Bitcoin was inspired by the need to have an electronic-payment system that is optimized for commerce on the Internet without reliance on intermediaries. Until Bitcoin, there was no system that made payments over a communications channel without a trusted party possible.
A digital currency or cryptocurrency, bitcoin was invented by Satoshi Nakamoto in January 2009. Satoshi Nakamoto is the pseudonym of a person or group of persons that remain unknown till date.
Though Satoshi Nakamoto’s identity remains unknown, Bitcoin and the technology behind it as well as its network is known, open source, and public. Bitcoin is controlled by no single central authority. This is why it is described as the world’s first decentralized currency.
Bitcoin is a type of digital currency that is not issued by any central bank or reserve bank. Bitcoin is a public blockchain, open source, and permissionless. These attributes combine to ensure that Bitcoin is not centrally controlled but decentralized. It is governed by its own protocol or set of rules governing the exchange or transmission of data within the network.
Bitcoin is an electronic payment system that is based on what Satoshi Nakamoto described as “cryptographic proof” instead of having to trust in a third party such as a central authority or intermediary. This cryptographic proof involves generating evidence of transactions through a process of mathematical calculation which is recorded in a chronological order that is immutable.
The Bitcoin Whitepaper and the double-spending solution
In the Bitcoin whitepaper by Satoshi Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, Bitcoin is described as a purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution. To achieve this, Bitcoin had to solve one of the biggest challenges in electronic transactions—double spending.
Double spending simply means the risk that a digital currency can be spent twice. This problem is peculiar to digital currencies and not physical currencies because digital currencies are basically data that are capable of being duplicated or reproduced relatively easily. Every digital information is. And this is why central authorities or third parties have to govern transactions, ensuring the integrity of the system. If a digital currency is capable of being spent twice, distrust amongst parties will arise. With double spending, from a central authority arbitrarily reversing a transaction or even a party one is transacting with perpetuating fraud, anything can happen.
Before Bitcoin, the use of digital signatures which relied on a central authority or third party had been the solution to the double-spending problem. But with Bitcoin, the solution has gone beyond using digital signatures. Bitcoin is the first digital currency that has solved the double-spending problem by relying on a peer-to-peer network instead of a trusted third party.
This peer-to-peer network timestamps transactions. It does this by hashing. Hashing means using a number to represent a piece of computer data in order to protect it or make it to be found quickly. When hashed, these transactions form a record of transactions chained together and authenticated through a consensus mechanism called proof of work.
What is Proof of Work?
Because bitcoin, Ethereum, litecoin, and a number of other cryptocurrencies are without a central authority, they rely on algorithms for governance. Proof of work is an algorithm. This algorithm secures decentralized cryptocurrencies, tracking both users and the transactions each user completes. Proof of work also secures the network against fraud and manipulation without the need for a trusted third party.
Bitcoin is a cryptocurrency that uses what is called proof of work (PoW) as a mechanism for reaching consensus in the network.
Proof of work is a consensus mechanism that is decentralized. It requires participants in a decentralized network such as Bitcoin for example to expend effort solving a mathematical puzzle in order to prevent fraud or manipulation of the system.
Cryptocurrencies such as bitcoin and Ethereum are mined using proof of work Apart from using proof of work to mine new tokens or coins, it is also used to validate transactions on the network.
One major concern about proof of work is its huge use of energy. As the number of miners increases, the energy used by proof-of-work blockchains also increases. This has raised environmental concerns, which in fact mainly led to the recent drop in the value of proof-of-work-based bitcoin in May 2021. This is in contrast to proof of stake (POS) blockchains such as EOS for example.
However energy-sapping and demanding proof of work consensus mechanism is, advocates of proof of work argue that this is a trade-off that has ensured that Bitcoin for example remains the most secured blockchain network amongst the many blockchain projects out there. A proof-of-work blockchain, Bitcoin is based on the SHA-256 hashing function. This enables transaction validation and confirmation. It also enables mining of new bitcoins.
Altering or changing any aspect of a proof-of-work blockchain is extremely difficult. This is because it will require that all subsequent blocks are mined again. Also, a user or pool of users will find it extremely difficult to gain monopoly of the network’s computing power. The resources that would be needed to monopolize the network—particularly for a network that has seen its early days—will be prohibitively massive. This is why while a proof-of-work-based cryptocurrency such as Bitcoin Satoshi Vision (BSV) for example has suffered a number of 51% attacks or malicious attacks, bitcoin—from which BSV was created as a fork—has not suffered a 51% attack till date. Forks such as Bitcoin Gold and Ethereum Classic has also suffered 51% attacks.
A 51% attack occurs on a proof-of-work blockchain when malicious miners take control of more than 50% of the network’s total computing power.
Will a 51% attack on Bitcoin be successful?
While it is not impossible for a 51% attack on Bitcoin to be successful, such an attack is most improbable.
Bitcoin’s hashrate is very high, considering its relatively wide adoption. Control requires huge computing power and machinery.
Therefore, to take 51% control of Bitcoin, the miners must double the existing Bitcoin hashrate, and more. They must have their independent power source and machinery to attempt the 51% attack. Though the cost of a Bitcoin 51% attack varies, by August 2021 it has been estimated at $15 billion.
Because they are typically decentralized and peer-to-peer by design, cryptocurrencies such as bitcoin and Ethereum require some way of achieving both consensus and security. This is where PoW comes in, ensuring that both the network and the data stored within bitcoin are not vulnerable to attack or theft.
Bitcoin is currently the most dominant and biggest cryptocurrency or crypto asset. As a digital currency, bitcoin is used as means of payment as well as for cross-border transactions or remittances. As a crypto asset, bitcoin serves largely speculative investment purposes, growing from less than $1 per coin in 2009 to as high as $65,000 per coin in April 2021. Whether as a peer-to-peer network, a cryptocurrency, or a protocol, Bitcoin is revolutionary and unprecedented. As its adoption by both institutional and retail investors grows, the value of bitcoin is expected to also grow higher. Although alternative coins (altcoins) are coming up fast and strong, bitcoin is expected to continue to dominate the crypto market.