Crypto Basics Notes: Cryptocurrency Bitcoin

Source: HualihuawaiDAO
1. About Bitcoin1. Basic Introduction
Bitcoin is a digital currency that runs on the basis of blockchain technology. This article mainly provides a detailed review of the knowledge of the cryptocurrency Bitcoin.
Satoshi Nakamoto first published Bitcoin: A Peer-to-Peer Electronic Cash System on the P2P foundation website on October 31, 2008. It has been 16 years since then, and the maximum increase of Bitcoin has exceeded 96 million times, as shown in the figure below.
(The above figure is up to August 2024)
Bitcoin is equivalent to a decentralized ledger. There is no independent manager. Anyone can keep accounts. Each block is a page in this ledger. The system automatically generates Bitcoin as a reward. This process is what we hear about mining in daily life.
Every ten minutes, all miners calculate the same problem at the same time. The miner who first calculates the answer will get the right to record a page of accounts. After completing the accounting, he will receive a certain amount of Bitcoin. This is the process of Bitcoin issuance.
In the Bitcoin network, the production speed of new coins is pre-set, and the generation time of each transaction block is maintained at about 10 minutes. Initially, the reward for each successful block is 50 bitcoins.
2. Bitcoin halving
Every time the size of the blockchain reaches an integer multiple of 210,000 (which happens every four years), the reward for successfully grabbing a block will be halved: first from 50 bitcoins to 25, then from 25 to 12.5. By analogy, the entire system will generate 21 million bitcoins by 2140, reaching the pre-set total limit. After that, the number of bitcoins will no longer increase, and the income of bitcoin miners will be paid by transfer fees.
The so-called Bitcoin halving is not the coin value that is halved, but the accounting reward (mining).
So how much is this reward?
From the 1st to the 210,000th block, the bookkeeping reward (i.e. mining) for each block is 50 bitcoins.
From block 210001 to block 420000, the reward for each block is reduced to 25.
And so on. In short, every time 210,000 blocks are recorded, the reward is reduced by half.
Bitcoin produces one block every ten minutes on average, so it takes about four years to produce 210,000 blocks each time, which means the reward is halved every four years.
(III) Bitcoin halving market
This is the trend chart before and after the first halving:
It can be seen that on November 28, 2012, nothing happened. It did not start to rise until March of the following year (more than three months in between), rose to 266 and then began to fall. It did not start to soar again until November 2013, at which time it had been a full year since the halving.
This is the trend chart before and after the second halving:
It can be seen that before the halving on July 10, 2016, the price had already risen once, but it fell after the halving, and it was not until the beginning of 2017 that it started to rise again.
This is the trend chart before and after the third halving:
Everyone knows that it will be halved every 4 years, so you cannot use this information to speculate.
(IV) Major Events in the Development of Bitcoin
2008: An individual using the pseudonym Satoshi Nakamoto publishes a white paper outlining plans for a "completely new electronic cash system that is fully peer-to-peer and does not require a trusted third party."
2009: The first Bitcoin is mined.
2010: A programmer named Laszlo Hanyecz conducts the first Bitcoin transaction, purchasing two Papa John’s pizzas with 10,000 Bitcoins.
On November 1, 2010, the Bitcoin logo was born: an unknown artist created it using the name "Bitboy", and to this day, the identity of "Bitboy" remains unknown.
December 12, 2010, Satoshi's last post: Satoshi published his last post on bitcointalk.org, adding some DoS restrictions and removing the previously introduced alarm system safety mode.
June 2011, the first Bitcoin bubble: Although Bitcoin was created in 2008, its price didn’t really start to soar until 2011. Bitcoin was trading at less than $1 per coin in early 2011, but by June 2011, the price of each Bitcoin had risen to over $31. However, due to the massive hack of the Mt. Gox exchange, which resulted in the theft of 25,000 Bitcoins, the price of Bitcoin fell to $2 by November 2011.
On November 18, 2012, Bitcoin was halved for the first time: The first Bitcoin halving event occurred at block height 210,000, and the block reward was reduced from 50 bitcoins to 25 bitcoins.
On March 18, 2013, the market value of Bitcoin exceeded $1 billion for the first time.
On July 9, 2016, Bitcoin's second halving occurred at block height 420,000, and the block reward dropped from 25 bitcoins to 12.5 BTC.
In November 2017, CME officially launched Bitcoin futures trading, and Bitcoin reached a high of $19,000.
In January 2018, the legendary Lazlo Hanyecz successfully purchased a pizza again via the Lightning Network.
On May 25, 2020, Bitcoin was halved for the third time: The third Bitcoin halving event occurred at block height 630,000, and the block reward was reduced from 12.5 bitcoins to 6.25 bitcoins.
On February 8, 2021, Tesla announced that it would accept Bitcoin payments
On February 19, 2021, the market value of Bitcoin exceeded 1 trillion US dollars
Bitcoin price reaches $65,000 in April 2021
In June 2021, China banned Bitcoin mining, Bitcoin fell below $30,000, and Bitcoin computing power migrated to the United States
Bitcoin becomes legal tender in El Salvador on September 7, 2021
In November 2021, the price of Bitcoin reached the previous ATH of $69,000
2023 is a big year for the development of the Bitcoin ecosystem: new concepts such as Ordinals, Inscriptions, BRC20, Atomical, ARC20, Bitstamp, SRC20, Rune, Taproot Assets, RGB, etc. emerge in an endless stream. The development in 2023 is the sum of the development in the previous years.
In January 2024, the US SEC approved 11 Bitcoin spot ETFs for listing.
In March 2024, stimulated by the Bitcoin spot ETF, the price of Bitcoin rose to US$73,000, breaking the previous high for the first time before the halving.
In April 2024, Bitcoin will be halved for the fourth time.
The rise of Bitcoin layer 2 from 2024 to date.
2. Lightning Network1. Basic Introduction
It is a Bitcoin Layer 2 protocol that improves Bitcoin transaction speed and privacy by establishing a payment channel between the two parties. The main idea of ​​the Lightning Network is to place a large number of transactions outside the Bitcoin blockchain and only put the key links on the chain for confirmation.
The design was first proposed in the paper "The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments" in February 2015. The Lightning Network mainly improves the off-chain transaction channel by introducing the idea of ​​smart contracts. There are two core concepts: RSMC (Recoverable Sequence Maturity Contract) and HTLC (Hashed Timelock Contract). The former solves the problem of off-chain transaction confirmation, and the latter solves the problem of payment channels.
In the Lightning Network, a payment channel can be established between two users. This is usually achieved by creating a special transaction on the Bitcoin blockchain that "locks" a certain amount of Bitcoin in a multi-signature wallet. This transaction is called a "funds escrow transaction" and it marks the opening of the payment channel.
In traditional blockchain networks, each node processes each transaction after broadcasting it to the network as a whole. As a result, when the network becomes busier, transactions may be processed slowly and incur high fees. The Lightning Network enables off-chain transactions to be completed instantly by establishing a network of payment channels between users, without waiting for confirmation from the underlying blockchain network.
2. How the Lightning Network works
1. Channel opening: Two users can jointly create a Lightning Network channel, in which each person must lock a portion of Bitcoin on the blockchain as the initial funds of the channel. These funds will be used for off-chain transactions within the channel.
2. Off-chain transactions: After the channel is opened, two users can conduct multiple off-chain transactions within the channel. These transactions will not actually be submitted to the main blockchain, but will only be settled within the channel.
3. Channel Closure: When a user wishes to end the channel and submit the final transaction results to the main blockchain, they can close the channel. This will record the final transaction status on the blockchain and complete the settlement.
3. Bitcoin UTXO Model
Bitcoin transactions need to specify inputs and outputs. The input is the UTXO (Unspent Transaction Output) to be used by the payee, and the output is the UTXO paid to the payee.
How to understand UTXO? For example:
If A and B both have 10 yuan in their wallets, and now A wants to transfer 5 yuan to B, then if the transfer is done through Ethereum (the account balance model used by Ethereum), just change the balance of A's wallet to 5 yuan and then change the balance of B's ​​wallet to 15 yuan, and the transaction process will be completed.
But if the UTXO model is used for transactions, it is completely different. A needs to spend 10 yuan as a whole, and then this 10 yuan will be split into two 5 yuan notes in the Bitcoin network, one of which is transferred to B and the other is returned to A. This process is equivalent to B's wallet receiving a new 5 yuan note. And A's wallet receives 4 yuan in change (assuming that 1 yuan is deducted from the absenteeism fee), which is a bit similar to you taking Mao Zedong to spend offline.
Then, let's go back to the inscription. Suppose you withdraw 0.1 BTC from the exchange to your wallet in order to make an inscription (that is, you now hold a UTXO of 0.1 BTC). When you mint (transact) the inscription, this only UTXO will be spent in the "submission phase". Assuming that the corresponding inscription requires 0.05 BTC, the excess bitcoins will theoretically be returned to your address. But because your address now has only one UTXO, and it happens to catch up with the current Bitcoin block time of 10 minutes (here it is assumed to be 10 minutes, or it may be longer), then within these 10 minutes, the UTXO of your address is equivalent to 0 (because the UTXO that has been spent cannot be spent again), which means that you can no longer create a new UTXO, so the inscription will fail, which is also the underlying reason why it is displayed as insufficient balance.
IV. Review of the main development of Bitcoin ecology
(Bitcoin ecosystem map)
What is Bitcoin Layer 2?
Layer2 is an independent blockchain network built on Layer1. Its purpose is to package most of Layer 1's transactions into Layer2 to reduce pressure and expand capacity.
Note: Bitcoin ecological knowledge system mind map (reply to the public account private message "Bitcoin mind map" to get the high-definition original map)
Knowledge Index
A brief overview of the development of Bitcoin Layer2
SegWit (Segregated Witness): A Bitcoin scaling improvement proposal proposed in December 2015 by Bitcoin Core developers Eric Lombrozo, Johnson Lau and BlockStream co-founder Pieter Wuille.
SegWit (BIP141) was implemented in 2017. The most significant advantage brought by the SegWit upgrade is the increased block capacity, which lays the foundation for the development of Layer 2.
Taproot: In January 2018, the Taproot proposal released by Bitcoin Core developer Greg Maxwell was officially implemented in 2021. Taproot is a major upgrade since SegWit, designed to improve privacy, simplify transaction verification and improve efficiency, and more complex smart contract processing capabilities.
These upgrades pave the way for the development of Bitcoin Layer2. Mainstream Layer2 solutions include:
State Channels: Allow participants to conduct multiple transactions without having to record all transactions on the blockchain.
Sidechains: Blockchains that run independently of the main chain, allowing assets to be transferred between the main chain and the sidechain.
Rollup: Provides an efficient scaling solution by bundling a large number of transactions and submitting them to the main chain.
PoS Scaling: A scaling solution based on Proof of Stake (PoS) to further improve the network’s scalability and efficiency.
5. Bitcoin ETF1. What are ETFs (Exchange-Traded Funds)?
An exchange-traded fund (ETF) is an investment fund that trades on a stock exchange and trades similarly to stocks. ETFs hold assets such as stocks, commodities or bonds and typically operate with an arbitration mechanism designed to keep their trading price close to their net asset value.
Bitcoin ETFs are investment funds that allow people to invest in Bitcoin indirectly without actually owning the cryptocurrency. Because ETFs exist in the traditional financial system, Bitcoin ETFs open the door to a wider group of investors.
As of January 2024, the U.S. Securities and Exchange Commission has approved 11 Bitcoin spot ETFs listed in the United States.
2. What is the difference between spot and futures cryptocurrency ETFs?
1. Underlying assets: Spot Bitcoin ETFs directly hold Bitcoin as the underlying asset. This means that the fund owns and manages actual Bitcoin. The price of the ETF tracks the price changes of Bitcoin and has a variety of embedded mechanisms to ensure that the price remains relevant. Futures Bitcoin ETFs hold futures contracts that usually use Bitcoin as the underlying asset. These contracts represent an agreement to buy or sell Bitcoin at a predetermined price on a future date.
2. Trading mechanism: Spot Bitcoin ETFs track the real-time price of Bitcoin. When traders buy shares of a spot Bitcoin ETF, the fund buys and holds an equivalent amount of Bitcoin. Futures Bitcoin ETFs hold and therefore track the price of Bitcoin futures contracts, which are traded on regulated futures exchanges and have expiration dates. The performance of the ETF is related to the performance of these futures contracts, not the spot price of Bitcoin.
3. Risk Overview: Spot Bitcoin ETFs bear the risks associated with owning and managing Bitcoin, and the value of the ETF may fluctuate based on the price changes of Bitcoin. Futures Bitcoin ETFs carry additional risks, such as the risk of futures contract expiration and the possible price difference between Bitcoin futures prices and spot prices. These ETFs also have market and liquidity risks associated with futures trading.
We will share the content of this section here. This is the second part of the "Basic Encryption Knowledge Notes" series. We will continue to share more content in the knowledge architecture diagram. The full version of "Basic Encryption Knowledge Notes" will be organized into a PDF and provided for download and reading after the serialization is completed.
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