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Crypto Classroom Lesson #1: Bitcoin (BTC)

The Creation of Bitcoin

Bitcoin was created by Satoshi Nakamoto in early 2009. In wake of the 2008 financial crisis, Satoshi saw the need for a new kind of money. The current financial system relies almost exclusively on trusted third parties to process payments. Middlemen are required to mediate disputes, which lead to expensive fees and slow processing. Satoshi hoped to create a decentralized peer-to-peer payment system with no reliance on central authorities.

How does it work?

1. When transactions are initiated, it contains information of the sender, the recipient, the transaction amount and a digital signature.

2. The user will generate two keys. The digital signature is signed with the sender’s private key and the public key is available to other nodes to verify the signature.

3. When a transaction is signed, it will be sent to a pool of unconfirmed transactions called a mempool (memory pool). The transactions will be picked by miners and put into the next block.

4. Miners validate blocks by solving mathematical problems i.e. hash function. The first miner to solve the problem will receive a block reward paid in Bitcoins.

The hash identifies a block and is dependent on the transactions within. Any changes to the transactions will cause the hash to change completely and be rejected by the rest of the network. This brings immutability to the history of transactions.

5. Miners will broadcast the solved hash (i.e. his ‘proof of work’) to other nodes in the network. When other nodes verify and agree on acceptance, a consensus is reached.  Nodes express acceptance by working on the next block.

Why is Bitcoin Decentralized?

There is no centralised authority in the Bitcoin network. The blockchain ledger is distributed across nodes all over the world and is open for anyone to view. The Bitcoin network is a peer-to-peer network where nodes reach consensus collectively. Risks of data tampering and data loss are mitigated.

Why is Bitcoin Secure and Immutable?

As a digital currency, bad actors may attempt to double-spend. Bitcoin’s network solves this problem by timestamping transactions.

Each block contains a hash of itself and the hash of the previous block. If a bad actor attempts to tamper with a transaction in the past, the hash of the blocks will change completely. The block will thus be rejected by other honest nodes.

Features

– Block size: 1MB
– Average block time: 10mins
– Consensus algorithm: Proof-of-Work (SHA-256)
– Supply limit: 21,000,000 BTC

 

Written by Peter Chan
Trader @Genesis Block
For any queries please contact [email protected]