Bitcoin (currency code: BTC, unicode symbol: ₿) is a the original cryptocurrency blockstream technology. On October 31, 2008 a white paper defining the term bitcoin was published by Satoshi Nakamoto. On January 3rd, 2009, the bitcoin network was created when Satoshi Nakamoto mined the first block of the bitcoin chain, known as the genesis block.
Bitcoin has found world-wide noteriety since inception. So, how does it work?
The unit of account of the bitcoin system is the bitcoin. One bitcoin is divisible to eight decimal places. Units for smaller amounts of bitcoin are the millibitcoin (mBTC), equal to 1⁄1000 bitcoin, and the satoshi (sat), which is the smallest possible division, and named in homage to bitcoin's creator, representing 1⁄100000000 (one hundred millionth) bitcoin. 100,000 satoshis equals one mBTC.
Bitcoin network nodes can validate transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other nodes to await confirmation. To achieve independent verification of the chain of ownership, each network node stores its own copy of the transaction ledger and blockchain. At varying intervals of time averaging every 10 minutes, a new group of accepted transactions, called a block, is created, added to the blockchain, and quickly published to all nodes, without requiring central oversight. These transactions are now considered "confirmed" by their inclusion in the blockchain. This allows bitcoin software and bitcoin wallets to determine when a particular bitcoin was spent, which is needed to prevent double-spending. A conventional ledger records the transfers of actual bills or promissory notes that exist apart from it, but as a digital ledger, bitcoins only exist by virtue of the blockchain. The ability to create new transactions is determined by the unspent outputs of previously confirmed transactions.
Individual blocks, public addresses, and transactions within blocks can be examined using a blockchain explorer. There are many bitcoin blockchain explorers publicly available on the internet.
Though transaction fees are optional, miners can choose which transactions to process and prioritize those that pay higher fees. Miners may choose transactions based on the fee paid relative to their storage size, not the absolute amount of money paid as a fee. These fees were generally measured in satoshis per byte (sat/b), but new protocols using Segregated Witness (SegWit) now commonly use satoshis per virtual byte (sat/vB). The size of transactions is dependent on the number of inputs used to create the transaction and the number of outputs.
The blocks in the blockchain were originally limited to 32 megabytes in size. The block size limit of one megabyte was introduced by Satoshi Nakamoto in 2010. Eventually, the block size limit of one megabyte created problems for transaction processing, such as increasing transaction fees and delayed processing of transactions. Andreas Antonopoulos has stated Lightning Network is a potential scaling solution and referred to lightning as a second-layer routing network.
The Segregated Witness (SegWit) bitcoin protocol softfork allows for a block to no longer be restricted to the size limit of 1mb, but instead, to its weight limit of 4mb. Each block is still limited to 1 million virtual bytes. Each byte in the non-witness part of a transaction counts as 1 virtual byte. Each byte in the witness part of a transaction counts as 1/4 of a virtual byte. If a transaction does not contain SegWit inputs, the transaction has no witness data, and its size is the same in bytes and virtual bytes. Virtual bytes (vbytes) are essentially a conversion tool that helps us measure weight units back to size (by dividing the weight units by 4). This feature of SegWite effectively discounts witness data and makes it more cost effective to spend old outputs, rather than to create new ones. This incentivizes shrinkage in the total number of unspent transaction outputs and helps scalability, by reducing storage and bandwidth requirements for bitcoin nodes.
Currently, the best bitcoin miner strategy is to select the transactions which pay the highest fee per virtual byte when deciding which transactions to include in their blocks.
For more details, see "What is Bitcoin Mining?"
If the private key is lost, the bitcoin network will not recognize any other evidence of ownership. Withou a private key the bitcoins are unusable, and effectively lost or destroyed. For example, in 2013 one bitcoin user claimed to have lost ₿7,500, worth $7.5 million at the time, when he accidentally discarded a hard drive containing his private key. About 20% of all bitcoins are believed to be lost. They would have had a market value of about $20 billion at July 2018 prices. As of March 2023, these "lost" bitcoins represent a value of over $187 million on the one lost hard drive, and possible more than $125,000,000,000 ($125 billion) around the full bitcoin network. While bitcoin prices are volatile, this likely leaves over $500,000,000,000 of usable bitcoins in circulation as of March 2023 at price of $25,000 per bitcoin.
To ensure the security of bitcoins, the private key must be kept secret. If the private key is revealed to a third party, e.g. through a data breach, bitcoin malware, or other poor security practices, the third party can use it to steal any associated bitcoins. As of December 2017, around ₿980,000 have been stolen from cryptocurrency exchanges.
Regarding ownership distribution, as of 28 December 2022, 9.62% of bitcoin addresses own 98.51% of all bitcoins ever mined. The largest of these addresses are thought to belong to bitcoin exchanges, which are keeping their bitcoin and other crytocurrency in cold storage.
To get started using bitcoin cryptocurrency, you must choose which type of wallet to use. The options are extensive, and are explored in further detail on this bitcoin wallet choices page.
Bitcoin has found world-wide noteriety since inception. So, how does it work?
Bitcoin Units and Divisibility
| Unit | Decimal |
|---|---|
| One bitcoin (BTC) | = 1.00000000 |
| One mBTC (millibitcoin) | = 0.00100000 |
| One satoshi (sat) | = 0.00000001 |
The unit of account of the bitcoin system is the bitcoin. One bitcoin is divisible to eight decimal places. Units for smaller amounts of bitcoin are the millibitcoin (mBTC), equal to 1⁄1000 bitcoin, and the satoshi (sat), which is the smallest possible division, and named in homage to bitcoin's creator, representing 1⁄100000000 (one hundred millionth) bitcoin. 100,000 satoshis equals one mBTC.
Blockchain - Data Structure of Blocks in the Ledger
The bitcoin blockchain is a public ledger that records miner-confirmed bitcoin transactions. It is implemented as a chain of blocks, each block containing a cryptographic hash of the previous block up to the genesis block in the chain. A network of communicating bitcoin nodes running bitcoin software maintains the blockchain by way of sharing or broadcasting potential transactions and confirmed bitcoin transactions to be included in the blockchain. Transactions of the form "payer" sends "XX.XXXXXXXX" bitcoins to "payee" (receiver) are broadcast to this network using readily available software applications, called bitcoin wallets.Bitcoin network nodes can validate transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other nodes to await confirmation. To achieve independent verification of the chain of ownership, each network node stores its own copy of the transaction ledger and blockchain. At varying intervals of time averaging every 10 minutes, a new group of accepted transactions, called a block, is created, added to the blockchain, and quickly published to all nodes, without requiring central oversight. These transactions are now considered "confirmed" by their inclusion in the blockchain. This allows bitcoin software and bitcoin wallets to determine when a particular bitcoin was spent, which is needed to prevent double-spending. A conventional ledger records the transfers of actual bills or promissory notes that exist apart from it, but as a digital ledger, bitcoins only exist by virtue of the blockchain. The ability to create new transactions is determined by the unspent outputs of previously confirmed transactions.
Individual blocks, public addresses, and transactions within blocks can be examined using a blockchain explorer. There are many bitcoin blockchain explorers publicly available on the internet.
Bitcoin Network Transactions
Transactions are defined using a Forth-like scripting (programming) language. Transactions consist of one or more inputs and one or more outputs. When a user sends bitcoins, the user designates each receiving bitcoin address and the amount of bitcoin being sent to that bitcoin address in an output. To prevent double spending, each input must refer to a previously confirmed and unspent output in the blockchain. The use of multiple inputs corresponds to the use of multiple bills/coins in a cash transaction. Since transactions can have multiple outputs, users can send bitcoins to multiple recipients in one transaction. As in a cash transaction, the sum of inputs (bills/coins used to pay) can exceed the intended sum of payments. In such a case, an additional output is used, returning the change back to the payer by way of a "change address" in the sender's wallet. Any input satoshis not accounted for in the transaction outputs become the transaction fee, which is paid to the bitcoin miner that confirms the block.Though transaction fees are optional, miners can choose which transactions to process and prioritize those that pay higher fees. Miners may choose transactions based on the fee paid relative to their storage size, not the absolute amount of money paid as a fee. These fees were generally measured in satoshis per byte (sat/b), but new protocols using Segregated Witness (SegWit) now commonly use satoshis per virtual byte (sat/vB). The size of transactions is dependent on the number of inputs used to create the transaction and the number of outputs.
The blocks in the blockchain were originally limited to 32 megabytes in size. The block size limit of one megabyte was introduced by Satoshi Nakamoto in 2010. Eventually, the block size limit of one megabyte created problems for transaction processing, such as increasing transaction fees and delayed processing of transactions. Andreas Antonopoulos has stated Lightning Network is a potential scaling solution and referred to lightning as a second-layer routing network.
The Segregated Witness (SegWit) bitcoin protocol softfork allows for a block to no longer be restricted to the size limit of 1mb, but instead, to its weight limit of 4mb. Each block is still limited to 1 million virtual bytes. Each byte in the non-witness part of a transaction counts as 1 virtual byte. Each byte in the witness part of a transaction counts as 1/4 of a virtual byte. If a transaction does not contain SegWit inputs, the transaction has no witness data, and its size is the same in bytes and virtual bytes. Virtual bytes (vbytes) are essentially a conversion tool that helps us measure weight units back to size (by dividing the weight units by 4). This feature of SegWite effectively discounts witness data and makes it more cost effective to spend old outputs, rather than to create new ones. This incentivizes shrinkage in the total number of unspent transaction outputs and helps scalability, by reducing storage and bandwidth requirements for bitcoin nodes.
Currently, the best bitcoin miner strategy is to select the transactions which pay the highest fee per virtual byte when deciding which transactions to include in their blocks.
For more details, see "What is Bitcoin Mining?"
Bitcoin Ownership
Simplified chain of ownership as illustrated in the bitcoin whitepaper. In practice, a transaction can have more than one input and more than one output. In the blockchain, bitcoins are registered to bitcoin addresses. Creating a bitcoin address requires nothing more than picking a random valid private key and computing the corresponding bitcoin address. This computation can be done in a split second. But the reverse, computing the private key of a given bitcoin address, is practically impossible. Users can tell others or make public a bitcoin address without compromising its corresponding private key. Moreover, the number of valid private keys is so vast that it is extremely unlikely someone will compute a key pair that is already in use and has funds. The vast number of valid private keys makes it unfeasible that brute force could be used to compromise a private key. To be able to spend their bitcoins, the owner must know the corresponding private key and digitally sign the transaction. The network verifies the signature using the public key; the private key is never revealed.If the private key is lost, the bitcoin network will not recognize any other evidence of ownership. Withou a private key the bitcoins are unusable, and effectively lost or destroyed. For example, in 2013 one bitcoin user claimed to have lost ₿7,500, worth $7.5 million at the time, when he accidentally discarded a hard drive containing his private key. About 20% of all bitcoins are believed to be lost. They would have had a market value of about $20 billion at July 2018 prices. As of March 2023, these "lost" bitcoins represent a value of over $187 million on the one lost hard drive, and possible more than $125,000,000,000 ($125 billion) around the full bitcoin network. While bitcoin prices are volatile, this likely leaves over $500,000,000,000 of usable bitcoins in circulation as of March 2023 at price of $25,000 per bitcoin.
To ensure the security of bitcoins, the private key must be kept secret. If the private key is revealed to a third party, e.g. through a data breach, bitcoin malware, or other poor security practices, the third party can use it to steal any associated bitcoins. As of December 2017, around ₿980,000 have been stolen from cryptocurrency exchanges.
Regarding ownership distribution, as of 28 December 2022, 9.62% of bitcoin addresses own 98.51% of all bitcoins ever mined. The largest of these addresses are thought to belong to bitcoin exchanges, which are keeping their bitcoin and other crytocurrency in cold storage.
To get started using bitcoin cryptocurrency, you must choose which type of wallet to use. The options are extensive, and are explored in further detail on this bitcoin wallet choices page.
