🔥 Bitcoin 101 – Topic 2: How Bitcoin Works
🔑 2.1 The Blockchain – Bitcoin’s Foundation
- What is a Blockchain?
- A distributed, public ledger that records all Bitcoin transactions.
- It consists of blocks of data linked together in chronological order.
- How It Works:
- When a transaction occurs, it is broadcast to the network.
- Miners verify and group transactions into a block.
- Each block contains:
- A list of transactions
- A timestamp
- A cryptographic hash of the previous block (ensuring immutability)
- Blocks are linked together, forming the blockchain.
- Immutability and Security:
- Once a block is added, it cannot be altered.
- Tampering with one block would require re-mining all subsequent blocks, which is computationally infeasible.
⚙️ 2.2 Proof-of-Work (PoW) – The Mining Process
- What is Mining?
- The process by which new Bitcoin transactions are verified and added to the blockchain.
- Miners use powerful computers to solve complex cryptographic puzzles.
- How it Works:
- Miners compete to solve the puzzle by finding a valid hash.
- The first miner to solve it broadcasts the new block to the network.
- Other nodes verify the block’s validity and add it to their copies of the blockchain.
- Mining Rewards:
- The winning miner receives a block reward (newly minted Bitcoin) + transaction fees.
- The block reward started at 50 BTC in 2009 and halves roughly every 4 years (halving event).
- Current block reward: 3.125 BTC (after the 2024 halving).
- Purpose of PoW:
- Secures the network by making attacks extremely expensive.
- Prevents double-spending and ensures decentralization.
🔒 2.3 Bitcoin’s Supply and Halving
- Fixed Supply Cap:
- Bitcoin has a finite supply of 21 million coins.
- This artificial scarcity makes it deflationary and resistant to monetary debasement.
- Halving Events:
- Approximately every 210,000 blocks (roughly 4 years), the block reward is cut in half.
- This reduces the new supply entering circulation, making Bitcoin more scarce over time.
- Halving timeline:
- 2009: 50 BTC per block
- 2012: 25 BTC
- 2016: 12.5 BTC
- 2020: 6.25 BTC
- 2024: 3.125 BTC
- Impact of Halving:
- Reduces inflationary pressure.
- Historically correlated with bullish price movements due to supply shock.
🔑 2.4 Bitcoin Transactions – Sending and Receiving BTC
- How Transactions Work:
- When you send Bitcoin, you are transferring ownership of a specific amount of BTC to another public address.
- Each transaction includes:
- Sender’s public key (Bitcoin address)
- Recipient’s public key
- Transaction fee (paid to miners)
- Miners confirm the transaction by including it in the next block.
- Transaction Fees:
- Fees vary based on network congestion.
- Higher fees = faster confirmations.
- Transaction Speed:
- On the main Bitcoin network, it takes ~10 minutes on average to confirm a block.
- High volume can lead to longer confirmation times.
- Lightning Network enables near-instant and low-fee transactions (Layer 2 solution).
🔐 2.5 Security and Trustless Nature
- Decentralized Validation:
- The network consists of tens of thousands of nodes worldwide.
- Each node keeps a copy of the entire blockchain, ensuring redundancy.
- Trustless Verification:
- No central authority validates transactions.
- The network enforces rules using cryptographic proof, making it trustless.
- Resistance to Attacks:
- To alter the blockchain, an attacker would need to control 51% of the mining power, which is highly unlikely due to the enormous energy and cost required.
- Double-Spending Protection:
- The PoW consensus prevents double-spending by making it computationally impractical to rewrite the blockchain.
✅ Key Takeaway:
Bitcoin operates on a decentralized, immutable blockchain secured by Proof-of-Work mining, ensuring trustless transactions. Its fixed supply cap and halving events enforce scarcity, making it a deflationary, sound money system.
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