In the world of cryptocurrencies, Bitcoin (BTC) is the undisputed leader. It is the first digital currency ever invented and it caused the creation of a whole new segment of financial services, facilitated by cryptocurrencies. Millions of people are initiating BTC transactions on a daily basis for all sorts of needs, from payments for products and services to storing value and conducting large-scale investments.
Bitcoin has become very popular since its launch back in 2009 when it was only accepted by a small community of crypto enthusiasts who believed that a virtual currency can really become an authentic alternative to the contemporary fiat money financial system.
Just a few years after the launch, corporate investors and companies started joining the crypto market and investing in cryptocurrency. Pretty soon after, the name Bitcoin became well known in most parts of the world because it was the first type of digital cash that could be used by anyone, anywhere in the world with an internet connection.
We are going to take a detailed look into the basics of Bitcoin, how the blockchain works, what is the role of miners, and what’s the hashing algorithm used on the Bitcoin network.
The Launch of Bitcoin and the Early Days
In 2009, a mysterious programmer known only by their alias, Satoshi Nakamoto, published the Bitcoin white paper. The white paper was a document that presented Bitcoin as the first decentralized, electronic cash in the world that runs on a peer-to-peer network without any central authority.
The Bitcoin blockchain was the first such network in the world. Blockchain technology reached widespread popularity in the years after the first block (the genesis block) on the Bitcoin network, with thousands of new cryptocurrencies like Litecoin (LTC) using the same type of network and others like Ethereum taking all of the best features from Bitcoin and extending it with new features. Various businesses from the IT, healthcare, production and logistics fields have adopted blockchain-based solutions as a method for improving both efficiency and productivity. This was all started by Bitcoin.
During the first years, BTC wasn’t very popular since financial institutions and banks were very skeptical about the reliability of this new, digital currency. While fiat money exists physically and can be held in wallets and deposited in bank accounts, Bitcoin exists only on its blockchain network. This was inconceivable to most people who relied on classic bank transfers and didn’t realize that the fact that BTC doesn’t have a physical form isn’t a risk, but rather an opportunity to store value securely using the blockchain system.
When the first Bitcoin exchange platforms appeared in 2010, the coin started gaining some trust within the tech community and among developer teams that started recognizing the potential of cryptocurrency. Soon after its increased adoption rate, BTC started changing rapidly, and during the course of the following 10 years, it had started growing in market capitalization, trading volumes, and popularity. The coin had risen from less than $1 per coin, through the value of several hundred USD per coin, to the all-time high in the spring of 2020 when BTC surpassed $60,000 USD per coin.
Blockchain Technology: The Power Behind Bitcoin
The rise in popularity and the tremendous value Bitcoin represents—both as a potential investment and a daily trading instrument—wouldn’t be possible without the advanced programming behind its blockchain network. Theoretically, blockchain technology has existed as a concept even before Bitcoin, but this was the first case it was implemented and proven to be truly functional.
Bitcoin’s blockchain has become a blueprint for creating successful cryptocurrencies and hundreds of altcoin developer teams have recognized it. The blockchain is a form of decentralized distributed public ledger that acts as data storage for all transactions that ever happened on the BTC network.
The chain itself consists of blocks of data that are set in a chronological string, from first to last. Each of the blocks results in new Bitcoins being issued as rewards to Bitcoin miners, in addition to transaction fees to compensate for the processing power that is required to run the network. Each block is a fixed size, and can contain 1MB of transaction data, which can include up to ~2,700 transactions. After that, transactions will need to be held over for the next block before they are able to be processed.
Decentralization is a key aspect of blockchain technology that enables the smooth functioning of the network. Unlike big tech companies that provide apps tied to their central servers, the Bitcoin protocol has no central server or authority that maintains the chain and approves all the transactions. Instead, the network looks like a huge web of network nodes, which are Bitcoin miners, who provide the computing power required to run validation on each transaction. The network nodes store copies of the whole blockchain on their machines and simultaneously update the whole chain as they approve transfers.
This is a huge advantage over centralized financial systems that can be hacked or shut down by attacking the central servers or power sources. In the case of the BTC blockchain, pulling the plug on a single network node would do absolutely no damage to the blockchain as a whole.
Blockchain Security
Security was one of the major doubts people had regarding the BTC blockchain when it appeared. People didn’t believe that their funds could be safely stored and protected on the internet, especially if no government institution or bank guarantees the safety of their assets.
The blockchain proved these doubtful individuals wrong because, in order for a hacker to pull off a successful scam and steal funds by relocating them on the blockchain, they would need a huge amount of processing power to alter the content of already approved blocks on the blockchain. The thing is that when the next block is added to the chain, it can’t be changed and no one can alter the Bitcoin address of a transaction.
The only way a block of data can be changed is if 51% of all network nodes approve the change, which would mean that literally thousands of people that participate in the network as miners are actually part of a scam. This is extremely unlikely to ever happen and it would require nearly unreachable quantities of computing power.
Blockchain Speed
Standard bank transfers take hours or even days, especially if large amounts of money are involved and there are several intermediary banks. This is a huge issue with fiat money transfers. The Bitcoin blockchain has enabled people to facilitate a transaction of any amount in just 5 to 10 minutes, which is the average duration of a BTC transfer. It can be instantaneous if you complete a Coinbase transaction between two users, as the transfer is settled without it being
This speed was something truly revolutionary for financial operations when BTC was launched. Numerous altcoins with shorter transfer times have been launched in the meantime, but none of them rival the popularity of Bitcoin transactions because of the high security and reliability of its blockchain.
Data Blocks
Every block has a capacity of 1MB of data. This amount of data might seem small, but this is exactly what makes the network work quickly because miners manage to fill each block with confirmed transactions in 5 to 10 minutes and everything runs smoothly. There are currencies with bigger block sizes, such as Bitcoin Cash (BCH), the most famous Bitcoin fork, whose blocks have an 8MB capacity, but the adoption rate pales in comparison.
Headers
Every block has a block header which is its unique identifier. Just as transactions have their txID, blocks have their headers. A block receives its header once it is hashed and added to the blockchain. For it to get added to the chain, all transactions within it need to get verified. When all transfers within the new block are approved, the next block gets added to the chain after the previous block. The headers are proof that a block is confirmed and the rest of the network is notified that a new block is added.
Timestamps
Timestamps are another integral part of every Bitcoin block. They are pieces of information that show the exact time when a certain block was hashed and approved to be added to the blockchain. After the network approves the creation of a new block by miners, a timestamp is added to the block showing when it was created.
The Role of Transactions on the Bitcoin Network
Every time you want to pay for a product or service in BTC or to make a trade on an exchange platform, you need to initiate a transaction.
Most Bitcoin transfers are made on the BTC blockchain, although some exchanges like Coinbase will complete transactions off-chain. Private keys act as passwords that prove your ownership over a certain amount of BTC, and public keys are your Bitcoin addresses to which people can send you bitcoins.
You need a cryptocurrency wallet to store your BTC safely, but keep in mind that you aren’t really storing your bitcoins since they are always on the blockchain. Instead, you just store the private keys that allow you to transact using your bitcoins in secure crypto wallet apps or on hardware wallets, which are specialized USB devices.
In case of a transaction, you need to have the public key, the Bitcoin address of the person you wish to send bitcoins to, along with your private key that will enable you to sign the transfer. When you start a transaction either from your crypto wallet or from your cryptocurrency exchange account, the information about your transaction starts traveling through the BTC blockchain.
Transactions of Bitcoin should be understood as messages that carry information about the current location of certain funds on the blockchain, along with a command to send those funds to another blockchain address. Your transfer has a complex journey ahead of it until it reaches its final destination. This journey is facilitated by Bitcoin miners.
The Role of Bitcoin Mining
The main process that facilitates transactions is called mining, and transfers wouldn’t be possible without it. The fact that there is no central server or administrative authority on the BTC blockchain means that there is no single entity responsible for the validation of all transfers that are happening on a daily basis.
After you initiate a transaction, it goes into the mempool (memory pool) where miners select transactions based on the transaction fees that are included. Transfers with average or higher than average fees will get processed faster, and that is why transfer fees exist; to act as an incentive for miners to process transactions.
However, the real, main incentive why miners invest large amounts of money in powerful rigs that are essential for the mining process are the block rewards of new Bitcoins after the creation of each new block. The miners that are responsible for validating transactions and creating new blocks get freshly mined BTC as a reward.
These block rewards are very difficult to obtain by a single miner because they’re competing against thousands of other miners. Instead, miners usually join forces in mining pools, where they share their computing power and share the block rewards from each validated transfer.
Hash Rates
When miners validate transactions, they solve complex computations. Those mathematical problems require them to find a unique 64-digit combination hash for each transaction. Every transfer has a different hash. The only way to find the appropriate combination for a transaction is through brute force, or in this case, through the sheer computing power of mining rigs, by trying out huge amounts of combinations.
A mining rig uses the processing power of its GPUs to constantly try out different combinations that might reveal the right hash for a transaction. It is possible to use CPUs for hashing bitcoins as well, but it is far slower. That’s why mining rigs use two or more GPUs that are connected to a processor and a motherboard. These rigs are constantly working and require advanced cooling systems to keep hashing and processing transactions 24/7.
The power of a mining rig is measured in hashes per second, so if you want to start mining Bitcoin, you should carefully choose GPUs for your rig based on their hash rates. This will help you calculate how much profit your rig will generate. It’s a good idea to check a profitability calculator website such as Nicehash.com in order to get a clear picture about the potential profitability of your rig. There are also machines called ASIC miners that are far more powerful than classic mining rigs but they are also far more expensive and usually used by Bitcoin mining companies.
A high hash rate means that a rig is able to try more 64-digit combinations, thus processing more transactions and mining more BTC in the process.
SHA-256: The Bitcoin Hashing Algorithm
The hashing algorithm used by miners to verify transactions and generate new BTC is called the SHA-256 (Secure Hash Algorithm) cryptography algorithm. This is the essential piece of cryptography that secures the Bitcoin blockchain. A SHA-256 hash function generates output hashes that are set to have a fixed size and fixed length of 256 digits regardless of the input data size.
It is worth noting that the SHA-256 cryptographic hash function isn’t something developed specifically for Bitcoin. It was created by cryptography experts from the National Security Agency way back in 2001. SHA-256 isn’t only used in cryptocurrency. It also has a huge amount of other uses, including in SSL certificates for validation of input data from web sites, DKIM email signing, and much more.
SHA-256 is essential for the functioning of the proof-of-work algorithm that makes sure every transaction on the blockchain is valid. The SHA-256 hash value is the ultimate proof of work for every transaction, confirming to the whole network that a transfer has a valid hash before it can be added to a new block and the block joins the rest of the chain.
The Role of Merkle Trees and Merkle Roots
It can get really complicated to find a certain transaction within a blockchain if there isn’t some sort of blockchain blueprint that helps users find a specific transfer quickly. The Merkle tree acts as an overview of the Bitcoin blockchain and it provides BTC users with a structuralized scheme of the Blockchain data storage.
This overview of the blockchain shows hash roots of transactions, which serve as a tool for decoding if a transfer was verified and processed through the network. The Merkle tree is very practical since users don’t need to have the whole BTC blockchain downloaded if they use the Merkle trees to verify if a certain transfer was approved and went through the network.
Hash roots are also named Merkle roots and they show the root hash for a selected transfer that is already added to a block of the blockchain. Every transaction within a single block has the same Merkle root and the hash root of the new block is always different from the hash of the previous block.
A Few Ending Words…
It might be relatively common knowledge that new Bitcoins are generated by mining, but it’s less known how exactly Bitcoin mining works and what the exact role of mining rigs is, especially how the hashing function works and the particular hashing algorithm used. That’s why we opted to share all the essential basics of BTC mining and hashing blocks, which is a must-know for all crypto enthusiasts.
