Adoption of Blockchain Applications Part 4

Short overview of the Bitcoin network. The reasons for the success of Bitcoin.

 

As Bitcoin has been maturing and successfully withstanding all kinds of attacks on the network, many people started to criticize the network for its inability to process large volumes of transactions.

As of 2017 and 2018, the transactional capacity of the Bitcoin network is between three and seven transactions per second. The capacity of Visa Financial network is tens of thousands of transactions per second, with the record of 24,000 transactions per second.

The Bitcoin has the current limitation of between three and seven transactions because it aims to create a block of its blockchain every ten minutes and the size of a block is limited to one megabyte.

However, even with all the limitations of the network, the Bitcoin network has been extremely successful is being a peer-to-peer network for transactions without a bank between individuals.

 

The number of coins on the Bitcoin network

The Bitcoin network can only have 21 million Bitcoins. It adds the coins into circulation by giving them as rewards to miners for creating blocks of the Bitcoin blockchain. For the first 210,000 blocks of the Bitcoin blockchain, the reward has been 50 bitcoins per block. Then, it divided into half and became 25 bitcoins per blocks. As of the writing of this article, the Bitcoin network has over 500,000 blocks and the reward for mining a block on the blockchain is 12.5 bitcoins per block. These numbers mean that today there are over 17 million bitcoins in circulation, which is over 80% of the total supply of Bitcoins that will ever exist. The total number of Bitcoins left to mine is less than 4 million and the next halving of the reward for creating a block on the Bitcoin blockchain will occur approximately in May or June of 2020. To see the exact number of coins that the Bitcoin network has in circulation as you are reading this article, as well as a number of other interesting stats and facts about the network, visit http://www.bitcoinblockhalf.com/

 

Bitcoin network and difficulty of mining

Mining on the Bitcoin network has a parameter of difficulty. Satoshi Nakamoto programmed the network to aim to create a block of its blockchain every ten minutes. Every 2016 blocks, the network adjusts the parameter of difficulty based on how quickly it has created the latest 2016 blocks. In the ideal world, the network would be creating a block exactly every ten minutes, which would mean that the creation of 2016 blocks would take exactly two weeks. If the network is adding blocks faster, it decides that the parameter of difficulty is too small and increases it. If it is adding blocks slower than 2016 blocks in two weeks, then the parameter of difficulty goes down.

When Satoshi Nakamoto just launched the network in 2009, there were only a handful of people interested in being a miner on the Bitcoin network. For this reason, the parameter of difficulty was very small and it was possible to mine Bitcoins using a regular home computer. This is why today you will hear stories about people trying to get permits to dig out their old computers with Bitcoins on the hard drives from landfills. Some people tried mining early in the history of Bitcoin network, received several hundred Bitcoins and forgot about them because the price of the coins was very low. When the price of Bitcoin approached $20,000 in 2017, they have remembered that they had a lot of Bitcoins on their old hard drives and if they had access to those coins, they could have become millionaires.

 

ASIC cards

However, even back in 2009 and 2010 mining used the resources of the computers to the fullest. As the Bitcoin network started becoming more popular, manufacturers started introducing specialized mining equipment. Such equipment is called ASIC cards. ASIC stands short for application-specific integrated circuit cards. ASIC cards are similar to sports cars. Just like a sporty coupe can go really fast and has incredible traction, but is not a very pleasant car on a rough road and is not very useful during a run to Home Depot or Costco for a family of five, ASIC cards do one thing but do it extremely well. This one thing is generating hashes on a cryptocurrency network. Different cryptocurrency networks use different hashing algorithms, which is why, for example, a Bitcoin ASIC will be useless on the Ethereum network.

 

The exchange of value

With all this being said, the ingenuity of the Bitcoin network and other cryptocurrencies is that they have figured out a way to transfer real world resources (paying for hardware and electricity required to mine blocks of a blockchain) into the digital world.

When a miner today invests in an ASIC card and starts burning electricity to mine Bitcoins, or any other cryptocurrency for this matter, the miner is exchanging resources from the real world that have real, tangible value, into the value on the cryptocurrency network. In the case with ASIC cards, the cards are useless for anything other than mining, which means that the miners are also interested in the price of the coin they mine staying high and growing. This way, the value of their rewards will stay high and their hardware will have value, too. On the other hand, if someone were to attack the network they mine a cryptocurrency on, the price of the currency would likely go down, meaning that the real-world value of their rewards would go down and there would be less people interested in buying their hardware, meaning that the price of the hardware will go down, too. Because of this, both miners and users on blockchain networks are interested in having the networks operating as designed and not experiencing any attacks or turmoil. This is the real accomplishment of the Bitcoin network and this is the area where the network has been extremely successful.