Bitcoin is electronic dollars controlled by a bunch of computers that don’t need a dominating command such as a bank. In 2009¹ a person (or group) behind the nickname Satoshi Nakamoto created and released a cryptocurrency known as Bitcoin. The creation of such a cryptocurrancy birthed many others in the same line, some of which have become foundational for a little over a century now, and has inheritedBitcoin as the original, and perhaps most successful, of all cryptocurreny.
But that is exactly what Bitcoin is: extraordinary or revolutionary – at least if Snowden and Assange’s assumptions are true. This is the way that it works and what do the benefits and liabilities of it stand? In this blog post, we will attempt to answer these questions, and provide some basic introduction to Bitcoin for new users.
What characterizes bitcoins?
It is the criteria of such bitcoin use that differ from how other common monetary systems or payment methods work. Some of the most important ones are:
• Decentralization: One of those is bitcoin, because it is not under any company or other legal structures. Instead, it will have many nodes (computers), each working to approve the transactions, and preserve record space known as the blockchain. Bitcoin, first released in 2008 by an anonymous coder (going by the pseudonym Satoshi Nakamoto), uses two pieces of tech: a blockchain that keeps track of every transaction of this money substitute ever (including the original chain that Satoshi created), and a system of agreement called proof-of-work (PoW). PoW nodes are supposed to solve complex mathematical problems so they can be rewarded in bitcoins when they create new blocks. This ensures that the network can not be controlled or regulated by anyone who does not want such information to appear, and the one becomes a member.
• Limited supply: Whereas very large central bank issued fiat currencies can be slammed out as the whim dictates, Bitcoin has an intrinsic protocol which imposes a limit of 21 million coins. Satoshi Nakamoto put this into the code and we can’t adjust it. Block rewards are earned and then gradually received, because every 2100,00 blocks (that is 4 years) this amount doubles. At the end of 2140 of the Gregorian calendar we expect the last coin will be mined by twelfth generation of ASIC. This feature makes Bitcoin scarce or deflationary because with the increase in demand the value of the currency rises, and as that supply decreases.
Peer-to-peer: The point is that Bitcoin was not supposed to be a payment system, much less envisaged as one without the need of third party services or a trusted third party. In minutes, nodes confirm every transaction sent out to the whole network by anyone that wants to make one. They create the bitcoin wallet, as the code of the application active on the wallet allows an user to access his/her bitcoin (wallet) with an associated or corresponding private key. You can install the wallets either on the computer, mobile phone or specialized hardware equipment. The online platforms or services can also be availed by customers with custodial or non custodial wallet.
• Pseudonymity: Though bitcoin addresses don’t tie users to their physical identities, they do create unique user identifiers that come from their public keys. It also increases the privacy of the users, who can use their Self generated random addresses to process other transactions. However, given that transactions on the Bitcoin blockchain are pseudonymous due to the Internet, and stored in a public ledger, so to speak, any other person can be traced and tracked through them. This means that they will be able to extend their defenses so much so that they can ensure that their privacy is well taken care of for instance through the use of mixing services, VPN or Tor etc.
• Open-source: The underlying technology behind the Bitcoin is an open source program that anyone can scrutinize, amend or replicate for free. You can find the source code of Bitcoin on GitHub³ – it is possible to improve Bitcoin (or, create a new version of Bitcoin, a ‘fork’). Developers are the relevant participants of the Bitcoin system, miners is another, users is another, businesses is another, researchers is another, etc., and the channels through which we can imagine the different participants of the Bitcoin system of interacting are forums, social networks, newsletters, podcasts, etc.
What are the challenges of Bitcoin?
However, similar to any other proposal, Bitcoin usage isn’t free from a few limitations. Some of the most prominent ones are:
• Volatility: The volatility of Bitcoin is very high and can be moved by various factors like supply and demand, sentiment, news, regulations, hackings and many more because of this high volatility, Bitcoin is good for those investors and speculators with high risk tolerance, good yield. Additionally, Bitcoin’s high volatility makes which it is ill suited for its basic mediums of exchange and a unit of account inasmuch as people prefer stable money.
• Scalability: Based on the current limitation of Bitcoin network, where the current block size limit is 1 megabyte and time_taken_per_block is 10 minutes, the identified technical constraints. This has the effect of traffic jam and slow down of the block when the rate that transactions require to complete is higher than the capacity of block. As it stands currently, the only way users can get into the next block is if they pay higher fees to the miners while they hash through transactions based on fee rate. In addition, the Bitcoin transaction is less faster and cheaper than other payment processing systems. There is a solution to this problem which has been proposed or implemented, and it is hard forks: This includes increasing the block size, soft forks: making the usage of the space in the block increase, and off chain solutions: creating a second layer of the blockchain, like the layer which enables cheap and fast transactions on the network — the Lightning Network, for instance.
• Regulation: Bitcoin is a currency in the legal ambiguity, many countries don’t know what to call it, don’t know if they should allow it or not, so in an overcrowded field there is this money that is in the legal ambiguity. In some it is banned or restricted, in others acknowledged or controlled. Bitcoin is not regulated by the states, but its legal recognition relies on definition and categorization it receives from authorities. For instance, some examples of such, most popular being; Bitcoin, which could be considered Currency, good, Security, Estate or a digital good; this makes things skew the users and the businesses that transact in Bitcoin because legal structures governing the crypto vary from country to country.
• Security: However, PoW, the current cryptographic protocol for this network is also the means to keep the network safe from being hijacked by its actors who would need more than 50% of the network capacity to gain control. But this has not stopped incidents of thefts and breaches of Bitcoin's security in the past. Risk that users and businesses which save or handle bitcoins can be subject to includes hacking, phishing, malware, ransomware, etc. This leads to them having to implement best practices for their funds and project, as well as the best wallets and platforms on which they save their funds. Yet again, like almost all digital products, users need to be exceedingly careful to avoid losing their private keys and forgetting their passwords because there are no means to recover one, and there is no way to access bitcoins in any other fashion.
Bitcoin is the invention that totally altered the way we think about money and payments. These are decentralised, have a scarce supply, they are based on a peer to peer network, they are pseudonymity for users and they are open source. But there is relevant constraints and issue that would hinder its course for progress like volatility, scalability, regulation, and security. But Bitcoin has withstood the test of time and thanks to widespread integration with digital currency innovations, was the most popular cryptocurrency in the world.