What Is Bitcoin and What is It Used for
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What is Bitcoin used for?
What makes Bitcoin valuable?
Bitcoin is decentralized, censorship-resistant, secure, and borderless.
This quality has made it appealing for use cases such as international remittance and payments where individuals don’t want to reveal their identities (as they would with a debit or credit card).
How does Bitcoin work?
When Angel makes a transaction to Boma, she’s not sending funds in the way you’d expect. It’s not like the digital equivalent of handing him a dollar bill. It’s more like her writing on a sheet of paper (that everyone can see) that she’s giving one dollar to Boma. When Boma goes to send those same funds to Rose, she can see that Boma has them by looking at the sheet.
The sheet is a particular kind of database called a blockchain. Network participants all have an identical copy of this stored on their devices. The participants connect with each other to synchronize new information.
What is the blockchain?
Is Bitcoin legal?
Bitcoin is perfectly legal in most countries. There are a handful of exceptions, though – be sure to read up on the laws of your jurisdiction before investing in cryptocurrency.
In countries where it’s legal, government entities take varying approaches to it where taxation and compliance are concerned. The regulatory landscape is still highly underdeveloped overall and will likely change considerably in the coming years.
A History of Bitcoin
Who created Bitcoin?
Did Satoshi invent blockchain technology?
Bitcoin actually combines a number of existing technologies that had been around for some time. This concept of a chain of blocks wasn’t born with Bitcoin. The use of unalterable data structures like this can be traced back to the early 90s when Stuart Haber and W. Scott Stornetta proposed a system for timestamping documents. Much like the blockchains of today, it relied on cryptographic techniques to secure data and to prevent it from being tampered with.
Interestingly, at no point does Satoshi’s white paper make use of the term “blockchain.”
Digital cash before Bitcoin
Bitcoin wasn’t the first attempt at digital cash, but it is certainly the most successful. Previous schemes paved the way for Satoshi’s invention:
The DigiCash model was a centralized system, but it was nonetheless an interesting experiment. The company later went bankrupt, which Chaum believes was due to its introduction before e-commerce had truly taken off.
Ultimately, b-money never took off, as it didn’t make it past the draft stage. That said, Bitcoin clearly takes inspiration from the concepts presented by Dai.
Like b-money, it was never further developed. Bit Gold’s similarities to Bitcoin have, however, cemented its place as the “precursor to Bitcoin.”
Where Do Bitcoins Come From?
How are new bitcoins created?
How many bitcoins are there?
How does Bitcoin mining work?
It’s expensive to generate a block, but cheap to check if it’s valid. If someone tries to cheat with an invalid block, the network immediately rejects it, and the miner will be unable to recoup the mining costs.
How long does it take to mine a block?
The protocol adjusts the difficulty of mining so that it takes approximately ten minutes to find a new block. Blocks aren’t always found exactly ten minutes after the previous one – the time taken merely fluctuates around this target.
Getting Started with Bitcoin
How can I buy Bitcoin?
How to buy Bitcoin with a credit/debit card
Binance allows you to seamlessly buy Bitcoin in your browser. To do so:
- Go to the Buy and Sell Cryptocurrency portal.
- Select the cryptocurrency you want to buy, and the currency you wish to pay with.
- Log in to Binance, or register if you don’t already have an account.
- Select your payment method.
- If prompted, insert your card details and complete identity verification.
- That’s it! Your Bitcoin will be credited to your Binance account.
How to buy Bitcoin on peer-to-peer markets
- Launch the app and log in or register.
- Select One click buy sell, followed by the Buy tab in the top left corner of the interface.
- You’ll be prompted with a number of different offers – tap Buy on the one you wish to go with.
- You can pay with other cryptocurrencies (the By Crypto tab) or fiat currency (the By Fiat tab).
- Below, you’ll be asked for your payment method. Pick whichever one suits you.
- Select Buy BTC.
- You now have to make the payment. When you’re done, tap Mark as paid, and confirm.
- The transaction is completed when the seller sends your coins.
What can I buy with Bitcoin?
There are a lot of things you can buy with Bitcoin. At this stage, it can be difficult (though not impossible) to locate merchants that accept Bitcoin in physical stores. However, you’ll still be able to find websites that accept it or allow you to purchase gift cards with it for other services.
Just to name a few, some of the things you can buy with Bitcoin are:
- Airplane tickets
- Hotel rooms
- Real estate
- Food & drink
- Gift cards
- Online subscriptions
Where can I spend Bitcoin?
You can spend your Bitcoin at a growing number of places! Let’s go through a few of them.
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Spendabit is a search engine for products that you can buy with Bitcoin. Just search for what you’d like to buy and get a list of merchants who you can buy it from with Bitcoin.
Search for all the cryptocurrency merchants and ATMs around your area. If you’re eager to spend your Bitcoin and just looking for a place to spend it, this might be an ideal choice for you.
What if I lose my bitcoins?
Can I revert Bitcoin transactions?
Can I make money with Bitcoin?
How can I store my bitcoin?
There are many options to store coins, each with their own strengths and weaknesses.
Storing your bitcoin on Binance
Storing your coins on Binance allows you to easily access them for the purposes of trading or lending.
Storing your coins in a bitcoin wallet
Non-custodial solutions are the opposite – they put the user in control of their funds. To store funds with such a solution, you use something called a wallet. A wallet doesn’t hold your coins directly – rather, it holds cryptographic keys that unlock them on the blockchain. You have two main options on this front:
Cryptocurrency wallets that are not exposed to the Internet are known as cold wallets. They’re less prone to attack because there is no online attack vector, but they consequently tend to provide a clunkier user experience. Examples include hardware wallets or paper wallets.
The Bitcoin Halving
What is the Bitcoin halving?
A Bitcoin halving (also called a Bitcoin halvening) is simply an event that reduces the block reward. Once a halving occurs, the reward given to miners for validating new blocks is divided by two (they only receive half of what they used to). However, there is no impact on transaction fees.
How does the Bitcoin halving work?
When Bitcoin launched, miners would be awarded 50 BTC for each valid block they found.
The first halving took place on November 28th, 2012. At that point, the protocol reduced the block subsidy from 50 BTC to 25 BTC. The second halving occurred on July 9th, 2016 (25 BTC to 12.5 BTC). The last one took take place on May 11th, 2020, bringing the block subsidy down to 6.25 BTC.
Why does the Bitcoin halving happen?
It’s one of Bitcoin’s main selling points, but Satoshi Nakamoto never fully explained his reasoning for capping the supply at twenty-one million units. Some speculate that it’s merely a product of starting with a block subsidy of 50 BTC, which is halved every 210,000 blocks.
It makes sense that there are limits on how fast participants can mine coins. After all, 50% were generated by block 210,000 (i.e., by 2012). If the subsidy remained the same, all units would have been mined by 2016.
With the halving mechanism, there is an incentive to mine for 100+ years. This gives the system more than enough time to attract users so that a fee market can develop.
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What impact does the Bitcoin halving have?
Those that are most impacted by halvings are miners. It makes sense, as the block subsidy makes up a significant part of their revenue. When it is halved, they only receive half of what they once did. The reward also consists of transaction fees, but to date, these have only made up a fraction of the block reward.
Halvings could, therefore, make it unprofitable for some participants to continue mining. What this means for the wider industry is unknown. A reduction in block rewards might lead to further centralization in mining pools, or it could simply promote more efficient mining practices.
Historically, a sharp rise in Bitcoin price has followed a halving. Of course, there isn’t much data available as we’ve only seen two so far. Many attribute the price movement to an appreciation of Bitcoin’s scarcity by the market, a realization triggered by the halving. Proponents of this theory believe that value will once again skyrocket following the event in May 2020.
When is the next Bitcoin halving?
Common Bitcoin Misconceptions
Is Bitcoin anonymous?
Is Bitcoin a scam?
No. Just like fiat money, Bitcoin may also be used for illegal activities. But, this doesn’t make Bitcoin a scam in and of itself.
Is Bitcoin a bubble?
Due to Bitcoin’s unique nature as a decentralized digital commodity, its price is entirely dictated by speculation in the free market. So, while there are many factors driving the Bitcoin price, they ultimately affect market supply and demand. And since Bitcoin is scarce and follows a strict issuance schedule, it’s thought that long-term demand will exceed supply.
The cryptocurrency markets are also relatively small when compared to traditional markets. This means that Bitcoin and other crypto assets tend to be more volatile, and it’s quite common to see short-term market imbalances between supply and demand.
Does Bitcoin use encryption?
It’s worth noting, though, that many applications and crypto wallets make use of encryption to protect users’ wallets with passwords. Still, these encryption methods have nothing to do with the blockchain – they’re just incorporated into other technologies that tap into it.
What is scalability?
Scalability is a measure of a system’s ability to grow to accommodate increasing demand. If you host a website that’s overrun with requests, you might scale it by adding more servers. If you want to run more intensive applications on your computer, you could upgrade its components.
In the context of cryptocurrencies, we use the term to describe the ease of upgrading a blockchain so it can process a higher number of transactions.
Why does Bitcoin need to scale?
To function in day-to-day payments, Bitcoin must be fast. As it stands, it has a relatively low throughput, meaning that a limited amount of transactions can be processed per block.
As you know from the previous chapter, miners receive transaction fees as part of the block reward. Users attach these to their transactions to incentivize miners to add their transactions to the blockchain.
How many transactions can Bitcoin process?
Because it’s not managed by a data center that a single entity can upgrade at will, Bitcoin must limit the size of its blocks. A new block size that allows 10,000 transactions per second could be integrated, but it would harm the network’s decentralization. Remember that full nodes need to download new information roughly every ten minutes. If it becomes too burdensome for them to do so, they’ll likely go offline.
If the protocol is to be used to payments, Bitcoin enthusiasts believe that effective scaling needs to be achieved in different ways.
What is the Lightning Network?
The Lightning Network allows users to send funds near-instantly and for free. There are no constraints on throughput (provided users have the capacity to send and receive). To use the Bitcoin Lightning Network, two participants lock up some of their coins in a special address. The address has a unique property – it only releases the bitcoins if both parties agree.
From there, the parties keep a private ledger that can reallocate balances without announcing it to the main chain. They only publish a transaction to the blockchain when they’re done. The protocol then updates their balances accordingly. Note that they don’t need to trust each other, either. If one tries to cheat, the protocol will detect it and punish them.
In total, a payment channel like this one only requires two on-chain transactions from the user – one to fund their address and one to later dispense the coins. This means that thousands of transfers can be made in the meantime. With further development and optimization, the technology could become a critical component for large blockchain systems.
What are forks?
Since Bitcoin is open-source, anyone can modify the software. You could add new rules or remove old ones to suit different needs. But not all changes are created equal: some updates will make your node incompatible with the network, while others will be backward-compatible.
Older nodes can still receive these blocks or propagate their own. That means that all nodes remain part of the same network, no matter which version they run.
In the below animation, we can see that the smaller blocks are accepted both by older and updated nodes. However, newer nodes will not recognize 2MB blocks, because they are already following the new rules.
The black chain in the diagram above is the original one. Block 2 is where the hard fork has taken place. Here, nodes that have upgraded have started producing larger blocks (the green ones). The older nodes don’t recognize those, so they continue along a different path. There are now two blockchains, but they share a history until Block 2.
Now there are two different protocols, each with a different currency. All the balances on the old one are cloned, meaning that if you had 20 BTC on the original chain, you have 20 NewBTC on the new one.
In 2017, Bitcoin went through a controversial hard fork in a scenario similar to the above. A minority of participants wanted to increase the block size to ensure more throughput and cheaper transaction fees. Others believed this to be a poor scaling strategy. Eventually, the hard fork gave birth to Bitcoin Cash (BCH), which split from the Bitcoin network and now has an independent community and roadmap.
Participating in the Bitcoin Network
What is a Bitcoin node?
“Bitcoin node” is a term used to describe a program that interacts with the Bitcoin network in some way. It can be anything from a mobile phone operating a Bitcoin wallet to a dedicated computer that stores a full copy of the blockchain.
There are several types of nodes, each performing specific functions. All of them act as a communication point to the network. Within the system, they transmit information about transactions and blocks.
How does a Bitcoin node work?
Full nodes are integral to Bitcoin’s decentralization. They download and validate blocks and transactions, and propagate them to the rest of the network. Because they independently verify the authenticity of the information they’re being provided with, the user doesn’t rely on a third party for anything.
Light nodes are not as capable as full nodes, but they’re also less resource-intensive. They allow users to interface with the network without performing all of the operations that a full node does.
Light nodes are ideal for devices with constraints in bandwidth or space. It’s common to see this type of node being used in desktop and mobile wallets. Because they can’t perform validation, however, light nodes are dependent on full nodes.
Mining nodes are full nodes that perform an additional task – they produce blocks. As we touched on earlier, they require specialized equipment and software to add data to the blockchain.
Mining nodes take pending transactions and hash them along with other information to generate a number. If the number falls below a target set by the protocol, the block is valid and can be broadcast to other full nodes.
But in order to mine without relying on anyone else, miners need to run a full node. Otherwise, they can’t know what transactions to include in the block.
If a participant wants to mine but doesn’t want to use a full node, they can connect to a server that gives them the information they need. If you mine in a pool (that is, by working with others), only one person needs to run a full node.
How to run a full Bitcoin node
A full node can be advantageous for developers, merchants, and end-users. Running the Bitcoin Core client on your own hardware gives you privacy and security benefits, and strengthens the Bitcoin network overall. With a full node, you no longer rely on anyone else to interact with the ecosystem.
A handful of Bitcoin-oriented companies offer plug-and-play nodes. Pre-built hardware is shipped to the user, who just needs to power it on to begin downloading the blockchain. This can be more convenient for less technical users, but it’s often considerably more expensive than setting up your own.
In most cases, an old PC or laptop will suffice. It’s not advisable to run a node on your day-to-day computer as it could slow it down considerably. The blockchain grows continuously, so you’ll need to ensure that you have enough memory to download it in its entirety.
A 1TB hard drive will suffice for the next several years, provided there isn’t any major change to the block size. Other requirements include 2GB of RAM (most computers have more than this by default) and a lot of bandwidth.
How to mine Bitcoin
In the early days of Bitcoin, it was possible to create new blocks with conventional laptops. The system was unknown at that point, so there was little competition in mining. Because activity was so limited, the protocol naturally set a low mining difficulty.
Mining Bitcoin today requires significant investment – not only in hardware but also in energy. At the time of writing, a good mining device performs upwards of ten trillion operations per second. Although very efficient, ASIC miners consume tremendous amounts of electricity. Unless you have access to several mining rigs and cheap electricity, you’re unlikely to ever turn a profit with Bitcoin mining.
With the materials, however, setting up your mining operation is straightforward – many ASICs come with their own software. The most popular option is to point your miners towards a mining pool, where you work with others to find blocks. If you’re successful, you’ll receive part of the block reward proportional to the hash rate you’ve provided.
How long does it take to mine a bitcoin?
Who can contribute to the Bitcoin code?
The Bitcoin Core software is open-source, meaning that anyone can contribute to it. You can propose or review new features to be added to the 70,000+ lines of code. You can also report bugs, or translate and improve the documentation.
Changes to the software go through a rigorous reviewing process. After all, software that handles hundreds of billions of dollars in value must be free of any vulnerabilities.
That’s the much we can take on the topic “What Is Bitcoin and What is It Used for”.
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