The Technical Ins and Outs of Bitcoin: From Mining to Public Key Cryptography

Article by Steller7 - Published: 26/01/2023

Bitcoin is a decentralised digital currency that utilises blockchain technology to facilitate secure, peer-to-peer transactions. The blockchain is a decentralised and distributed public ledger that records all transactions on the network. Each block in the chain contains a list of transactions and a reference to the previous block in the chain, forming a chain of blocks, hence the name blockchain.

The Bitcoin network utilises a consensus mechanism known as proof-of-work (PoW) to validate and add new transactions to the blockchain. Miners compete to solve a complex mathematical problem, known as a "hash," which is based on the SHA-256 hashing algorithm. The first miner to solve the hash is able to add the next block to the blockchain and is rewarded with a certain number of newly minted Bitcoins, currently the reward is 6.25 BTC. This process is known as "mining" and it is through this process that new Bitcoins are created and added to the circulating supply.

The Bitcoin protocol also has a built-in mechanism to adjust the difficulty of the mathematical problem to ensure that the rate of block creation remains steady. This is known as the difficulty adjustment algorithm and it ensures that the time taken to mine a block remains roughly 10 minutes on average.

Bitcoin utilises Public Key Cryptography to secure transactions. Each user on the network has a public key and a private key. The public key is a unique address that can be used to send and receive Bitcoins, while the private key is used to sign transactions and must be kept secret. Transactions are broadcasted to the network, and once they are confirmed by the miner, they are added to the blockchain and become permanent and cannot be altered.

The Bitcoin protocol also has a built-in mechanism to limit the total supply of Bitcoins, with a maximum of 21 million Bitcoins that can be mined. This ensures that the currency will not be subject to inflationary pressures in the long run.

However, despite its many technical advancements, Bitcoin still faces several challenges such as scalability, security, and regulatory compliance. Bitcoin's scalability problem is related to the limited number of transactions that can be processed on the network at any given time. This is caused by the 1mb block size limit and the need for each transaction to be verified by the network. To address this problem, several scaling solutions such as SegWit, Lightning Network, and others have been proposed and implemented to increase the capacity of the network.

In terms of security, Bitcoin is vulnerable to attacks such as 51% attacks and double-spending. While these are relatively rare and difficult to execute, they are still potential threats to the network.

Overall, Bitcoin is a complex and powerful technology that continues to evolve and improve. It's underlying blockchain technology has a wide range of potential use cases, and it will be interesting to see how it is adopted and integrated into various industries in the coming years.