This is the first post of my Blockchain Quick Notes Series where I share short and quick notes that I take while learning blockchain.
Bitcoin, Cryptocurrency and Blockchain
Bitcoin is one of the most widely used cryptocurrencies. A cryptocurrency is a digital, decentralized currency built using blockchain technology.
Bitcoin (uppercase) is the protocol that is running this currency, and bitcoin (lowercase) is the actual unit of currency.
Bitcoin is a cultural revolution when it comes to currency and financial systems. It is not backed by any organization or government. That's why it represents a shift towards privacy and decentralization.
In October 2008 by Satoshi Nakamoto (a pseudonym of an individual or a group of individuals) published a whitepaper proposal for the structure of a peer-to-peer cryptocurrency where users do not rely on financial intermediaries or trust anyone to make a transaction. Users do not need to use their real identities; instead, they are represented by addresses of strings of random letters and numbers.
How Does Bitcoin Work?
The key is in the Bitcoin network. A Bitcoin network is a group of users communicating using the Bitcoin protocol. It substitutes centralization and intermediaries such as central banks.
The blockchain stores all the transactions to ever occur in the history of Bitcoin in an append-only ledger meaning any information added to the ledger cannot be removed. A copy of this ledger will be stored on all the nodes in the Bitcoin network. This will allow the system to not have a single point of failure. This is the actual meaning of decentralization in Bitcoin; there is no single node that solely controls or stores the transactions.
Bitcoin challenges and their solutions
There are no central parties to ask for information about user accounts, and there are no central parties to censor users and act on malicious activities.
Decentralized networks generally suffer from this, leading to inconsistencies between parties and malicious messages travelling through the network.
Decentralized networks are also vulnerable to double-spending attacks, where a value is used for more than its worth. Therefore there needs to be an assurance that money tokens have not been promised to more than one party.
Another distributed systems challenge that Bitcoin inherited is that when a computer within the network or a node can join and leave without constraints and behave however it likes.
Satoshi Nakamoto was able to overcome these challenges by proposing two innovations: the blockchain and the Proof-of-Work. Because of these two things, any node with access to the internet can join the Bitcoin Network and can audit and verify the history of transactions on its own.
Proof-of-Work enables the creation of bitcoins through the process of mining. We will go into more details about Proof-of-Work in the upcoming Blockchain Quick Notes posts.