full image - Repost: Bitcoin - Research (Jun 2022) (from Reddit.com, Bitcoin - Research (Jun 2022))
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Bitcoin Purpose and Early HistoryEarly HistoryBitcoin was the first notable cryptocurrency. It was invented in 2008 during the 2007-2009 Financial Crisis by an anonymous entity under the pen name of Satoshi Nakamoto and implemented in 2009. For the first several years, under 100 supporters worked altruistically to mine the network and develop its code. It is a inflationary (with deceleration) cryptocurrency with a cap of 2.1 quintillion Satoshis (21M BTC).Blocks were originally limited to 32MB in size but later reduced to 1MB in 2010. Gavin Andresen later replaced Nakamoto as the lead developer of the Bitcoin code repository and lead developer at the Bitcoin Foundation.Bitcoin is constantly being forked. The most notable forks were the ones that created Bitcoin XT (2014) and Bitcoin Cash (2017). There were also 2 forks in 2010 and 2013 due to coding bugs where the Bitcoin community decided to roll by the Bitcoin ledger by forking it.PurposeThe original purpose of Bitcoin according to Satoshi's whitepaper was to provide a "peer-to-peer electronic cash system". During the early years, the main use case for Bitcoin was black markets such as the Silk Road before its shut down in late 2013. Many larger merchants who accepted Bitcoin directly in earlier years stopped due to extreme price fluctuations. Instead, nearly all merchants nowadays work through centralized payment systems that convert Bitcoin into fiat. The current lead purpose of Bitcoin according most crypto investors is as a censorship-resistant currency. Its extreme price fluctuations prevent it from being a good Store of Value, and it is too slow and inefficient to be used for merchant and day-to-day transactions.Design and ConsensusProof of WorkBitcoin uses Proof of Work, which is a Nakamoto consensus--a class of consensus algorithms based on having something scare to win a randomly-chosen lottery. It has probabilistic finality instead of deterministic finality, which means that the Bitcoin Proof of Work consensus protocol can not guarantee that transactions are final. Block times are about 10 minutes each with 1MB blocks. This allows for a maximum of about 5-7 transactions per second. Most exchanges and wallets use 6 blocks for finality, which means that transactions take 60 minutes to finalize. For practical security, exchanges typically finalize larger transactions slower.Bitcoin was originally mined by CPUs, then GPUs, and now is only mined by specialized ASIC processors. Mining is the process of solving a hash puzzle that has a set number of leading zeros. Whoever figures it out first is able to package transaction from the mempool into a block and submit it. The longest chain is known as the canonical chain, and miners typically build on that chain. However, they can decide to build on another chain and fork Bitcoin. Bitcoin is constantly being forked, sometimes intentionally and other times accidentally or due to network latency. However, the only the longest chain is considered the canonical chain.The puzzle difficulty is algorithmically set so that blocks are submitted once every 10 minutes on average. Every 2 weeks, the difficulty automatically readjusts to maintain constant block times. Due to the difficulty and rarity of solving the block puzzle as an individual, miners often join mining pools where their rewards are collectively split. Miners in mining pools often get paid by the pool for solving easier puzzles (fewer leading zeros).The wining miner is rewarded with a block reward, which is the sum of the block subsidy (built-in inflation on the Bitcoin network used to pay for its security) and the transaction fee (paid by the user submitting the transaction). The block subsidy halves in nominal BTC roughly once every 3.8 years, meaning that it reduces by 99% every 27 years.Transaction DesignBitcoin uses UTXO transactions, which store the unspent input and output balances of a transaction. Unlike account transactions, it is difficult to keep track of the balance of an user's account with UTXO. UTXO is also less storage-efficient than account transactions. But UTXO is efficient for performing transactions with multiple inputs and outputs.Each 1MB block can hold roughly 1500-2000 transactions on average.Transactions are submitted with a fee to the Bitcoin network. They sit in the mempool until a miner packages them into a block. The higher the fee, the quicker miners will pick up the transactions. Users can also use Replace By Fee and Child Pays For Parent to increase the transaction fee of previously-submitted transactions.Speed and Efficiency (or lack thereof)Bitcoin is one of the slowest cryptocurrency networks. It can only perform 5-7 TPS and 30-60 minute probabilistic transaction times. Compare this to Avalanche's X-Chain (another UTXO network), which can do 4500-6000 TPS with 1-2 deterministic finality.Bitcoin is one of the least efficient cryptocurrencies. In 2021, each block cost roughly $150-300K in costs to mine, which is equivalent to $100-150 of fees per transaction. The amount of energy needed for a single Bitcoin transaction in Sept 2021, ~1800 kWh, is roughly the same as the amount of energy used by a typical US household over 62 days.Because of the slow transaction speed of Bitcoin, there's often a traffic jam of transactions waiting to be picked for the next block. Transactions sent to the network via gossip protocol sit in the mempool, and there were several times where the backlog ended up being greater than 100k transactions (8 hours) in 2021 and 2022. Many transactions were untouched for days until they timed out. This happens multiple times every year.Due to its slow speed, Bitcoin is not suitable as a payment system for point-of-sales transactions.Rudimentary scripting languageBitcoin is very basic. It only supports 1 token: Bitcoin. The scripting language it uses, Bitcoin Script is rudimentary. Most miners will refuse to run anything beyond the few known basic scripts that have been whitelisted for Bitcoin use. This includes multi-signature and time-locks. These are scripts, but they're too basic to be considered actual smart contracts.Lightning NetworkLightning is a Layer on top of Bitcoin that runs on an interconnected network of State Channels. 2 parties have to open a payment channel using a Hash TimeLock Contract and add funds to it. They can do however many transactions as they want off Bitcoin network. Once they're done, they can close the channel and receive their portions of their funds from the channel. The network links multiple of these state channels together to create the Lightning Network.It's a partially-centralized, low-security layer that is meant to be used for fast transactions. There are a lot of limitations to the Lightning Network, and participants have to monitor their channels constantly to make sure they aren't improperly closed or disconnected.While the Lightning Network has many opened wallets, it barely has any stored value, accounting for under 0.01% of Bitcoin's total locked value. Transaction fees are low, and running a Lightning Network Daemon is not particularly profitable.
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