The Internet Gold and the Evolution of Money - Part 1

     

     For the first time ever in the history of the human race, we have a currency or monetary store of value that did not have to originate with a person or an institution. It could not be manipulated or controlled by a third party. This is like the money for the internet which means any individual could own it needless of their background or societal status.

     The bitcoin is a decentralized digital currency which is transferrable on the peer to peer bitcoin network. Bitcoin transactions are verified by network nodes through cryptography and they are recorded in a public distributed ledger called a blockchain. It was invented back in 2008 by an unknown persons or pseudonymous group of persons called Satoshi Nakamoto. The word "bitcoin" was coined on a whitepaper published on 31st October 2008. It is composed of the words "bit" and "coin". The currency began use in 2009 when its implementation was released as open source software. We will come back to the timeline of bitcoin in the next phase of this topic. For now, let us focus on the concept it promotes.

     We start with divisibility. The unit of account of the bitcoin system is the bitcoin. Currency codes for representing bitcoin are BTC and XBT. The ₿

is its unicode character. One bitcoin can be divided into eight places. Units for smaller amounts of bitcoin are the millibitcoin(mBTC) equal to 1/1000 bitcoin and the satoshi (sat) which is the smallest possible division named in homage to bitcoin's creator representing 1/100000000 (one hundred millionth) bitcoin. 100000 satoshis equal 1 mBTC. 

Bitcoin and Blockchain

      A bitcoin blockchain is like a public ledger that records bitcoin transactions. It is implemented as a chain of blocks, each block containing a cryptographic hash of the previous block up to the genesis block of the chain. A network of communicating nodes running bitcoins software maintains the blockchain. Transactions of the form payer X sends Y bitcoins to payee Z are broadcast to his network using readily available software applications. Network nodes can validate transactions, add them to their ledger and then broadcast these ledger additions to other nodes. At varying intervals of time averaging to every 10 minutes, a new group of accepted transactions called a block is created, added to the blockchain and it is quickly published to all nodes without requiring central oversight. This allows the bitcoin software to determine when a particular bitcoin was spent which is needed to prevent double spending. Individuals, blocks, public addresses and transactions within blocks can be examined using a blockchain explorer. 

     Transactions consist of one or more inputs and one or more outputs. To prevent double spending, each input must refer to a previous unspent output in the blockchain. The use of multiple inputs refer to the use of multiple coins in a cash transaction. Since transactions can have multiple outputs, users can send bitcoins to multiple recipients in one transaction. In a cash transaction, the sum of inputs( coins used to pay can exceed the intended sum of payments). In such a case, an additional output is used returning the charge back to the payer. Any input satoshis not accounted for in the transaction outputs become the transaction fee. 

     Transaction fees are optional, but the miners can decide which transactions to execute and prioritize those that pay higher fees. The fees are generally measured in satoshis per byte(sat/b). The size of transaction is dependent on the number of inputs used to create the transaction and the number of outputs as well.

     The blocks in the blockchain were originally limited to 32 megabytes in size. The block size limit of one megabyte was introduced by Satoshi Nakamoto in 2010. Eventually, the block size limit of one megabyte created problems for transaction processing such as increasing transaction fees and delayed processing of transactions. Andreas . M . Antonopolous stated that the Lightning network was a solution to the problem of delayed transactions because it offered scalability thus satisfying all ingredients of the CAPS theorem.

     In the blockchains, bitcoins are registered to bitcoin addresses. Creating a bitcoin address requires no more than picking a random valid private key and computing the corresponding bitcoin address. This computation can be done in a split second. But the reverse, computing the private key of a given bitcoin address is practically unfeasible. Users can tell others to make public a bitcoin address without compromising it's corresponding private key. The number of private keys is so vast that it is so unlikely that someone will compute a key that is already in use and has some funds. The vast number of valid private keys makes it unfeasible that brute force could be used to compromise a private key. To be able to spend their bitcoins,, the owner must know the corresponding private key and digitally sign the transaction. The network verifies the signature using the public key but the private key is never released. If the private key is lost, the bitcoin network will not recognize any other evidence of ownership. The coins are then unusable and effectively lost. For example in 2013, one user claimed to have lost 7500 bitcoins worth $7.5 million at the time when he accidentally discarded a hard drive containing his private key. About 20% of all bitcoins are believed to be lost. They would have a market value of about 20 billion dollars at July 2018 prices. The private key is kept secret to ensure the security of all bitcoins contained in it. If the private key is revealed to a third party due to some data breach, all associated bitcoins will be stolen. As of December 2017, around 980000 bitcoins have been stolen from cryptocurrency exchanges. Regarding ownership distribution as of 16 March 2018, 0.5% of all bitcoin wallets have 87% of all bitcoins ever mined.

     Mining of bitcoins is where the main job is done. It can be described as a record keeping service done through the use of computer processing power. It helps to keep the blockchain active and impenetrable by grouping all newly broadcast transactions into a block which is then broadcast to the network and then verified by recipient nodes. Each block contains a SHA-256 cryptographic hash which is some mathematical algorithm of the previous block and it is linked to it creating a chain. The proof of work (PoW) is a form of cryptographic proof in which a party (the provers) proves to another party (the verifiers) that a certain amount of a specific computational effort has been expended. A new block must contain the PoW to be accepted by the rest of the network. The PoW requires miners to find a number called a nonce(number used once), such that when the block content is hashed with the nonce, the result is numerically smaller than the network's difficulty target. This proof is easy for any node to verify but it is literally time consuming to generate. Thus, miners have to try out different nonce values usually a set of ascending natural numbers. But fortunately, the difficulty target can be adjusted thus reducing the amount of work needed to generate a block. On average, a  new block is generated every 10 minutes and after every 2,016 blocks which is created every 14 days, the nodes adjust the difficulty target based on the recent rate of block generation and maintains the average block creation span of 10 minutes. As of April 2022, it takes about on average 122 sextillion (122 thousand billion billion attempts) to generate a block hash smaller than the difficulty target. Computations of this magnitude definitely require rapid executions and so specialized and costly hardware equipments are required for this cause. The benefits of the proof of work mechanism in general is that it makes modification of a certain block extremely difficult from the end of an external threat. In order to bundle the rewards for block generation, a mining pool is set up. Now we understand it to be a clustered mechanism that allows all participants to get rewarded when a participating server solves a block and the rewarded amount depends on the efforts of individual miners to find that block.

     When a successful miner is able to find the new block, he is granted access by the rest of the network to collect all transaction fees from the transactions they included in the block and a specific reward of newly created bitcoins. As of today, that reward is 6.25 bitcoins. A special transaction called a coinbase is included in the block to enable the miner claim this reward. Satoshi's protocol specifies a term we can describe as "bitcoin halving" which has quite an impact on bitcoin's ecosystem. Now after every 210,000 blocks is generated, the reward for adding a block is halved. Satoshi billed the limit of 21 million bitcoins on the general market supply of bitcoin. He did that to cross check inflation because bitcoin as we know was created just after the "Great Economic Recession" of 2008. The genesis block which was the first ever block to be generated contained a reward of 50 bitcoins. Eventually the reward will round down to zero and according to calculations, that is bound to happen by the year 2140. After then, the record keeping will be rewarded by the transaction fees only. 

     So now how does the bitcoin halving affect the market? In the market, we have a bull run( a period in which the price of a currency/commodity/stock skyrockets to an all time high) and a bear run ( a period in which the price of a currency/commodity/stock plunges to newer all time lows). We can also use the term pump and dump/dip. So over the years, we have spotted a trend in the bitcoin market prices. After every bitcoin halving, there is always a pump in the price of bitcoin. The last halving took place in the year 2020 and immediately after that, we saw the most significant jump in the price of bitcoin(69,000 dollars) in like the last decade. The bull run lasted for two years into which we presently are and now we are currently experiencing a bear market and we are heading for another global recession. So the bear market is set to last until the year 2024 which happens to be when the next halving occurs. So in that year, we are going to see bitcoin spike to newer all time highs like maybe between 100,000 and 280,000 dollars in price and then two years after that, we will surely see another dump. So that is the one trend to watch out for.

     In the next article, we are going to see an overall history of bitcoin from its birth until now and some really incredible features of the first ever digital currency. So people, stay tuned for part two. Hope you enjoyed this one.

Peace.