Free Bitcoin Training – 2023 Edition2. How does Bitcoin work?
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Bitcoin works thanks to a combination of technologies: encryption algorithms (cryptography), a decentralized network and a consensus mechanism: theProof of Work.
The operating logic of Bitcoin is simple:to secureBitcoin (the protocol) by rewarding the actors who make it work in bitcoins (the currency).
Bitcoin users have a pair of public and private keys to secure their transactions, this is called asymmetric encryption.
Here we will talk about private key, public key and Bitcoin address. Often people tend to confuse public key and Bitcoin address.
The public key and the Bitcoin address are two distinct but related components of the Bitcoin system. The public key is derived from a user's private key by a mathematical process called the elliptic curve algorithm (we will not go into detail on the subject of the elliptic curve in this training).
The Bitcoin address, on the other hand, is a hashed and encoded version of the public key.
The Bitcoin address is generated from the public key, which itself is generated from the private key –Source bitira
Essentially, your public key is used to ensure that you are the owner of a transaction that is sent to your Bitcoin address, while the Bitcoin address itself is what other users use to send you bitcoins. So the Bitcoin address is like your account number, while the public key is like an electronic signature that validates your ownership of the bitcoins sent to that address.
The Bitcoin address is used to receive bitcoins, much like an email address is used to receive emails or a pseudonym serves as a point of contact for exchanging information on social networks and online games.
The private key is used to signtransactionsand authorize spending, just as you use a PIN or password to access your bank account or pay with your bank card.
Example of Paper Wallet generated via https://www.bitaddress.org/ displaying a Bitcoin public address and private key
There is no central point of control or central authority in the networkBitcoin. This is made up of thousands of independent nodes which communicate with each other to verify and validate transactions. All these nodes are managed by the community made up of individual users and businesses.
A node is a computing device connected to the rest of the network, this could be a personal computer, a server or a mobile phone.
To cut off the networkBitcoinit would be necessary to prevent all computing devices that host the Bitcoin software from communicating with each other over the Internet or over different communications protocols such as satellite networks. It's almost impossible and that's what makes the strength ofcryptocurrencies in general.
Proof of Work is a consensus mechanism used by the Bitcoin network to ensure that all nodes agree on the current state of theblockchain(transaction register). It ensures the integrity of theblockchainby preventing any individual or group from taking control of the network and manipulating the transactions recorded in the ledger.
The proof of work process works as follows: validator nodes (called miners) in the networkBitcoinmust solve mathematical equations to add a new block to the blockchain. These equations are designed to be difficult to solve, but easy to verify. Miners who succeed in solving these calculations first are rewarded with bitcoins, this process is called mining.
The software"Bitcoinindicates that the difficulty of equation calculations is adjusted based on the total computing power of the network, to ensure that it always takes around 10 minutes to add a new block. This process ensures that it is extremely difficult for an individual or group to take control of the network and falsify transactions, as this would require considerable computing power and therefore an increasingly higher budget as the number of players mining Bitcoin is increasing.
Bitcoin Proof of Work is one of the mechanisms ofconsensusmost used to guarantee the security of decentralized networks. However, it has limits, particularly from an ecological point of view because it consumes a lot of energy. Alternatives to Proof of Work are emerging such asProof of Stake.
Bitcoin mining farm from the Quebec company Bitfarms
THEconsensusProof of Work remains factually the most secure way to operate cryptocurrency software because Bitcoin has not suffered the slightest outage for more than 10 years. No othercryptocurrencyused on a large scale cannot boast of having operated without failure for more than 10 years in Proof of Stake (for the moment).
In its early days, the networkBitcoinhas experienced some disruptions and incidents, but it has never been completely broken down. Some disruptions were caused bydenial of service attacks(DDoS) on the nodes hosting the blockchainBitcoin, but these attacks were also generally repelled without disrupting network operation.
A DDoS denial of service attack is a tactic used in cyberspace to overload and disrupt a server/computer, service, or computer network by flooding it with a high volume of requests. The idea is to overwhelm the target system to the point that it can no longer handle the flow of requests, resulting in degraded performance or even a complete shutdown of the service.
Transaction fees on the Bitcoin network provide a deterrent to DDoS attacks. To understand this, we must first remember that each Bitcoin transaction requires space in a blockchain block and computing power to be processed (validated) by miners.
A DDoS attack on the Bitcoin network would consist of flooding the network with transactions, with the aim of overloading and slowing it down. However, each transaction requires a fee that is paid to miners as a reward for their validation work. If someone wanted to launch a DDoS attack, they would have to pay a fee for every transaction they send. This tactic would make such an attack extremely costly, which generally deters would-be attackers.
Additionally, miners tend to prioritize transactions that offer the highest fees. So even if a DDoS attack was launched, normal transactions with higher fees would still be prioritized.
People mine bitcoins for two main reasons: to earn them as a reward for solving mathematical equations and to maintain network security by validating transactions.
The reward for mining a block of bitcoins is currently 6.25 bitcoins. However, over time this reward will decrease, meaning there are fewer and fewer bitcoins to earn, so bitcoins become more and more scarce over time. Thus, the value ofbitcoin, which is determined by supply and demand in cryptocurrency markets, is an important factor for miners.
Later in this training we will see how Bitcoin transactions work in more detail and how to calculate the profitability of bitcoin mining in order to get an idea.
As a reward for adding a new block to the blockchain, the miner receives a certain number of bitcoins. This is called the "block reward".
WhenBitcoinwas launched in 2009, the block reward was 50 bitcoins knowing that a new new block is created every 10 minutes on average. However, this reward is designed to halve every 210,000 blocks or so, or roughly every four years, in an event called "halving".
| Year | bitcoins created with each block |
|---|---|
| 2009 | 50 |
| 2010 | 50 |
| 2011 | 50 |
| 2012 | 50 then 25 after the Halving in November 2012 |
| 2013 | 25 |
| 2014 | 25 |
| 2015 | 25 |
| 2016 | 25 then 12.5 after the Halving of July 2016 |
| 2017 | 12.5 |
| 2018 | 12.5 |
| 2019 | 12.5 |
| 2020 | 12.5 then 6.25 after the May 2020 Halving |
| 2021 | 6.25 |
| 2022 | 6.25 |
| 2023 | 6.25 |
| 2024 | 6.25 then 3.125 after the Halving in April 2024 |
The Coinbase transaction is the first transaction of a new block on the Bitcoin blockchain, created by a miner, who rewards the miner with the new bitcoins generated by the block as well as the transaction fees associated with the transactions included in that block.
We can note thatthe first block mined by Satoshi NakamotoJanuary 9, 2009 contains only one transaction: the Coinbase transaction, when a cryptocurrency miner mines a block he always indicates an address for receiving the new bitcoins created, these bitcoins are completely clean because they do not have any transaction history.
Coinbase transaction of the 1st block of Bitcoin –Source blockchain.com
As of the year 2020, the block reward was 6.25 bitcoins. The next halving is scheduled for April 2024 and the reward will then be divided by 2 again, it will then be 3,125 bitcoins per block.
It is important to note that the total number of bitcoins that will ever be created is limited to 21 million BTC. This limit was integrated into the Bitcoin protocol by its creator, SatoshiNakamoto, to guarantee the scarcity of money. As of May 2023, more than 19.3 million bitcoins have already been mined.
Free Bitcoin Training – 2023 Edition2. How does Bitcoin work?What you must remember
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- Bitcoin combines several technologies invented long before it such as encryption algorithms (cryptography) and the Proof of Work consensus mechanism.
- Bitcoin relies on asymmetric encryption (public key and private key)
- The public key comes from the private key
- The Bitcoin address comes from the public key, it is a hashed and encoded version of the public key.
- Bitcoin address is used to receive payments
- The private key is used to access bitcoins and sign transactions to spend bitcoins
- Bitcoin is based on a decentralized network to validate transactions
- It uses consensus based on proof of work (PoW) to ensure that all nodes agree and mining to reward actors who contribute to maintaining network security.
- Transaction fees on Bitcoin are used to reward miners and protect the network against attacks
- Each new block of transactions on Bitcoin is mined every 10 minutes on average
- When Bitcoin was launched, each new block created 50 new bitcoins; this number of newly created bitcoins is divided by 2 every 210,000 blocks, or approximately every 4 years.
- The maximum number of bitcoins that can be created is approximately 21 million BTC. In reality it's even a little less, because a miner can choose not to receive any bitcoin during the Coinbase transaction.