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Bitcoin basics – part one

Bitcoin is a simple yet complicated idea to understand, however the time spent learning about it is not wasted. By understanding Bitcoin and all the processes behind how it works one is also able to better understand the way that the current global monetary machine works. The point of the following articles is to function as an introduction to the basic concepts behind Bitcoin.

The articles in this thread will cover the following topics:

1. What is Bitcoin
2. What is a node?
3. What is a Bitcoin wallet?
4. What is Bitcoin mining?
5. Why proof of work?
6. What is an ASIC?
7. How do miners make money?

1. What is Bitcoin

Bitcoin is a “A Peer-to-Peer Electronic Cash System” as Satoshi Nakamoto explained in his white paper, released in 2008 during the financial crisis . Bitcoin is a permissionless—meaning anyone can use and access it without restrictions—and decentralised—meaning no single party or entity controls it—network that facilitates the ownership and transfer of digital value. Essentially Bitcoin is a protocol—meaning a set of rules that everyone using the system agrees on—that facilitates the transfer of digital value without a trusted third party on an open decentralised ledger.

Generally when talking about Bitcoin there are two aspects to the system: Bitcoin the network (usually with a capital B) and bitcoin the asset (denominated with a lowercase b), with the ticker symbol being the same as the abbreviated word: BTC.

A bitcoin can be subdivided into smaller pieces, just like a euro or a dollar can be divided into 100 cents so can a bitcoin be divided into 100 000 000 satoshis (sats for short); so one sat would be 0.00000001 bitcoin.

There are three main aspects of Bitcoin: miners, nodes and wallets. Originally when Satoshi released the white paper and subsequently the program all three aspects were part of the Bitcoin core software. However as time has gone on and things have evolved it has proven to generally be more efficient to separate the different aspects from one another. A miner is a computer (nowadays generally an ASIC, more on these later) that runs a program which essentially guesses really large numbers in order to keep the whole Bitcoin network safe from attackers. This process requires heavy lifting so the computers are designed to be as powerful as possible. A node is a computer that runs a software which validates the computation that the miners do. It also connects with other nodes and keeps a downloaded copy of the entire history of the Bitcoin network, known as the blockchain. Since the process of validating is much less energy intensive these computers can be as simple as a raspberry pi. Wallets are generally only software that handles the public and private keys in order to make bitcoin transactions easier for the end users. Essentially a wallet can send and receive bitcoin. Wallet software is normally run on handheld devices such as smart phones.

Contrary to general knowledge there have been a lot of attempts at creating a digital monetary system before, with a history going back to the 70s. The earliest mention however being by Henry Ford himself when he suggested a monetary system based on energy. Bitcoin is however the first (and many would argue only, including the author of this text) successfully run decentralised digital monetary system.

Most people have a hard time understanding the need or use of Bitcoin, this is normally due to a lack of understanding both in regard to Bitcoin itself but also to the current global monetary system and the essence of what money is. Ask yourself what is money? Sure its something we all use on a daily basis and something that most people aspire to acquire a great deal of, but how many times have you every really questioned what money is, how it works and why it exists at all? In essence the difference is simple: one relies on trust and the other on mathematics; the former being the current system and the latter being Bitcoin. A common phrase in the Bitcoin community is: Don’t trust, verify.

At this point you should have more questions than answers; this is a good thing for knowledge comes only by the means of inquiry. In the coming articles we will dig deeper into to rabbit hole that is Bitcoin by answering the most common questions about Bitcoin.

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