#explain-card ## Introduction & Definition **[[Bitcoin]] (BTC)** is the first decentralized Cryptocurrency. It was invented in 2008 by an anonymous individual or group known as [[Satoshi nakamoto]] and launched in 2009 as open-source software. Bitcoin enables peer-to-peer transactions without the need for intermediaries like banks or governments, operating on a distributed [[Ledger|ledger]] technology called a Blockchain. ### Analogy/ELI5 (Explain Like I'm 5) Imagine digital cash that you can send to anyone directly, like sending an email, without needing a bank to process the payment. All transactions are recorded in a public, shared digital notebook (the blockchain) that everyone in the network has a copy of, making it very hard to cheat or change past transactions. ### Importance & Purpose Bitcoin's primary importance lies in its ability to create a censorship-resistant and permissionless financial system. It aims to solve the problem of trust in financial transactions by relying on cryptographic proof instead of third-party intermediaries. It enables individuals to have full control over their assets and transact globally with relatively low fees, especially for larger amounts, compared to traditional systems. ### Historical Context & Evolution - **Pre-Bitcoin Era**: Concepts like digital cash and [[Proof of work]] existed before Bitcoin. Hashcash, developed by Adam Back, was an early example of a proof-of-work system. - **2008**: [[Satoshi]] nakamoto published the Bitcoin whitepaper, "Bitcoin: A Peer-to-Peer Electronic Cash System." - **2009**: The Bitcoin network was launched with the mining of the [[Block|block]]|[[Genesis block|genesis block]]]]. The first Bitcoin transaction occurred between Satoshi Nakamoto and Hal Finney. - **Early Growth (2010-2012)**: Bitcoin started gaining traction, with the first commercial transaction (10,000 BTC for two pizzas) taking place. Early adopters were often enthusiasts and those interested in alternative financial systems. - **Regulatory Attention (2013-2014)**: As Bitcoin's popularity grew, it attracted regulatory scrutiny. Events like the shutdown of the Silk Road marketplace highlighted its use in illicit activities, leading to increased regulatory discussions. - **Mainstream Interest & Development (2015-Present)**: Bitcoin has seen significant fluctuations in price and mainstream adoption. Major developments include the activation of SegWit (Segregated Witness) to improve scalability and the Lightning Network as a layer-2 scaling solution. El Salvador adopted Bitcoin as legal tender in 2021. Bitcoin [[ETF|ETFs]] (Exchange Traded Funds) began trading in the US in 2024, further integrating it into traditional financial markets. ## Core Principles & Detailed Mechanism ### Key Components/Elements - Blockchain: A public, distributed, and immutable ledger that records all Bitcoin transactions in chronological order. - **Transactions**: Transfers of Bitcoin value between Bitcoin addresses. Each transaction is digitally signed by the sender. - **Addresses**: Pseudonymous identifiers, derived from [[Public key|public keys]], used to send and receive Bitcoin. - **Private Keys**: Secret cryptographic keys that allow users to spend their bitcoins. Losing a [[Private key|private key]] means losing access to the associated funds. - **Public Keys**: Cryptographic keys derived from private keys, used to generate Bitcoin addresses and verify signatures. - **[[Miner|Miners]]**: Network participants who validate transactions, group them into blocks, and add them to the blockchain through a process called mining. - **Proof of work**: The [[Consensus|consensus]] algorithm that secures the Bitcoin network. Miners compete to solve a computationally intensive puzzle; the first to solve it gets to add the next block to the blockchain and is rewarded with newly created bitcoins and transaction fees. - **[[Node|Nodes]]**: Computers that participate in the Bitcoin network by maintaining a copy of the blockchain, validating transactions and blocks, and relaying them to other nodes. ### In-depth Mechanism/How it Works 1. **Initiating a Transaction**: A user initiates a transaction using their Bitcoin [[Wallet|wallet]] software. The transaction includes the sender's address(es) (inputs), the recipient's address(es) (outputs), and the amount to be sent. 2. **Signing the Transaction**: The sender's wallet uses their private key to digitally sign the transaction, proving ownership of the bitcoins being spent without revealing the private key. 3. **Broadcasting the Transaction**: The signed transaction is broadcast to the Bitcoin network. 4. **Validation by Nodes**: Nodes in the network receive the transaction, verify its validity (e.g., checking the signature, ensuring the sender has sufficient funds), and relay it to other nodes. 5. **Mining Process**: - Miners collect unconfirmed valid transactions from the network's memory pool ([[Mempool|mempool]]). - They group these transactions into a new block. - Miners then compete to solve a cryptographic puzzle (find a [[Nonce|nonce]]) that, when combined with the block's data, results in a hash below a certain target [[Difficulty|difficulty]]. This is the Proof of work process. - The first miner to find a valid nonce broadcasts their new block to the network. 6. **Block Verification & Propagation**: Other nodes receive the new block, verify its validity (including the PoW solution and the transactions within), and if valid, add it to their copy of the blockchain and propagate it further. 7. **Confirmation**: Once a block is added to the blockchain, the transactions within it are considered confirmed. Each subsequent block added on top of it increases the number of confirmations, making the transaction progressively more secure and immutable. Typically, 6 confirmations (about 1 hour) are considered highly secure. 8. **Reward**: The successful miner receives a block reward (newly minted bitcoins) and the transaction fees from the transactions included in their block. ### Underlying Technical Details - **Cryptography**: Bitcoin relies heavily on cryptographic techniques such as SHA-256 (for hashing) and Elliptic Curve Digital Signature Algorithm (ECDSA) for digital signatures. - **Supply Limit**: The total supply of Bitcoin is capped at 21 million coins. This is enforced by the protocol, which halves the block reward approximately every four years (or every 210,000 blocks) in an event known as the "[[Halving|halving]]." - **Difficulty Adjustment**: The difficulty of the PoW puzzle adjusts approximately every 2016 blocks (roughly two weeks) to maintain an average block creation time of 10 minutes, regardless of changes in the network's total mining power (hashrate). - **Scripting Language**: Bitcoin uses a simple, stack-based scripting language for transactions, allowing for basic programmable money features like multi-signature addresses. ## Practical Applications, Use Cases & Implications ### Concrete Examples & Real-World Applications - **Peer-to-Peer Payments**: Sending money directly to individuals or businesses across borders with potentially lower fees and faster settlement times than traditional banking, especially for large sums. - **Store of Value**: Often referred to as "digital gold," some individuals and institutions hold Bitcoin as a long-term store of value or an inflation hedge, though its price volatility is a significant factor. - **Remittances**: Sending money internationally to family members, potentially bypassing high fees charged by traditional remittance services. - **Censorship-Resistant Transactions**: Used in situations where traditional financial systems might be restricted or censored. - **Investment Asset**: Traded on cryptocurrency exchanges and, more recently, accessible through traditional investment vehicles like ETFs. ### Benefits & Advantages - **Decentralization**: No single point of control or failure. - **Transparency**: All transactions are publicly viewable on the blockchain (though user identities are pseudonymous). - **User Control**: Users have direct control over their funds via their private keys. - **Permissionless**: Anyone can participate in the network, send transactions, or become a miner. - **Limited Supply**: The fixed supply of 21 million coins is seen by some as a protection against inflation. - **Security**: The PoW consensus mechanism and distributed nature make the Bitcoin network highly secure against many forms of attack, provided no single entity controls a majority of the mining power. ### Limitations, Challenges & Criticisms - **Scalability**: The Bitcoin network can only process a limited number of [[Transactions per second|transactions per second]] (around 3-7 TPS), leading to high fees and slow confirmation times during periods of congestion. Solutions like the Lightning Network aim to address this. - **Price Volatility**: Bitcoin's price is highly volatile, making it risky as a short-term store of value or for everyday transactions. - **Energy Consumption**: The PoW mining process consumes a significant amount of electricity, leading to environmental concerns. - **Use in Illicit Activities**: Due to its pseudonymous nature and perceived anonymity, Bitcoin has been used for illegal transactions, although chain analysis can often trace these activities. - **Complexity**: Understanding and securely using Bitcoin can be challenging for non-technical users. - **Regulatory Uncertainty**: The legal and regulatory landscape for Bitcoin varies significantly across countries and is still evolving. - **Transaction Fees**: While often lower for large international transfers, fees can become very high during network congestion, making small transactions uneconomical. - **51% Attack Risk**: Although costly and difficult, if a single entity or colluding group gains control of more than 50% of the network's mining power, they could potentially disrupt the network or double-spend transactions. ### Future Trends & Developments - **Layer-2 Scaling Solutions**: Continued development and adoption of the Lightning Network and other layer-2 solutions to improve transaction speed and reduce fees. - **Privacy Enhancements**: Research and development into technologies that could improve the privacy of Bitcoin transactions. - **Institutional Adoption**: Increasing interest and investment from traditional financial institutions. - **Regulatory Clarity**: Ongoing efforts by governments worldwide to establish clearer regulatory frameworks for cryptocurrencies. - **Taproot Upgrade**: An upgrade activated in 2021 that introduced Schnorr Signatures, improving efficiency, privacy, and [[Smart contract|smart contract]] capabilities (e.g., for the Lightning Network). - **Ordinals and Inscriptions**: A more recent development allowing for the creation of Bitcoin-based [[NFT|NFTs]] and other arbitrary data to be inscribed on satoshis, expanding Bitcoin's use cases beyond simple payments. ## Related Concepts - Proof of work - Satoshi nakamoto - Miner - Wallet - Smart contract (though Bitcoin's smart contract capabilities are limited compared to platforms like [[Ethereum]]) - [[DApp]] (Bitcoin itself is a dApp, and the concept is related) - [[Altcoin]] (other cryptocurrencies created after Bitcoin)