In 2014, I set up a Google alert for the keyword “Bitcoin” when I was writing my graduating thesis on cryptocurrencies and blockchain technology. I have received so many notifications from Google as Bitcoin reached one and another new high. Although I still kick myself today for not having bought Bitcoins at $200 per piece, I wanted to illustrate some basic characteristics that make Bitcoin an impressive innovation in five minutes and less.
1. Bitcoin Blocks: Bitcoin blocks can be thought of as bundles of transaction information. It is like a page of your journal recording your daily activities. In this case, blocks record the movements of Bitcoin wealth. These blocks are not stored in one location but dispersed to every single computer within the Bitcoin network. All participants have the ability to verify transactions. Bitcoin is considered a decentralized currency because it does not rely on a third-party authority to keep track of transactions.
2. Blockchain: Blockchain is such a hot buzzword now that anything it touches turns into gold (Long Blockchain Iced Tea Story). Yet, it really is just a chain of blocks, simply put. The Bitcoin Blockchain is a complete transaction history of every single Bitcoin existing. From time to time, the chain might fork into two but only the longest will be recognized as legitimate.
3. Bitcoin Mining: The term “mining” makes Bitcoin appear similar to natural resources. Yet, “mining” is not physical. It is the process of encoding the transaction information into a block and adding it onto the blockchain after solving a mathematical problem. In each new block mined, the miners assign a certain amount of Bitcoins to themselves. That is how new Bitcoins come into circulation.
4. Bitcoin Hash Function: In my opinion, hashing holds the essence of Bitcoin and is also the reason it is called a “cryptocurrency”. Crypto hash functions are functions that are impossible to guess the input based on the output. Going through the hash function is like drinking a magic potion; we simply don’t know if it will give us the desirable result (as demonstrated in the comics below). So in order to get the target value permitted by the Bitcoin network, miners have to try millions of combinations. This is why Bitcoin mining is so computationally intensive.
·5. Finally, Bitcoin Security: all the previous elements we have learned come together to solve a major problem plaguing decentralized digital currencies before Bitcoin — double-spending. For example, I just spent 10,000 Bitcoins buying two large pizzas (read here). Once I finished eating, I decided to cheat and take my Bitcoins back. In order to do that I have to fork the blockchain and create an “alternative” transaction history or “alternative facts”. So I started to “mine” blocks with fake transactions in them including one that reassigns the 10,000 Bitcoins back to me. However, while I am working on my blocks, the entire network is working on the legitimate chain and adding more blocks to it. Because only the longest blockchain will be acknowledged as valid, the success of my attack depends on my ability to create blocks faster than the entire network. Further, because the hash function makes mining a computationally-intensive process, the speed of Bitcoin mining depends on the miners’ computational power. Thus, in order to create the longest chain and regain ownership of those 10,000 Bitcoins, I need to possess larger computational power than the entire Bitcoin network combined (millions of computers/ ASIC miners). Thus, it is computationally infeasible to change the Bitcoin transaction history with the exception of the attacker owning more 50% of the computational power in the network (the 51% attack).
