The first time I heard the word 'Bitcoin' was in 2017. I was in college and there was a craze for digital assets that had everyone in a frenzy. I paid little attention because I was a struggling student then, so I brushed it off as another scam–just like the MMM Ponzi scheme which was ravaging the campus at the time. Little did I know I know that this would be the industry where I will build my life around for the next decade.
After I joined Hive in 2018 I began to learn more about bitcoin and cryptocurrency and its important role in creating an alternative permissionless financial system that was transparent and accessible to all. I bought my very first bitcoin around that time but I did not hold it long, unfortunately. However, there have been important lessons learnt along the way and I would like to share some of them with you today.
A BRIEF HISTORY OF CRYPTOCURRENCY AND BITCOIN
When people think about cryptocurrency, the first thing that comes to mind is Bitcoin. However, they are shocked whenever they discover that Bitcoin was not the first cryptocurrency/digital currency. The idea of a digital currency was popularized in the 1800s by David Chaum, an American cryptographer and computer scientist. He came up with the concept of blind signatures which allowed users to sign messages without delivering their content.
He went on to create a company called digiCash, which developed eCash–the first digital currency. The company partnered with several banks in North America and Europe to bring about mass adoption of digital currency but encountered several infrastructural and financial problems which led to the discontinuation of the project but laid the founding blocks for the development of Bitcoin.
Unlike eCash, Bitcoin's history is quite evasive and rightly so for the technology to grow. Bitcoin was created by a computer scientist with the pseudonym Satoshi Nakamoto. He published a white paper in 2008 titled "Bitcoin: A Peer-to-Peer Electronic Cash System." Unlike Chaum, this system did not require the traditional financial system to operate, and neither did it need a centralized entity controlling it, hence his anonymity. It was a permissionless system maintained by the individuals who used it.
The Bitcoin genesis block was first mined in January 2009 by Nakamoto, with a capped supply of 21 million Bitcoin. This single act changed the landscape of the financial system, ushering in an era of technological development and advancement in the financial system connecting every part of the world through Bitcoin.
HOW DOES BITCOIN WORK?
The Bitcoin network operates a Proof of Work (PoW) consensus protocol. Node validators have to solve a series of complicated mathematical equations to mine Bitcoin; this is done using supercomputers/hardware (ASICs- Application Specific Integrated Circuits). To achieve this, miners have to compile pending transactions into a block and apply a cryptographic function (SHA256) to it. Once the nonce (a random number) is found, the function produces a 64-digit hexadecimal number which is known as a hash. This is then validated and added to the existing blocks. It takes roughly about 10 minutes to complete this process.
Mining Bitcoin ensures that the blockchain remains safe and decentralized. The mining difficulty is increased every 2,016 blocks on the computation power of the network to ensure consistency in which blocks are created. Meaning as more miners join the network, increasing computing power, the network scales up to balance things out to maintain the equilibrium between computing time and block creation.
INTERACTING WITH THE BITCOIN NETWORK
To interact with the Bitcoin network, a user must have a private key. This is generated by using an elliptical curve digital signature algorithm which produces a key pair: a private and public key. These keys are mathematically linked, however, a public key can be derived from a public key but not the other way around. This is known as asymmetric encryption.
The process of creating a key pair can be done through various means using a wallet shock that stores the account holders' private and public keys. There are 3 major types of wallets:
Paper wallet: This is an offline wallet created using certain algorithms. They are considered to be the most secure ways of storing your Bitcoin
Software wallet: These are the most common type of crypto wallets and they are found on our mobile devices, desktops and tablets. They provide easy access, however, they pose the most security risk
Hardware wallet: These are physical devices designed to store cryptocurrencies i.e Ledger wallet. These wallets can only be accessed physically and provide offline storage.
Based on the user's technical knowledge or even preference, an appropriate wallet can be selected.
It is also important to note that a Bitcoin address is not directly linked to the bitBitcointwork. There are an infinite number of ways in which an address can be created. However, also those that have Bitcoin are linked to the network.
In addition, there is a likelihood of sending Bitcoin to an invalid account. This can only be retrieved if someone has access to the private key of the account to which the Bitcoin was sent. However, based on the information available, this is mathematically impossible. This is also known as a burn and is used by projects to reduce the number of tokens in circulation.
PURCHASING BITCOIN
There are 4 major ways of getting Bitcoin. The first is through mining, but this requires expensive computing infrastructure to be feasible and profitable. The other way is via peer-2-peer transactions. There are various over-the-counter (peer-2-peer) Bitcoin transactions. This is subjected to market pricing as parties decide on the terms of exchange.
The most popular way to get Bitcoin is via centralized exchanges like Binance, FTX, Huobi, etc. Here users can trade fiat or other cryptocurrencies for bitcoin. The last option would be via decentralized exchanges where bitcoins are wrapped i.e. bitcoin on the Ethereum blockchain. The exchange is permissionless using smart contracts to execute the transaction.
BENEFITS OF BITCOIN AND BLOCKCHAIN TECHNOLOGY
One of the major arguments against Bitcoin is the duplication of function. Many critics think that Bitcoin is unnecessary because there is a financial system already in place. However, crypto enthusiasts would argue that this system is broken and has been usurped by centralized entities who have coveted the system for their gains.
Bitcoin eliminates the need for centralized control and the corruption and temptation that comes with it. This allows for a transparent and immutable network that everyone can verify and trust. Also, this network is protected by the people who use it and is less susceptible to malicious attacks.
There is also the argument for financial inclusion. For many parts of the world i.e. Africa and parts of South America and Asia, access to financial services is very limited. Bitcoin and Blockchain technology solves this problem in a fast and cost-effective way. Now people, irrespective of their placement on the globe, can transfer value anywhere in the world in a few seconds/minutes at little to no financial cost.
Bitcoin has also championed technological advancement. Thousands of Dapps and smart contracts globally have been launched on the back of Bitcoin. Founders have more access to funding to develop their projects and this is done through DAOs, ICOs, etc.
SOME OF THE CHALLENGES FACING BITCOIN
Despite its many benefits, Bitcoin still has a couple of challenges which mitigate its growth and acceptance. One such challenge is the issue of engine consumption.
As earlier stated, mining Bitcoin requires a stupendous amount of computing power. This requires a lot of carbon energy which many argue has a negative environmental impact. To mitigate the environmental impact of mining Bitcoin, many miners are switching to renewable sources of energy like solar and wind. There is also speculation of Bitcoin shifting from PoW to PoS (Proof of Stake) consensus protocol which requires significantly less energy consumption.
There is the case of scalability. It takes about 10 minutes for a block to be processed on the Bitcoin network. This limits the number of transactions to a few thousand every 10 minutes. When compared to another network this is relatively slow and cannot replace some of the payment platforms. To solve this issue layer two protocols like lightning were created. This allows for fast and cheaper transactions.
Also, there is a case for transaction costs. As the bitcoin network grows, transacting on the chain has not only become cumbersome but also expensive for the average person. Hence most people have opted for other blockchains likeHivee where transactions are not only fast but feeless.
CONCLUSION
Satoshi Nakamoto built on the idea of David Chaum to create Bitcoin which has become one of the most important technologies of the 21 century. It has led to the rapid development of the financial sector by creating new financial tools and onboarding new entrants into the financial system.
Although faced with a few limitations, the merits of the network cannot be denied. It has changed how many people across the globe see and use money. I believe this technology is here to stay.
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