Bitcoin Explained Josiah Wu (Year 12, Churchill)
Seriously, what is this? In 2017, there was a huge frenzy surrounding Bitcoin. Not only did it attract attention from economists and investors, it also became a hot topic amongst the general public. In fact, throughout 2017, questions like “How to buy Bitcoin?” and “How to mine Bitcoins?” were in the Top Ten list of the most trending ‘How to’ queries on Google [1] and it even had its own subreddit [2]. But what is Bitcoin? To start, we need to understand that Bitcoin is, in fact, a type of cryptocurrency. Cryptocurrency is a digital currency; however, unlike the conventional currencies we know (such as US dollars or UK pounds), cryptocurrency is not controlled by any central authority. If I wanted to make a transaction with Bitcoin, the transaction would not be verified by any bank or government, but it would instead rely on a network of computers that govern transactions.
Figure 1: Depiction of a Blockchain (Source: matejmo, Getty Images)
Cryptocurrencies rely on a system called blockchain, which is an accessible public ledger that records all the valid transactions made between users. It is designed in a way such that it is nearly impossible for anyone to tamper with it. Blockchain consists of two parts: the ‘block’ and the ‘chain’. There is a long list of valid transactions within each ‘block’, and each block is labelled with an individual identity called ‘hashes’. The ‘chain’ connects one block to another to form a blockchain. Nobody owns or controls this public ledger. Instead, volunteers (known as Miners) update the public ledger by creating a new ‘block’ and connecting it to one of the old blocks, helping the system circulate and function. The first person to update the ledger is rewarded with approximately 12.5 Bitcoins (~US$100,000 after conversion, as of Feb 2019 [3]). However, updating the public ledger is a laborious job. When a deal is struck and confirmed, the transaction is announced publicly into the Bitcoin network. Miners must first gather and verify one megabyte worth of those transactions into a block, and then solve an extremely difficult cryptographic ‘puzzle’ before they can upload their block onto the blockchain. This whole process is known as ‘mining’.
CRYPTOGRAPHIC HASH FUNCTION To understand this ‘puzzle’, we need to first grasp the idea of a cryptographic hash function. This function converts a string of plain text into a hash, or a string of binary numbers (also known as ‘bits’). The one Bitcoin uses is the SHA-256, which is a common cryptographic hash function used for internet security. One characteristic of this cryptographic hash function is that every input has a unique output, and a minor change to the input affects the output drastically. For example, if we want to convert the word “Bitcoin” using SHA-256, it would output* a string of 256 bits which starts with these 16 bits: 1011010000000101... However, changing the input by replacing the upper case “B” to lowercase, “bitcoin” yields an output* which as you can see, already differs significantly in only the first 16 bits: 0110101110001000... 121
