Ever wondered how Bitcoin (or any cryptocurrency for that matter) came to be?
As a long-standing coin and the first of its kind, Bitcoin has revolutionized the cryptocurrency space, much like the internet changed the way people use the internet. A detailed history of Bitcoin as a whole is beyond the scope of this article, but we do offer a brief summary below, along with a few notable facts and figures.
Pre-2008: The Cryptocurrency Era
In the beginning, cryptocurrencies were regarded as part of a global revolution. There were groups dedicated to investing, facilitating and running decentralized and peer-to-peer networks.
The first of these was Bitcoin, which was created in 2009 as a peer-to-peer currency that used a blockchain for authentication and transparency. So, how does Bitcoin truly work?
Blockchain: The Underlying Technology
A blockchain is a type of public or permissionless ledger, in which transactions are recorded on a decentralized peer-to-peer network. Because each blockchain (or set of blocks in a blockchain) can be read by any participant, data is secured and immutable. For every transaction, a new block is created and it is only added to the blockchain if the creator holds the majority of the keys (private or public key pairs).
A blockchain also solves the double spending problem, in which it is possible to spend the same Bitcoin twice on the same wallet address. With each transaction, the previous block is updated to record the new transaction. Thus, any transaction can be traced back through the blockchain, and double spending becomes a challenge and a security problem.
In addition, a blockchain doesn’t have to depend on a third party in which it has to go through an intermediary. A third-party can never change the transactions that occur on the blockchain because the blockchain is inherently decentralized. This removes the need for regulatory bodies to approve all transactions.
As a public or permissionless ledger, the blockchain also provides near zero transaction fees to use and transact using it.
Proof of Work: The Way a Bitcoin Is Generated
Not all blockchains are based on a proof of work protocol. A proof of work (PoW) algorithm uses an algorithm or hashing function that gives all users one chance to add a new block to the chain at any given time. To do this, they must also prove that they have the computing power to add the block by submitting a ‘nonce’.