Origin Of Bitcoin and The Blockchain
Understanding The Blockchain and Cryptocurrency
This article discusses the history of bitcoin and the Blockchain and is not investment advice.
In the late 1980s, researchers began using cryptography to build digital currencies. The earliest forms of digital currency were usually backed by a national fiat currency or a precious metal.
Although these earlier digital currencies worked, there was a fatal chink in their armor -- they were highly centralized. Unfortunately, they used central clearinghouses to settle transactions at regular intervals like traditional banking. Consequently, they were easy targets for hackers and even antagonist governments. In addition, it was soon demonstrated that parties could "double-spend" -- which is analogous to writing hot checks in traditional banking systems. Consequently, digital currencies were quickly becoming corrupted and litigated into oblivion.
The solution was to invent a digital currency that could not be hacked and had no central authority, ruler, or board of directors. In other words, what was needed was a form of money that could be "everywhere but nowhere."
In 2008, a person using the alias, Satoshi Nakamoto, published a paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System.” The paper describes his invention of a completely decentralized electronic cash system that does not rely on a central authority to create new money or settle or validate its transactions. Here are the main points of his paper:
A peer-to-peer network prevents double-spending.
Trust in a counterparty is not required (thus, a trustless arrangement).
Participants enjoy significant (but limited) anonymity.
The creation of new coins can only be done through proof-of-work (see below).
Satoshi's new currency requires that a worldwide, "global" consensus be reached every 10 minutes (144 times per day). The purpose of each consensus is to confirm new transactions contained in the block of transactions. The consensus is achieved through a process known as "proof of work." Proof of work is performed by hundreds of thousands of independent high-speed computer processors known as "miners." Proof of work is analogous to gold miners expending resources to produce gold. However, unlike gold mining, potential units that can be produced are strictly limited.
Miners select transactions and group them into what are called "blocks." Each miner then independently performs trillions of calculations in an attempt to be the first to arrive at a target value. This is called "proof of work" because the target is so challenging to find, it cannot be reached without tremendous computing effort. For each block, the winning miner currently receives 6.25 bitcoin (today worth $46,000 each), plus all the transaction fees for that block.
Each block contains hashed data from the block before it, thus creating a continuously linked data chain. Therefore, should anyone attempt to revise the history of transactions, the whole chain would be disrupted. This makes the chain immutable – which is critical for data integrity.
Satoshi mined the first block (called the Genesis Block) and continued mining until he sent a final message in early 2011. He has not been heard from since, and he has never been conclusively identified. It is estimated that he mined 1.1 million Bitcoins, of which there is no indication that he has ever spent any. Today, his holding is worth nearly $52 billion. Although his pseudonym is Japanese, there is doubt that he is native Japanese as his writing style does not fit that heritage.
The first commercial Bitcoin transaction occurred on May 22, 2010, when Laszio Hanyecz agreed to pay 10 thousand Bitcoin for two Papa John's pizzas. At the time, the value of that bitcoin was approximately $40. Today they are worth $470 million. Every year, Bitcoin Pizza Day is celebrated by Bitcoin enthusiasts.
Today, the Blockchain has processed over 714 thousand completed blocks through which approximately 19 million Bitcoin have been created. However, it is estimated that 3 to 4 Million have been permanently lost. The total market capitalization is presently $881 Billion. The total number of Bitcoins that will ever be produced (21 Million) will be reached in the year 2140.
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