the same thing, to make sure all transactions are accurate. Practical analogy of ledger in bitcoin is similar to notebooks on playing poker.
Imagine that you are playing the game of poker with some pals, but none of friends have poker chips. There’s no money on the table, so a few of you get out some notebooks, and start writing down who bets how much, who wins and who loses. You don’t completely trust anyone else, so everyone keeps their ledgers separately. And at the end of every hand, you all compare what you’ve written down. In this way if someone makes a mistake, or tries to cheat and snag some extra money for themeselves, that discrepancy is caught. After a couple hands, you might fill up a page of your notebook with notes about the money movement. Each page on poker playing is equivalent as a block of transactions in the Bitcoin. To stick with our poker analogy: think of the entire bitcoin peer-to-peer network as a really huge poker table with millions of people. Some are just exchanging money, but lots of volunteers are keeping ledgers. So when you want to send or receive money, you have to announce it to everyone at the table, so the people keeping track can update their ledgers. So for every transaction, you’re announcing a couple of things to the bitcoin network: your account number. the account number of the person you’re sending bitcoin to and how many bitcoins you want to send. And all of the users who are keeping copies of the blockchain will add your transaction to the current block. Having a bunch of people keep track of transaction seems like a pretty good security measure.
Specifically, bitcoin stays secure because of keys, which are basically chuncks of information that can be used to make mathmatical guarantees about messages. When you create an account on bitcoin network, which you might have heard called a ” wallet ” that account is linked to two unique keys: a private key and a public key. In this case, a private key can take some data and basically mark it, also known as signing it, so that other people can verify those signatures later if they want. Everyone keeping track of all the bitcoin tranding known to add my transaction to their copy of the blockchain. In other words, if the public key works, that’s proof that the message was signed by my private key and is something I wanted to send. Unlike a handwritten signature, or a credit card number, this proof of identity isn’t something that can be faked by a scam artist. The owner part of each transaction is obviously important; to make sure the right people are swapping bitcoins. But the time instance matters, as well.
If you had a thousand dollars in your bank account, for example, and tried to buy two things for a thousand dollars each, the bank would honor the first purchase and deny the second one. If the bank did not do that, you would be able to spend the same money multiple times. A financial system can’t work like that, because no one would get paid. So if I only have enough money to pay only one thing, but I try to pay them both, there’s a check built into the bitcoin system. Both the Bitcoin network and your wallet automatically check your previous transactions to make sure you have enough bitcoins to send in the first place. Network delays is another problem that might happen with timing. Because lots of people are keeping copies of the blockchain all over the world, network delays mean that you won’t always receive the transaction requests in the same order. So now you’ve got a bunch of people with a bunch of slightly different blocks to pick from, but none of them are necessarily wrong. This is a math problem and solve by a special kind of math problem created by a cryptographic hash function. A hash function is an algorithm that takes an input of any size, and turns it into an output with a fixed size. The hash function that bitcoin uses is called SHA256, which stands for Secure Hash Algorithm 256 bit (SHA256). And it was originally developed by the United States National Security Agency. Computers that were specifically designed to solve SHA256 hash problems take, on average, about ten minutes to guess the solution to each one. That mean they are churning through billions and billions of guesses before they get it right. Whoever solves the hash first gets to add the next block of transactions to the blockchain which then generates a new math problem that need to be solved. If multiple people make blocks at roughtly at the same time, then the networks picks one to keep building upon, which becomes the logest and most trusted chain. And any transations in those alternate branches of the chain get put back into a pool to be added onto later blocks. These volunteers spend thousands of dollars on special computers built to solve SHA256 problems, and run their electricity bills up sky high to keep those machines running.
The Bitcoin has a built-in system to reward them. Nowadays every time you win the race to add a block to the blockchain, 12 and a half new bitcoins are created out of thin air, and awarded to your account. The bitcoin ledger keepers are known by another name: miners. That’s because keeping the blockchain updated is like swinging a proverbial pickaxe at those hash problems, hoping to strike it rich. When bitcoins were first created in 2009, they didn’t really have any perceived value. Tens of bitcoins would have been worth the same as a bunch of pennies. As of February 23th, 2019, though, one bitcoin is worth 4000 US dollars. So 12 and a half bitcoins are worth 50,000 dollars. That was a nice chunk of change, every single bitcoin that exists was created to reward a bitcoin miner.
Beside the big payout when they add a new block of transactions, miners are also essentially tipped a very small amout for each transaction they add to the ledger. It’s also worth noting that every 210,000 blocks, the number of coins generated when a new block is added goes down by half. So what started as a reward of 50 bitcoins decreased to 25, then 12 and a half? It’ll only be around 6 bitcoins in a couple more years and keep decreasing. Eventually, there will be so many transactions in a block that it’ll still be worthwhile for miners to mostly be paid in tips. This decreasing number of bitcoins is actually modeled off the rate at which things like gold are dug out of the earth. And the idea is that keeping the supply of bitcoins limited will raise their value over time. Bitcoin is still volatile, and experimental. A lot of people love it, and a lot of people think it’s doomed to fail.
Source: Nepal Telecommunications Authority