Cryptocurrency

Cryptocurrency provides a secure way to conduct transactions. Unlike traditional currencies controlled by central banks, cryptocurrencies operate on decentralized networks using blockchain technology. This decentralized nature ensures that no single entity has control over the currency, reducing the risk of manipulation and central failure. Additionally, the use of advanced cryptographic techniques controls the creation of new units, making it exceedingly difficult for hackers to alter transaction data or create counterfeit coins.

Blockchain technology offers a transparent ledger of all transactions, fostering trust among users by allowing anyone to verify transactions and ensure the integrity of the system. Furthermore, cryptocurrencies minimize transaction costs by enabling direct transfers between users, thus eliminating the need for intermediaries like banks and payment processors.

Moreover, some cryptocurrencies, such as Ethereum, support smart contracts—self-executing contracts with the terms of the agreement directly written into code. This innovation enables complex transactions and applications, from decentralized finance (DeFi) platforms to automated legal agreements, showcasing the programmable nature of digital currencies. Investment opportunities further enhance the appeal of cryptocurrencies, which have emerged as a new asset class.

Bitcoin Blockchain

Bitcoin is a cryptographic representational system that allows transfer of control of Coins using an open-source blockchain implementation invented in 2008, by an unknown person or group of people using the name Satoshi Nakamoto. The utilization of the cryptography as a digital currency began use in 2009. There are distributed ledgers of transactions that are verified by miners confirming blocks, seeking 64-digit hexadecimal numbers, within the framework of a system-dependent reduction of bitcoin over time or due to the number of blocks. Once the chain is established, it's hard to go back and change a block because of processing power restraints, which stabilizes the chain and solves the double-payment problem.

The bitcoin blockchain contains a public record of all bitcoin transactions. Each time a trade is made through a cryptocurrency platform like Coinbase, the details of the transaction are coded and broadcast, along with other transactions, to a vast network of users called bitcoin miners. Miners compete to add the next car to the train by bundling up a bunch of transactions into “blocks.” Miners solve a computational problem (called “proof of work”) that assigns the block an identifying code (a hash). The “winning” block is distributed to, and verified by, all the other miners in the network and is added to the blockchain. Only one car can be added to the train at any given time, and each one takes ~10 minutes on average to verify and attach.

Bitcoin Ownership

In the blockchain, bitcoins are registered to bitcoin addresses. Creating a bitcoin address requires picking a random valid private key and computing the corresponding bitcoin address. 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. The coins are then unusable, and effectively lost. 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, the third party can use it to steal any associated bitcoins. Losses have been enormous at selected cryptocurrency exchanges over the years.

Bitcoin Mining

Bitoin mining is a record-keeping service done through the use of computer processing power. Miners keep the blockchain consistent, complete, and unalterable by repeatedly grouping newly broadcast transactions into a block, which is then broadcast to the network and verified by recipient nodes. Each block contains a SHA-256 cryptographic hash of the previous block, thus linking it to the previous block and giving the blockchain its name.

Every 2,016 blocks (approximately 14 days at roughly 10 min per block), the difficulty target is adjusted based on the network's recent performance, with the aim of keeping the average time between new blocks at ten minutes. In this way the system automatically adapts to the total amount of mining power on the network.

The proof-of-work system, alongside the chaining of blocks, makes modifications of the blockchain extremely difficult, as an attacker must modify all subsequent blocks in order for the modifications of one block to be accepted. As new blocks are mined all the time, the difficulty of modifying a block increases as time passes and the number of subsequent blocks (also called confirmations of the given block) increases.

The successful miner finding the new block is allowed by the rest of the network to reward themselves with newly created bitcoins and transaction fees. To claim the reward, a special transaction called a coinbase is included with the processed payments. All bitcoins in existence have been created in such coinbase transactions. The bitcoin protocol specifies that the reward for adding a block will be halved every 210,000 blocks. Eventually, the reward will decrease to zero, and the limit of 21 million bitcoins will be reached. The record keeping will then be rewarded solely by transaction fees.

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