Hey guys! This is my second post for the steemcryptochallenge #5. In my last post, I walked you guys through how I first came across Bitcoin. In this entry, we will have a closer look at the working of Bitcoin.

^{Bitcoin under the hood | src}

Initially, in 2017, I didn’t know anything about Bitcoin or any other cryptocurrencies. I just treated this as an asset that I can buy low and sell high to make some quick bucks. However, then the price moment of Bitcoin just reached a whole new level. So, I decided to actually do some research on this cryptocurrency and understand why we have Billions of dollars invested in it.

How does Bitcoin work?

Bitcoin is the world’s first-ever successful decentralized cryptocurrency. In simple words, Bitcoin is a peer-to-peer currency that is digital in nature. Features such as immutability, decentralization, and deflationary model is what makes it very popular.

This cryptocurrency has been made possible by an ingenious technology called the blockchain. A blockchain is a continuous chain of blocks of transactions on a particular crypto network. Any transaction that is registered on the blockchain can never be removed from it. This is what makes the crypto networks immutable.

Every new block on the blockchain has a link(knows the address of) to the previous block on the chain. This means that all transactions are in an ordered fashion on the blockchain.

Whenever you create a new transaction on the Bitcoin network(send/receive BTC), your transaction enters a transaction pool. This pool contains hundreds of transactions that were made from around the world. Transaction validators on the crypto network are called miners.

The miners solve complex mathematical problems to verify every single transaction on the Bitcoin network. In return for verifying a transaction, the miners receive 2 sets of rewards. The first set comes in the form of miner fees, directly from the people who transact on the Bitcoin network. The second set of rewards is in the form of newly created Bitcoins that are used to reward the miners who found and mined a block of transactions on the network.

Amazing features of Bitcoin:

Price of Bitcoin increases as supply decreases and demand increases | src
1- Deflationary model: These rewards help to incentivize the miners to safeguard and verify transactions on the network. Since part of the miner reward is newly created Bitcoin, doesn’t that mean that new Bitcoins are added every day? Thus, making the whole network inflationary.

Wrong! This is where Bitcoin’s, fixed upper limit of 21 Million Bitcoins solves the problem. In the case of traditionally fiat currency, the new currency is printed regularly without having a physical asset backing its value. Additionally, there is no upper limit to this and you are at the mercy of the centralized financial body. Several countries such as Venezuela, Zimbabwe, etc have extremely inflated centralized currency that people use cryptocurrencies such as Bitcoins, etc to pay for their daily needs.

Every 210,000 blocks, the rewards credited to miners is reduced in half. So, far we have had three Bitcoin halving events. The initial block reward was 50 BTC. This has currently reduced to 6.25 BTC. So, approximately every 4 years, the rate at which new Bitcoins is added into circulation reduced by half. However, the rate at which new people get exposure to Bitcoin keeps increases. Consequently, the demand is higher than the supply. Hence, the deflationary model.

2- Immutability: All Bitcoin transactions are immutable i.e. once a transaction is verified, it is imprinted on the publicly accessible ledger. Once a transaction is recorded on the blockchain, no one can change it. Thus making Bitcoin immutable. This not only helps to keep track of all your transactions but also helps to minimize corruption.

In the past, we have had so many instances where corrupt bank officials have altered the banking ledger. This is not possible on the Bitcoin network.

Bitcoin is the world's first decentralized cryptocurrency | src

3- Decentralization: Unlike a centralized banking system, Bitcoin is completely decentralized. It runs on hundreds of thousands of computers around the world. The main advantage of decentralization is that it removes the central point of attack.

If someone wants to attack and bring down the entire Bitcoin network, he would need to figure out a way to bring down all the computers around the world. With it being this hard to attack the Bitcoin network, it means that you can transaction on this network at any time of day.

The same cannot be said about our banking systems whose servers tend to go down every now and then.

4- No problem with double spending: The main reasons for the failure of previous digital currencies is the double-spend problem that arose when centralized authorities didn’t verify every transaction.

The only way double-spends are possible if a user tries to spend the same Bitcoin twice. The solution to this problem is through the proof of work mining concept. When a transaction enters a mining pool, the miners pick one and include it in a block.

Every node(miner) is aware of a transaction that is verified. When a majority of the nodes agree upon a valid transaction, the second transaction would be considered a duplicate. Thus, avoiding unnecessary double-spends without any centralized authorities.

Conclusion:

The features that Bitcoin offers have several advantages that definitely make it a great cryptocurrency to replace centralized fiat currencies. There is however a lot of misconception regarding Bitcoin and cryptocurrencies in general that it is being used to buy illegal items. However, this can be true even with fiat currencies. This along with the failing inflationary model of fiat currencies make it a prime candidate for failure.

Cc:-
@steemitblog
@steemcurator01
@steemcurator02

This post has been set to 100% power up