The evolution of Bitcoin

The evolution of Bitcoin

The evolution of Bitcoin
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The evolution of Bitcoin

 

Bitcoin as a result of post-crisis development of innovative financial technologies

 

According to the information published by the U.S. Chamber of Accounts, the international financial system lost trillions of dollars as a result of the global financial crisis caused by cascade failures and systemic risks, as well as increased capitalization of derivatives (derivatives).

 

Over the past ten years, following the crisis, many alternative asset classes have started to develop around the world, resulting in digital assets that represent the latest class with unique characteristics and features unmatched in the past generation of technologies.

 

Bitcoin is an example of one of the most common cryptovials today in terms of market capitalization and network size. So what led to the success of the young cryptovolta and the emergence of the cryptographic industry in general?

 

Increased interest in alternative FinTech assets

 

The low interest rates that remained as a result of the global financial crisis forced many institutional investors to seek higher returns in alternative markets.

 

Capital inflows [smart money] into alternative investments and alternative asset classes (non-banking products) have helped to create new financial products through innovative financial technologies (FinTech).

 

The P2P era of crowdfunding and social media

 

As investors were looking for higher returns in alternative markets, FinTech companies started innovative experiments with new financial products in various industries in order to meet the existing and expected demand for alternative financial products.

 

Venture and private investment in FinTech, together with the overall growth of the global alternative financing market, helped accelerate this process. Moreover, the emergence of peer-to-peer (P2P) technologies has coincided with similar trends in payment applications, social networks, social trading and crowdfunding.

 

Emergence of a new system of financial products: digital assets

 

In the midst of the global financial crisis of 2008, a document titled "Bitcoin: Single-ranked Electronic Money System" was published, the author of which was hiding under the alias "Satoshi Nakamoto".

 

This white paper described the operation of cryptographic evidence that does not require intermediaries in the relationship between the network parties and uses cryptography as a validation mechanism, thereby eliminating the need for any trusted third party or centralized management.

 

Bitcoin Bitcoin is a digital currency that runs on a decentralized peer-to-peer distributed network (P2P) on the Internet and is supported by the user community. Users transmit bitcoins through unique public addresses owned by the sender and the receiver respectively, and the miners that help process the transaction receive a small fee, which is paid by the sender (more on this below).

 

Publicity and decentralization help bitcoin maintain its distributed network, which consists of copies of the registry placed by users in the so-called node. The current bitcoin registry size is currently nearly 145 gigabytes, and continues to grow every day, making it necessary to run the full node on the hard drive.

 

Bitcoin nodes

 

Hosting of the complete node, which can be implemented by virtually any user, helps the bitcoins work network. By running a full or partial node, users contribute to a collective network of nodes that acts as a checkpoint for the entire system, since each node contains a full registry with a history of transactions that cannot be changed (more on the process of mining and processing transactions below).

 

Bitcoin extraction (mining)

 

The maximum number of bitcoins is limited by the code used in the protocol, which is followed by the entire bitcoin network without exception (not including forks, more on this later). Thus, the code has a ceiling of 21 million bitcoins, it should be noted that currently there are about 17 million.

 

Bitcoins are created on the basis of a multi-level process in which computers solve certain mathematical problems in order to guess the one-time code (nonce) chosen randomly, which is used for secure transmission of the master password. The increasing complexity of finding such a code and the limited number of bitcoins create a narrow channel for maintaining inflation compared to traditional currencies such as US dollars or euros (where inflation is controlled by the central bank).

Network Incentives: Mining and Network Commission

 

Each time code value (nonce) is guessed, a new block is created and the guessed code number (nonce) is hashed or connected to the previous block, connecting the previous and current blocks.

 

Miner Reward

 

A miner or a pool of miners that guessed the correct code value (nonce) gets a certain amount of bitcoins contained in a newly created block, which is currently 12.5 bitcoins per block. Users who participate in the block mining also compete with each other to add the latest bitcoins between users to the new block to verify them.

 

Miner Commission

 

Senders of bitcoins pay a certain commission, which encourages the miners to include these transactions in new blocks in order to receive this commission.

 

This construction of the system supports the flow of capital into the bitcoins of the network and at the same time supports the interest of the maintainers in its continuous maintenance, which in turn allows to support more and more users whose transactions allow the maintainers to receive their commission.

 

Cyclical price increases

 

The cyclic process on which the bitcoin system is built is similar to economic cycles. Bitcoin can be seen as an economy that literally hit the top 40 leading M1 economies as of November 2, 2017, when the market capitalization of the crypt currency exceeded $110 billion shortly after the price of 1 bitcoin reached $7,200.

 

Many believe that Bitcoin is in the price bubble, but looking at its historical price movement, we can say that over the past 9 years, Bitcoin has already overcome numerous bubbles where its price fluctuated significantly.

 

Passive investment in cryptov currencies.

 

Despite price fluctuations, many analysts believe that if the main engines of bitcoin growth continue, it will be able to reach the level of 1 million per 1 bitcoin in a few years. However, others believe that this will not happen and that the bitcoin will fail or be replaced by next-generation cryptographic networks with more advanced survival characteristics.

 

These problems make life very difficult for even the most passive investors, as maintaining a diversified portfolio in the cryptographic markets may require active asset redistribution, as the performance of digital assets is constantly changing (when comparing the top 50 cryptographic assets, for example, in just the last few months).

Social cryptosystems

 

Just like FaceBook, which attracts more new users to get more profit in the form of marketing companies' fees for viewing their ads on a social network, the size of the crypt network is the main engine of its monetary value growth. Without users, such a network will not have any value.

 

However, when we deal with FaceBook, payments are made to advertisers, which does not allow users to benefit from their participation in any way other than using the Facebook platform itself. Social cryptographic networks, which are inherently P2P networks, eliminate the need for an intermediary, but maintain their size and growth rate, which is key to their sustainability, usefulness and final evaluation.

 

P2P transactions without a trusted party

 

While the need for trusted third parties has been eliminated through the use of cryptographic networks, there are still risks associated with ensuring that there are enough users to create enough transactions that would encourage enough miners to maintain the network and prices of digital assets.

Cyclicality of the system

 

Bitcoin is no exception, and like any cryptovite, there should be enough users in the network to create enough transactions to support the demand (price) and to stimulate minimers to process transactions and create new blocks. A bitcoin network follows a cyclical process and is comparable to other natural economic cycles in global economies and different industries where trading takes place.

 

Private key public address

 

All bitcoin transactions use a public address/private key system, where each public key address (bitcoin address) is controlled by a private key (except for coinbase transactions, which are used by miners in the process of creating a new block).

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