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Part 3 Bitcoin
What is Bitcoin
A cryptocurrency, such as Bitcoin (BTC), eliminates the need for a third party to be involved in financial transactions by acting as money and a means of payment independent of any person, organization, or entity. It is available for purchase on multiple exchanges and is paid to blockchain miners in exchange for their efforts to verify transactions.
An unidentified creator or group of developers going by the pseudonym Satoshi Nakamoto released Bitcoin to the world in 2009 through the publication of a white paper.
Since then, it has emerged as the currency with the most global recognition. Many additional cryptocurrencies have been created as a result of its success. These rivals either want to displace it as a means of exchange or are employed as utility or security tokens in other blockchains and cutting-edge financial systems.
With that, let us dive deeper and learn more about Bitcoin.
Origin of Bitcoin
In August 2008, the domain name bitcoin.org was registered. At least as of right now, this domain is protected by WhoisGuard, making the name of the person who registered it anonymous. In October 2008, a person or group posting under the fake name Satoshi Nakamoto said on the Cryptography Mailing List at metzdowd.com: “I’ve been working on a new electronic payment system that’s fully peer-to-peer, with no trusted third party.” The now-famous white paper “Bitcoin: A Peer-to-Peer Electronic Cash System,” which was published on Bitcoin.org, would later serve as the foundation for how Bitcoin operates today.
How Bitcoin Works
Block 0—the very first Bitcoin block—was mined on January 3, 2009. This is sometimes referred to as the “genesis block” and contains the text: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks,” which may serve as both pertinent political commentary and as evidence that the block was mined on or after that date.
For every 210,000 blocks, bitcoin payouts are half. For instance, in 2009, the block reward was 50 brand-new bitcoins. The third halving took place on May 11, 2020, reducing the reward for finding a block to 6.25 bitcoins.
The smallest unit of a bitcoin, which is divisible to eight decimal places (100 millionths of a bitcoin), is known as a satoshi. Bitcoin might someday be divided to even more decimal places if necessary and if the active miners agree to the move.
Understanding Bitcoin as a type of digital currency isn’t that difficult. For instance, if you have a bitcoin, you may transmit smaller amounts of that bitcoin to pay for goods or services using your cryptocurrency wallet. However, when you attempt to grasp how it operates, it gets really difficult.
Cryptocurrencies are elements of a blockchain and the network that supports it. A distributed ledger, or blockchain, is a shared database where data is kept. To protect data within the blockchain, encryption methods are utilized. When a transaction happens on the blockchain, the previous block’s content is moved to a new block containing the new data, encrypted, and the transaction is confirmed by network validators known as miners. When a transaction is validated, a new block is established, and a Bitcoin is created as a reward for the miner(s) who verified the data within the block—this Bitcoin can then be used, held, or sold.
Transactions are placed in a queue to be verified by network miners. The Bitcoin blockchain network’s miners all attempt to validate the same transaction at the same time. The mining software and hardware work together to solve the nonce, which is a four-byte value in the block header that miners are attempting to solve. A miner hashes, or randomly generates, the block header until it hits a goal number provided by the blockchain. The block header is “solved,” and a new block emerges from encrypted and validated transactions.
How to get Bitcoin
Bitcoin is easy to come by when you have the resources and expertise. There are two ways to acquire Bitcoin:
Bitcoin may be mined using a variety of devices and software. When Bitcoin was originally launched, it was feasible to mine it on a home computer in a competitive manner. However, as it grew in popularity, more miners joined the network, reducing the chances of being the one to solve the hash. You can still mine with your computer if it has modern hardware, but your odds of solving a hash individually are extremely low.
This is because you are competing with a network of miners that create around 220 quintillion hashes (220 exa hashes) each second.
Machines designed exclusively for mining, known as Application Specific Integrated Circuits (ASICs), can create around 255 trillion hashes per second. A machine with the most recent hardware, on the other hand, hashes roughly 100 mega hashes per second (100 million).
There are various ways to become a successful Bitcoin miner. You may use your existing computer to run Bitcoin mining software and join a mining pool. Mining pools are groups of miners that pool their processing resources to compete with huge ASIC mining farms.
If you have the funds, you might also invest in an ASIC miner. A new one costs roughly $20,000 or KShs 2.5 million, although older ones are also sold by miners when they improve their systems. If you buy one or more ASICs, you must factor in substantial expenditures such as energy and cooling.
There are several mining programs to pick from, as well as numerous pools to join. CGMiner and BFGMiner are two of the most well-known apps. When selecting a pool, make sure to investigate how they distribute rewards, and what fees may apply, and read some mining pool reviews.
Proof of work versus Proof of Stake
Bitcoin uses proof of work, while Ethereum uses proof of stake.
The proof of work consensus technique employs tough challenges that miners utilize high-powered computers to solve. The ability to add new blocks to the blockchain for transactions is granted to the first miner who completes the problem or cryptographic equation. A proof-of-work system needs fast computers that consume a lot of energy. The chain can fork, which means that the community modifies the protocol and the chain splits into two chains. Miners can choose to support the original network or the newer forked network.
The proof-of-stake mechanism was created as a replacement for proof of work. Miners make a digital currency investment before confirming transactions with proof of stake. Miners must stake their currencies to validate blocks. The decision on who validates each transaction is made at random using a weighted algorithm that is weighted depending on the stake and validation experience.
According to the University of Cambridge, Bitcoin consumes about 39% of the world’s yearly electrical production. Bitcoin mining consumes more power per year than Finland and Belgium combined. According to the Ethereum Foundation, this move will consume 99.95% less energy. Instead of miners solving hard challenges, the proof of stake network selects validators at random and does not have complex puzzles that require high-energy input. Because of this feature, proof of stake is a superior environmental choice.
If you do not wish to mine bitcoin, you may purchase it through a cryptocurrency exchange. Most individuals will be unable to acquire a complete BTC due to its high price, but you may purchase chunks of BTC on these exchanges in fiat money such as US dollars. For example, on Coinbase, you may purchase bitcoin by opening an account and financing it. Your bank account, credit card, or debit card can all be used to finance your account.
The Problem with Bitcoin
There have been various complaints regarding bitcoin, notably that the mining mechanism consumes a significant amount of electricity. The University of Cambridge has an online calculator that measures energy use, and it was anticipated at the start of 2021 that it will use more than 100 terawatt-hours per year. In comparison, the United Kingdom consumed 304 terawatt hours overall in 2016.
Critics have also connected cryptocurrencies to criminality, pointing out that it is an ideal tool to conduct black market transactions. In actuality, the currency has served this purpose for millennia, and the public ledger of bitcoin may be used by law enforcement.
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