You're reading from Blockchain Quick Reference

Product typeBook

Published inAug 2018

Reading LevelIntermediate

PublisherPackt

ISBN-139781788995788

Edition1st Edition

Languages

Solidity

Tools

Ethereum

Concepts

Blockchain

Authors (4):

Mariko Amekodommo

Brenn Hill

Samanyu Chopra

Paul Valencourt

View More author details

Bitcoin

In earlier chapters, we discussed blockchain, its components, and its structure in detail. We also discussed cryptography, the mechanics behind blockchain, and how blockchain is revolutionizing the network world. In this chapter, we will be discussing Bitcoin's origins.

We will discuss the introduction of Bitcoin, its history, and how it became one of the biggest revolutions of financial history in such a short space of time. We will also dive deep into other aspects of Bitcoin, such as its encoding system, transaction process, network nodes, and we'll briefly cover the mining of Bitcoins.

The topics that we will cover in this chapter include the following:

The history of Bitcoin
Why Bitcoin is volatile
Keys and addresses
Transactions
Blocks
Bitcoin network
Wallets

The history of Bitcoin

Bitcoin is the first and, to date, the most successful application of blockchain technology. Bitcoins were introduced in 2008, in a paper on Bitcoin called Bitcoin: A Peer-to-Peer Electronic Cash System (https://bitcoin.org/bitcoin.pdf), which was authored by Satoshi Nakamoto.

Bitcoin was the world's first decentralized cryptocurrency; its introduction heralded a revolution, and, in just about a decade, it has proved its strengths, with huge community backing and widespread adoption.

From 2010, certain global businesses have started to accept Bitcoins, with the exception of fiat currencies. A lot of currency exchanges were founded to let people exchange Bitcoin with fiat currency or with other cryptocurrencies. In September 2012, the Bitcoin Foundation was launched to accelerate the global growth of Bitcoin through standardization, protection, and promotion...

Why Bitcoin is volatile

When we say Bitcoin is volatile, we mean the price of Bitcoin is volatile. The spot rate of Bitcoin at various exchanges changes every moment and, moreover, it functions 24/7. Hence, any user or community member of Bitcoin is perturbed by the regularly changing price of Bitcoin. The following chart shows the price fluctuation of Bitcoin over the last financial year:

The volatility of Bitcoin is the most discussed topic and has been a concern for investors, miners, and supporters of Bitcoin since the exchanges of Bitcoin came up. Some prime reasons for this as follows:

Security breaches: This has been a major issue in the price fluctuation of Bitcoin in the past; whenever news of security flaws at an exchange's end comes up, the price of Bitcoin takes a hit, since this makes the investors start to doubt a certain exchange or the Bitcoin network.
Legal...

Keys and addresses

Bitcoin, being a purely digital currency, can be owned by people by keeping or storing it in files or in a Bitcoin Wallet. Addresses are used to transfer Bitcoins from one wallet to another, and keys are used to secure a transaction.

Keys in Bitcoins are used in pairs. One is a public key, and the other is a private key. The private key is to be kept securely, since it gives you control over a wallet. The keys are stored and controlled by a Bitcoin wallet.

Addresses are alphanumeric strings that are shared for sending or receiving Bitcoins from one wallet to another. The addresses are mostly encoded as Base58Check, which uses a Base58 number for address transcription. A Bitcoin address is also encoded in a QR code for quick transactions and sharing.

Currency units...

Transactions

This is the primary part of the Bitcoin system. Transactions are not encrypted, since Bitcoin is an open ledger. Any transaction can be publicly seen in the blockchain using any online blockchain explorer. Since addresses are encrypted and encouraged to be unique for every transaction, tracing a user becomes difficult.

Blocks in Bitcoin are made up of transactions that are viewed in a blockchain explorer; each block has the recent transactions that have happened. Every new block goes at the top of the blockchain. Each block has a height number, and the height of the next block is one greater than that of the previous block. The consensus process is commonly known as confirmations on the blockchain explorer.

Types

...

Blocks

The transaction data is recorded in files, and these files are known as blocks. The blocks are stacked on top of one another, the most recent block being at the top. The following table depicts the structure of the block and the size of the elements in a block:

Every block in the Bitcoin network has almost the same structure, and each of the blocks is chained to the most recent block. These are the fields of the block:

Magic number: This number is an identifier for the blockchain network. Its value is always constant at 0xD9B4BEF9. It confirms the start of the block and verifies that the data is from the production network.
Block size: This signifies the size of the block.
Block header: A header contains the metadata of the block. It comprises multiple items of data, such as the Bitcoin version, the previous block hash, Merkle root, timestamp, mining difficulty, and nonce...

Bitcoin network

The network is based on a peer-to-peer (P2P) protocol. Various nodes exchange transactions and blocks in this network. Every node in this Bitcoin network is treated equally. One advantage of this is that each node has the option of taking different roles, depending on each person's preference on how they want to participate in the Bitcoin network.

Types of nodes

Before we discuss the types of nodes, let's discuss some of the primary functionalities that the nodes perform:

Wallet
Mining
Full blockchain
Routing

Majorly, there are two types of nodes in the Bitcoin network. We'll now go into some brief details on each.

...

Wallets

Bitcoin wallets are an important function of the Bitcoin node; they contain private and/or public keys and Bitcoin addresses. There are various types of Bitcoin wallets and each one offers a varied level of security and functions, as required.

There is a common misconception that an e-wallet can contain Bitcoins but a Bitcoin wallet will only contain keys. Each Bitcoin is recorded on the blockchain in the Bitcoin network. A Bitcoin wallet contains keys, and these keys authorize the use of Bitcoins that are associated with the keys. Users or wallet owners sign a transaction with the keys in the wallet, proving that they own the Bitcoins. In reality, these Bitcoins are stored on the blockchain in the form of transaction outputs that are denoted as txout.

Types

...

Summary

In this chapter, we discussed the basics of Bitcoin, its history, and its pricing in comparison to fiat currency. We also discussed Bitcoin addresses, their encoding, their transaction types, and blocks. Finally, we discussed the Bitcoin network and the types of nodes the network contains.

Now that we have discussed the world's first cryptocurrency in this chapter, in the next chapter, we will discuss various other cryptocurrencies that were inspired by Bitcoin and are also known as alternative currencies. We will discuss the alt-currencies, which are sometimes also called Altcoins.

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Authors (4)

Mariko Amekodommo

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