Bitcoin is the first decentralized cryptocurrency. Based on a free-market ideology, bitcoin was invented in 2008 by Satoshi Nakamoto, an unknown person. Use of bitcoin as a currency began in 2009, with the release of its open-source implementation. In 2021, El Salvador adopted it as legal tender.
It is mostly seen as an investment and has been described by some scholars as an economic bubble. As bitcoin is pseudonymous, its use by criminals has attracted the attention of regulators, leading to its ban by several countries as of 2021.
Nodes in the peer-to-peer bitcoin network verify transactions through cryptography and record them in a public distributed ledger, called a blockchain, without central oversight.
Consensus between nodes is achieved using a computationally intensive process based on proof of work, called mining, that secures the bitcoin blockchain. Mining consumes large quantities of electricity and has been criticized for its environmental impact.
Bitcoin’s Mining
The mining process in bitcoin involves maintaining the blockchain through computer processing power. Miners group and broadcast new transactions into blocks, which are then verified by the network.
Each block must contain a proof of work (PoW) to be accepted, involving finding a nonce number that, combined with the block content, produces a hash numerically smaller than the network’s difficulty target.
This PoW is simple to verify but hard to generate, requiring many attempts. PoW forms the basis of bitcoin’s consensus mechanism.
The difficulty of generating a block is deterministically adjusted based on the mining power on the network by changing the difficulty target, which is recalibrated every 2,016 blocks to maintain an average time of ten minutes between new blocks. The process requires significant computational power and specialized hardware.
Miners who successfully find a new block can collect transaction fees from the included transactions and a set reward in bitcoins. To claim this reward, a special transaction called a coinbase is included in the block, with the miner as the payee.
All bitcoins in existence have been created through this type of transaction. This reward is halved every 210,000 blocks until ₿21 million, with new bitcoin issuance slated to end around 2140. Afterward, miners will only earn from transaction fees.
These fees are determined by the transaction’s size and the amount of data stored, measured in satoshis per byte.
The proof of work system and the chaining of blocks make blockchain modifications very difficult, as altering one block requires changing all subsequent blocks. As more blocks are added, modifying older blocks becomes increasingly challenging.
In case of disagreement, nodes trust the longest chain, which required the greatest amount of effort to produce. To tamper or censor the ledger, one needs to control the majority of the global hashrate. The high cost required to reach this level of computational power secures the bitcoin blockchain.