Cryptocurrency & Bitcoin: Explained in 6 minutes
In 1983, David Chaum, an American cryptographer, laid the foundation for modern blockchain technology. He introduced the use of public-private key pairs to secure digital monetary transactions. The idea was to overcome the defects of credit card transactions. Transactions between banks and credit card merchants were not encrypted and vulnerable to hacking attacks.
David’s short-lived success triggered a massive interest in cryptography and secured digital transactions. So much so that cryptography became a threat to the US Govt.
To learn how public and private keys cryptography works in a Blockchain, check out this example video: https://youtu.be/3NyprXQwVpc.
Since its genesis, blockchain technology has gone through several tweaks and adjustments to benefit its proprietor. In 2008, it received a significant upgrade of becoming a decentralised network. This enabled a Blockchain to digitally replicate on different computers distributed worldwide and become a collective authority figure in matters of data integrity.
Currently, implemented Blockchain technology has two influential forms of application: Cryptocurrency and Non-fungible tokens. In this article, I’ll be discussing the origin story of Cryptocurrency and how it works.
Applications of Blockchain technology
The first Application- Digicash
In 1986, David Chaum founded a company called Digicash to start secured digital exchange of currency — the first-ever application of Blockchain technology. Digicash introduced Ecash or electronic cash as a digital form of money. Customers can purchase E-cash from their respective banks on 1:1 currency equivalency. Banks will encrypt E-cash with their private keys and, on receiving it- merchants can verify E-cash authenticity using the paired public key provided by the same banks. Meanwhile, all the transactions will get logged with a timestamp in a digital ledger.
In 1988, Bill Gates, founder of Microsoft, reportedly offered a $100 million to buy out Digicash, but it didn’t work.
In 1998, the company filed for bankruptcy because of a lack of interest from banks. Banks still preferred the credit card system.
The appearance of the first cryptocurrency
In 1998, Nick Szabo, cryptographer and former employee of Digicash designed a mechanism for a decentralized cryptocurrency he called — BitGold.
In theorized mechanism, Szabo eliminated the need for a central bank by replacing digital cash with cryptocurrency. Unlike digital money- cryptocurrency wasn’t a token for money, it was actual money.
In BitGold blockchain, each peer would have to dedicate computer power to solving cryptographic puzzles. Puzzle’s solution has to reach a majority consensus among all the peers before it can generate a new puzzle. The first one to solve the puzzle will receive a BitGold on their public key.
Though it was never implemented but has been called “a direct precursor to the Bitcoin architecture.”
What is a Bitcoin?
Bitcoin is a digital cryptocurrency, first of its kind, a reward for successfully adding data to a data block in the public Blockchain — Bitcoin Blockchain.
A digital Cryptocurrency is just like any other existing national currency- the difference is:
- It has no physical manifestation, like paper notes or coin.
- Central banks do not regulate the value of cryptocurrency.
In 2008, Szabo’s BitGold design was implemented as a public Blockchain called Bitcoin. Since it was unrestricted- everyone could store or mine data on this Blockchain. On successful mining- 1 Bitcoin was awarded. Bitcoin value was unregulated and determined purely based on laws of demand and supply.
Currently, Bitcoin cryptocurrency is trending worldwide. Since 2018, governments of countries have recognized cryptocurrency as a legitimate form of currency. All transactions are secured and logged in an immutable blockchain, this discourages money laundering. However, only a few crypto currencies are declared acceptable- Bitcoin is one of them.
1 Bitcoin currently trades at 57624.00 USD. To know more about the economics of cryptocurrency, check out my other blog: coming soon.
How to get a Bitcoin?
At a time in a public blockchain network there are n numbers of peers, but to add new data to a data block only a percentage of peers are selected. These peers are then called miners.
The basis of selection is the computing capacity of a peer. Once new data entry is requested- miners will have to individually solve the ‘difficulty target’ or cryptographic puzzle set by Blockchain algorithm before they can successfully add new data to the block. First miner to solve the puzzle is rewarded.
It takes a very strong hardware support with fast computing power to mine a high trading cryptocurrency. The best mining CPU currently costs more than 3000$.
Check out this example video to understand how miners add new data to a data block : https://youtu.be/lgeiQHk5ClI.
Blockchain sends solved puzzles to the Byzantine fault-tolerant public registry ; built inside it. Each solution would become part of the next puzzle for validating a growing chain of new data blocks. This aspect of the system provides a way for the Blockchain network to verify and time-stamp new rewards.
BFT ( Byzantine fault-tolerant) system takes its name from an allegory, the “Byzantine Generals Problem”. In this, every miner will have to submit their solution to the puzzle in time interval of 10 minutes and until 50% of them individually arrive at the same solution puzzle is not considered solved.
The above-discussed process is also called Proof of work (PoW). In public blockchains, one way of keeping hackers away from joining the network is PoW. In order to compete, the hackers will have to invest in multiple expensive hardware and supporting infrastructure for fastest computing power and to gain control of 50% blockchain.
Due to high capital cost involved in PoW — Ethereum, second-largest public Blockchain network by both market capitalisation and daily trading volume uses Proof of stake (PoS). PoS requires miners to stake their 1 ETH coin to become a validator in network. 1 ETH currently trades at $2073.
Another way of getting a Bitcoin or any other cryptocurrency is to buy them on exchange portals. Cryptocurrency is a fungible token which means we can trade it for another object. Example: cryptocurrency exchanges offer popular cryptocurrency for local currencies. The exchange rate is relative and volatile.
Luxury car companies like Nisaan, Tesla, BMW now accepts Bitcoin payments.
Do you know other form of Blockchain which rewards user with non-fungible tokens. Checkout my other blog on CryptoArt and NFT.
There are only 21 million Bitcoins that can be mined in total. At present, 18.5 million Bitcoins are already mined and of which 17.5 million are in circulation. 1 million Bitcoins are owned by the creator of Bitcoin- Satoshi Nakamoto.
The Bitcoin mining process rewards miners with a chunk of bitcoin upon successful verification of a block. This process adapts. When bitcoin first launched, the reward was 50 bitcoins. In 2012, it halved to 25 bitcoins. In 2016, it halved again to 12.5 bitcoins. As of February 2021, miners gain 6.25 bitcoins for every new block mined. This effectively lowers Bitcoin’s inflation rate in half every four years.
The reward will continue to halve every four years until the final bitcoin has been mined. In actuality, the final bitcoin is unlikely to be mined until around the year 2140. However, it’s possible that the Bitcoin network protocol will be changed between now and then.