10 Bitcoin Basics Every Cryptographic Investor Should Know – Motley's Fool

Investors are capricious and often turn to fashionable investments that offer the most immediate opportunity to get rich quickly. Bitcoin has attracted a horde of investors in 2017 as its price has surpassed the $ 10,000 mark, but its sharp declines since 2018 have resulted in a cryptocurrency losing momentum. Nevertheless, investors can not deny that bitcoin has made its mark on the world, with its huge price gains and increased interest from investors and supporters of blockchain technology in the broad sense.

As many investors recollect the painful memories of the financial crisis of 10 years ago, another anniversary is coming. In October 2008, the pseudonym Satoshi Nakamoto published a white paper on the concept of bitcoin. Even a decade later, the newspaper has a lot to explain about how bitcoin works. It is essential for anyone who wants to invest in cryptocurrencies. In honor of the 10th anniversary of Bitcoin, here are 10 key quotes from the Nakamoto newspaper.

1. Bitcoin got rid of the middleman

Internet commerce has come to rely almost exclusively on financial institutions acting as trusted third parties. … What's needed, it's an electronic payment system based on cryptographic evidence rather than trust.

Cryptocurrency advocates love the fact that bitcoin does not rely on a centralized authority like a bank, especially because of the risk of breach of trust. For example, credit card companies allow buyers to cancel their transactions in certain circumstances, thus preventing a seller from being assured of a permanent payment. Bitcoin has eliminated thirds of the equation, making payments reliable and irrevocable.

2. The fundamental vulnerability of Bitcoin

The system is secure as honest nodes collectively control more processor power than any cooperating group of attacking nodes.

To work, the bitcoin must be hard enough to fear so that those who seek to constitute a chain of fraudulent transactions can not surpass the true blockchain. This requires computing power and identifies what could potentially be a threat to cryptocurrency: enough people trying to overthrow the dominance of bitcoin could threaten its integrity.

3. The foundation of trust in Bitcoin

We need to find a way for the recipient to know that the previous owners have not signed any previous transactions. … The solution we propose starts with a timestamp server.

The biggest threat to the use of Bitcoin as a payment system is the potential double expense. With a physical currency, it is impossible to double expenses because it is necessary to hand the currency to the seller. The fundamental reliability of Bitcoin stems from the idea that everyone knows each previous transaction, allowing them to trust what was happening before.

4. Why proof of work is essential

Once the processor has made considerable effort to make it work proof, the block can not be changed without redoing the job. As subsequent blocks are chained after work, the block change job would include the recovery of all blocks after.

One of the reasons why bitcoin is so resistant is that it has grown stronger over time and that proof of work is an essential part of that strength. As the blockchain grew, the efforts to attack it successfully decreased. With the increasing difficulty of proof of work, bitcoin further enhances its defenses.

5. How bitcoin continues to grow

Nodes always consider the longest string as the correct one and will continue to extend it.

The growing popularity of Bitcoin is due to the fact that not all nodes of the Bitcoin network always have the latest version of the blockchain. Over time, however, the following transactions will more broadly disperse the longer blockchain distribution, allowing the entire network to catch up.

6. The incentive to exploit bitcoin

By convention, the first transaction of a block is a special transaction that starts a new piece belonging to the creator of the block. This encourages the nodes to support the network and provides a way to initially distribute the coins in circulation.

The exploitation of bitcoins has always been an attractive part of the cryptocurrency movement and, with the rising price of bitcoin, a huge computing power is now needed to unlock new blocks and recover the small amount of bitcoin resulting from success. As the paper notes, mining also encourages those with enormous computing power not to try to overthrow the blockchain itself, because they can simply claim new bitcoins.

7. Deal with the growing blockchain

Once the last transaction in a coin is buried under a sufficient number of blocks, the transactions expended before they can be discarded to save disk space.

The treatment of bitcoins has slowed with the growing popularity of the latter, but the founders of Bitcoin have anticipated the need to prune the growing blockchain. The methodology is to compress older blocks using shorter hashes, sufficient once enough past transactions have accumulated. However, the theoretical size of the blockchain has proven to be more problematic than the predicted white paper, in part because it is impossible to guarantee that any block identified as being pruned does not have any "color". vital information for the rest of the world. the blockchain.

8. Deal with larger transactions

Although it is possible to handle parts individually, it would be difficult to perform a separate transaction for every penny of a transfer. To make it possible to split and combine a value, the transactions contain several inputs and outputs.

Currencies have units such as 1 euro coins or 20 dollar bills. Bitcoin theoretically could have been configured in this way, with discrete units. Yet, it is more efficient to authorize transactions of varying size. This essentially allows users to pay with a "4 bitcoin bill" instead of forcing the blockchain to include four transactions involving a single bitcoin, as would be required for a $ 4 cash transaction using four $ 1 bills.

9. Bitcoin privacy

The public can see that someone sends an amount to someone else, but without information linking the transaction to anyone. This is similar to the level of information disseminated by stock exchanges, where the time and size of individual transactions, the "band", are made public, but without specifying the parties' identities.

Confidentiality is a valuable benefit of cryptocurrency transactions compared to most payments. Bitcoin has proved to be not as private as some users would like, which has prompted more and more rivals to take an interest in privacy. Nevertheless, the white paper notes other steps that bitcoin users can take, including the use of slightly different key information in each transaction.

10. The Bitcoin defense mechanism

Nodes will not accept an invalid transaction as payment and honest nodes will never accept a block containing them. An attacker can only attempt to modify one of his own transactions to recover the money he has recently spent.

Finally, the white paper examines the chances that an attacker generates another chain of blocks. To do this, the attacker must work fast enough so that his false version is accepted. Otherwise, if the attacker moves behind other nodes, the chances of reversing a past transaction eventually become zero.

Is Bitcoin here to stay?

The sharp drop in bitcoin prices has led some investors to conclude that bitcoin can survive in the long run. Yet, given the state of the fundamentals of the white paper, bitcoin has emerged as a key technology – one that will remain its legacy, no matter how long-term bitcoin prices evolve.