The balances themselves are kept through the usage of:
- Public Keys
- Private Keys
A public key is a cryptographic code typically used to facilitate the transactions between parties and allows the users to receive cryptocurrencies within their accounts. This public key is used to verify the digital signature that can prove the ownership of the private key itself that a user holds.
Private keys are a sophisticated form of cryptography that can allow any user to access their cryptocurrency. It is an integral part of bitcoin as well as altcoins and its security helps protect a user from theft and unauthorized access. This private key has a few forms, which are depicted by a series of alphanumeric characters that make it harder for a hacker to even have the possibility of hacking.
Typically, a digital wallet can store the private key for a user and when a transaction is initiated, the wallet software itself creates a digital signature through processing the transaction with a private key.
Now, what truly made Bitcoin special at the time is the fact that it was one of the first digital currencies to ever use peer-to-peer technology in order to conduct its instant payments.
The independent individuals as well as companies who own the governing computer power are known as miners and are in charge of processing the transactions on the blockchain. Of course, all of this comes at a cost, so in order to keep them engaged, they are rewarded through receiving bitcoin for their efforts.
These miners are essentially the decentralized authority that enforces the credibility of the network as a whole. The new bitcoin that is released to these miners is fixed, however, it can periodically decline.
To give you a bit of a perspective, a total of 21 million bitcoin can be mined in total at the most throughout the entire lifespan of Bitcoin. As of February of 2021, around 19 million have been mined already.
This is another way in which bitcoin differentiates itself when compared to other currencies. In a traditional centralized banking system, the currency is released based on the growth in goods in order to maintain the stability of the price of these goods.
In a decentralized system such as bitcoin, the release rate is set ahead of time and according to a very specific algorithm.
The Bitcoin Mining Process
The mining process of bitcoin is the way through which bitcoins are released into circulation. In order to mine, a user needs to have computers solve difficult puzzles in order to discover a new block. This block is later added to the blockchain.
Mining adds and verifies the transaction records across the entire bitcoin network, and for adding these new blocks to the blockchain itself, these miners are rewarded with bitcoins.
The interesting part about all of this is that the reward is split in half every 210.000 blocks.
To give you a bit more of a perspective, the reward for a new block was 50 bitcoins in 2009, and now it sits at 6.25 bitcoin due to the fact that the third halving happened in 2020.
Now, when it comes to the mining requirements of bitcoin, a variety of different hardware solutions can be implemented in order to mine efficiently.
The thing to keep in mind here is that some methods have higher rewards than other methods. Computer chips are known as Application-Specific Integrated Circuits or ASIC and other units such as Graphics Processing Units or GPUs can achieve higher rewards.
When you combine all of this, you get what is known as mining rigs, and they typically cost a fortune to purchase and rack up quite an expensive power bill at the end of each month.