Bitcoin – The things we don’t think about

You’ve already heard about Bitcoin like most of the world. However, the Bitcoin inner workings might surprise you a bit.

Transactions and Servers

If Alice wants to send Bob a few dollars worth of bitcoin she will use a phone app (there are also desktop wallets available). The phone app will connect to a node through an API to send the transaction. A node is a server run by a company that installed the latest bitcoin software on it. Anyone could install and create such a server.

The node will help the transition get propagated between all bitcoin nodes in about 2 seconds. A node can choose to be a miner or just be used for transaction propagation and validation. 

For example Trust Wallet uses Trezor Blockbook implementation for Bitcoin, that connects to the Trezor backends through a custom api (Phone -> Trust Wallet -> Trezor BlockBook Bitcoin Server).

Miners

Miners are aware of all the network pending transactions. They choose the best one based on fees, because they will collect them, pack in a block and try to guess a string called a hash that starts with a certain number of zeros. The length of the zeros will vary but in general it goes up because the complexity adjusts itself based on how fast the previous blocks are created. When a block is found it gets propagated to the entire network. Other nodes can validate the block by checking if the hash is valid.

If two nodes would find a block at the same time there would be a collision. For a short while both blocks will exist and each network node will be aware of them. It’s theoretically a temporary fork. But one of the blocks will still be propagated first and will have priority over the second one. At one point in time one of the chains will become larger and be kept. The transactions on the other chain get invalidated if they were not included already. That’s why exchanges wait for 3 block validation before confirming a transaction.

Mining bitcoin with a personal computer is theoretically possible. In practice to compute such a hash it takes too long so the probability to find it goes to zero.

On certain intervals the rewards received by miners are cut in half. Until all 21 million bitcoins are mined we could assume bitcoin is an inflationary asset just like any currency. After the threshold is reached the incentive for miners will be generated only by the fees associated with all the transactions in a block. It’s estimated the last Bitcoin mined will be around 2140.

Bitcoin Roadmap

The Lightning Network, a layer 2 protocol built on top of Bitcoin is the most anticipated improvement that would instant payments. 

The white paper can be found on lightning.network and was published in 2015. Some of the implementations are done by Blockstream, Lightning Labs and ACINQ in different programming languages, but they are not compatible with each other.

Bitfinex has opened deposits and withdrawals through the Lightning Network using the symbol LNX.  According to bitcoinmagazine they are running the LND implementation (built by Lightning Labs) and planning to add a second implementation “c-lightning” (built by Blockstream).

According to Defi Pulse the growth trend is very strong.

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