LeoGlossary: Bitcoin

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A decentralized digital currency that operates on the Bitcoin network. This is a system that uses the Proof-of-Work protocol for consensus.

The nodes, which are different computers, compete to solve the 64 hash required to add a block. Those that are able to achieve this end up getting rewarded in the coins allocated for that specific block.

Bitcoin is the most widely recognized of all cryptocurrencies.

Beginnings

Bitcoin was created by Satoshi Nakamoto, an anonymous figure who is still unknown.

Nakamoto introduced the world to Bitcoin by releasing the Bitcoin White Paper on October 31, 2008. It contained an idea for "peer-to-peer electronic cash system". In fact, the paper was called Bitcoin: A Peer-to-Peer Electronic Cash System.

The bitcoin software was implemented as open-source code and released in January 2009. This is when Nakamoto starting mining, creating the genesis block.

Hal Finney was the receiver of the first bitcoin transaction. He reportedly received 10 BTC from Nakamoto on January 12, 2009. Other cypherpunks who were also involved in the early transactions were Wei Dai and Nick Szabo.

It is estimated that Nakamoto mined over 1 million Bitcoin before disappearing. In 2012, he ceded the network alert key and control of the code repository over to Gavin Andresen, who became lead developer of the Bitcoin Foundation. From there, the goal was to decentralize control of the network.

10,000 Bitcoin Pizzas

The first attributed commercial transaction of Bitcoin was the purchase of pizza. It is now an infamous story in cryptocurrency circles.

In 2010, programmer Laszlo Hanyecz bought two Papa John's pizzas from Jeremy Sturdivant. The goal was to see if Bitcoin could be used for a real world acquisition.

As the price of Bitcoin increased, so did the cost of the pizzas. By the end of the 2010s, with Bitcoin reaching 5 figures, those two pizzas ended up costing millions of dollars.

Distributed Ledger Technology

Bitcoin is seen as the first distributed ledger technology. The major breakthrough was the solving of the double-spend problem.

All transactions are recorded in blocks. These form the ledger that is built as more are added to the chain. The ledger is validated by computers all over the world that keep the network running. It is decentralized to the degree that no individual or group can reverse the transactions. For this reason, many feel that Bitcoin cannot be shut down.

Each node runs its own copy of the blockchain. Those that add blocks validate transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other nodes. This is all done without any central authority of entity.

Once this is done, the software is able to determine when a particular Bitcoin was spent, which is needed to prevent double-spending. A conventional ledger records the transfers of actual bills or promissory notes that exist apart from it, but the blockchain is the only place that Bitcoins can be said to exist in the form of unspent outputs of transactions.

This presents a radical change to the traditional monetary system. Here, the banks are the ones that handle all the transactions and alter the ledger. They are the gatekeepers of all the global financial activities occurring around the world.

By having a network of uncorrelated node operators from around the world, blockchain offers ledger technology that could shift things away from the legacy server based systems.

Impact As Money

Bitcoin can be thought of as money that operates outside of any government and the central bank system. The decentralized and global nature of the network make it more akin to the Eurodollar system than one that operates domestically.

The approach is disinflationary money with a halving roughly every four years. This means the rewards per block are reduced by 50%. Here we see the distribution of the coins slowing, until it reaches the hard cap of 21 million. It is expect to reach this in 2140.

Many believe the hard cap will help make Bitcoin a strong store of value. A challenge could arise in the fact that it lacks money elasticity to serve as a primary driver of the global economy.

Bitcoin's smallest unit of account is the Satoshi (Sat), with 100 million equaling one Bitcoin.


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