I. What is Bitcoin? Cryptocurrency is a completely digital, formless currency, tied together using computer science, cryptography and economics. Bitcoin is the first and most widely used cryptocurrency.
Bitcoin is inspired by the Cypherpunk Movement in the 1980s, which advocated for protection of privacy from external entities using cryptography. Satoshi Nakamoto first outlined and created Bitcoin in 2008 and 2009.
Bitcoin aims to be pseudonymous, trustless, decentralized, and immutable. In addition, anyone with a computer and internet connection can join the Bitcoin network. Each computer is a node in the Bitcoin network, and each node may verify and audit the transaction history of their own funds. In Bitcoin, the minting and distribution of bitcoins is determined through mining; since anyone can mine and win bitcoins, this process also aims to be decentralized.
Some of the challenges Bitcoin addresses are: The difficulty to ensure every Bitcoin node holds a consistent version of the transaction history The difficulty to identify malicious actors
These conditions may normally allow a node to conduct a Double Spend Attack, in which the one spends the same funds more than once by tricking parts of the network to believe different versions of the transaction history. However, Satoshi overcame this problem using blockchain and Proof-of-Work. Bitcoin is robust because it serves the same functions as a bank: Account management; the Bitcoin protocol gives users a way to create and manage their own identities (account)
Legitimacy; It ensures we are legitimate owners and accessors of our accounts Record-keeping; It honestly records account balances at each transactions.
Unlike a bank, Bitcoin is decentralized and ensures a high degree of privacy and trust. Trust is built on the blockchain due to a high level of transparency: blockchain is a publicly verifiable ledger, not owned by any entity, and it prevents any single point of failure.
To maintain this trust, we need identity in Bitcoin for authentication and assigning blame. Bitcoin uses public keys to send funds and private keys to prove ownership of the public key and redeem the sent funds. Each individual is responsible for creating and managing their own private and public keys. Public keys are generated from Private keys and are used to send/receive funds. Private keys are randomly generated and used to prove ownership of the public key. The chances of guessing the same private key are very low.
In addition to proof of ownership, in order to be considered valid, transactions must also have enough available funds to spend from and guarantee that no other transaction uses the same funds. Bitcoin uses the Unspent Transaction Output (UTXO), in which users spend directly from transactions made to them.
Instead of storing transactions individually, Bitcoin batches them into “blocks,” built off of their previous blocks, thus forming the tamper-evident, blockchain data structure.
Users on the blockchain must come to a consensus on which updates and blocks to add to the blockchain. Doing so also prevents Double Spend Attacks. Bitcoin uses a form of peer validation to build a shared transaction history; everyone on the network casts votes on the validity of a transaction. To prevent a Sybil Attack, where users create multiple identities for malicious purposes, Bitcoin employs Proof of Work, where voting power is based on computational power, to make voting expensive.