Who created Bitcoin?

Bitcoin was designed by Satoshi Nakamoto, an unknown person or group of people. He was a member of the cyberpunk community. Several members of the movement, prior to Satoshi, had already proposed several solutions for digital money, but none of the solutions were accepted or did not solve all the problems. At the end of October 2008, Satoshi published a whitepaper entitled "Bitcoin: an electronic system for the direct exchange of cash". On only 9 pages, he described the problems of the financial system and proposed his solution. He used many solutions of its predecessors, and was the first who managed to solve the problem of double spending of resources in a decentralized system (if we want to send the same asset to several users at the same time).

In January 2009, Nakamoto published the first version of the Bitcoin code and created the initial block, block number 0. Soon after, the first transaction was made. Satoshi participated in the development of the program code until the middle of 2010. He was working with other members of the Cyberpunk community for several months and since 2011 there is no trace of him.

 

What is Bitcoin?

Bitcoin is an open source, decentralized payment system and digital currency in one.

It is a ledger or database of transactions on a decentralized system of computers or servers that run the Bitcoin protocol code and ensure the correct time sequence of transactions. The need for trust (to a third party - e.g. a bank) is replaced by verification. Anyone can verify the transaction. The transaction cannot be prevented, reversed or refunded. Communication (information) is carried out directly between the sender and the recipient, without a third party.

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Transactions and currency

Bitcoin does not exist as a banknote or coin. It represents only a digital record of bitcoin transactions on the blockchain (blockchain is a decentralized database that is being constantly updated with transaction data and distributed to all network stakeholders). Everyone keeps a copy of the entire transaction history. The transaction history itself is what represents bitcoin as a digital currency and thus records who has the right to spend bitcoin.

If we draw an analogy with the Internet and e-mail, we can say that the Bitcoin network represents the Internet, and bitcoin as a currency represents e-mail. The Bitcoin protocol has many potential uses, and the currency is the first such application.

Transactions are public and visible to everyone. The sender and recipient are known by their public addresses. The identity has not been directly disclosed. Bitcoin is pseudonymous. Users can send and receive cryptocurrency without providing any personal credentials like you would with a regular credit card transactions. Each bitcoin owner has a public and private key. The public key is generated from the private key. You can imagine the public key as your transaction account, and the private key as your digital certificate with which you sign the transaction. To send bitcoin to your friend you need to have his address. You validate the transaction by digitally signing the transaction with your private key.

 

The problem of double spending
In the event that the sender tries to send the same bitcoin to several addresses at the same time, the transaction that was first verified by the miners and included in the blockchain or database is considered as a valid transaction. The rest of the attempts to spend the same funds are treated as invalid, since all Bitcoin network computers monitor the same database of transactions and, since it already exists, such transactions are rejected.

 

Mining

Mining is a process thgrough which transactions are being verified and validated. It ensures the security of the system and the consensus of all participants. Part of this process is also the creation of new bitcoin. Miners collect user transactions, which accumulate in a so-called mempool, into blocks and compete to solve a mathematical equation. The first that succeeds in finding a solution distributes his block to the network, along with proof of work done so that the rest of the stakeholders can verify it (such mining based on work done is called "Proof of work"). Finding the solution to an equation is a very demanding process, but checking the solution is simple and fast. Other miners receive information that a solution to this block has been found and check the solution. If they confirm that the block is valid, the miner receives a reward for the work done in the form of newly issued bitcoin. It also includes incentives that users offer to miners to get their transactions included in the next block sooner.

Each block, in its header, contains a reference to its previous block. This is how the sequence of transactions is determined and with this whole process a blockchain is created.

If two miners find the solution at the same time, the key is how many miners will include their block as the predecessor of their new block, and the one who will be included first in the next valid block will be the winner. Longest blockchain rule applies. Transactions that were included in the loser`s block will be marked as unconfirmed and added back to the database of unconfirmed transactions. 

 

10 minutes

Miners collect unconfirmed transactions, form a new block and search for a solution to a mathematical equation for about 10 minutes. The beauty of the Satoshi`s solution is a difficulty adjustment mechanism. Every 14 days, the difficulty increases or decreases so that if the miners find a solution in less than 10 minutes, it increases to approach 10 minutes. The opposite is true if miners take more than 10 minutes to solve the equation.
Before each miner receives the information that a block has already been created, which means that they have lost the competition this time, it can take from a few seconds to 1 minute. During this one minute (or until receiving the information about the created block), miners are still searching for the solution of the already created block and this represents a waste of energy, an additional cost. Satoshi predicted the 10-minute interval as an acceptable ratio between the lost work of miners and the work required to  generate new blocks (up to 10% loss)

 

Energy consumption

The mining process requires a lot of processing power, which means a lot of energy. Miners are subject to a free market and consequently seek the cheapest resources. In most cases, miners use stranded energy that would otherwise be discarded (wind, hydro, solar). This energy was already produced (but not for Bitcoin mining). 67% of all energy produced in the US is unused. In rare cases, electricity is generated exclusively for mining purposes.

 

Miners are not incentivized to abuse the mining process, as the proof of work method requires a lot of energy, resources, and if the system marks their work as invalid, they would be left without these resources, and their servers would be kicked out of the system.

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Watch a great video about the amount and type of energy used in mining here. 

 

21 million

There will ever be only 21 million bitcoin. The last bit of bitcoin will be issued around year 2140. More than 19 millions have been issued so far. Monetary policy was defined at its inception. It is known to everyone, as it is written in the program code. The reward that the miner receives for the work done is reduced by half every 4 years. At the beginning, it was 50 BTC, but now it is 6.25 BTC. The next halving will be in 2024.

The reduction of the award can be equated with the reduction of inflation, which will amount to around 1% in 2024 and only 0.5% in 2028.

 

Who manages the Bitcoin network?

There is no central person, organization, government, country that manages the network and is able to independently influence changes to the Bitcoin protocol. Currently, there are almost 12,000 servers in the world where the Bitcoin software code is running. Everyone individually checks whether the transactions in each new block are valid and follow all the rules. Tens of millions of users and decentralization gives Bitcoin the status of the most secure, powerful and robust network.

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You can find more material in Knowledge base.