Protocol

Blockchain

The blockchain protocol is a decentralised database of all transactions relating to a digital asset (ledger). This ledger is distributed across all the computers (nodes) connected to the network.

Blockchain makes manipulation of the ledger very difficult as the ledger is distributed across all the nodes so there isn’t one point of failure.

Bitcoin was one of the first use cases of blockchain technology for cryptocurrency, which solved the “double-spend” problem where money could be spent twice from the same account due to discrepancies in various ledgers held by central banks.

Proof of Work

In order to process the transactions of Bitcoin, a mechanism called “Proof of Work” is used where computers need to solve complex mathematical puzzles called “hashes“. Solving these puzzles requires work and energy by specialised computers, which is where the name comes from.

If someone wanted to change Bitcoin’s ledger, they would have to invest billions in hardware and energy expenditure to do so, which makes Bitcoin the most secure blockchain going.

Bitcoin Economics

Bitcoin’s first block, called the “genesis block“, was created on 3rd January 2009 where 50 Bitcoins were produced. A new block is created every 10 minutes, which adds new Bitcoins to the supply until the maximum amount of 21 million Bitcoins is reached. This is how Bitcoin was designed by it’s creators.

Every 210,000 blocks, which is about 4 years, the amount of Bitcoin that is produced with each block gets cut in half. This is known as the Bitcoin halving and is a much anticipated event. 50 Bitcoins were produced every block for the first 210,000 blocks, which reduced to 25 Bitcoins for the next 210,000 and so on. This will continue until about 2140 when all 21,000,000 Bitcoin will be created.

1 Bitcoin is divisible by 100 million and these smaller denominations are called “sats“. You can think of sats to a Bitcoin as cents to a dollar or pence to a pound and so on.

When you want to send Bitcoin to another address, you will need to pay a network fee in sats so that your transaction gets added to the next block. These fees are received by the miners that process the transactions so even after the final Bitcoin is created, miners still receive some reward for processing transactions.