The first decentralized cryptocurrency is Bitcoin. Bitcoin described by Satoshi Nakamoto in his self-published paper “Bitcoin: A Peer-to-Peer Electronic Cash System” 3. The first release of the open-source Main Client was in January 2009. Bitcoin does not rely on any central services for managing the creation or execution of transactions.
Each party owns a set of a private and public key similar to a bank account. In order to execute transactions, users create it and sign it with their private key.
Bitcoins are created by solving a cryptographic problem connected with creating a Block and providing a proof-of-work (Chart 1.3). The process requires a lot of computational devices, power, and resources.
Bitcoins have fixed supply and are secured by cryptographic algorithms. Bitcoin can be used for trades, services, and fiat. Bitcoin lacks quality with today’s transactions fees but provides owners a high level of anonymity.
Block Chain and Mining are the important part of Bitcoin design.
1.1.1 Block Chain
A block chain is a digitized, decentralized, public ledger of all cryptocurrency transactions. It contains a list of records, called blocks that are secured by using cryptography. Each Block has a hash pointer as a link to a previous block, a timestamp and transaction data.
Management of Block Chain is related to the list of transaction records thus It does not require any 3rd parties to track down the transactions.
Where do bitcoins come from? Governments decide when to print and distribute money with paper money. Bitcoin doesn’t have a central government.
With Bitcoin, miners use special software to solve math problems and are issued a certain number of bitcoins in exchange. This is a smart way to issue the currency and also provides an incentive for more people to mine. 4 This process is also used by adding transaction records to Block Chain. Allowing Bitcoin nodes to reach a secure consensus is the primary purpose of mining.
3.1.3 Mining Difficulties
There are 3 types of difficulties about mining Bitcoin; The Computationally-Difficult problem, The Bitcoin Network Difficulty Metric, The Block Reward.
18.104.22.168 The Computationally Difficult Problem
The SHA-256 hash of a block’s header must be lower than or equal to the target in order to find a new block to work on and also be accepted by the network. This problem can be clarifying for explanation purposes: The hash of a block must start with a certain number of zeros. The probability of calculating a hash that starts with many zeros is very low, therefore many attempts must be made. In order to generate a new hash each, round, a nonce is incremented (Chart 1.3).