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What Is Bitcoin? History, Characteristics, Pros & Cons

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7 min read

What Is Bitcoin? History, Characteristics, Pros & Cons

THE BITCOIN REVOLUTION

2008 was a prominent year in the history of international finance. With the recession affecting millions of lives globally, attitudes towards banking institutions were becoming highly skeptical. It was evident that the responsibilities which came hand in hand with money management could easily be abused.

This led some prominent minds to develop a completely different medium of exchange where transactions could be verified publicly without requiring parties to surrender their personal information. No central authorities needed. This new technology was launched under the name of Bitcoin.

A group of computer scientists using the pseudonym Satoshi Nakamoto published a paper in October 2008 titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. This paper promised to deploy an open source code that would establish a distributed ledger called the blockchain network. Using encryption to mask personal information, the participants of this distributed network could anonymously verify transactions from around the globe. This completely removed the necessity of a central authorizer.

Establishing a decentralized infrastructure is a huge leap for cryptocurrency since it provides solutions to a lot of issues we currently have with money. Transactions involving digital coins like Bitcoin, also known as cryptocurrencies are:

  1. Irreversible: After confirmation from the network, a transaction on the blockchain can’t be reversed by anyone.
  2. Anonymous: All personal information is masked using encryption, so when verifying transactions, the nodes on the network can’t access sensitive information.
  3. Fast and Global: There are no physical limitations as long as the internet is accessible, therefore funds can be sent and received globally.
  4. Secure: Due to its distributed nature, the blockchain network is extremely robust against hacking attempts, since all the nodes would need to be fooled simultaneously.
  5. Permissionless: The lack of a hierarchy means that anyone can participate on the network without needing to be authorized.

Considering these traits, the reason Bitcoin is so revolutionary is because Satoshi figured out a way to let two people confidently trade with each other directly. This is a fundamental shift from the way financial institutions functioned for a long period of time.

PROS AND CONS OF BITCOIN AS A MEDIUM OF EXCHANGE 

The mass adoption of cryptocurrency is a process that is riddled with obstacles. The advent of blockchain started with Bitcoin, but since then, many new coins have debuted, all trying to improve on some of the caveats involved with Bitcoin. Here is a breakdown of the pros and cons of using Bitcoin as a medium of exchange:

Pros Cons
  • Decentralized
  • Transparent
  • No merchant accounts
  • No credit card processing hardware
  • No chargebacks
  • Mathematical framework free of politics and human error
  • Slow Transaction speeds (up to 1 hour)
  • Software Complexity
  • Difficult to run smart contracts
  • Democratized code can lead to rifts in the community leading to the creation of new coins

Ultimately, Bitcoin is the Gold Standard of cryptocurrencies. It may not be the fastest, most secure or most agreed-upon option, but it certainly helps contextualize the value of any altcoins that launched after.

MINING WITHOUT A HARD HAT

Bitcoin functions on processing power provided by nodes called miners. These are not miners with a pick axe or a hard hat. Instead, they come with dedicated computer processors that are good at solving complex math puzzles, and large storage capacity to hold an updated version of the blockchain ledger.

Essentially, the job of a Bitcoin miner is to generate new blocks on the chain in order to verify transactions. Miners are selected based on a special computer algorithm known as the consensus protocol. The terms of this algorithm vary between cryptocurrencies, but in the case of Bitcoin, miners are required to solve complex mathematical puzzles called hashing algorithms. If the result of these algorithms fall within a certain range, that particular node is chosen to mine the next block and earn the associated award plus transaction fees.

STORAGE  WARS: BITCOIN EDITION

The idea of “holding Bitcoin in a wallet” can have disingenuous connotations. To be clear, Bitcoin is not a physical entity, it is simply a record of transactions. Bitcoin that gets held in a wallet is just the final balance of that wallet address once the transactions are accounted for on the blockchain ledger.

There are different types of Bitcoin wallets with varying degrees of control and accessibility. The client-side of a wallet is responsible for the generation of a private key, implementing security, and sending payments. The server is what stores and updates the blockchain ledger. Here is a list of characteristics and features of each:

Full Client Lightweight Client Web Client
Stand alone server Stand-alone client with a third party server Client and server provided by a third party
Full control over every aspect of the transaction Little control over transactions Transaction totally reliant on third parties
Advanced Intermediate Beginner

CONCLUSION

All in all, Bitcoin is undoubtedly unique since it stands at the helm of the cryptocurrency revolution. It has established itself as the most popular coin in terms of market cap, and more generally, a standard for all other following cryptocurrencies to emulate.

The underlying tech, specifically blockchain ledgers, have the potential to change a wide range of operations globally. With an increasing number of businesses adopting digital currency solutions, Bitcoin has become a word for the history books.

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