#CreatorPad What is Bitcoin?
Chapters
Introduction to Bitcoin
Where do bitcoins come from?
Get started with Bitcoin
Bitcoin Halving
Common misconceptions about Bitcoin
Bitcoin Scalability
Participating in the Bitcoin network
Chapter One - Introduction to Bitcoin
Contents
What is Bitcoin?
What is Bitcoin used for?
What makes Bitcoin valuable?
How does Bitcoin work?
What is blockchain?
Is Bitcoin legal?
The history of Bitcoin
Who founded Bitcoin?
Did Satoshi invent blockchain technology?
Digital money before Bitcoin
What is Bitcoin?
Bitcoin is a digital form of money. However, unlike the fiat currencies you are used to, there is no central bank that controls it. Instead, the financial system in Bitcoin is run by thousands of computers distributed around the world. Anyone can participate in the ecosystem by downloading open-source software.
Bitcoin was the first digital currency, announced in 2008 (and launched in 2009). It gives users the ability to send and receive digital money (Bitcoin is written with a lowercase b or as BTC). What makes it even more appealing is that it is untraceable, cannot be spent more than once, and transactions can be made at any time from anywhere.
What is Bitcoin used for?
People use Bitcoin for various reasons. Many appreciate it for its permissionless nature – anyone with an internet connection can send and receive it. It is somewhat similar to cash in that no one can stop you from using it, but its digital nature means it can be transferred globally.
What makes Bitcoin valuable?
Bitcoin is decentralized, censorship-resistant, secure, and unrestricted by borders.
These properties make it attractive for use cases like international remittances and payments that individuals do not want to disclose their identity for (as they would with a debit or credit card).
Many do not spend their bitcoins; instead, they choose to hold them long-term (also known as hodling). Bitcoin has been dubbed digital gold, due to the limited number of coins available. Some investors see Bitcoin as a store of value. Due to its scarcity and the difficulty of producing it, it has been likened to precious metals like gold or silver.
Long-term holders believe these traits – along with global availability and high liquidity – make it the ideal medium for storing wealth over long periods. They believe the value of Bitcoin will continue to increase over time.
How does Bitcoin work?
When Alice makes a transaction to Bob, she does not send the money in the way you might expect. It’s not like the digital equivalent of handing over a banknote. It’s like writing on a piece of paper (that everyone can see) that she will give one dollar to Bob. When Bob goes to send that same money to Carol, she can see that Bob has it by looking at the paper.
The ledger is a specific type of database called a blockchain. All participants in the network have a matching copy of this ledger stored on their devices. Participants communicate with each other to synchronize new information.
When a user makes a payment, they broadcast it directly to the peer-to-peer network – there is no central bank or central institution to process transfers. To add new information, Bitcoin's blockchain uses a special mechanism called mining. Through this process, new blocks of transactions are recorded on the blockchain.
What is blockchain?
The blockchain is a ledger that is append-only: meaning it can only have data added to it. Once information is added, it is extremely difficult to modify or delete it. The blockchain enforces this by including a pointer to the previous block in every subsequent block.
The index actually represents a hash of the previous block. The hash involves passing data through a one-way function to produce a unique 'fingerprint' of the inputs. If the input is modified slightly, a completely different fingerprint will appear. Since we link blocks in a chain, there is no way for someone to modify an old input without affecting the subsequent blocks. Such a structure is one of the components that make the blockchain secure.
For an overview of blockchain, see the Ideal Beginner's Guide to Blockchain Technology.
Is Bitcoin legal?
Bitcoin is completely legal in most countries. There are a few exceptions, but – be sure to read your jurisdiction's laws before investing in the digital currency.
In countries that follow different legal entities regarding taxes and compliance, the regulatory body is still generally lagging and is likely to change significantly in the coming years.
The history of Bitcoin
Who founded Bitcoin?
No one knows! The creator of Bitcoin used the pseudonym Satoshi Nakamoto, but we know nothing about their identity. Satoshi could be a single person or a group of developers anywhere in the world. The name is of Japanese origin, but Satoshi's mastery of English has led many to believe they are from an English-speaking country.
Satoshi published the Bitcoin white paper along with the software. However, the mysterious founder disappeared in 2010.
Did Satoshi invent blockchain technology?
Bitcoin combines several existing technologies that have been around for some time. The concept of a chain of blocks did not originate with Bitcoin. The use of immutable data structures can be traced back to the early 1990s when Stuart Haber and W. Scott Stornetta proposed a system for document verification. Like the current blockchain, it relied on cryptographic techniques to secure data and prevent tampering.
Interestingly, Satoshi's white paper did not use the term 'blockchain.'
Also read: The History of Blockchain.
Digital money before Bitcoin
Bitcoin was not the first attempt at digital cash, but it is certainly the most successful. Earlier schemes paved the way for Satoshi's invention:
DigiCash
DigiCash was a company founded by cryptographer and computer scientist David Chaum in the late 1980s. It was introduced as a privacy-focused solution for online transactions based on a paper authored by Chaum (explained here).
DigiCash was a centralized model, but it was nonetheless an enjoyable experience. The company later went bankrupt, which Chaum believes is due to launching the model before e-commerce actually began.
B-money
B-money was initially described in a proposal by computer engineer Wei Dai published in the 1990s. It was cited in the Bitcoin white paper, and it is not hard to see why.
B-money proposed a proof-of-work system (used in Bitcoin mining) and the use of a distributed database where users sign transactions. A second version of b-money also described a concept similar to staking used in other digital currencies today.
Ultimately, b-money never took off as it never progressed beyond the draft stage. However, it is clear that Bitcoin draws inspiration from the concepts introduced by Dai.
Bit gold
Just as there are similarities between Bit Gold and Bitcoin, some believe that its creator, computer scientist Nick Szabo, is Satoshi Nakamoto. At its core, Bit Gold consists of a ledger that records chains of data resulting from a proof-of-work process.
Like b-money, it was not developed further. However, the similarities between Bit Gold and Bitcoin solidified its place as a 'precursor to Bitcoin.'
Chapter Two - Where do bitcoins come from?
Contents
How are new bitcoins produced?
How many bitcoins are there?
How does Bitcoin mining work?
How long does it take to mine a block?
How are new bitcoins produced?
Bitcoin has a limited supply, but not all units are traded yet. The only way to produce new coins is through a process called mining – the mechanism for adding data to the blockchain.
How many bitcoins are there?
The protocol caps Bitcoin's maximum supply at twenty-one million coins. As of 2020, just under 90% of that figure has been created, but it will take more than a hundred years to produce the remaining amount. This is due to periodic events known as halving, which gradually reduce the mining reward.
How does Bitcoin mining work?
By mining, participants add blocks to the blockchain. To do this, they must devote computing power to solve a cryptographic puzzle. As an incentive, there is a reward available for those who propose a valid block.
Creating a block is expensive, but cheap to verify if it is valid. If someone tries to cheat using an invalid block, the network rejects it immediately, and the miner will not be able to recover the costs of mining.
The reward – which often carries the label block incentive – consists of two components: transaction fees and block support. Block support is the only source of 'new' Bitcoin. With each mined block, a specific amount of coins is added to the total supply.
How long does it take to mine a block?
The protocol adjusts the mining difficulty so that it takes about ten minutes to find a new block. Blocks are not always found exactly after ten minutes – the time taken fluctuates around this target.
Chapter Three - Getting Started with Bitcoin
Contents
How can I buy Bitcoin?
How to buy Bitcoin with a debit/credit card
How to buy Bitcoin through peer-to-peer markets
What can be bought with Bitcoin?
Where can I spend Bitcoin?
What happens if I lose my bitcoins?
Can I revert Bitcoin transactions?
Can I profit with Bitcoin?
How can I store Bitcoin?
Store your Bitcoin on Binance
Storing your coins in a Bitcoin wallet
Hot wallets
Cold wallets
How can I buy Bitcoin?
How to buy Bitcoin with a debit/credit card
Binance allows you to buy Bitcoin seamlessly from your browser. To do this:
Go to the Buy and Sell Cryptocurrency entry.
Choose the cryptocurrency you want to buy and the currency you want to pay in.
Log in to Binance or create an account if you haven't created an account before.
Select the payment method that suits you.
If requested, enter your card details and complete the identity verification steps.
There you go! Your Bitcoin will be added to your Binance account.
How to buy Bitcoin through peer-to-peer markets
You can also buy and sell Bitcoin through peer-to-peer markets. This will allow you to buy coins directly from other users via the Binance app. To do this:
Open the app and log in or create an account.
Choose One Click buy sell and then the Buy box in the top left corner of the user interface.
You will be presented with various offers – click Buy on what you want to choose.
You can pay with other digital currencies (in the By Crypto box) or with fiat currency (in the By Fiat box).
Below you will be asked about your payment method. Choose what suits you.
Choose Buy BTC.
Now you need to complete the payment. When you are done doing that, click Mark as paid and Confirm.
The transaction is complete when the seller sends the coins to you.
Want to get started with digital currencies? Buy Bitcoin on Binance!
What can be bought with Bitcoin?
There are many things you can buy using Bitcoin. At this point, it may be difficult (if not impossible) to pinpoint physical stores that accept Bitcoin. However, you will still be able to find websites that accept it or allow you to purchase gift cards for other services.
For example, some of the things you can buy with Bitcoin are:
Flight tickets
Hotel rooms
Real estate
Food & beverages
Clothing
Gift cards
Online subscriptions
Where can I spend Bitcoin?
You can spend your Bitcoin in an increasing number of places! Let's see a few of them.
TravelbyBit
Save on huge credit card fees while traveling around the globe! You can book flights and hotels using Bitcoin and other digital currencies through TravelbyBit. Register and book with digital currencies for a 10% discount on your purchase.
Spendabit
Spendabit is a search engine for products that you can buy using Bitcoin. Just search for what you want to buy and get a list of merchants from whom you can purchase what you want using Bitcoin.
Coinmap
Find all digital currency merchants and ATMs in your area. If you are eager to spend your Bitcoin and just looking for a place to cash it out, this might be the ideal option for you.
Bitrefill
You can buy gift cards for hundreds of services and top up your phone credit using Bitcoin and other digital currencies here. It’s very easy to do, and you can also use the Lightning Network to pay.
A heatmap of stores that accept digital currencies as a payment method. Source: https://coinmap.org/
What happens if I lose my bitcoins?
Since there is no shared bank, you are responsible for keeping your coins secure. Some prefer to store them on exchanges, while others take care to save them in a variety of wallets. If you are using a wallet, it is important to write down the seed phrase so that you can recover it.
Can I reverse Bitcoin transactions after they are made?
Once data is added to the blockchain, it is not easy to remove (in fact, it is practically impossible). This means that when a transaction is made, it cannot be reversed. You should always double and triple-check that you are sending your money to the correct address.
As an example of how to theoretically reverse a transaction, see What is a 51% attack?
Can I profit with Bitcoin?
You can make money using Bitcoin, but you can also lose money using it. Typically, long-term investors buy Bitcoin and hold it, believing the price will rise in the future. Others choose to trade Bitcoin actively against other digital currencies for short to medium-term gains. Both strategies come with risks, but they are often more rewarding than a low-risk approach.
Some investors adopt mixed strategies. They hold Bitcoin as a long-term investment while simultaneously trading (in a separate wallet) for short-term gains. There is no right or wrong way to allocate assets in your portfolio – each investor has different risk appetites and goals.
Lending is an increasingly common form of passive income. By lending your coins to someone else, you can generate the interest they will pay back later. Platforms like Binance Lending allow you to do this using Bitcoin and other digital currencies.
How can I store Bitcoin?
There are many options for storing coins, each with its strengths and weaknesses.
Store your Bitcoin safely on Binance
The custody solution refers to storage where the user does not actually hold the coins but trusts a third party to do so. To make transactions, they log into the third-party platform. Trading platforms like Binance often use this model as it is more efficient for transactions.
Storing your coins on Binance allows you to easily access them for trading or lending.
Storing your coins in a Bitcoin wallet
Non-custodial solutions are the opposite – they enable the user to control their funds. To store money using this solution, you can use something called a wallet. The wallet does not hold your coins directly – it holds the cryptographic keys that link you to them on the blockchain. You have two main options here:
Hot wallets
A hot wallet is software that connects to the internet in some way. Generally, it will take the form of a mobile app or desktop application that allows you to easily send and receive coins. An easy-to-use example of a mobile wallet with a lot of supported currencies is Trust Wallet. Because they are connected to the internet, hot wallets are usually more convenient for transactions but are also more susceptible to attacks.
Cold wallets
Digital wallets that do not connect to the internet are called cold wallets. They are less susceptible to attack because there is no online attack vector, but they tend to provide a more old-fashioned user experience. Examples include electronic wallets or paper wallets.
For a more detailed explanation of wallet types, make sure to review the explanation of digital wallet types.
Chapter Four - Bitcoin Halving
Contents
What is Bitcoin halving?
How does Bitcoin halving work?
Why does Bitcoin halving happen?
What is the impact of Bitcoin halving?
When will the next Bitcoin halving occur?
What is Bitcoin halving?
Bitcoin halving (also known as Bitcoin's half) is simply an event that reduces the block reward. Once halving occurs, the miners' reward for adding new blocks is cut in half (so they receive only half of what they usually would). However, this does not affect transaction fees.
How does Bitcoin halving work?
When Bitcoin launched, miners were awarded 50 BTC for each valid block they found.
The first Bitcoin halving event occurred on November 28, 2012. At that time, the protocol reduced the block reward from 50 BTC to 25 BTC. The second Bitcoin halving event occurred on July 9, 2016 (from 25 BTC to 12.5 BTC). The next Bitcoin halving is expected to occur in May 2020, reducing to 6.25 BTC.
You may notice a certain pattern here. A new halving occurs approximately every four years, sometimes plus or minus a few months. This is by design, but the protocol does not specify exact dates for halving. Instead, it occurs according to block height – every 210,000 blocks, halving occurs. Therefore, we can expect it to take about 2,100,000 minutes to cut the incentive in half (remember, it takes about 10 minutes to mine a block).
In the chart above, we can see the decline in block reward over time and its relationship with total supply. At first, it may seem that the rewards have dropped to zero and that the maximum supply is already in circulation. But this is not the case. The trends of the curves are incredibly close, but we expect support to reach zero around the year 2140.
Why does Bitcoin halving happen?
It's one of the main selling points of Bitcoin, but Satoshi Nakamoto never explained why he thought to cap the supply at twenty-one million units. Some speculate it is simply a product that started with a block reward of 50 BTC, which is halved every 210,000 blocks.
Having a limited supply means that the currency is not prone to degradation in the long term. This contrasts sharply with fiat money, which loses purchasing power over time as new units enter circulation.
It makes sense to have restrictions on the speed at which participants can mine coins. After all, 50% was mined at block number 210,000 (i.e., by 2012). If support had remained the same, all units would have been mined by 2016.
With the halving mechanism, there is an incentive to mine for over 100 years. This gives the system enough time to attract users so that the fee market can develop.
Want to get started with digital currencies? Buy Bitcoin on Binance!
What is the impact of Bitcoin halving?
Those most affected by halving are the miners. This makes sense, as the block reward constitutes a large part of their revenue. When it is cut in half, they receive only half of what they once did. The incentive also includes transaction fees, but so far, these have only constituted a small portion of the block reward.
Thus, halving can become unprofitable for some participants to continue mining. What this means for the broader industry is unknown. A reduction in block incentives may lead to more centralization in mining pools, or it can promote more efficient mining practices.
If Bitcoin continues to rely on a proof-of-work algorithm, fees may need to rise to maintain mining profitability. This scenario is entirely possible as blocks can carry many transactions. If there are many pending transactions, those with higher fees will be prioritized first.
Historically, there has been a sharp increase in Bitcoin's price after halving. Of course, there is not much data available since we have only seen two so far. Many attribute the price movement to the market's perception of Bitcoin's scarcity, a realization that arose due to halving. Proponents of this theory believe that the value will significantly increase again after this event in May 2020.
Others disagree with this logic, arguing that the market has already factored in the halving (see Efficient Market Hypothesis). This event doesn’t seem like a surprise event – participants have known for over a decade that the reward would decrease in May 2020. Another point that is often raised is that the industry was too slow during the first two halving events. Nowadays, the industry is in a better position and provides advanced trading tools and is more accessible to a broader range of investors.
When will the next Bitcoin halving occur?
The next halving is expected to occur in May 2020 when the reward decreases to 6.25 BTC. Keep an eye on the countdown with Binance Academy's countdown to Bitcoin halving.
Chapter Five - Common Misconceptions About Bitcoin
Contents
Is Bitcoin anonymous?
Is Bitcoin a scam?
Is Bitcoin a scam?
Does Bitcoin use encryption?
Is Bitcoin anonymous?
Not true. Bitcoin may seem anonymous at first, but this is not the case. Bitcoin's blockchain is public, and anyone can see the transactions. Your identity is not linked to your wallet addresses on the blockchain, but any observer with the right resources can likely connect the two. It would be more accurate to describe Bitcoin as pseudonymous. Bitcoin addresses are visible to everyone, but their owners’ names are not.
However, the system is relatively private, and there are ways to make it more difficult for observers to know what you are doing with your bitcoins. Freely available technologies can create a policy of denial to 'unlink' addresses. Moreover, future updates may significantly enhance privacy – see Introduction to Confidential Transactions for an example.
Is Bitcoin a scam?
No. Just like paper money, Bitcoin can also be used in illegal activities. But this does not make Bitcoin a means of fraud in itself.
Bitcoin is a digital currency that is not controlled by anyone. Critics have described it as a pyramid scheme, but it does not fit that definition. As a digital currency, it works at $20 per coin just as it does at $20,000 per coin. It has been around for over a decade and the technology has proven to be incredibly secure and reliable.
Unfortunately, Bitcoin is used in many scams that you should be aware of. These may include online phishing and other social engineering schemes such as fake giveaways and free distribution of coins to multiple wallet addresses. As a rule of thumb: if something seems too good to be true, it probably is a scam. Never give your private keys or seed phrase to anyone, and be wary of schemes that promise to double your money with little to no risk on your behalf. If you send your coins to a scammer or a fake giveaway, they will be lost forever.
Is Bitcoin a scam?
During the numerous spikes that came in the form of equivalent jumps in Bitcoin's price, it was common to see people refer to them as speculative bubbles. Many economists compared Bitcoin to periods like the Tulip Mania or the dot-com boom.
Due to Bitcoin's unique nature as a decentralized digital commodity, its price is entirely governed by speculation in the free market. Thus, while there are many factors that control Bitcoin's price, they ultimately influence market supply and demand. And since Bitcoin is scarce and follows a strict issuance schedule, long-term demand is believed to outstrip supply.
Cryptocurrency markets are relatively small compared to traditional markets. This means that Bitcoin and other digital assets tend to be more volatile, and it is very common to see short-term market imbalances between supply and demand.
In other words, Bitcoin can sometimes be a volatile asset. But volatility is part of financial markets, especially those that have relatively lower volume and liquidity.
Does Bitcoin use encryption?
No. This is a common misconception; Bitcoin's blockchain does not use encryption. Each peer on the network needs to be able to read transactions to verify their validity. Instead, it uses digital signatures and hash functions. While some digital signature algorithms use encryption, this is not the case for Bitcoin.
However, it is worth noting that many applications and digital wallets use encryption to protect users' wallets with passwords. However, these encryption methods are unrelated to the blockchain – they have simply been integrated with other technologies that they will benefit from.
Chapter Six - Bitcoin Scalability
Contents
What is scalability?
Why does Bitcoin need to scale?
How many transactions can Bitcoin process?
What is the Lightning Network?
What are forks?
Soft forks
Hard forks
What is scalability?
Scalability is a measure of a system's ability to grow to accommodate increasing demand. If you host a website that has exceeded its capacity due to an influx of requests, you can increase its capacity by adding more servers. If you want to run applications that require higher operating requirements on your computer, you need to upgrade its components.
In the context of digital currencies, we use the term to describe the ease of updating the blockchain so that you can process a larger number of transactions.
Why does Bitcoin need to scale?
For Bitcoin to work in everyday payments, it needs to be fast. As it stands, it has relatively low throughput, meaning it can only process a limited number of transactions per block.
As you learned from the previous chapter, miners receive transaction fees as part of the block incentive. Users add these fees to their transactions to incentivize miners to add their transactions to the blockchain.
Miners seek to achieve a return on their investments in hardware and electricity, so they prioritize transactions with higher fees. If there are many transactions in the network's 'waiting room' (called the mempool), fees may rise significantly as users bid to have their transactions selected. In its worst cases, the average fee has exceeded $50.
How many transactions can Bitcoin process?
Based on the average number of transactions per block, Bitcoin can currently handle around five transactions per second. This is much lower than centralized payment solutions, but this is one of the trade-offs of a decentralized currency.
Because it is not managed by a data center that a single entity can update at will, Bitcoin must limit the size of its blocks. A new block size that allows for 10,000 transactions per second could be implemented, but it would harm the decentralization of the network. Remember that full nodes need to download new information roughly every ten minutes. If it becomes too burdensome for them to do so, they are likely to lose their connection to the network.
If the protocol states that it will be used for payments, Bitcoin enthusiasts believe that scalability must be achieved effectively in various ways.
What is the Lightning Network?
The Lightning Network is a proposed solution for Bitcoin scalability. We call it a second-layer solution because it moves transactions off the blockchain. Instead of logging all transactions on the base layer, they are processed by another protocol built on top of it.
The Lightning Network allows users to send funds instantly and for free. There are no productivity restrictions (as long as users have the ability to send and receive). To use the Lightning Network for Bitcoin, participants lock some coins in a special address. The address has a unique property – it only releases Bitcoin if both parties agree.
From there, both parties maintain their private ledger, which can redistribute balances without announcing them to the main chain. They only publish a transaction to the blockchain when it is completed. Then the protocol updates their balances accordingly. Note that they do not need to trust each other either. If either tries to manipulate, the protocol will expose and punish them.
Overall, a payment channel like this requires only two transactions online from the user – one to fund their address and the other to spend the coins later. This means thousands of transfers can be made in the meantime. With further development and refinement, this technology can become an important component for large blockchain systems.
For a more detailed explanation of the scalability problem and its potential solutions, take a look at Bitcoin Scalability – Sidechains and Payment Channels.
What are forks?
Since Bitcoin is open-source, anyone can modify the software. You can add new rules or remove old ones to suit different needs. However, not all changes are created equal: some updates will make your node incompatible with the network, while others will be backward compatible.
Soft forks
A soft fork is a change in the rules that allows updated nodes to interact with old nodes. Let's take block size as an example. Suppose we have a block size of 2 megabytes, and half of the network implements a change – from now on, all blocks should not exceed 1 megabyte. Any block that exceeds this capacity will be rejected.
Older nodes can still receive or propagate these blocks. This means all nodes remain part of the same network, regardless of the version they are running.
In the animated illustration below, we can see that smaller blocks are accepted by both the old and updated nodes. However, newer nodes will not recognize 2 megabyte capacity blocks, as they already follow the new rules.
Bitcoin's separate witness (or SegWit) is an example of a soft fork. Using clever technology, it introduced a new format for blocks and transactions. Old nodes continue to receive blocks, but they do not validate the new type of transaction.
Hard forks
A hard fork is messier. Suppose now that half the network wants to increase the block size from 2 megabytes to 3 megabytes. If you try to send a 3 megabyte block to the older nodes, the nodes will reject it because the rules clearly state that 2 megabytes is the maximum they can accept. Because the two networks have now become incompatible, the blockchain splits into two networks.
The black chain in the image above is the original chain. Block number 2 is where the hard fork occurred. Here, the updated nodes began producing larger blocks (those in green). The older nodes do not recognize these blocks, so they continue moving down a different path. There are now two blockchains, but they share the record up to block number 2.
Now there are two different protocols, each with a different currency. All balances on the old blockchain are cloned, meaning if you had 20 BTC on the original blockchain, you now have 20 new BTC on the new blockchain.
In 2017, Bitcoin underwent a controversial hard fork in a scenario similar to the previous one. A minority of participants wanted to increase the block size to ensure greater throughput and cheaper transaction fees. Others believed this was a weak strategy for scaling. Ultimately, the hard fork created Bitcoin Cash (BCH), which split from the Bitcoin network and now has an independent community and roadmap.
To learn more about forks, see hard forks and soft forks.
Chapter Seven - Participating in the Bitcoin Network
Contents
What is a Bitcoin node?
How does a Bitcoin node work?
Full nodes
Light nodes
Mining nodes
How to run a full Bitcoin node
How to mine Bitcoin
How long does it take to mine Bitcoin?
Who can contribute to Bitcoin's code?
What is a Bitcoin node?
A 'Bitcoin node' is a term used to describe the software that interacts with the Bitcoin network in some way. It can be anything from a mobile phone running a Bitcoin wallet to a dedicated computer storing a complete copy of the blockchain.
There are several types of nodes, each performing specific functions. Each serves as a point of connection to the network. Within the system, they relay information about transactions and blocks.
How does a Bitcoin node work?
Full nodes
The full node verifies transactions and blocks if they meet certain requirements (for example, following the rules). Most full nodes run the Bitcoin Core software, which is the reference application for the Bitcoin protocol.
Bitcoin Core is the software released by Satoshi Nakamoto in 2009 – it was simply called Bitcoin at that time, but it was later renamed to avoid any confusion. Other applications can also be used as long as they are compatible with Bitcoin Core.
Full nodes are an integral part of Bitcoin's decentralization. They download, verify, and propagate blocks and transactions to the rest of the network. Because they independently verify the validity of the information provided to them, the user does not rely on a third party for anything.
If the full node stores a complete copy of the blockchain, it is referred to as a full archival node. Some users ignore old blocks to save space – Bitcoin's blockchain contains over 200 gigabytes of transaction data.
The global distribution of full Bitcoin nodes. Source: bitnodes.earn.com
Light nodes
Light nodes are not as capable as full nodes, but they are also less resource-intensive. They allow users to interact with the network without performing all the operations that a full node does.
While the full node downloads all blocks to verify their validity, light nodes only download a portion of each block (called the block header). Although the header size is very small, it contains information that allows users to verify that their transactions are in a specific block.
Light nodes are ideal for devices with constraints on bandwidth or space. It is common to see this type of node used in desktop and mobile wallets. Because they cannot verify transactions, light nodes rely on full nodes.
Mining nodes
Mining nodes are full nodes that perform an additional task – producing blocks. As we touched on earlier, they require specialized hardware and software to add data to the blockchain.
Mining nodes take pending transactions and hash them along with other information to create a number. If the number is less than the target set by the protocol, the block is valid and can be broadcast to other full nodes.
But to mine without relying on anyone else, miners need to run a full node. Otherwise, they won’t be able to know which transactions to include in the block.
If a participant wants to mine but does not want to use a full node, they can connect to a server that provides them with the information they need. If you are mining in a pool (meaning, working with other miners), only one person needs to run a full node.
For a detailed explanation regarding different types of nodes, see What are nodes?
How to run a full Bitcoin node
A full node can be beneficial for developers, traders, and consumer users. Running a Bitcoin Core client on your own devices gives you privacy and security advantages and strengthens the Bitcoin network overall. With a full node, you no longer rely on anyone else to interact with the ecosystem.
Some companies that rely on Bitcoin offer a plug-and-play solution. Pre-configured devices are shipped to the user, who only needs to power it on to start downloading the blockchain. This may be more convenient for less technically inclined users, but it is often much more expensive than setting it up yourself.
In most cases, an old personal computer or laptop will suffice. It is not advisable to run a node on your everyday computer as it can significantly slow it down. The blockchain is continually growing, so you’ll need to ensure you have enough space to download it fully.
A 1 terabyte hard drive will be sufficient for several years to come, provided there are no significant changes in block size. Other requirements include 2 gigabytes of RAM (most computers have more than this by default) and plenty of bandwidth.
From here, the guide on running a full node at bitcoin.org explains the process of setting up your node.
How to mine Bitcoin
In the early days of Bitcoin, new blocks could be created with conventional laptops. The system was not well-known at that stage, so there was little competition in the mining space. Because activity was so limited, the protocol inherently set a low mining difficulty.
As the network's hash rate increased, participants needed to upgrade to better equipment to stay competitive. By transitioning through different types of hardware, the mining industry eventually entered what can be called the application-specific integrated circuit (ASIC) era.
As the name suggests, these devices are designed with a specific purpose in mind. They are very efficient but capable of performing only one task. Thus, an ASIC miner is a specialized computer used for mining and nothing else. A Bitcoin ASIC can mine Bitcoin but cannot mine currencies that do not use the same algorithm.
Mining Bitcoin today requires significant investments – not just in hardware but also in energy. At the time of writing, a good mining machine performs over ten trillion operations per second. Despite the high efficiency, ASIC miners consume vast amounts of electricity. Unless you have access to many mining platforms and cheap electricity, it is unlikely you will turn a profit from Bitcoin mining.
However, in terms of materials, setting up a mining operation is easy – many ASICs come with their own software. The most popular option is to direct miners to mining pools where you work with others to find blocks. If successful, you will receive a portion of the block reward proportional to the hash rate you contributed.
You can also choose solo mining, where you work alone. The chance of creating a block will be lower, but you will keep all the rewards if you create a valid block.
How long does it take to mine Bitcoin?
It is difficult to provide a one-size-fits-all answer because there are a number of variables to consider. The speed at which you can mine a currency depends on the amount of electricity and hash rate available to you. You will also need to determine the operating costs of running the mining device.
To get an idea of the revenue generated from mining Bitcoin, we recommend using a mining calculator to estimate costs.
Who can contribute to Bitcoin's code?
The Bitcoin Core software is open-source, meaning anyone can contribute to it. You can suggest or review new features to be added to over 70,000 lines of Bitcoin code. You can also report bugs or translate and improve documentation.
Changes to the software undergo a rigorous review process. After all, the software that handles hundreds of billions of dollars in value must be free of any vulnerabilities.
If you are interested in contributing to Bitcoin, be sure to check out developer Jimmy Song's blog on how to contribute, or the Bitcoin Core website.#BTCHashratePeak $BTC
