What Is Bitcoin? Explanation By Analogy

Written by on December 29, 2021 in Investing and Insurance with 0 Comments

The first cryptocurrency that has been in operation since January 2009. It is based on blockchain technology and cryptography. It was developed by an anonymous creator hiding under the pseudonym Satoshi Nakamoto. Within a decade, bitcoin has made its way into the financial mainstream as a full-fledged financial asset with unmatched long-term returns, as well as a full-fledged currency in Japanese オンラインカジノ. How does this cryptocurrency work? We invite you to read on.

The genesis of bitcoin dates back to October 2008. Someone signing himself as Satoshi Nakamoto published a 9-page document online at the time entitled: “Bitcoin: A Peer-to-Peer Electronic Cash System”. It's a brief outline of how the alternative payment system works. Because bitcoin is precisely a payment system and a unit of account in one. Nakamoto wanted people to be able to use a digital medium of value that was not dependent on any central entity in the form of a bank or payment company. It was to be a cross-border means of payment that anyone wishing to do so could access from a smartphone, with its value dependent on the play of supply and demand rather than the monetary policy of a central bank or government. Such a practical implementation has proved possible through the use of programming, blockchain technology and cryptography. Bitcoin was launched in 2009 and continues to operate today. To best understand its model of functioning it is worth comparing it to the banking system. It turns out that the solutions used in the cryptocurrency system have their equivalents in banking.

Blockchain, or ledger

The heart of bitcoin is the blockchain. This is the database in which all transactions carried out with bitcoin are recorded. This database takes the specific form of a chain of blocks. The blocks store information about transactions made with bitcoin in a given unit of time. Each block has the same limited storage capacity, so when it gets full it is added to the chain. In the bitcoin network, this happens on average every 10 minutes and the chain gets systematically longer.

Looking for an analogy to the world of banking, blockchain can be compared to a bank's ledger, which holds data on customer transactions and balances. The difference is that the bank is the sole owner of this database and keeps it on several servers. It is therefore a centralised system. The bitcoin blockchain, on the other hand, is decentralised, as the entire blockchain is stored by multiple users around the world (called nodes). Moreover, as bitcoin operates in an open source model, anyone can download such a database and become a co-creator of the system. It is enough to have enough space on the computer disk.

Miner or transaction validator

The key role in the bitcoin system is played by so-called miners. These are users who have nodes and special software with the help of which they validate transactions conducted in the network. In simple terms, they group data in blocks and connect these blocks to the chain. And here is an important point. Miners take a commission for grouping and validating individual transactions. For connecting a full block they receive an additional reward, which will be discussed below.

If we look for an analogy to the banking system, we can compare a miner to a customer service point which makes sure that our transfer is carried out correctly and that the balances of the transaction parties are updated. Of course, today this is done primarily digitally, and programmed banking systems are responsible for confirming banking transactions and updating the ledger.

Digging bitcoin, or issuing money

 As mentioned above, the block filled with data is connected to the chain and a reward awaits the miner who completes it. The reward is in the form of bitcoins, and these are brand new bitcoins, the first time they have entered the network as such a reward. Miners then compete with each other to add a block, a process commonly referred to as bitcoin mining. In practice it is guessing a digit from a very large series. This requires a lot of computing power, which is why nowadays specialised, energy-consuming processors (so-called diggers) are used for digging. The first one to guess wins the prize

The process of bitcoin mining can be compared to the process of issuing money in the traditional financial system. In the latter the central bank (or sometimes the government) is entirely responsible for this, while in bitcoin it is the result of computer-generated gamification. What is important, however, is that the target number of bitcoins is limited and there will be a maximum of 21 million of them. This is possible thanks to the so-called halving mechanism. It consists in the fact that approximately every 4 years the reward for adding a block to the chain decreases by half (at the beginning it was 50 bitcoins, then 25, etc…). So it is an automatic process of reducing the money supply in the cryptocurrency system.

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