Bitcoin arouses passion, curiosity and more and more media attention, especially after it rose to the decade’s highest economic assets. However, the higher the price, many doubts and questions arise, especially about the miners’ source and energy consumption.
The Bitcoin protocol created a unique digital resource
To understand how Bitcoin (BTC) is created and what mining is, the question of dual use is important.
Before Bitcoin, there was no digital value for a transfer or a digital asset to divide it into several parts. That is, if you scan a $ 100 bill and want to give it to someone, you can just send a copy of it.
We are all already used to smartphones and computers. We send emails and photos, but we are not aware of this process: We send a copy of the email (not the original message), and a copy of our photos (not the original). When we press the send button on our smartphone or computer, a copy of the original always remains on our devices.
When it comes to financial transactions, when we click on the “Send” button in our online bank or ATM account, there is always an intermediary who transfers money from one account to another. And this is the problem Bitcoin seeks to solve – the problem of dual use.
For example, when you click the Send Bitcoin button on your mobile phone, you are not sending a copy, but are actually sending a digital object. Once the transaction is completed in Bitcoin, it cannot be undone and cannot be counterfeited.
For this reason, the Bitcoin transfer cannot be undone or reversed after validation of the blockchain network, as the Bitcoin protocol solved the problem of dual use. It has made a single asset, Bitcoin, digitally unique, so that value transactions can be carried out online without intermediaries (independent of a centralized organization).
Who issues Bitcoins?
While traditional money is issued (created) through (central) banks, Bitcoin is issued using an algorithm whose rules are predetermined in the protocol – Bitcoin blockchain.
In turn, Bitcoin blockchain is a transaction registration system held in an open (distributed) network of “suspicious” participants who do not know or trust each other.
So when Satoshi Nakamoto wrote the source code for the Bitcoin protocol program and posted it on the Internet, he suggested the following: If you keep this network secure and help this financial network work, you will be rewarded.
The logic of the predefined rules of the Bitcoin protocol was very transparent and written in programming languages. The breakthrough that the first blockchain made after years of researching digital currencies is not just about computing.
The secret is incentives
To create the architecture of the Bitcoin blockchain, Satoshi Nakamoto researched current research – gold bullion, b-money, cache hash, time-stamped cryptography – and added game theory.
Using game theory, Satoshi implemented a stimulus mechanism called a proof of work, which created a new field of economic coordination, now called “cryptoeconomics” (the field of economics and informatics to study markets and decentralized applications that can be used built through a combination of cryptography and financial incentives).
It is this financial incentive system that ensures that Bitcoin network participants act for security reasons, and the system works flawlessly. This is the main reason why the Bitcoin blockchain has not been hacked yet.
The importance of mining
As more and more people realized potential incentives in Bitcoin and began to “plug” their computers to keep the network secure, the Bitcoin chain became more, more viable and secure. There is now enormous computing power to secure transactions: Bitcoin is the powerhouse of computing.
Bitcoin is “extracted” from the blockchain protocol by miners (accountants) who need to solve mathematical algorithms to get the right to enter Bitcoin transactions in the blockchain network and be rewarded for it.
Each Bitcoin transaction, before being added to the blockchain, is sent to a “mempool”, a pending transaction storage area, where it waits to be listed in a block. Then miners take the pending transactions and wait for them to be written, combining them to create a “block” of transactions.
Understand that miners are competing with each other, which is why their computers are selected to record the last transactions in the next block to be connected to the network.