What is Bitcoin?

Dear BitcoinInternational readers,

In this third publication, we will enter the world of Bitcoin. If you haven't read the first and second episodes yet, I recommend that you read them before continuing.

You have probably heard about Bitcoin in the news, on social media, or through friends. But what exactly is it? Continue reading and I am convinced that you will understand it.

What is Bitcoin at its core?

Bitcoin is a digital currency, transferable from individual to individual without the need for third parties (banks). When the coin changes ownership through a transaction, everyone can see the transaction in a public ledger without needing to know who made it. This is the essence of Bitcoin.

But... not so fast. To understand the digital currency, we need to understand the structure on which is based. This structure consists of different parts, and we will look at each of these parts. Let's start with the blockchain.

What is a Blockchain?

In a nutshell, a "blockchain" is a publicly readable, distributed, digital, and secure ledger. Let's clarify the terms used here:

• Ledger: Keeps the history of asset movements (in this case, Bitcoin) from one account to another. So, it's like a register that contains all the transfers.
• Public: Anyone can see such register, every block containing transfers, and every transfer of each block from the first block (genesis block).
• Secure: No one can modify the register by changing the positions of blocks or transfers. All participants have a copy of the register.
• Digital: The register exists in electronic format.
• Distributed: means that the register exists in thousands of copies distributed globally.

The ledger consists of blocks where each block contains a number of transactions. When the block with new transfers is considered valid, it is added to the other blocks in the register in chronological order, thus forming a chain of blocks. Every block that ends up in the blockchain is immutable.

Up to this point, we can say that a distributed and public ledger like the "blockchain" is a common concept. The rest of our structure is known by the name mempool.

What is a Mempool?

"Mempool", an abbreviation for "memory pool", is an area in the Bitcoin network where all new transfers created by users but not yet included in the ledger are held. So, it's better to think of the mempool as a waiting room for transfers.

When you send Bitcoin to someone, your transfer initially goes to the mempool (the waiting room). There, it waits until someone selects your transfer to be included in a new block. A block that will be added to the ledger. The selection process depends on the fee you pay for the transfer. Every user who creates a transfer also adds a fee to make the transfer. Transfers with higher fees are usually selected faster to be included in new blocks and become part of the ledger (blockchain).

So, the mempool acts as a waiting area where your transfers remain until it's their turn to be processed in the Bitcoin network. Now, after seeing what the blockchain and mempool are, we need to look at the process of block creation.

How does a new Block comes in existence?

As we showed, every time someone sends Bitcoin, the transfer goes to the mempool. In this part, we will describe the journey your transfer makes from the mempool (the waiting room) to the blockchain.

• Collecting transactions: The creation of a new block in Bitcoin starts with collecting new transfers that have not yet been included in a block and are waiting in the Mempool. The transfers that will end up in the new block are selected by miners, who are the users that build the blocks. The criteria miners use to select transfers are simple. Transfers that pay a higher fee are chosen first. This means your transfer may wait longer depending on the fee and the total number of transfers in the mempool. In fact, if the mempool has few transfers, they will be immediately chosen by a miner to become part of the new block without waiting. Each miner chooses the transfers in the way they prefer and is not necessarily only those that pay higher fees. They can select them based on the chronological order (according to the order they were entered into the mempool). Also, for constructing a block with transfers, the miner must follow some rules related to the block size, the legality of transfers, and after the block is formed by the miner, they must start the mining process.
• The mining process: is the use of powerful computers to solve a very difficult mathematical problem. This problem is like a complicated puzzle that requires a lot of effort and time to solve. The first miner to solve this problem proposes the new block. The word "mining" has little meaning from a mathematical perspective. It's simply a borrowed term from gold miners who similarly need to expend energy with work and machinery to extract and profit from gold.
• Verification and adding to the chain: After solving the puzzle, the miner who first solved it presents the block they created along with the puzzle solution. The solution is verified by all other users in the network. If the solution is correct, the new block with the included transfers is added to the ledger, and the work to create a new block starts from scratch. This block, along with all the transfers it contains, is now part of the public register and cannot be altered by anyone.

This process is the foundation of Bitcoin's security and decentralization, and no central authority controls the network.

What is a transaction?

A Bitcoin transaction is a process through which Bitcoin is transferred from one wallet to another. When someone sends Bitcoin, they are essentially signing (digitally) the ownership of their digital coin to the recipient.

A Bitcoin transfer involves several key elements to ensure the secure transfer of value on the Bitcoin network. The elements of a Bitcoin transfer are:

• Sender's Address: The public address of the wallet from which Bitcoins are sent.
• Recipient's Address: The public address of the wallet where Bitcoins will be sent.
• Transferred Amount: The amount of Bitcoin that is transferred from the sender to the recipient.
• Fee: An amount paid as a fee to miners who confirm and record the transaction in the ledger.
• Digital Signature: To authorize the transfer, the sender signs the transfer message with the private key of his address. This signature verifies that the sender has the right to spend the Bitcoins.
• Transaction ID (TxID): Every transfer creates a unique identifier called the Transaction ID, which is used to track the transfer in the blockchain.

Naturally, a real transfer contains more information, but the elements mentioned are sufficient for this publication.

What is the mathematical puzzle to be solved?

The mathematical puzzle or problem that a miner must solve is such that the work to solve it is very difficult, but once the solution is found, it is easy for everyone else to verify that it is indeed the solution to the puzzle. Let's understand it with an example: Imagine that the key to open a door has been thrown into a field of grass and flowers. Finding the key is difficult because it would require a lot of searching. On the other hand, verifying that this key opens the door is easy, you just need to insert the key into the lock and you can immediately see whether it opens the door or not.

How much time it takes to create a new block?

The Bitcoin protocol stipulates that a new block should be created approximately every 10 minutes. To maintain this rate, the protocol continuously monitors, over two weeks, how long it takes on average to create a new block. If the average time to create a new block is less than 10 minutes, the difficulty of solving the puzzle is increased; if it is greater, the difficulty is decreased. Following the example of the key above, one way to speed up the finding of the key in the field of grass and flowers is to increase the number of people searching. This means in the real situation of Bitcoin that more computers are engaged in solving the mathematical problem.

In this scenario, the protocol would notice that the time to find the key has decreased and, in response, would throw more keys into the field where the new problem is to find all the keys. Now, even though we engage more people, the protocol made the task harder by throwing more keys into the field. At another point, where finding takes more than 10 minutes, the protocol starts removing keys one by one. Thus, it simplifies the finding by now requiring the discovery of a smaller number of keys.

Miners Reward?

As a reward for the work and energy expended during mining, the miner who creates the new block and solves the mathematical puzzle receives a certain amount of Bitcoin, known as the "block reward." This is how new Bitcoins are created in the network. But how does it work in practice?

At the moment of forming the block, the miner creates a special transfer (known as a “coinbase” transaction) with a value of 6.25 Bitcoin and adds it to the block. With this transfer, the miner pays themselves at the moment they solve the puzzle of the block they have created.

The Winner takes it all.

In this game, miners are competing against each other to solve the next block. At any given time, there are many blocks being created in parallel by different miners. Only one of the miners will be the first. All others will not receive any reward, consuming a large amount of electrical energy. Once the solution for the block is found by a miner, the reward does not end with 6.25 Bitcoin. The miner also collects all the fees that have been paid in all the transactions contained in the block. This is why, when forming the block, the miner chooses to collect those transactions that pay a higher fee. To give an idea, at the time of publishing this article, the total value of the fees is somewhere around 2 - 3 Bitcoin, which brings the miner's total reward to almost 9 Bitcoin.

Summary of a Cycle

From what we've read so far, the cycle of transactions can be summarized in the following sequence:

• Various individuals create transactions through exchanges or their own applications.
• The transactions end up in the mempool (the waiting room).
• Miners collect the transactions to form a new block, which can become the candidate block to be added to the ledger.
• The miner who first solves the puzzle of the block they have created adds the new block to the public ledger as a continuation of the previous block.
• The transactions of individuals are finalized through the winning block in the public ledger.
• The miner is rewarded or not (in cases where they did not solve the puzzle first) and the race begins again.
• Every 10 minutes, a new race takes place.

What are the security mechanisms in place?

Having understood how the Bitcoin system works, we should dedicate a paragraph to the very important aspect of security, or rather, how the security of the ledger is guaranteed. This security exists at the levels of transactions, blocks, and the ledger itself.

• Transaction: The moment a transaction is created, its entire content is signed, generating a numerical sequence known as a HASH (which will be explained later). The hash function of a body of information is like the fingerprint in individuals. Each individual has a unique one. Thus, modifying the parameters of the transaction would be detectable because it would render the HASH invalid. It would simply result in a different hash.
• Block: Just like the transaction, it is impossible for a malicious actor to make modifications to a block. If this happens, then the proposed solution for the block by the miner would not work, and everyone could easily verify it. It's as if someone tries to exchange another key for the door, but you can insert the key into the door at any moment and see that it is the wrong key. Just like the transaction, the block has a numerical sequence generated as the hash of this block, and it is unique.
• Blockchain: What remains to be seen is the possibility of a malicious actor manipulating the ledger. That is, going back to an arbitrary point in time and replacing a block within the chain of blocks. When a block is created, it includes what is called a Merkle root. A Merkle root ensures that the entire chain is in order and that no one has exchanged blocks within it (not swapped the placement of the links). As we saw, when a block is created, the block's hash (the fingerprint of the block) is generated. This hash is placed within the second block as part of the second block's information, thus marking in the second block, which is the block that comes before it. When the second block is created, the hash of the first block is combined with the hash of the second block, and from this combination, a new hash is generated that represents both blocks. The same thing is done with the hash of the third block; it is combined with the resulting hash from the first two blocks to generate a new hash. The process continues in order until in the end, only a single hash remains. This hash is known as the Merkle root and is important because it allows verifying the entire ledger with a simple verification, highlighting whether there have been attempts to modify the ledger or not.

What is a HASH function?

A hash function is an algorithm that takes data of any size and produces a fixed and unique value or sequence of numbers, called a "hash." This is like a "digital stamp" for the data or like taking the fingerprint of a document. Whether you have a short sentence or an entire book, the result of the hash function will always be a string of a certain length. For example, the hash256 function (used in the Bitcoin protocol) will always produce a number with 256 binary digits that represent the digital signature of a block. Some of the key characteristics of hash functions are:

• Determinism: For the same input data, the hash function always produces the same result.
• Efficiency: Calculating the hash is quick and efficient.
• Security: It is very difficult (nearly impossible) to find the original data from the hash value alone.
• Sensitivity to changes: Even a small change in the input data produces a completely different hash.
• Uniqueness: It is very rare for two different pieces of data to produce the same hash (known as a "hash collision").

How secure is hash256

A 256-bit binary number, which is comprised entirely of 256 ones and zeros, translates into an extraordinarily vast number when converted into a decimal base, roughly equivalent to 10771077 - a number followed by 77 zeros. To put the enormity of such a number into perspective, consider the following comparisons:

• Stars in the Observable Universe: It's estimated that there are about 10221022 to 10241024 stars in the observable universe. A number with 77 zeros far exceeds this estimation.
• Sand Grains on Earth: The total count of sand grains across all the beaches and deserts on Earth is roughly estimated at 10191019. A 256-bit number is astronomically larger than this count.
• Water Molecules in Earth's Oceans: The oceans on Earth contain approximately 4.4×10464.4×1046 water molecules. Yet again, 10771077 (or a 256-bit number) is vastly greater than this number.
• Comparison with Avogadro's Number: Avogadro's number, which is used in chemistry and is 6.022×10236.022×1023, represents the number of atoms or molecules in one mole of a substance. The 256-bit number is exponentially greater than Avogadro's number.
• Possibilities in Chess: The total number of different possible games of chess is estimated to be around 1012010120. This is, in fact, larger than a 256-bit number, but it demonstrates that even highly complex and varied systems like chess do not reach this scale of combinations.
• Data Storage: Assuming one could store one bit per atom and use every atom on Earth (estimated to be around 10501050 atoms), millions of Earths would be required to have enough atoms to store a 256-bit number in this way.

These examples serve to illustrate that a 256-bit number represents a value that is vastly beyond everyday amounts, astronomical figures, and even the conceptual numbers used in science and mathematics, emphasizing its immense size and complexity. Thus, breaching the security safeguarded by a 256-bit binary number is nearly impossible.

Who is Satoshi Nakamoto?

It was inevitable not to talk about Satoshi. Satoshi Nakamoto is the pseudonym of the individual or group of individuals who created Bitcoin, the first digital and decentralized currency, and developed its underlying technology, the blockchain. For more information, you can refer to the first publication of Bitcoin.→ Bitcoin Whitepaper. The true identity of Satoshi remains a great mystery since the publication of his paper, "Bitcoin: A Peer-to-Peer Electronic Cash System," in 2008. This document outlined the fundamental principles of Bitcoin and how it would operate. Nakamoto was active in the development of Bitcoin until 2010, when he withdrew from the project and left its direction to others in the developer community. Since then, much speculation has been made about his identity, but none has ever been confirmed. His trace less withdrawal is one of the reasons for Bitcoin's success. We can say that Satoshi has left something of value to all humanity.

Conclusions

In this article, we explained what Bitcoin is and how it is transferred. We also observed the process of mining new Bitcoins and aspects of security and verification. The explanations and various examples we used help convey knowledge without the need to delve into the details of computer science and mathematics. We conclude the article by reiterating why Bitcoin is special:

• Decentralized: There is no central bank or government controlling Bitcoin. It's like a community garden where everyone works together and benefits.
• Secure: The public ledger (blockchain) makes it very difficult for anyone to dishonestly change the content.
• Anonymous: Although transactions are public, the people making them remain anonymous. It's like everyone wearing masks at a masquerade ball.
• Deflationary: The circulating supply decreases over time. Every 4 years, a halving occurs, and the amount that the network rewards miners is halved. This creates the opposite of inflation and contributes to long-term price increases.
• Peer to Peer: From individual to individual. For transfers, there is no need for any banks, exchanges, or third-party applications.

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