Cryptocurrency All-in-One For Dummies - Peter Kent

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alt="Remember"/> In very simple terms, the blockchain is a public ledger of all transactions in the Bitcoin network, and the nodes are computers that are recording entries into that ledger. The Bitcoin protocol is the rules that govern this system.

      Nodes safeguard the network by mining for the cryptocurrency Bitcoin. New Bitcoins are created as a reward for processing transactions and recording them inside the blockchain. Nodes also earn a small fee for confirming transactions.

      Anyone can run the Bitcoin protocol and mine for tokens. (Read more about cryptocurrency mining in Book 6.) It’s an open-source project that thrives as more individuals participate in the network. The fewer people who participate, the more centralized it becomes — and centralization weakens the system. The primary thing that makes Bitcoin a secure system is the large number of independent nodes that are globally distributed.

      In order to create a message in the Bitcoin blockchain, you have to send some Bitcoin from one account to another. When you send a transaction in Bitcoin, the message is broadcast across the whole network. After the message is sent, it’s impossible to alter it because the message is recorded inside the Bitcoin blockchain. This feature makes it imperative that you always choose your message wisely and never broadcast sensitive information.

      Broadcasting the same message to thousands of nodes and then saving it forever in the token’s ledger can add up in a hurry. So, Bitcoin requires that you keep your communications very short. The current limit is just 40 characters.

      There is significant conflict around the core development of Bitcoin. Dubbed the “Bitcoin Civil War” or the “block size limit debate,” the general conflict is between keeping Bitcoin core as it is and enlarging the functionality of the software. This conflict appears simple, but the repercussions are enormous. Bitcoin’s permanent nature and the billions of dollars’ worth of assets that Bitcoin software secures mean that every code change is rigorously reviewed and debated.

      Bitcoin hard-forked and split into two separate blockchains in 2017. The community of developers and Bitcoin miners couldn’t agree on how to address growth. Bitcoin had become increasingly unreliable and expensive to use. It had once been a nearly instant and almost free system; now transactions were costing more than $50 and taking hours to days to clear. The high cost and slow speed drove away users.

      A primary issue was that Bitcoin’s transaction speeds were too slow, at seven transactions per second, to meet the demand on the network. Transaction fees climbed as users competed to have their transactions processed faster. One of the limiting factors was that Bitcoin’s block size limit was 1MB in 2017.

      Bitcoin Cash used the same codebase as Bitcoin but adjusted the block size limit. They increased the block size to 32MB. At the time of the fork, anyone holding Bitcoin was also given the same amount of Bitcoin Cash. The increase was controversial because it disenfranchised smaller miners who had slower equipment.

      Many miners feared that they couldn’t be competitive mining larger blocks. There was also concern that the larger block size would lead to centralization of the Bitcoin blockchain network.

      THE LIMITATIONS OF BITCOIN

      Blocks that make up the Bitcoin blockchain are limited to 1MB in size. This limits the number of transactions that the Bitcoin blockchain can handle to seven transactions per second. New blocks occur on average about every ten minutes, but they aren’t guaranteed.

      These limitations are hard-coded into the Bitcoin protocol and help ensure that the network stays decentralized. And decentralization is key to Bitcoin’s robustness. Larger blocks would impose hardships on the miners and might push out small operations.

      Bitcoin has built-in limitations that prevent it from handling the global volume of monetary transactions. It is also being used to secure other types of data and systems. The demand to use the secure Bitcoin ledger is high. This difficulty is referred to as Bitcoin bloat, and it has slowed down the network and increased the cost of transactions.

      At this point, most blockchain developers are only experimenting with expanding the utility of the Bitcoin blockchain. Most are not at a point where they need to scale up their prototypes and concepts so that the Bitcoin blockchain can handle their requests. Other new blockchain technologies have also helped bring down the pressure on Bitcoin and have given developers cheaper options to secure data.

      AS THE WORLD TURNS: THE DRAMA OF BITCOIN

      People are often suspicious of anything new, especially new things that aren’t easy to understand. So, it’s only natural that Bitcoin — a totally new currency unlike anything the world had ever seen before — would confound people, and a few misconceptions would result.

      Here are some of the misconceptions you might have heard about Bitcoin:

       Bitcoin was hacked. There was one known instance in 2011 where someone double-spent their Bitcoin, but it was resolved within an hour. Since this issue, there have been no known successful attacks on the Bitcoin blockchain that resulted in stolen Bitcoins. However, many central systems that use Bitcoin have been hacked. And wallets and Bitcoin exchanges are often hacked due to inadequate security. The Bitcoin community has fought back by developing elegant solutions to keep their coins safe, including wallet encryption, multiple signatures, offline wallets, paper wallets, and hardware wallets, just to name a few.

       Bitcoin is used to extort people. Because of the semi-anonymous nature of Bitcoin, it’s used in ransomware attacks. Hackers breach networks and hold them hostage until payment is made to them. Hospitals and schools have been victims of these types of attacks. However, unlike cash, which was favored by thieves in the past, Bitcoin always leaves a trail in the blockchain that investigators can follow.

       Bitcoin is a pyramid scheme. Actually, Bitcoin is the opposite of a pyramid scheme from the point of view of Bitcoin miners. The Bitcoin protocol is designed like a cannibalistic arms race. Every additional miner prompts the protocol to increase the difficulty of mining. From a social point of view, Bitcoin is a pure market. The price of Bitcoins fluctuates based on market supply, demand, and perceived value. Bitcoin is not a pyramid scheme, but many scams exist surrounding Bitcoin, so be careful.

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