Bitcoin Notes

What is Bitcoin?

  • A peer-to-peer internet currency facilitating decentralized transfers of value between individuals and businesses.
  • Bitcoin is the system; bitcoins are the units.

Bitcoin & the Mining Process

  • Bitcoin was created by Satoshi Nakamoto in 2008.
  • It operates as a peer-to-peer electronic cash system.
  • Bitcoin employs a decentralized record system, eliminating the need for a single authority.

How it works:

  • Users broadcast transactions to the network.
  • Each transaction (e.g., A gives 5 BTC to B) is grouped into a block.
  • Blocks are linked to previous ones, forming a blockchain.
  • This ensures everyone can verify the history (transparent and tamper-proof).

Why Mining?

  • Incentives: Whoever records a block gets a reward.
  • Example: If A pays B, and B records it, B gets a fee or mining reward.
  • This record-keeping process is called mining.

Mining Rewards

  • Early miners received 50 BTC per block (2009-2012).
  • Reward halves every 4 years:
    • 25 BTC (2013-2016)
    • 12.5 BTC (2017-2020), etc.

Bitcoin Supply Cap

  • Satoshi's design: total reward halves every 4 years.
  • Mathematically modeled as a proportional series that converges to 21 million.
  • Fixed supply implies scarcity (like gold).
    • Makes Bitcoin resistant to inflation.

Summary Ideas

  • Bitcoin is digital gold: limited, verifiable, and decentralized.
  • Blockchain ensures transparency and trust without needing a bank.
  • Mining is the engine of security and record-keeping, powered by incentives.
  • The system is mathematically constrained and designed to self-regulate.

How many Bitcoins in total?

  • According to Satoshi Nakamoto, each "block reward" (for mining) halves roughly every 4 years.
  • The process looks like this:
    • Initial reward: 50 BTC every block
    • 1 block every 10 minutes
    • 6 blocks per hour (\frac{60}{10} = 6)
    • 6 x 24 = 144 blocks per day
    • 144 x 365 = 52,560 blocks per year
  • Over time:
    • The rewards halve like this: 50 + 25 + 12.5 + 6.25 + 3.125 + 1.5625 + …
    • This is a geometric series:
    • Total BTC = 50 \times (1 + \frac{1}{2} + \frac{1}{4} + …) = 50 \times 2 = 100 BTC per 10 minutes, over full cycle
    • 50 \times 6 \times 24 \times 365 \times 4 \times (1 + \frac{1}{2} + \frac{1}{4} + …) = 21,000,000 BTC

How Does Bitcoin Prevent Double Spending and Tampering?

Double Spending Problem

  • Scenario:
    • A only has 10 BTC, but tries to pay:
    • B: 10 BTC
    • C: 10 BTC
  • Can this work? No.
  • Why?
    • Bitcoin's blockchain is public and shared.
    • Everyone verifies balances by reviewing previous blocks.
  • In this case:
    • If A received 50 BTC from mining
    • And has already paid 20 BTC to B, balance = 30 BTC
    • If A claims again to pay 60 BTC to C → Invalid.

What If A Tries to Trick the System?

Example of Attack:

  • A sends 10 BTC to both B and C at the same time.

  • So now the network sees two versions of the truth:

    • Chain 1: A → B D E F G
    • Chain 2: A → C H I J K

  • But…

    • Rule: The Longest Chain Wins
    • The first chain that solves the next block faster becomes the accepted truth.

  • Suppose chain 1 (with A→B) wins the block race:

    • B gets the 10 BTC
    • C's version is ignored

  • This is how the network automatically resolves conflicts-via consensus through computational effort.

Tampering with History? Impossible

  • What if a malicious user wants to delete their transaction from history?
    • Imagine A wants to erase their payment to B from 5 blocks ago.
    • They'd have to recalculate all blocks after that one faster than the rest of the world.
  • That means:
    • Re-solve all proof-of-work puzzles from that point forward
    • Outpace every miner globally
    • Build a longer chain than the honest one
  • Why it fails:
    • Nearly impossible due to the immense computational power required.

Advantages of Bitcoin

  1. Decentralized
    • No reliance on central banks or governments
    • Eliminates sovereign or political risk
  2. Fixed Supply
    • Total number of Bitcoins is capped at 21 million
    • Prevents inflation and preserves value (scarcity = digital gold)
  3. Transparency & Security
    • Blockchain is open and publicly verifiable
    • Very difficult to forge or tamper with transaction records

Disadvantages of Bitcoin

  1. Anonymity & Crime
    • No way to trace real-world identities of users
    • Enables blackmail, ransomware, and illicit trade
  2. Money Laundering & Arbitrage
    • Can be misused to launder funds
    • Cross-border use makes regulatory arbitrage easier