What is Bitcoin & how does it work?
Bitcoin is a decentralized digital currency that enables instant payments to anyone, anywhere in the world.
The primary objective was to design Bitcoin to have a cross-country payment system such that no government organization will have control over it. A decentralized architecture helps it get a system where one has external control over it and works over a complete peer-to-peer network, and supports different securities levels so that the entire system becomes tamper-proof.
The entire system runs and manages two broad operations: transaction management and money insurance. The transaction management includes the transferring of bitcoins from one user to another safely. The money issuance mechanism generates bitcoins in an economic aspect to properly regulate the monetary base of bitcoin.
Money insurance in Decentralized Bitcoin Cryptocurrency
To understand the methodologies of money issuance in a decentralized system, let us first understand how the centralized or normal banking system manages money. The banking authority, the Central Bank (In India, RBI), regulates the money inside the country. They create the new money, or with time they demolish or drop the old money. They also control the rate at which money will be generated, and all the banks must be compliant with the rules and regulations of the Central Bank.
Bitcoin Cryptocurrency is an example of a Decentralized digital currency system. It is designed and developed by considering technical and economic aspects together. It uses underlying blockchain technology and a permissionless distributed consensus mechanism where anyone can join the cryptocurrency system, and there wouldn’t be any controller such as Central Agencies.
A high-level overview of Bitcoin Cryptocurrency
In the bitcoin cryptocurrency system, there are two types of users: miners and normal users.
- A normal user needs to download and install a bitcoin wallet then generate a bitcoin network identity for himself/herself so that other uses can send or receive transactions.
- Internally bitcoin wallet communicates to the seed node, a special node with information about other nodes in the peer-2-peer network, and gets a list of nearby nodes’ IP addresses to communicate and exchange transaction details.
- A normal user role is to transfer or receive bitcoins from others within the bitcoin network and validate the transactions received from other peers and forward the valid transactions to other peers except where it received. However, if the received transaction is for him/her, then he/she updates their wallet with the transaction amount.
- A Miner plays an important role in the bitcoin network. He listens to all the transactions for approximately 10 minutes, validates all the transactions, combines them, and places them into a block. Later he appends the newly generated block to the bitcoin blockchain and forwards it to the peers within the bitcoin network. Once others accept the newly appended block, the system generates a reward, and this reward is the only mechanism through which money is generated in the bitcoin network.
- Bitcoin blockchain uses blockchain technology, and this technology provides tamper-proof assurance for the bitcoin blockchain. It means no one will modify old transaction details. These transaction records are used to validate the new transactions. So the tamper-proof assurance is crucial for the proper functioning of a distributed permissionless cryptocurrency system.
Permission-less Blockchain
Bitcoin-based architecture where blockchain has been used as a fundamental building block. It uses a permission-less model. Ideally, in this model, any node can join the network anytime without having any pre-authentication and pre-authorization security services. It is more like anyone can join the network.
The major difficulty is how to validate the transactions when each individual does not know or trust each other. This is achieved via the challenge-response consensus protocol among the nodes. However, this kind of consensus protocol cannot be used in the conventional distributed system.
In the challenge-response consensus method, the network throws a certain challenge to the users or the nodes in the bitcoin network, and then the users or nodes collectively try to solve the problem. If anyone such as an individual or a group of users or nodes could solve the problem, they advertise the solution to its neighbor. This is the way block of transactions are committed in the bitcoin blockchain.
Summary
Bitcoin cryptocurrency, the difference between decentralized vs. centralized banking system, and a high-level overview of the bitcoin cryptocurrency.
References:
- NPTEL lecture series on Blockchains Architecture, Design and Use Cases by Prof. Sandip Chakraborty, IIT Kharagpur.
176 total views, 1 views today
