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Simple Analogy Explains How Bitcoin Works

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Bitcoin can seem like a financial concept made in a parallel universe to most people. Yes, it’s a complex and complicated concept, but it doesn’t mean it’s impossible to learn.

Many people started investing in Bitcoin without any understanding of how the blockchain worked. If you were to track them down you would probably see they are trading in various other cryptocurrencies like pros. They may also be profiting very nicely now that they have a better understanding. In this article, I will try to simply explain the process using a betting analogy.

how bitcoin works simple

Bitcoin Explained In Simplicity

Let’s pretend that you want to play a betting game with some friends but no one has any money on hand. You decide that everyone will keep a ledger so that you can track winnings and losses. You don’t want to put your trust in one friend to record everything, so many of you decide to make a ledger simultaneously.

This way, at the end of each game, those who kept ledgers can compare
their records to see if it all evens out. By multiple people keeping up with ledgers it would be virtually impossible to cheat the system. Each ledger contains its own record of the betting game with the wins and losses.

Related Reading: Bitcoin “Speculative Chart” Suggests Cryptocurrency To Soon Blast off – Crypto Bite

The Ledger is Public

The ledger is not hidden or exclusive to the ledger keepers; you can view it anytime you want. To add your transactions to the ledger, all you have to do is broadcast your transactions to the ledger keepers, and you pay as little or as much as you want to make sure they put your name down on that ledger as soon as possible.

Your friends who keep the ledgers up to date will receive compensation for their hard work with a reward in the form of money. This money comes from an external source—say, a vault with a limited amount of money. The money in the vault wasn’t part of the money circulating in the betting pool, but it became so once it was acquired by your ledger-keeper friends.

This simple analogy is exactly how Bitcoin operates, albeit on a much more complicated level. Bitcoin runs on a global computer network, and each transaction is compiled into new blocks, which are then connected to the last block on the blockchain. And the bitcoin miners are the ledger-keepers who work hard to record transactions and mine those precious bitcoins.

How Bitcoin Works Conclusion

I hope that this post helps you to have a better understanding of how Bitcoin works and gets you started before the mass adoption.

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Bitcoin

Blockchain and Artificial Intelligence

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Artificial intelligence (AI) was introduced in 1955 by John McCarthy

Artificial intelligence (AI) is the ability of a computer program to think, learn and mimic human thought. Introduced in 1955 by John McCarthy, artificial intelligence has several different fields of study. These fields include computer science, mathematics, psychology, and philosophy, among many others. AI is linked to several different use cases. The most prominent use cases include machine learning, supply chain optimization, speech recognition, self-driving cars, and manufacturing optimization.

Now we know a bit about AI, let’s review a few examples of how AI is improving decentralized networks like blockchain.

Cryptocurrency Trading

During the past few years, artificial intelligence has substantially increased its presence in the area of crypto trading. This is particularly true with high-frequency trading (HFT). Essentially, HFT is a type of algorithmic financial trading characterized by high speeds and high turnover rates. High-frequency trading is a perfect vehicle for cryptocurrency trading because the crypto universe has several different exchanges.

HFT uses artificial intelligence to analyze multiple technical indicators across various exchanges in an effort to take advantage of market opportunities. AI is still in its infancy stage in regard to crypto trading. Going forward, artificial intelligence will play a pivotal role within the crypto trading community. These are commonly known as trading bots.

Suggested Read: What Are Public, Private, and Consortium Blockchains? – Cryptobite

Blockchain Security

Unfortunately, industries that find themselves in a hyper-growth phase are more susceptible to cyberattacks and malware. Without question, blockchain technology, along with digital assets, is currently experiencing an explosive rate of growth. Consequently, the blockchain industry has endured an exponential increase in malware, phishing, fraud, and digital theft. Based on data provided by industry experts, $9 million is lost to cryptocurrency scams on a daily basis.

The key to successfully thwarting a blockchain hack is to identify the threat and understand the nature of the attack as quickly as possible. Hackers are acutely aware that they must strike quickly in order to launch a profitable attack. Unfortunately, crypto exchanges have a poor track record in preventing cyber-attacks. AI-based cybersecurity systems are designed to detect a hack in real-time and dramatically increase the likelihood of stopping the attack. AI systems are far superior to traditional cybersecurity systems because AI has the ability to detect patterns from previous attacks. This information can be used to prevent future cyber threats.

Bitcoin Mining

As you know, all crypto transactions are verified and added to the blockchain by Bitcoin miners to maintain the integrity of the network. In exchange for their work, miners are rewarded with Bitcoin. Crypto mining requires energy consumption and computing power. Over the past few years, Bitcoin miners have explored the idea of using artificial intelligence to reduce energy waste and computing power to reduce costs.

A few of the largest mining companies have created AI-based systems, allowing companies to share power and increase profitability. AI algorithms have made crypto mining faster, more profitable, and more efficient. Without question, artificial intelligence will continue to play an essential role throughout the crypto industry.

Brief Summary of Blockchain and Artificial Intelligence

Artificial intelligence (AI) was introduced in 1955 by John McCarthy

  • AI is the ability of a computer program to think, learn and mimic human thought.
  • AI encompasses several different fields of study.
  • AI has increased its presence in cryptocurrency trading.
  • High-frequency trading uses AI to analyze technical indicators across many exchanges.
  • AI-based cybersecurity systems are designed to detect a hack in real-time.
  • Bitcoin miners use AI to reduce energy consumption and computing power.
  • A few of the largest mining companies have created AI-based ecosystems.
  • AI algorithms have made crypto mining faster, more profitable, and more efficient.
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What Is Blockchain Consensus Algorithm?  

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What Is Blockchain Consensus Algorithm

Blockchain technology has many different moving parts. Hence, to operate smoothly, the architecture must be properly designed. An important piece of Nakamoto’s architectural design is the use of a consensus algorithm. 

Blockchain Consensus Algorithm in a Nutshell

In its simplest format, a blockchain consensus algorithm is a decision-making process. It is designed to assist in reaching a common decision by a group of people. Of course, in this particular scenario, the consensus algorithm involves blockchain-related solutions.

How Does it Work?

Let’s assume that 20 co-workers are asked to collaborate and offer a recommendation on a specific project. Each participant in the group will reach a decision that will provide the greatest individual benefit. The group must listen to each recommendation and decide which of them will provide the greatest overall benefit. The final recommendation must be accepted by all group members regardless of whether it offers the best solution for each individual.

Let’s assume that 20 co-workers are asked to collaborate and offer a recommendation on a specific project. Each participant in the group will reach a decision that will provide the greatest individual benefit. The group must listen to each recommendation and decide which of them will provide the greatest overall benefit. The final recommendation must be accepted by all group members regardless of whether it offers the best solution for each individual.

Suggested Read: Luxury Fashion Brands Are Entering The Crypto Space (cryptobite.io)

Brief Summary of Blockchain Consensus Algorithm

  • An important piece of blockchain architecture is the use of a consensus algorithm.
  • It is a decision-making process that helps a group of people to make a common decision.
  • The consensus algorithm always produces the optimum solution for the overall group.
  • A consensus algorithm helps to create fairness and equality in a decentralized ecosystem.
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What Is Lightning Network?

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what is the lightning network

The Lightning Network is a solution designed to solve the problem of transaction speed on the Bitcoin blockchain. It was introduced in a white paper by Joseph Poon and Thaddeus Dryja in February 2015.

Problems With Bitcoin

When Bitcoin was launched in January 2009, transaction speed was not a major concern. In fact, for the first eight years of its existence, it operated quite well. As Bitcoin entered a raging bull market in 2017, it became abundantly clear that transaction speed was becoming a major detriment to the long-term sustainability of the crypto network.

Some experts believe that Nakamoto poorly designed the process for validating transactions on the blockchain network.

As we discussed in previous sections of Blockademy, a consensus algorithm known as proof of work (PoW) is used to validate Bitcoin transactions. Unfortunately, PoW can be a slow and cumbersome process. The transaction processing capacity is limited in terms of size and frequency.

The average block creation time is 10 minutes, and the block size is limited to 1 megabyte. Therefore, the average time to process a transaction on the network is three to seven seconds.

Lightning Network Solution

Lightning Network was never intended to replace PoW. It is used to reduce the burden on the Bitcoin blockchain. The key ingredient of the Lightning Network is the fact that all transactions occur off-chain.

It operates on top of the Bitcoin blockchain known as a ‘layer 2’ protocol. By adding another layer to the blockchain, it enables users to create payment channels between any two parties. These payment channels have no expiry, allowing both parties to conduct multiple transactions.

When all activity between the two parties completes, the information is transferred to the main network. All transactions between the two parties are recorded as a single transaction on the Bitcoin blockchain for efficiency.

A large portion of the Bitcoin community has never endorsed the Lightning Network because transactions occur outside of the main blockchain. They argue that decentralization is being compromised each time a transaction is conducted off-chain.

Even though the Lightning Network has not been well received by the entire Bitcoin community, it holds a great deal of promise in terms of solving Bitcoin’s scalability problem. Therefore, the network will continue to play an important role in managing Bitcoin’s ever-increasing volume of transactions.

Brief Summary of Lightning Network

  • Lightning Network is designed to solve the problem of Bitcoin transaction speed.
  • It was introduced by Joseph Poon and Thaddeus Dryja in February 2015.
  • In 2017, transaction speed became detrimental to the long-term viability of BTC.
  • Lightning Network removed some of the burden from the Bitcoin blockchain.
  • All transactions on the Lightning Network occur off-chain.
  • The transactions occur outside of the Bitcoin blockchain network.
  • The Lightning Network is known as a ‘layer 2’ protocol.
  • Many Bitcoiners believe that the Lightning Network reduces decentralization.
  • They argue that off-chain transactions compromise decentralization.
  • Overall, the Lightning Network is still very popular within the Bitcoin community.
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