A lot has been said in recent years about cryptocurrency, mainly that of Bitcoin, the most widely adopted form of cryptocurrency. This post aims to help give you an understanding of what it is and how you can use it.
The origins of cryptocurrency stem all the way back to 1998, when computer engineer Wei Dai published a description of “b-money”, an anonymous, distributed electronic cash system. This was quickly followed up by Nick Szabo with the creation of “Bit Gold”, an electronic currency system which required users to complete proof of work functions, with solutions being cryptographically put together and published.
Fast forward to 2009 and Bitcoin was born. Bitcoin was the first decentralized cryptocurrency, created by the anonymous developer Satoshi Nakamoto. To this day, it is still unknown who is behind “Satoshi Nakamoto”, whether it be a single person or a group. Like Bit Gold, Bitcoin runs on proof of work functions using a SHA-256 cryptographic hashing algorithm. Bitcoin uses a peer-to-peer network to allow users to transact without an intermediary, with transactions being verified by network nodes recorded in a public distributed ledger called the block chain.
So what does the block chain do?
The block chain documents all transactions on the Bitcoin network, for example Person A sends 1 Bitcoin to Person B. Network nodes verify the transaction, before adding them to the ledger and broadcasting to other nodes. Roughly every 10 minutes, a new block is created and added to the block chain that contains all of the recently accepted transactions that have been made since the previous block.
The next stage in this journey is Mining. Mining involves computers carrying out incredibly complex calculations to verify a new block. New blocks contain information that “chains” it to the previous block, which gives the block chain its name. This information is in the form of a cryptographic hash, using the SHA-256 hashing algorithm. Miners are required to “show” a proof of work, by finding a number known as a nonce. When the content of the block is hashed together with the nonce, the result should end up smaller than the network’s difficulty target. Therefore, as the difficulty increases, so does the number of possible nonces, which makes it very time consuming.
In the beginning, you could use your PC and a special mining software, to utilise your hardware to carry out the calculations, but as more and more people were being turned onto Bitcoin mining and the difficulty increased, the harder it became to mine with your PC. This then led to people creating “farms” of graphics cards (which could be used to mine) to help increase their chances of mining success. As time went on, specialist hardware was created in the form of FPGA miners, which had a hash speed in the Mega Hash range moving onto ASIC miners which had a hash speed in the Giga Hash range. Now, you can buy miners which have over a Tera Hash range of hashing power in the form of both physical miners which you run and power yourself, or in the form of cloud miners.
Every 2016 blocks, the difficulty target is adjusted to factor in changes to the network’s overall hashing power and to try and ensure the block generation occurs as close to every 10 minutes as possible.
As a reward for their work, miners are rewarded with 25 newly created Bitcoins. This reward is then halved every 210000 blocks, meaning that the total number of Bitcoins that will ever be created is 21 million. What happens to mining after that limit is reached? Miners will be rewarded with transaction fees. Transaction fees are not mandatory for making transactions on the network, but do help speed up the process on them getting confirmed.
So how do you use it?
First you need to generate a Bitcoin Wallet. This wallet contains a unique address in which you can send and receive Bitcoins from. This address is normally output in a long string of letters and numbers, so isn’t easy to remember, but you can also get this converted to a handy QR code, which can easily be scanned in many apps for payment, making it nice and simple to use.
As previously mentioned, each transaction can does not necessarily require any form of fee to send currency from one person to another. Because of this, Bitcoin has become a great way to send currencies across the world for a fraction of the cost it would normally cost using traditional methods.
As previously mentioned, the total limit of Bitcoin is 21 million coins. Where normal currency is theoretically limitless and only breaks down into 2 decimal places (in most normal operations), Bitcoin breaks down into 8 decimal places. Each 0.00000001 Bitcoin is known as a Satoshi, named after it’s creator. This effectively means that there are just over 2 quadrillion Satoshis that can ever be in “circulation” at any one time. So don’t worry if you don’t have a whole Bitcoin to begin with, as with advancements in the price of Bitcoin, even the smallest amount could one day be worth something big!
As more and more companies become aware about Bitcoin, the adoption for it will increase. Microsoft even started accepting Bitcoin as a form of payment on their online store recently against certain purchases. The first purchase for a pizza to be publicly sold was for 10,000 Bitcoins back in 2010, which at the time, equated to the cost for your average pizza. Fast forward to now and that value would be worth somewhere in the region of £3,000,000/$4,500,000.
It’s fair to say, that those who invested in Bitcoin from its early days have made a small fortune if they held onto their coins. That’s not to say that there’s no point in getting started now. If anything, now is a great time to start. The block reward is set to half during the summer, which is likely to mean that the price of Bitcoin will rise as theoretically the supply of coins will decrease meaning that there will be more demand than there are coins.
Is Bitcoin the only cryptocurrency around now?
No. There have been several other coins launched since Bitcoins inception, the most famous being Litecoin, Dogecoin, Ripple and most recently Ethereum, which has seen price growth of 1200% in its price per coin.
This has only really scratched the surface on Bitcoin and cryptocurrencies in general and is designed to give an overview on what it is all about. Keep an eye out for future posts on They, Them & Us, expanding on what we have covered above and helpful guides on how you can easily get involved with the future of money…the digital currency.