"What is Bitcoin?"

Welcome back to abitnewworld.com! In this blog post, we will be introducing the key concepts of Bitcoin in digestible manner, so that its main features and objectives are accessible to novice of the digital asset space.

So, "What is Bitcoin?"

Bitcoin is a digital currency that operates on a decentralised system, meaning it is not controlled by any government or institution. Instead, it relies on a network of computers that work together to process transactions and maintain the integrity of the currency.

Let us unpack this first snippet. Traditional currencies (such as the US Dollar, the Euros, the Japanese Yen, etc.) are issued and backed by a government or central authority, such as a central bank. The value of the currency is based on the faith and credit of the issuing authority, rather than any physical commodity such as gold or silver. With Bitcoin, rather than trusting a single entity, you are trusting a gigantic network consisting of hundreds of thousands of supercomputers. These machines all run the same version of an open source software. This leads us to the next segment:

The backbone of the Bitcoin network is a technology called blockchain, which acts as a digital ledger to record all transactions made with the currency. Each block in the blockchain contains a list of recent transactions, and once a block is added to the chain it cannot be altered. This ensures the integrity of the currency and prevents fraud or double spending.

To exchange Bitcoins with one another (i.e., to execute a transaction) such exchange of value must be broadcasted to the internet, where a many distinct Bitcoin nodes "record" the transaction, independently from one another. A Bitcoin node is a computer or server that runs the Bitcoin software, maintains a copy of the blockchain and participates in the process of verifying and recording transactions on the Bitcoin network, helping to maintain its integrity. Different types of nodes perform different functions, but all of them contribute to the overall security and health of the network. Some nodes are called "mining nodes". They perform the computational work required to add new blocks to the blockchain, and are rewarded with an ever decreasing amount of newly minted Bitcoins (a.k.a. the "block subsidy) for their efforts. In other words: Bitcoin is a trust-less network where nodes verify transactions, rather than private entities (such as banks). Miners are motivated to continue their effort because they expect that the costs of their mining operations (equipment, infrastructure, electricity, etc.) will be offset by the block subsidy, turning a profit.

FAQs

What happens if some nodes decide to change the software and run a different version of it?

By doing that, they would stop verifying (or mining) Bitcoin and would therefore leave the network. By editing the original Bitcoin code, one is generating a modified version of it, a so-called "fork". Many of these forks have been generated, but none has been able to convince a significant portion of the nodes or the miners to join this modified version.

Is it true that Bitcoin consumes a lot of electricity?

It is indeed true! Bitcoin is very computationally intensive, and it is by design! In order to protect the network from external attacks, every transaction is cryptographically secured using an algorithm called SHA256. While it is true that the amount of electricity used is considerable, due to the extreme flexibility of mining operations (location independent, easily transportable, virtually infrastructure independent), miners very often use energy sources that would otherwise go completely wasted, such as stranded hydroelectric power plants (located in remote parts of the planet, where demand is very low), or from methane flaring (deliberately burning methane originating from oil deposits in order to transform it to carbon dioxide).

In our next blog post, we will introduce some aspects of Bitcoin's history and its main purpose. Stay tuned!