There’s something wrong with money today. In The Little Book of Bitcoin is the first decentralized digital currency. It was created in 2009, by an anonymous founder or group of founders... More, its authors point out that money is “broken”. Besides, “in an increasingly globalized economy, money remains stubbornly local.” In general, the lack of privacy, and the control of money by governments and financial entities, add problems to traditional funds. That’s why the Bitcoin whitepaper appeared.
As a result of the financial crisis of 2008, Satoshi Nakamoto created Bitcoin (An abbreviation for Bitcoin.). Nakamoto, whoever they were, was looking for a system in which governments couldn’t decide everything about money, and that would revolutionize the economy and personal finances.
In addition to its philosophical and ideological component, Nakamoto describes the technical operation of this system in a brief document known as the Bitcoin whitepaper. On October 31, 2008, this text was submitted to an email list of Cryptography is the mathematical basis for secure communication that allows only the sender and intended recipient of a message to... More researchers and cypherpunk activists —groups seeking to create technological tools for people’s privacy and freedom.
What does the Bitcoin whitepaper contain?
Although it’s only nine pages long, this “book” contains a general description of Bitcoin: a A peer-to-peer (P2P) network or service works with interconnected nodes ("peers") that share resources with each other without the use... More (P2P) payment system through a decentralized network. Nakamoto begins by describing how the system replaces trusted third parties (like banks or governments) with an automatic verification process. Such a system also provides irreversible payments for added security between A cryptocurrency transaction is an entry on the blockchain ledger, noting sender, receiver and number of coins transacted. More participants.
Let’s check the main concepts of this platform.
Transactions and coins
Bitcoin, as a payment system, requires secure transactions. And, as a digital currency, it needs a way to avoid double-spending. That would happen if a person sends (maliciously or otherwise) the same currency to different recipients —which would prove the system useless. To do this, Satoshi proposes in the Bitcoin whitepaper a A distributed system is made of components that are running on different networked computers, which communicate and coordinate their actions... More network protected with cryptography.
Each transaction, linked to all the previous ones, would be recorded in a type of digital A ledger is like a spreadsheet keeping track of which addresses own how many bitcoins. The Bitcoin blockchain is a... More — what we now call a “blockchain”. Each validator or A blockchain node is a server that downloads the history of transactions and shares it with other nodes in the... More has a copy of all transactions ever made. In our case, we can say that transactions and coins are basically the same things. They’re dubbed “Unspent Transaction Outputs” (UTXOs).
A UTXO is an output (of funds) that the user receives to spend in the future as input for someone else. The total balance in the portfolio of any user is formed by UTXOs of different sizes, or by a single one that may receive ‘change’ when isn’t fully spent.
We can think of UTXOs as the equivalent of individual coins or bills within the Blockchain is a type of database storing an immutable set of data, verifiable to anyone with access to it —through.... In the physical world, if you have a $100 bill and hand it to pay $20, the other party should give you back $80 in other bills. UTXOs work similarly in Bitcoin, but that’s just in the background, invisible to the average user.
Public and private keys
Digital wallets are needed to make transactions with Bitcoin. Usually, they’re mobile or desktop applications that serve as an interface to handle BTC coins. These wallets are built with private and public cryptographic keys, used to receive and sign the transactions. They serve as proof that the operation is made by (or sent to) the owner of the funds.
The public-private key pair is asymmetric since you can only encrypt with one key (with the public one) and decrypt with the other (with the private one). While the A public key can be used by anyone to encrypt messages for a particular recipient. In cryptocurrencies, this key enables... More is needed to receive funds (so it can be shared with others), the A cryptographic key that is used with an algorithm to encrypt and decrypt data. A cryptocurrency private key lets you... More is essential to prove the ownership of the A crypto wallet is a user-friendly software or hardware used to manage private keys. There are software wallets for desktop... More and spend the funds.
To sum it up: the public key would be like an e-mail An address is a blockchain equivalent to a bank account number in the traditional financial system, or an email address.... More you can give to receive money. Meanwhile, the private key would be the password to access that e-mail account (the money, in this case). This secret key is the only access to your crypto funds. Most wallets provide you with a row of secret random words (usually 12). You should keep these words somewhere safe all the time.
Distributed network or blockchain
We mentioned above a type of ledger or distributed network. That’s where each and every transaction made with Bitcoin is registered. Amounts, dates, addresses, commissions, and more are recorded there forever —without names or personal data, though.
This network is built with cryptography, chaining each data A collection of cryptocurrency transactions. Every few minutes (or seconds, depending on the blockchain) one miner or validator verifies the... More from the first to the last. The system allows verifying that the data hasn’t been modified and that each copy of the registry is identical. Why distributed? Because there’s no central or unique copy. Many identical copies are spread throughout the world, in different devices, with different people. There are as many copies as nodes and miners running the software for it.
Currently, according to BitNodes, there are 12,990 Bitcoin nodes around the world. About 50% of them are anonymous. The remaining ones are publicly located in the United States, Germany, France, Netherlands, Canada, Finland, the UK, Russia, Switzerland, and other countries.
Proof of Work (PoW) lets one party proof the execution of an algorithm to another party. In the Bitcoin PoW... More (Consensus Mechanism)
In a nutshell, Proof of Work (PoW) is a consensus algorithm that validates transactions on the Bitcoin network. The process is carried out by a computer. It’s a complex mathematical operation in which each node must find a unique number to process the transactions. The success of this depends on the processing power of the node (device). And it takes a lot of energy (work) to solve the cryptographic puzzle.
For all practical purposes, the PoW system also prevents the Bitcoin network from being maliciously modified. This way, the entire blockchain would need to be modified for an attack. According to Crypto51, a 51% attack on Bitcoin (to take control of the network and change transactions) would cost over $1 million per hour.
Besides the technical part, The inventor of Bitcoin, which might be one person or a group of people who released the original Bitcoin whitepaper... More makes it clear in the document that Bitcoin was created as an alternative to fiat money. It provides more autonomy and freedom to the citizens of the world. Let’s never forget that!
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