If we could name a turning point in the entire web3 movement that propelled this technology into the mainstream. It would be the introduction of Bitcoin. There is no doubt that Bitcoin is the first and most impactful cryptocurrency we have seen so far. This article will show the exact reasons behind Bitcoin’s strength.
On the 3rd of January 2009, the bitcoin blockchain was finally launched. And the first block (known as the genesis block) was mined by the same Satoshi Nakamoto with a reward of 50 Bitcoins. Who is Satoshi Nakamoto? This is one of the biggest mysteries in the crypto space.
New blocks are added to the blockchain using proof-of-work consensus algorithms for mining. The difficulty of adding a new block progressively increases. Bitcoin’s working mechanism has laid the foundation for all the coming cryptocurrencies. Since Bitcoin relies on a peer-to-peer network architecture. There was never a need for centralized server storage or sanctioned by a financial entity. Essentially, Bitcoin is simply a store of value. We also need to understand that trading in bitcoin or any other cryptocurrency isn’t as easy as it looks from the outside.
How Does Bitcoin Work?
Bitcoin is a blockchain that uses the proof-of-work consensus for its operation. Bitcoin’s supply has an upper limit of 21 million. This limit was basically introduced to control the inflation that might arise from an unlimited supply. The current supply (at the time of writing this article) sits at around 18 million. To make the entire Bitcoin ecosystem work. The bitcoin blockchain relies on miners. Mining requires powerful computers competing against each other to solve complex mathematical puzzles. The computer that can solve these puzzles first gets the reward of Bitcoin.
Mining can be either used to generate Bitcoin or to confirm existing transactions on the network. At the time of the introduction of Bitcoin, the blockchain had the ability to confirm 7 transactions per second.
However, as the blockchain has become bigger and the network has become congested. Currently, the processing of a transaction can take anywhere from 10 minutes to even one hour. Despite these shortcomings, Bitcoin continues to flourish and keeps its title as the “King of All Cryptocurrencies”.
What Makes Bitcoin So Special?
In the world of Cryptocurrencies, Bitcoin is a titan. It has the highest value of all Cryptocurrencies as well as the highest adoption. There are a few reasons why Bitcoin is a big player in this crypto space.
- Truly Decentralised: Currently we have over 10,000 Cryptocurrencies and many of these new cryptocurrencies surpass Bitcoin in terms of technology. Although none of them are as popular. The reason is simple, it is their ‘Decentralization’. Many of these cryptocurrencies claim to be truly decentralized. Some of them are completely centralized and have big silicon valley tech corporations or individuals behind them. Even popular cryptocurrencies like Ethereum have centralized plug points for many of the dapps made around them. This makes Bitcoin the only truly decentralized currency to ever exist.
- Distributed: All bitcoin transactions are on a public ledger that has come to be known as the ‘blockchain.’ The network relies on people voluntarily storing copies of the ledger and running the bitcoin protocol software. These ‘nodes’ contribute to the correct propagation of transactions across the network by following the rules of the protocol as defined by the software client. There are currently more than 80,000 nodes distributed globally. It makes it next to impossible for the network to suffer downtime or lose information.
- Transparent: The addition of new transactions to the blockchain ledger and the state of the Bitcoin network at any given time (in other words, the “truth”) is arrived upon by consensus and in a transparent manner according to the rules of the protocol.
- Peer-to-peer: Although nodes store and propagate the state of the network (the ‘truth’), payments effectively go directly from one person or business to another. This means there’s no need for any “trusted third party” to act as an intermediary.
- Permissionless: Anyone can use Bitcoin. There are no gatekeepers, and there is no need to create a ‘Bitcoin account.’ Any and all transactions that follow the rules of the protocol will be confirmed by the network along with the defined consensus mechanisms.
- Pseudo-anonymous: Identity information isn’t inherently tied to Bitcoin transactions. Instead, transactions are tied to addresses that take the form of randomly generated alphanumeric strings.
- Censorship resistant: Since all Bitcoin transactions that follow the rules of the protocol are valid, since transactions are pseudo-anonymous, and since users themselves have the ‘key’ to their bitcoin holdings, it is difficult for authorities to ban individuals from using it or to seize their assets. This carries important implications for economic freedom, and may even act as a counteraction force to authoritarianism globally.
Bitcoin's economic features
- Fixed supply: One of the key parameters in the Bitcoin protocol is that the supply will expand over time to a final tally of 21 million coins. This fixed and known total supply makes Bitcoin a “hard asset” one of several characteristics that have contributed to its perceived value from an investment perspective.
- Disinflationary: The rate at which new bitcoins are added to the circulating supply decreases along a defined schedule that is built into the code. Starting at 50 bitcoins per block (a new block is added approximately every 10 minutes), the issuance rate is cut in half approximately every four years. In May 2020, the third halving reduced the issuance rate from 12.5 to 6.25 bitcoins per block. At that point, 18,375,000 of the 21 million coins (87.5% of the total) had been ‘mined.’ The fourth halving, in 2024, will reduce the issuance to 3.125 BTC, and so on until approximately the year 2136, when the final halving will decrease the block reward to just 0.00000168 BTC.
- Incentive driven: A core set of participants, known as miners, are driven by profit to contribute the resources needed to maintain and secure the network. Through a process known as Proof-of-Work (PoW), miners compete to add new blocks to the chain that constitutes the ledger (the blockchain). The hardware and energy costs associated with PoW mining contribute to the security of the network in a decentralized fashion along game-theory-driven principles. Furthermore, miners tend to sell their earned bitcoin to cover their significant mining-related costs. The mining process is seen as a fair mechanism for widely distributing bitcoin.
Closing thoughts !!