By: A. Sharma
Introduction
The word ‘bitcoin’ refers to a type of cryptocurrency, that is, a virtual or digital currency used as a medium of exchange to purchase goods or services online, for making payments or investments, etc. It is the first-ever digital currency introduced that doesn’t need an intermediator like banks, governments, etc. making it the first decentralized digital currency. The concept of cryptocurrency or ‘bitcoin’ was first proposed in January 2009 by ‘Satoshi Nakamoto’ (a person or a group of people) whose identity remains unknown. It is based on Blockchain Technology. However, bitcoins and transactions in bitcoins are maintained and developed on the basis of the concept of ‘Proof of Work’ (PoW).
There is a limit to the number of bitcoins in the market. Currently, there are 21 million bitcoins in the world out of which around 17 million are in circulation. In order to honor the introducer of the concept of cryptocurrency (bitcoin), the smallest unit of bitcoin cryptocurrency is called a satoshi.
1 bitcoin = 100,000,000 satoshi
1 bitcoin = 50,93,597.44 Indian Rupee or 68,700 US Dollars.
There is a difference between the word ‘Bitcoin’ and ‘bitcoin’: Bitcoin ¹ bitcoin
Bitcoin refers to the public distributed ledger that stores information regarding transactions in bitcoins. bitcoin refers to the cryptocurrency that is used for online transactions.
Earning Bitcoins
In order to be eligible to transact using bitcoin, follow these steps :
- Download a bitcoin wallet app like Coinbase or Metabase.
- Create account.
- Write private key and remember it.
Using a private key (also called seed), the user can sign transactions and transfer a value into his wallet (buy bitcoins in exchange for fiat currency) or transfer value to someone else who has a bitcoin wallet and is eligible to send/receive funds on bitcoin’s blockchain.
Apart from buying bitcoins using fiat currency, bitcoins can also be traded on exchanges like Bitstamp where bitcoins can be bought in exchange for another crypto-like Ethereum, NEO, etc. Bitcoins can also be earned through shopping, publishing blog posts at platforms that pay users in cryptocurrency, or by setting up interest-earning crypto accounts. And the final but the most fruitful method of buying bitcoins is through Bitcoin-Mining.
Bitcoin-Mining
The process of verifying transactions in bitcoin and recording them onto public-ledger(i.e. Blockchain).
Prior to understanding bitcoin-mining, we need to understand a few terms:
- Blockchain : It refers public-distributed ledger which is a chain/network of blocks that stores records of transactions in cryptocurrency in chronological order. These record of transactions are cryptographically secure and immutable [1] [2].
- Block : Block is smallest unit of blockchain that stores cryptographically secure and validated(confirmed or verified) transactions A validated block has four fields which are as follows (figure 1) :
- Data : Details of several transactions in cryptocurrency (bitcoin).
- Previous Hash : Hash Value of previous block in the blockchain.
- Nonce : The random value used to change the output of hash value of a block whenever previous hash, data and nonce are fed to SHA-256 Algorithm [3] to generate hash value for the block.
- Hash : The resultant value obtained after feeding previous value, data and nonce to SHA-256 Algorithm. This value marks validation/verification of block in blockchain so that it can be successfully added to the network of blockchain across globe.
- Proof Of Work : The concept according to which transactions are verified and blocks are validated before adding them to blockchain. Basically, it involves solving a complex mathematical puzzle in which an appropriate value , called nonce value , is to be determined.
- SHA-256 Algorithm : The cryptographic hash algorithm that produces a unique 256 bit alphanumeric hash value for a given input.
- Miners : Bitcoin Users with appropriate Hardware, internet access who solve puzzles to validate and add blocks to blockchain network.
- Memory Pool : Set of unconfirmed transactions in a block which are to be verified suing proof of work.
Proof Of Work
The concept according to which transactions are verified and blocks are validated before adding them to the blockchain. This verification is based on solving a mathematical puzzle. Basically, miners are fed a set of unconfirmed transactions from the memory pool in the form of a Block. This block has fields called a nonce, data, and previous hash. In the course of solving a mathematical puzzle, miners have to generate a nonce (32-bit number); feed the nonce, data, and previous hash of the unverified block to SHA-256 Algorithm which then generates output in the form of Hash( a 256-bit number or 64 digit hexadecimal number). If this hash is equal to or less than a predefined hash, the puzzle is solved. Otherwise, the miner has to generate a new nonce, feed the new input to the SHA-256 Algorithm, generate a new Hash, and check its credibility.
Once the puzzle is solved by the miner, he/she shares his/her result with all nodes present across the blockchain network. If the majority of nodes approve of the result, the block is said to be validated and is successfully added to the blockchain network across the globe. Thus a successful transaction is carried out. Thus, a block is said to be mined. Each time a block is mined, bitcoins are created. This is how bitcoins are generated in the bitcoin market.
Now, the miner who was first to mine the block/solve the puzzle is rewarded with a certain value of bitcoins. As of May 2020, the miners get the reward of 6.5 BTC.
The average time given to mine a block is 10 minutes. If the block isn’t mined within that period, the block is left unconfirmed with unsuccessful transactions records and is called an orphan block. The predefined Hash value changes every 2016 block mined ( that is after every 14 days or 2 weeks).
The reward that miners get upon mining blocks successfully also changes every 210000 blocks mined (that is after every 4 years). In 2009, the reward was 50 BTC, in 2012 it became 25 BTC, in 2016 it became 12,.5 BTC and in May 2020, it fell down to 6.5 BTC.
References:
- M. Ali (2020), Blockchain Technology, Insights2Techinfo, pp.1
- Kouhizadeh, M., Saberi, S., & Sarkis, J. (2021). Blockchain technology and the sustainable supply chain: Theoretically exploring adoption barriers. International Journal of Production Economics, 231, 107831.
- Chen, Y., & Li, S. (2020, October). A high-throughput hardware implementation of SHA-256 algorithm. In 2020 IEEE International Symposium on Circuits and Systems (ISCAS) (pp. 1-4). IEEE.
Cite this article as:
A. Sharma (2020), BITCOIN, Insights2Techinfo, pp.1