Chapter
Getting to know Bitcoin
Where Do Bitcoins Come From?
Own Bitcoins
Bitcoin Halving
Misconceptions about Bitcoin
Bitcoin Scalability
Participation in the Bitcoin Network
Chapter 1 - Getting to Know Bitcoin
List of contents
What are Bitcoins?
What's the use?
What makes Bitcoin Valuable?
How does it work?
What is blockchain?
Is Bitcoin legal?
Bitcoin History
Who is the creator of Bitcoin?
Did Satoshi invent blockchain technology?
Digital money before Bitcoin
What are Bitcoins?
Bitcoin is money in digital form. but unlike the fiat currencies you're used to, there's no central bank to regulate them. Instead, the Bitcoin financial system is run by thousands of computers spread across the world. Everyone can join the ecosystem by downloading open-source software.
Bitcoin was the first cryptocurrency ever, announced in 2008 (and launched in 2009). You can send and receive digital money (bitcoin, with a lowercase b, or BTC). Some of the things that make it so attractive: no one can censor it, funds cannot be spent more than once, and transactions can be made at any time and from anywhere.
What's the use?
There are several reasons why many people use Bitcoin. Many people like it because of its permissionless nature – anyone with an internet connection can send and receive it. It's like cash, but in digital form, which means you can send it anywhere, and nothing can stop you from using it.
What makes Bitcoin Valuable?
Bitcoin is decentralized, censorship-resistant, secure, and borderless.
It is this quality that makes it attractive for use in international money transfers and payments, where the people involved do not need to show their identity (as is the case with credit and debit cards).
Many choose not to spend their bitcoins, but rather, hold them for the long term (also known as hodling). Bitcoin is nicknamed digital gold because of its limited supply of coins. Some investors see Bitcoin as a store of value. Because they are rare and difficult to produce, these coins are compared to precious metals such as gold or silver.
Holders (bitcoin owners who choose to hold them) believe that these properties – combined with global availability and high liquidity – make it an ideal medium for storing wealth for the long term. They believe that the value of Bitcoin will continue to increase over time.
How does it work?
When Alice makes a transaction with Bob, she doesn't send money in the way you might imagine. The process is not like giving dollars to Bob. But it's more like Alice wrote on a piece of paper (where everyone can see) that she gave Bob a dollar. When Bob sends the same funds to Carol, Carol can see that Bob has them by looking at the sheet of paper.
This piece of paper is a special database called a blockchain. All participants in the network have identical copies of this database stored on their devices. All connect to each other to synchronize new information.
When a user makes a payment, the transaction is directly propagated across a peer-to-peer network – there is no central bank or institution to process the transfer. To add new information, the Bitcoin blockchain uses a special mechanism called mining. Through this process, new blocks of transactions are recorded on the blockchain.
What is blockchain?
A blockchain is an append-only ledger: in other words, data can only be added to it. Once information is added, it is very difficult to modify or delete it, because the blockchain includes a hook in each block that connects it to the previous block.
This hash is actually a hash of the previous block. Hashing is the process of passing data through a one-way function to produce a unique “fingerprint” of the input. If the input is changed slightly, the fingerprint will look very different. Since we are linking the blocks, there is no possibility to edit an old entry without undoing the block that follows it. A structure like this is one of the components that makes a blockchain secure.
To learn more about blockchain, please go to the Basic Guide to Blockchain Technology for Beginners.
Is Bitcoin legal?
Bitcoin is completely legal in most countries. However, there are some exceptions – make sure to read the regulations in force in your country before investing in cryptocurrency.
In countries where Bitcoin is legal, government entities take various approaches to taxing it. There is still very little regulation overall, and will likely change a lot in the coming years.
Bitcoin History
Who is the creator of Bitcoin?
No one knows! The creator of Bitcoin used the pseudonym Satoshi Nakamoto, but we know nothing about this identity. Satoshi could be a person or a group of developers located anywhere in the world. His name is Japanese in origin, but Satoshi's proficiency in English leads many people to believe that he/they are actually from an English-speaking country.
Satoshi published the Bitcoin white paper along with the software. However, this mysterious creator disappeared in 2010.
Did Satoshi invent blockchain technology?
In fact, Bitcoin combines a number of technologies that have been around for some time. This block chain concept was not born at the same time as Bitcoin. The use of immutable data structures like this can be traced back to the early 90s when Stuart Haber and W. Scott Stornetta proposed a system for applying timestamping to documents. Just like today's blockchains, timestamps rely on cryptographic techniques to secure data and prevent it from being tampered with.
Interestingly, Satoshi did not use the term “blockchain” in his white paper.
Also see: History of Blockchain.
Digital money before Bitcoin
Bitcoin was not the first attempt at introducing digital money, but it was certainly the most successful. These previously existing schematics paved the way for Satoshi's discovery:
DigiCash
DigiCash is a company founded by cryptographer and computer scientist David Chaum in the late 1980s. Based on a paper written by Chaum himself (described more extensively here), DigiCash was introduced as a solution for privacy-oriented online transactions.
Even though DigiCash has a centralized system model, it is still an interesting experiment. The company later went bankrupt, which Chaum said was because the system was introduced before e-commerce was truly global.
B-money
B-money was originally described in a proposal by computer scientist Wei Dai, published in the 1990s. It is not surprising that this is also quoted in the Bitcoin white paper.
B-money proposes a Proof of Work system (used in Bitcoin mining) and uses a distributed database where users sign transactions. The second version of b-money also depicts an idea similar to staking, which is also used by many cryptocurrencies today.
In the end, b-money was never launched, because it did not make it past the concept maturity stage. That said, Bitcoin clearly takes inspiration from the concept presented by Dai.
Bit Gold
Due to the similarities between Bit Gold and Bitcoin, some people believe that its creator, computer scientist Nick Szabo, was Satoshi Nakamoto. At its core, Bit Gold consists of a ledger that records a series of data originating from Proof of Work operations.
Like b-money, Bit Gold is not being developed further. However, the similarity of this digital money to Bitcoin strengthens its position as a “precursor to Bitcoin”.
Chapter 2 - Where Do Bitcoins Come From?
List of contents
How are new bitcoins generated?
How many bitcoins?
How does Bitcoin mining work?
How long does it take to mine a block?
How are new bitcoins generated?
Bitcoin has a limited supply, but not all units are in circulation yet. The only way to generate these coins is through a process called mining – a special mechanism for adding data to the blockchain.
How many bitcoins?
The protocol stipulates that the maximum supply of Bitcoin is twenty-one million coins. As of 2020, almost 90% has been produced, but it will take more than a hundred years to produce the rest. This is due to periodic events known as halvings, which gradually reduce mining rewards.
How does Bitcoin mining work?
By mining, participants add blocks to the blockchain. To do this, they had to sacrifice computing power to solve cryptographic puzzles. As an incentive, rewards are available to anyone who enters a valid block.
It's quite expensive to generate a block, but cheap to check its validity. If someone tries to cheat by proposing an invalid block, the network will directly reject it, and the miner in question will not get a reward to cover mining costs.
Mining rewards – often called block rewards – consist of two components: fees attached to transactions and block subsidies. Block subsidies are the only source of “fresh” bitcoin. Each block mined adds a certain number of coins to the total supply.
How long does it take to mine a block?
The protocol adjusts the mining difficulty so that it takes about ten minutes to find a new block. Blocks are not always found exactly ten minutes after the previous one – the time required fluctuates around this value.
Chapter 3 - Owning Bitcoin
List of contents
How to buy Bitcoin?
How to buy Bitcoin with credit/debit card
How to buy Bitcoin on the peer-to-peer market
What can you buy with Bitcoin?
Where can Bitcoin be spent?
What if my Bitcoin is lost?
Can I reverse a Bitcoin transaction?
Can I make money with Bitcoin?
How to store bitcoins?
Storing bitcoins on Binance
Storing coins in a bitcoin wallet
Hot wallet
Cold wallet
How to buy Bitcoin?
How to buy Bitcoin with credit/debit card
Binance provides easy Bitcoin purchases through your browser. To do so:
Please go to the Buy and Sell Cryptocurrency page.
Select the crypto asset you want to buy, and the currency you want to pay with.
Log in to Binance, or register if you don't have an account yet.
Select a payment method.
If prompted, enter your card details and complete identity verification.
Just that! Bitcoins will be credited to your Binance account.
How to buy Bitcoin on the peer-to-peer market
You can also buy and sell Bitcoins on peer-to-peer markets. In this market you can buy coins directly from other users via the Binance mobile application. To do so:
Open the application, then log in or register.
Select Sell with one click, then select the Buy menu in the top left corner of the page.
You will be presented with several offers – select Buy on the offer you want.
You can pay with other cryptocurrencies (in the With Crypto menu) or fiat money (in the With Fiat menu).
Below that, there will be a choice of payment methods. Choose the one you want.
Select Buy BTC.
Now you have to make payment. When finished, select Mark as paid, and confirm.
The transaction is successful if the seller sends you the coins.
Do you want to own cryptocurrency? Buy Bitcoin on Binance!
What can you buy with Bitcoin?
There are many things you can buy with Bitcoin. At this time, it may be difficult (though not impossible) to find a store in the real world that accepts Bitcoin payments. However, you can find websites that accept or allow you to purchase gift cards for various services.
Here are some of them that you can buy with Bitcoin:
Flight ticket
Like a hotel
Real estate
Food & drink
Clothes
Gift card
Subscribe online
Where can Bitcoin be spent?
You can spend your Bitcoins in many places! Let's take a look at some of them.
TravelbyBit
Save on credit card fees while traveling around the world! You can book flights and hotels with Bitcoin and other cryptocurrencies through TravelbyBit. Register and order with crypto, you will get a 10% discount on your purchase.
He will spend
Spendabit is a search engine for products that you can buy with Bitcoin. Search for what you want to buy and you will find shops selling it with Bitcoin as payment.
Coinmap
Search all crypto shops and ATMs around you. If you want to spend your Bitcoins or just want to look at places that accept Bitcoin payments, this might be an ideal choice.
Bitrefill
You can buy gift cards for hundreds of services and buy mobile phone credit with Bitcoin and other cryptocurrencies here. Very easy to do, you can also use the Lightning Network to pay.
Heatmap of retailers that accept cryptocurrency as payment. Source: https://coinmap.org/
What if my Bitcoin is lost?
Since there is no bank involved, you are solely responsible for the security of your coins. Some people prefer to store them on exchanges, and others choose various wallets. If you use a wallet, it is very important to write down the seed phrase and save it.
Can I reverse a Bitcoin transaction?
Once data has been added to the blockchain, it is not easy to delete it (in practice it is almost impossible). This means that when you make a transaction, it cannot be reversed. You should always check several times to ensure that you are sending funds to the correct address.
For an example of how you could theoretically reverse a transaction, see What is a 52% attack?
Can I make money with Bitcoin?
You can make money with Bitcoin, but also vice versa, you can lose money. Typically, long-term investors buy and hold Bitcoin in the belief that its price will rise in the future. Some people choose to trade Bitcoin for other cryptocurrencies to earn short or medium term profits. Both strategies are high risk, but are often more profitable than low risk approaches.
Some investors adopt a mixed strategy. They hold bitcoin as a long-term investment while also trading some (with a separate portfolio) in the short term. There is no right or wrong way to allocate assets in your portfolio – every investor has different levels of risk and goals to choose from.
Lending is a new form of passive income that is currently popular. By lending coins to other people, you can earn interest that they will pay at a later date. Platforms like Binance Lending allow you to do this with Bitcoin and other crypto assets.
How to store bitcoins?
There are several options for storing coins, each with advantages and disadvantages.
Storing bitcoins on Binance
Custodial solutions refer to storage where users do not actually store the coins themselves, but trust a third party to do so. To make transactions, they will enter a third-party platform. Exchanges like Binance often use this model because it is much more efficient for trading.
Storing coins on Binance makes it easier for you for trading and lending purposes.
Storing coins in a bitcoin wallet
A custodial solution is the opposite – users are completely responsible for their funds. To store funds with this solution, you use a wallet. Wallets don't store your coins directly – instead they store the cryptographic keys that will unlock them on the blockchain. There are two options:
Hot wallet
A hot wallet is software that connects to the Internet in a certain way. In most cases, you'll need a mobile or desktop app to easily send and receive coins. One example of a mobile wallet that is easy to use and supports many coins is Trust Wallet. Because they are online, hot wallets seem more convenient for making payments, but are very vulnerable to attacks.
Cold wallet
Cryptocurrency wallets that are not connected to the Internet are known as cold wallets. This type of wallet is not vulnerable to attacks because it is not online, but its use tends to be more complicated. Examples of this wallet are hardware wallets or paper wallets.
To learn more about the types of wallets, please go to the Explanation of Types of Crypto Wallets.
Chapter 4 - Bitcoin Halving
List of contents
What is Bitcoin Halving?
How does Bitcoin Halving work?
Why did the Bitcoin Halving happen?
What is the impact of the Bitcoin halving?
When will the next Bitcoin Halving happen?
What is Bitcoin Halving?
Bitcoin halving (also known as Bitcoin halvening) is an event that reduces block rewards. When the halving occurs, the reward given to miners for validating blocks will be halved (they only receive half of the previous one). However, there is no impact on transaction fees.
How does Bitcoin Halving work?
When Bitcoin was launched, miners were given a reward of 50 BTC for every valid block.
The first halving occurred on November 28, 2012. At that time, the protocol reduced the block subsidy from 50 BTC to 25 BTC. The second halving occurred on July 9, 2016 (25 BTC to 12.5 BTC). The next halving, expected to occur in May 2020, and the subsidy will be 6.25 BTC.
You may notice a pattern here. It seems that halving occurs once every four years. It was designed that way, but the protocol does not set a specific date. Instead, it occurs based on block height – halving occurs every 210,000 blocks. So, we can estimate that the subsidy would take 2,100,000 minutes to halve. (remember, it takes 10 minutes to mine one block).
In the graph above, we can see the decline in block subsidies over time and its relationship to total supply. At first, it seems like the reward has dropped to zero and the maximum supply is in circulation. But this is not the case. The trend in the curve is very close, but we expect subsidies to reach zero around 2140.
Why did the Bitcoin Halving happen?
This was one of Bitcoin's selling points, but Satoshi Nakamoto never fully explained his reasoning for limiting supply to twenty-one million units. Some people think that this is just an ordinary product that starts with a block subsidy of 50 BTC, which is halved every 210,000 blocks.
Having a limited supply means that the currency is not susceptible to depreciation in the long term. This is in sharp contrast to fiat money, which loses purchasing power over time as new units come into circulation.
So it makes sense that there is a speed limit for mining coins. 50% is generated at block 210,000 (let's say in 2012). If subsidies remain the same, then all units will be completely mined by 2016.
With the halving mechanism, there is an incentive to mine for more than 100 years. This gives the system more than enough time to attract users so that the fee market can develop.
Do you want to own cryptocurrency? Buy Bitcoin on Binance!
What is the impact of the Bitcoin halving?
The parties most affected by the halving are miners. This makes sense, as block subsidies are a significant part of their revenues. When halved, they would only receive half as much as usual. And also keep in mind that this reward includes transaction fees.
Therefore, halving may make the mining process unprofitable, causing some participants to stop mining. What does this mean for the wider industry? No one knows. Reducing block rewards may make mining pools more centralized in the future, or actually stimulate more efficient mining practices.
If Bitcoin continues to rely on the Proof of Work algorithm, fees will have to increase for mining to remain profitable. This scenario is very possible, because blocks can store many transactions. If there are many pending transactions, the transactions with higher fees will be processed first.
Historically, a sharp rise in Bitcoin prices follows a halving. But it must be admitted that there is not much data available on this, because until now there are only two. Many attribute the price movement to the market appreciation of Bitcoin's scarcity triggered by the halving. Proponents of this theory believe that its value will skyrocket once again following the next event in May 2020.
Others disagree with the logic, arguing that the market has already factored the halving into current prices (see Efficient Market Hypothesis). The halving event was not a surprise – participants have known for over a decade that rewards would decrease in May 2020. Another frequent argument is that the industry was severely underdeveloped during the first two halvings. Today, its profile is clearer, offers advanced trading tools, and accommodates a wider group of investors.
When will the next Bitcoin Halving happen?
The next halving is expected to occur in May 2020, where the reward will be reduced to 6.25 BTC. Check out the countdown on the Bitcoin Halving Countdown on Binance Academy page.
Chapter 5 - Misconceptions about Bitcoin
List of contents
Is Bitcoin anonymous?
Is Bitcoin a scam?
Is Bitcoin just a bubble?
Does Bitcoin use encryption?
Is Bitcoin anonymous?
Not really. It may seem like Botcoin is anonymous at first, but that's not true. The Bitcoin blockchain is open to the public and anyone can view transactions. Your identity is not tied to your wallet address on the blockchain, but observers with the right data sources can connect the two. It might be more accurate to describe Bitcoin as a pseudonym. Bitcoin addresses can be seen by anyone, but not the owner's name.
That said, it could be said that this system is relatively private, and in fact there are methods that can make it difficult for observers to find out what you are doing with your bitcoins. Today's freely available technology can “break the link” between one address and another. What's more, future improvements could greatly improve privacy – for example, see Getting to Know Confidential Transactions.
Is Bitcoin a scam?
No. Just like fiat money, Bitcoin may also be used in illegal activities. But this does not mean Bitcoin is a scam or fraud.
Bitcoin is a digital currency that is not controlled by anyone. Detractors label it as a pyramid scheme, but that's clearly not true because it doesn't fit the definition. As digital money, Bitcoin works equally well when it is worth $20 or $20,000 per coin. For more than a decade, we see that the technology has proven to be very safe and reliable.
Unfortunately, Bitcoin is widely used in scams that you should be aware of. Fraud takes various forms, including phishing and social engineering schemes such as fake giveaways and airdrops. As a general rule: if something sounds too good to be true, it's likely a scam. Never give your private key or seed phrase to anyone, and be wary of schemes that offer to multiply your money with little risk. If you send your coins to a scammer or to a fake giveaway, then don't expect to get them back.
Is Bitcoin just a bubble?
Throughout Bitcoin's parabolic price rise, it was common to see people calling it a speculative bubble. Many economists compare Bitcoin to the Tulip Mania period or the dot-com bubble.
Due to Bitcoin's unique nature as a decentralized digital commodity, its price is determined entirely by speculation in the free market. There are many factors that drive the price of Bitcoin, ultimately affecting market supply and demand. And because Bitcoin is scarce, it is expected that long-term demand will exceed supply.
The cryptocurrency market is also still relatively small compared to traditional markets. This means that Bitcoin and other crypto assets tend to be more volatile, and it is quite common to see short-term market imbalances between supply and demand.
In other words, currently Bitcoin may be an asset whose price is easily volatile. But this volatile nature is part of financial markets, especially markets that have relatively low volume and liquidity.
Does Bitcoin use encryption?
No. This is a common misconception. The Bitcoin blockchain does not use encryption. Every peer on the network must be able to read transactions to ensure that they are valid. What is used is a digital signature and a hash function. While some digital signature algorithms do use encryption, that is not the case for Bitcoin.
However, it should be noted that many crypto apps and wallets use encryption to protect users with passwords. However, this encryption method has nothing to do with blockchain – as it is simply baked into other technologies that utilize it.
Chapter 6 - Bitcoin Scalability
List of contents
What is scalability?
Why does Bitcoin need to expand its capacity?
How many transactions can Bitcoin process?
What is the Lightning Network?
What is a fork?
Soft fork
Hard fork
What is scalability?
Scalability is a measure of a system's ability to grow so that it can accommodate increasing demand. If you run a website that is flooded with requests, you can manage it by adding more servers. If you want to run more intensive applications on your computer, you can upgrade its components.
In the context of cryptocurrencies, we use this term to describe the ease of upgrading a blockchain so that it can process a higher number of transactions.
Why does Bitcoin need to expand its capacity?
To work in everyday payments, Bitcoin needs to be fast. At this time, Bitcoin has relatively low throughput, meaning that the number of transactions that can be processed per block is limited.
As we know from the previous chapter, miners receive transaction fees as part of the block reward. Users add these fees to their transactions to incentivize miners for committing their transactions to the blockchain.
Miners seek to recoup capital from hardware and electricity consumption, so they prioritize transactions with higher fees. If there are a lot of transactions in the network's “waiting room” (called a mempool), fees can rise significantly as users bid to get their transactions in first. At a minimum, the average cost is over $50.
How many transactions can Bitcoin process?
Based on the average number of transactions per block, Bitcoin can currently manage around five transactions per second. This is much lower when compared to centralized payment solutions.
Because it is not managed by a data center that can be upgraded at any time by a single entity, Bitcoin must limit its block size. New block sizes that allow 10,000 transactions per second could be integrated, but this would harm the decentralization of the network. Remember that full nodes need to download new information approximately every ten minutes. If the load is too heavy, the network may go offline.
If this protocol is used for payments, Bitcoin enthusiasts believe there are other, more effective ways to achieve scalability, and they must be achieved.
What is the Lightning Network?
The Lightning Network is Bitcoin's scalability solution. We call it a layer 2 solution because it moves transactions off the blockchain. All transactions are not recorded at the base layer, but are transferred to other protocols built on top of it.
The Lightning Network allows users to send funds almost instantly and freely. There are no constraints on throughput (as long as users have the capacity to send and receive). To use the Bitcoin Lightning Network, two participants lock some of their coins in a special address. The address has a unique property – it only releases bitcoins if both parties agree.
From there, parties maintain private ledgers that can move balances without announcing them to the main chain. They only publish transactions to the blockchain when everything is complete. The protocol then updates their balance. Note that they don't need to trust each other either. If someone tries to cheat, the protocol will detect it and impose a penalty.
Overall, a payment channel like this only requires two on-chain transactions from the user – one to fund their address and another to then issue coins. This means that thousands of transfers can be made at the same time. With further development and optimization, this technology could become an important component for larger blockchain systems.
For a more detailed explanation of scalability and potential solutions, you can read Blockchain Scalability – Sidechains and Payment Channels.
What is a fork?
Since Bitcoin is open-source, anyone can modify this software. You can add new rules or delete old ones according to your needs. But not all changes are the same: some updates will make your nodes incompatible with the network, while others will be backward-compatible.
Soft fork
A soft fork is a change to the rules that allows updated nodes to interact with old nodes. Let's take block size as an example. Let's say we have a block size of 2MB and half of the network implements the change – from now on, all blocks must not exceed 1MB. If there are large ones, they will be immediately rejected.
Older nodes can still receive these blocks. Meaning that all nodes remain part of the same network, no matter what version they are running.
In the illustration below, we can see that smaller blocks are accepted by the old node as well as the updated node. However, newer nodes will not recognize 2MB blocks, because they already follow the latest rules.
Bitcoin Segregated Witness (or SegWit) is an example of a soft fork. Using smart techniques, introducing blocks and transactions with new formats. Old nodes continue to accept blocks, but they do not validate new transaction types.
Hard fork
hard forks are even more complicated. Suppose now half of the network wants to increase the block size from 2MB to 3MB. If you try to send a 3MB block to a legacy node, the node rejects it because the rules clearly state that 2MB is the maximum size they can accept. Since the two networks are no longer compatible, the blockchain splits in two.
The black chain in the diagram above is the initial chain. The hard fork occurs in block 2. Here, upgraded nodes start producing larger blocks (in green). Legacy nodes don't recognize this, so they continue on a different path. Now there are two blockchains, but before block 2, they were the same blockchain.
There are now two different protocols, each with its own currency. All balances on the old protocol are copied, meaning if you had 20 BTC on the original chain, you will have 20 NewBTC on the new chain.
In 2017, Bitcoin experienced a controversial hard fork in a scenario similar to the image above. A small percentage of participants want to increase the block size to ensure more throughput and cheaper transaction fees. Meanwhile, other participants considered it a poor scalability strategy. Ultimately, the hard fork gave birth to Bitcoin Cash (BCH), which was separated from the Bitcoin network and now has an independent community and roadmap.
To learn more about forks, you can read Hard Forks and Soft Forks.
Chapter 7 - Participation in the Bitcoin Network
List of contents
What are Bitcoin nodes?
How does it work?
Full node
Light node
Mining Node
How to run a Bitcoin full node
How to mine Bitcoin
How long does it take to mine one bitcoin?
Who can contribute to Bitcoin code?
What are Bitcoin nodes?
A “Bitcoin node” is a term used to describe a program that interacts with the Bitcoin network in a specific way. Starting from cellphones that operate Bitcoin wallets to computers that are intended to store complete copies of the blockchain.
There are several types of nodes, each performing a specific function. They all act as communication points to the network. Within the system, these nodes transmit information regarding transactions and blocks.
How does it work?
Full node
Full nodes validate transactions and blocks if they meet certain requirements (according to rules). Most full nodes run Bitcoin Core software, which is a custom implementation of the Bitcoin protocol.
Bitcoin Core is a program released by Satoshi Nakamoto in 2009 – at that time it was simply called Bitcoin, but later the name was changed to avoid confusion. Other implementations can also be used, as long as they are compatible with Bitcoin Core.
Full nodes are an integral part of Bitcoin decentralization. Downloads and validates blocks and transactions, then propagates them across the network. Since these nodes independently verify the authenticity of the information provided, users do not need to rely on third parties.
If a full node stores a complete copy of the blockchain, it is called a full archival node. However, some users discard old blocks to save capacity – the Bitcoin blockchain contains more than 200GB of transaction data.
Global deployment of Bitcoin full nodes. Source: bitnodes.earn.com
Light node
Light nodes are not as powerful as full nodes, but they also don't require as much power. This type of node allows users to interact with the network without performing all the operations performed by a full node.
Full nodes download all blocks and validate them, while light nodes only download part of each block (called the block header). Even though the size of the block header is very small, the information in it allows users to check that their transactions are in a particular block.
Light nodes are ideal for devices with limited bandwidth or capacity. Generally we see this type of node used in desktop and mobile wallets. However, because it cannot perform validation, the light node relies on the full node.
Mining Node
Mining nodes are full nodes that perform additional tasks – producing blocks. As we discussed previously, it requires special equipment and software to add data to the blockchain.
Mining nodes receive pending transactions and hash them along with other information to generate a number. If the number is below the target set by the protocol, the block is valid and can be propagated to other full nodes.
But to mine without depending on others, miners need to run full nodes. Otherwise, they won't know what transactions to include in the block.
If a participant wants to mine but does not want to use a full node, they can join a server that provides the required information. If you mine in a pool (cooperating with other people), then only one person needs to run a full node.
To elaborate on the differences between each node, you can read What Are Nodes?
How to run a Bitcoin full node
Full nodes are beneficial for developers, traders, and end users. Running Bitcoin Core on your own hardware gives you privacy and greater security, as well as strengthening the Bitcoin network as a whole. With full nodes, you no longer depend on other people to interact with the ecosystem.
A number of Bitcoin-oriented companies offer plug-and-play nodes. The pre-assembled hardware is shipped to users, who only need to turn it on to start downloading the blockchain. This can be more convenient for those without technical knowledge, but is usually much more expensive than assembling it yourself.
Actually an old PC or laptop is enough. It is not recommended to run node on your computer day to day as it can slow it down significantly. The blockchain is constantly growing, so it must be ensured that you have enough memory to download it.
A 1TB capacity hard drive is sufficient for the next few years, as long as there are no major changes to the block size. Other requirements are 2GB RAM (most computers have more than this) and plenty of bandwidth.
From here, you can follow the complete guide to Running a Full Node from bitcoin.org.
How to mine Bitcoin
In the early days of Bitcoin, it was possible to create new blocks with a conventional laptop. This system was not well known at that time, so there was little competition in mining. Since activity is so limited, the protocol naturally keeps the difficulty of the mining process low.
As the network hash rate increases, participants need to upgrade their devices to remain competitive. With the transition through different types of hardware, the mining industry has finally entered what we call the Application-Specific Integrated Circuit (ASIC) era.
As the name suggests, this device is made with a specific purpose in mind. Very efficient, but only capable of performing one task. So, mining ASICs are special computers that are only used for mining, for no other purpose. Bitcoin ASICs can mine Bitcoins, but cannot mine coins that use different algorithms.
Mining Bitcoin currently requires a sizable investment – not only in hardware, but also in energy. At the time this article was written, a good mining device performs more than ten trillion operations per second. Although very efficient, ASIC miners consume incredible amounts of electricity. Unless you have access to a few mining rigs and cheap electricity, you will never make a profit mining Bitcoin.
However, with the materials at hand, setting up your mining operation is very easy – many ASICs already come with their own software. The most popular option is mining in a mining pool, here you work together with other people to find blocks. If you are successful, you will receive a share of the block reward in proportion to the hash rate you provided.
You can also choose to mine alone, working alone. The probability of generating a block will be lower, but you will keep all the rewards if you find a valid block.
How long does it take to mine one bitcoin?
It is difficult to give a definitive answer to this question, as there are a number of variables to consider. How fast you can mine coins depends on the amount of electricity and hash rate available to you. You should also take into account the costs of operating the mining device.
To get an idea of the revenue generated from Bitcoin mining, you can use a mining calculator to estimate costs.
Who can contribute to Bitcoin code?
Bitcoin software is open-source, meaning anyone can contribute. You can propose or review new features to add to the more than 70,000 lines of existing code. You can also report bugs, or translate and update documentation.
Changes to the software are made through a rigorous review process. After all, software handling hundreds of billions of dollars should be free from any vulnerabilities.
If you are interested in contributing to Bitcoin and want to get involved, make sure you check out Jimmy Song's blog page, or the Bitcoin Core website.